2023-0964551C6 IFA 2023 Q3 - T1134 Supplement

Principal Issues: Part II Section 3(A)(2) of the T1134 supplement requires disclosure of dividends paid by a foreign affiliate. 1. Is the definition of dividends based on Canadian or foreign corporate/tax principles? 2. If subsection 90(2) applies but the taxpayer does not have information on whether the distributions are made on a pro rata basis, would the due diligence exception under section 233.5 be available?

Position: 1. The definition should be based on provisions of the Act. 2. It depends.

Reasons: 1. Subsections 90(2) and 90(5) together provide an all-encompassing definition of a dividend from a foreign affiliate for the purposes of the Act. 2. The CRA would expect that the determination of the distributions made by the foreign affiliate be based on all the information that can reasonably be obtained in a given situation.

Author: Zhang, Catherine
Section: 15(1); 90(2); 90(5); 93.2; 95(7); 162(5); 162(7); 163(2.4); 233.4; 233.5; definitions of "dividend" and "stock dividend" in subsection 248(1)

2023 IFA Annual Conference
CRA Roundtable

All statutory references are to the Income Tax Act (the “Act”), unless otherwise indicated.

Question 3 - T1134 Supplement Disclosure on Dividends

Part II Section 3(A)(2) of the T1134 supplement requires disclosure of dividends paid by a foreign affiliate.

1. Is the definition of dividends based on Canadian or foreign corporate/tax principles?

As an example, a U.S. limited liability limited partnership or U.S. limited liability company is considered to be a corporation for Canadian tax purposes but is considered as fiscally transparent or as a partnership by default under U.S. tax law. Distributions from these entities are not considered dividends for U.S. purposes and not shown on the financial statements of the foreign affiliate as dividends. However, pro-rata distributions to its members are deemed to be dividends under subsection 90(2) under the Act.

2. If Canadian principles are to be used and the taxpayer does not have information on whether the distributions are made on a pro-rata basis, would the due diligence exception under Part IV be available?

CRA Response

Question 3(1)

Subsection 90(2) generally provides that for the purposes of the Act, an amount is deemed to be a dividend paid or received on a share of a class of the capital stock of a non-resident corporation that is a foreign affiliate of a taxpayer if the amount is the share’s portion of a pro rata distribution made at that time by the corporation in respect of all the shares of that class, with certain exceptions.

Subsection 90(5) further provides that no amount paid or received at any time is a dividend paid or received on a share of the capital stock of a foreign affiliate of a taxpayer unless it is deemed under Part I of the Act.

The Department of Finance’s notes to subsection 90(2) state that subsections 90(2) and 90(5) together provide “an all-encompassing definition of a dividend from a foreign affiliate for the purposes of the Act”, and the definition also applies for purposes of the Income Tax Regulations “by virtue of their application for all purposes of the Act”.

In the example provided, to the extent that the U.S. limited liability limited partnership and the U.S. limited liability company are non-resident corporations that are foreign affiliates of a reporting taxpayer for Canadian tax purposes, pro rata distributions to their members, that are deemed to be dividends under subsection 90(2) of the Act, are to be reported as dividends in Part II Section 3(A)(2) of the T1134 supplement.

Question 3(2)

A failure to provide any information required on a prescribed form may result in penalties under sections 162 or 163 of the Act. Where a reporting taxpayer does not have all the information required to fulfil the reporting requirements of subsection 233.4(4) of the Act in respect of their foreign affiliate, it should still file the T1134 form on time indicating clearly, in the Disclosure section of the form, that some information is missing. In that scenario, the availability of the due diligence exception under section 233.5 of the Act or the reasonable effort exception contained in paragraph 162(5)(a) of the Act would be dependent upon the facts and the transactions that give rise to the requirement to file or that affect the information to be reported in the return under subsection 233.4(4) of the Act. The CRA would expect that the determination of the distributions made by the foreign affiliate be based on all the information that can reasonably be obtained in a given situation.

Catherine Zhang and Yara Barrak
2023-096455
May 17, 2023

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