Offshore Reporting Rules

Corporate Reporting

In December 1995 corporations received Revenue Canada’s revised version of form T106, the annual corporate information return for related-party transactions.

Any corporation resident or carrying on business in Canada must file, within six months after its year-end, an annual information return in respect of transactions with related non-residents. A separate form is required for each non-resident; a failure to file can mean penalties of up to $2,500 for each unfiled form. Revenue states that the new form is effective December 31, 1995, and that it will not consider a form to be filed on time unless the revised version is received.

There are a number of significant changes. The transfer-pricing methodology must be identified for each type of transaction between the parties. The revised form also requires disclosure of the country where the related person resides and the principal countries from which it derives income; if the non-resident is controlled by the reporting corporation and resides in a non-treaty country, its financial statements must be attached.

Budget Proposals

Proposals announced in the 1995 Federal Budget, which will be effective as early as April 30th, 1997, require even more extensive reporting.

For interests in foreign property, filings are required only where the total tax cost of “specified foreign property” exceeds $100,000 at any time in the year. “Specified foreign property” includes, for example, funds deposited or held outside of Canada, debt owed by a non-resident person (e.g., foreign government bonds), tangible property situated outside Canada, and so on. Shares of a non-resident corporation are also included.

The minimum penalty for failure to file is $500 per month, for up to 24 months. There is an additional penalty for failure to file for more than 24 months — equal to 10% of the total cost of the property, less the penalty otherwise determined. The penalties can apply for each year a return is required.

One strategy to avoid reporting requirements and penalties is to spread the acquisition of foreign investments among different taxpayers. The proposals do not at present contain anti-avoidance rules to address this.

Reporting is also required for an interest in a “foreign affiliate”. This will apply to situations where a direct and/or indirect interest in the shares of a non-resident corporation is at least 10% (counting the shareholdings of related persons). In certain situations, foreign trusts may also be considered to be foreign affiliates. Failure to report a foreign affiliate is subject to similar penalties to those described above. Each foreign affiliate must be reported.

A U.S. corporation, for example, may be a foreign affiliate and subject to the reporting requirements. There in no exception for foreign affiliates whose assets are used in an active business.

Apparently most types of offshore trust structures will also be subject to the reporting requirements. Similar penalties to those described above will apply (with the 10% penalty based on transfers and loans to the trust). Finally, filing is required for a taxation year or period where a reporting taxpayer has received distributions from or is indebted to a foreign trust in which the taxpayer is beneficially interested. The maximum penalty for failing to file is $2,500.