Who is considered a foreign affiliate under the Canadian tax system?
Under the Canadian tax system, a foreign affiliate is a non-resident corporation or other entity in which a Canadian resident, corporation, or partnership holds an ownership interest of at least 10%. The foreign affiliate may be engaged in various business activities, such as carrying on a business, holding investments, or providing services. These cases are most commonly known when a Canadian is the shareholder of a corporation that he/she has incorporated in the United States or has incorporated in Canada, and his/her Canadian corporation holds the shares of the corporation incorporated in the United States.
When a Canadian resident individual, corporation, or partnership holds an ownership interest in a foreign affiliate, they are deemed to have a certain level of control over the affiliate’s affairs and may therefore be subject to certain tax rules and reporting requirements in Canada.
The Canadian tax system has specific rules and regulations that may apply to your foreign affiliates. For example, Canadian taxpayers who own or control foreign affiliates are required to file annual information returns with the Canada Revenue Agency (CRA), which provides detailed information about the affiliate’s business activities, assets, liabilities, and income. Failure to comply with these reporting requirements can result in significant penalties and interest charges.
In addition to the reporting requirements, the Canadian tax system also has rules that govern the taxation of foreign affiliates, including the foreign accrual property income (FAPI) rules. These rules are designed to prevent Canadian taxpayers from deferring tax on passive income earned by foreign affiliates.
Overall, the definition of a foreign affiliate under the Canadian tax system is an important concept for Canadian taxpayers who have investments or business interests in non-resident corporations or other entities, as it may trigger various tax rules and reporting requirements. It is important for taxpayers to understand these rules and ensure that they comply with all relevant requirements to avoid penalties and other consequences.
You need to report your foreign affiliate information every year in Canada.
You will use appropriate tax form to report information about your ownership in a foreign affiliate. This form is required to be filed by Canadian residents Individual, corporations, or partnerships who own or have an interest in foreign affiliates, as defined by the Canadian Income Tax Act.
The purpose of this information is to help the CRA enforce Canadian tax rules related to foreign affiliates and other types of specified foreign property. By requiring taxpayers to report detailed information about their foreign holdings, the CRA can better monitor and assess the tax consequences of these investments.
It is important for taxpayers to comply with the this filing requirements, as failure to do so can result in significant penalties and interest charges. Taxpayers who are unsure about whether they are required to file this information or who need assistance in completing the form should seek advice from RKB Accounting or a tax professional with experience in cross-border taxes.
It is also important to note that, the filing deadline will not considered in compliance if the information was not provided in the correct form or some information is missing. In this situation CRA will consider that the due date deadline is not met and applicable penalties will apply.
If your taxation year or the fiscal year begins in 2021 or in the later year, you need to file this form within ten months from the year-end.
Reporting Requirements for Foreign Affiliates in Canada – Avoid Penalties
As a cross-border tax expert in Canada, we advise our clients that if they have investments or business interests in foreign companies, they may be subject to the foreign affiliate reporting requirements under Canadian tax law. These reporting requirements are designed to prevent tax evasion by Canadian taxpayers who use foreign entities to shelter income from Canadian taxation.
The foreign affiliate reporting requirements apply to Canadian residents who own or control foreign corporations, as well as to Canadian corporations that have foreign subsidiaries. In general, if a Canadian resident or corporation owns at least 10% of a foreign corporation, they will be considered to have a foreign affiliate and will be required to file an information return on their Canadian tax return with the Canada Revenue Agency (CRA) each year.
The information return must include details about the foreign affiliate’s business activities, assets, liabilities, and income. Failure to file the required information return can result in significant penalties and interest charges, so it is important for my client to ensure that they comply with these reporting requirements.
There are other requirements if those applies to you, you may be exempted from this filing requirement and you can save from interest and penalties when you thought that you might be non-complaint.
In addition, our client may also be subject to other tax rules that apply to foreign affiliates, such as the foreign accrual property income (FAPI) rules. These rules are designed to prevent Canadian taxpayers from deferring tax on passive income earned by foreign affiliates. If our client has significant investments in foreign companies that generate passive income, we advise them to consider how the FAPI rules apply to their situation carefully.
Overall, our advice to our client would be to carefully review their investments and business interests in foreign companies and ensure that they comply with all applicable Canadian tax rules, including the foreign affiliate reporting requirements and the FAPI rules.
What is the penalty for non compliance?
If you fail to file all the required information, which is used to report foreign affiliate information, the penalty can be quite significant. If a taxpayer fails to file the form, the Canada Revenue Agency (CRA) can assess a penalty of $25 per day for up to 100 days, to a maximum of $2,500 per year. You may not have met the filing requirement if the form was not filed properly or if there is missing information. If the failure to file was intentional, the penalty could be even higher, up to $12,000 or 5% of the cost of the foreign property at any time in the year.
If you are non-complaint or have filed an improper information return, RKB Accounting, a cross-border tax expert can help you in negotiating with Canada Revenue Agency on your behalf.
The CRA has been increasing its focus on ensuring compliance with the reporting requirements for foreign affiliates, and taxpayers who fail to comply with these rules could face significant financial and legal consequences.
RKB Accounting specializes in cross-border taxation, practices primarily in USA-Canada, and has solutions for all your cross-border business requirements, including incorporation on both sides of the border, payroll, sales tax, and income tax, and expert advice for critical tax issues and compliance matters.
Related Topic: Reporting Foreign Properties
Reference: CRA
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.