30 January 2025 External T.I. 2024-1036931E5 - Subsection 233.4(4) reporting requirement

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Whether the reporting requirements in subsection 233.4(4) apply to (a) a Canadian resident corporation (“Canco”) that owns, directly and indirectly, 100% of 3 non-resident corporations and (b) several holding corporations and individuals, residents in Canada, that together, directly and indirectly own the shares of Canco. 2. If the holding corporations in 1(b) are subject to the reporting requirements in subsection 233.4(4), clarify the information that must be reported.

Position: 1(a) Yes, if Canco is not exempt from Part I tax. 1(b) No. 2. Not applicable.

Reasons: 1(a) and (b) Based on the facts provided and paragraph 233.4(2)(a), for the purpose of section 233.4, the 3 non-resident corporations can be foreign affiliates of only Canco and cannot be considered foreign affiliates of the holding corporations and individuals. 2. Not applicable since the 3 non-resident corporations cannot be considered foreign affiliates of the holding corporations and individuals for the purpose of section 233.4.

XXXXXXXXXX									2024-103693
										Mei Ng

January 30, 2025

Dear XXXXXXXXXX:

Re: Reporting requirement in subsection 233.4(4)

We are writing in reply to your email of September 9, 2024 concerning the reporting requirement in subsection 233.4(4) of the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the “Act”).

All statutory references in this reply are to the Act unless stated otherwise.

Your email and subsequent emails of December 24 and 30, 2024 describe the following situation:

• 7 individuals, each own 100% of 7 holding corporations.
• The 7 holding corporations and an individual, other than the 7 individuals each owning a holding corporation (Mr. X), each own between 10.03% and 24% of the shares of a corporation (“Canco”).
• The 7 holding corporations and Mr. X, together own 100% of the shares of Canco.
• The holding corporations, individuals and Canco are all residents in Canada.
• 6 of the holding corporations have taxation year-ends of December 31; the 7th holding corporation has a taxation year-end of July 31.
• Canco owns 100% of the shares of a non-resident corporation (“Nrco1”).
• Nrco1 owns 100% of the shares of each of two non-resident corporations (“Nrco2” and “Nrco3”).
• Canco, Nrco1, Nrco2 and Nrco3 have taxation year-ends of December 31.
• Each of Nrco1, Nrco2 and Nrco3 has one class of shares.
• Nrco1, Nrco2 and Nrco3 are “foreign affiliates” and “controlled foreign affiliates” of each of the 8 individuals, each of the 7 holding corporations, and of Canco for the purpose of the Act, under the general meaning assigned to these expressions under subsection 248(1).

You have requested our guidance on the following matters:

1. Whether Canco qualifies as the “lowest tier” Canadian corporation and has a reporting requirement under subsection 233.4(4) in respect of Nrco1, Nrco2 and Nrco3.

2. Whether the holding corporations and individuals have reporting requirements under subsection 233.4(4) in respect of Nrco1, Nrco2 and Nrco3 for the 2024 and subsequent taxation years.

3. If the holding corporations are subject to the requirements in subsection 233.4(4), clarify the information that must be reported by the holding corporation with a July 31 taxation year-end in respect of Nrco1, Nrco2 and Nrco3 for the taxation year-ended July 31, 2024.

For the purpose of this letter, we have assumed that Canco is a taxpayer whose taxable income is not exempt from Part I tax.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Question 1

Subsection 233.4(4) requires a “reporting entity” to file Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates in respect of each of its foreign affiliates in a taxation year or fiscal period.

A “reporting entity” is defined in subsection 233.4(1) to include “a taxpayer resident in Canada (other than a taxpayer all of whose taxable income for the year is exempt from tax under Part I) of which a non-resident corporation is a foreign affiliate at any time in the year”.

For the purpose of section 233.4, in determining whether a non-resident corporation is a foreign affiliate or controlled foreign affiliate of a taxpayer resident in Canada, paragraph 233.4(2)(a) states:

“paragraph (b) of the definition “equity percentage” in subsection 95(4) shall be read as if the reference to “any corporation” were a reference to “any corporation other than a corporation resident in Canada”.”

Based on this modified application of the definition “equity percentage” in subsection 95(4) provided by paragraph 233.4(2)(a), for the purpose of section 233.4, a non-resident corporation can generally only be a foreign affiliate or a controlled foreign affiliate of a taxpayer resident in Canada to the extent the taxpayer directly owns shares in the non-resident corporation, or any other non-resident corporation that directly or indirectly owns shares in a non-resident corporation. This is consistent with the Explanatory Notes to subsection 233.4(2), which states:

“The purpose of these rules [paragraphs 233.4(2)(a) to (c)] is to ensure that a non-resident corporation can be a foreign affiliate of only the lowest tier corporation in a group of Canadian corporations under common control. This will limit the circumstances in which the same information is required to be reported by two or more Canadian corporations in respect of the same foreign affiliate. […]” [emphasis added]

Since Canco is a taxpayer resident in Canada that directly owns 100% of a non-resident corporation (Nrco1) and indirectly owns 100% of each of two non-resident corporations (Nrco2 and Nrco3) through a non-resident corporation (Nrco1), it would be considered the lowest tier corporation in the group of taxpayers resident in Canada.

In that regard, based on the facts provided and the modified application of the definition “equity percentage” in subsection 95(4) under paragraph 233.4(2)(a), Nrco1, Nrco2, and Nrco3 can be foreign affiliates of only Canco, for the purpose of section 233.4.

As a result, Canco would be subject to the reporting requirement under subsection 233.4(4) in respect of each of its foreign affiliates, i.e., Nrco1, Nrco2, and Nrco3, for the taxation year ended December 31, 2024.

Question 2

Based on the facts provided and the above noted modified application of the definition “equity percentage” in subsection 95(4) provided by paragraph 233.4(2)(a), Nrco1, Nrco2, and Nrco3 cannot be considered foreign affiliates and controlled foreign affiliates of the holding corporations and individuals, for the purpose of section 233.4.

As a result, the holding corporations and individuals would not be subject to the reporting requirements under subsection 233.4(4) in respect of Nrco1, Nrco2, and Nrco3, for the 2024 taxation year. The same conclusion applies to subsequent taxation years provided the facts remain unchanged.

Question 3

For reasons explained above, the holding corporations are not subject to the reporting requirements under subsection 233.4(4) in respect of Nrco1, Nrco2, and Nrco3, for the 2024 taxation year.

We trust these comments to be of assistance.

Yours truly,

Gillian Godson
Section Chief, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch