The February 27, 2018 Federal Budget announced several proposed changes with respect to foreign affiliates (non-resident corporations in which the taxpayer has a significant interest). Here’s what you need to know:
Currently, the filing deadline of the Form T1134 “Information Return Relating To Controlled and Not-Controlled Foreign Affiliates” with respect to foreign affiliate(s) of the Canadian taxpayer is 15 months after the taxpayer’s year-end. The Budget proposes to reduce the filing deadline to 6 months, with the measure applying for taxation years beginning after 2019.
Corporations with tracking arrangements
A foreign affiliate in which a taxpayer has a controlling interest is generally considered a controlled foreign affiliate (“CFA”) of the taxpayer. Property income of the CFA is taxed in the hands of the taxpayer when it is earned by the CFA, rather than when it is distributed to the taxpayer in the form of a dividend. This concept is known as foreign accrual property income or FAPI. Investment business (a business whose principle purpose is to earn income from property) carried on by a CFA will be subject to FAPI rules unless it meets one of a number of exceptions.
One such exception is for the CFA to employ more than five full-time employees in its investment business. In order to meet the requirements of this exception, multiple taxpayers sometimes pool their assets into a single affiliate that is large enough to justify employing more than five full-time employees. However, each taxpayer still retains control over their own assets, and return on investment for each taxpayer is determined with the reference to their contributed assets. This is known as a tracking arrangement. The Budget proposes to treat assets of each taxpayer within the single affiliate as a separate investment business, thus requiring each taxpayer to meet the aforementioned exception to the definition of investment business and removing the benefit of using a tracking arrangement.
Currently, the tracking arrangement is also used to avoid a foreign affiliate being considered a controlled foreign affiliate of a taxpayer. This can be accomplished as the ownership of a single common affiliate (as described above) is spread among multiple unrelated investors, none of whom can be said to control the affiliate. The Budget proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement.
Both measures, with respect to tracking arrangements, will apply to taxation years beginning on or after February 27, 2018.
The Budget proposes to extend the normal reassessment period of the taxpayer by an additional three years in relation to the income arising from the foreign affiliate of the taxpayer for taxation years beginning on or after February 27, 2018. Click here for a more detailed overview of proposed changes to reassessment periods.
Contact us today for more information on how the 2018 Federal Budget may affect you and your business.