The Canada Revenue Agency (CRA) has amended the return for reporting transactions with non-arm’s length nonresidents, with effect for tax years commencing on or after 1 January 2022. For over 30 years, the CRA has required reporting of transactions and account balances with non-arm’s length nonresidents, and the form, the T106 Information Return of Non-arm’s Length Transactions with Non-residents, or T106 Return, which consists of a Summary Form and a separate Slip for each nonresident, has been updated periodically. The T106 Return must be filed when total transactions during a taxation year between a reporting person, which may be a corporation (including the Canadian branch of a nonresident that must report transactions with other non-arm’s length nonresidents), individual or trust, or a partnership, and all non-arm’s length nonresidents exceed CAD 1 million. This threshold is considered relatively low and has not changed since the T106 Return was introduced. An authorised officer, person or representative must sign the certification declaration section of the T106 Return, attesting that the information provided is correct and complete.
The T106 Return requires that certain information be provided about the reporting person or partnership, and about each nonresident, including the relationship to the reporting person or partnership. In addition to reporting the transaction volume of intercompany transactions, the transfer pricing methodology used and certain intercompany balances, the reporting person or partnership must respond to the question as to whether or not contemporaneous transfer pricing documentation has been prepared or obtained. For many years, the CRA has used the response to this question as a screening tool for audit purposes. Although the CRA may levy a transfer pricing penalty on audit, there is no penalty for not preparing transfer pricing documentation, so if such documentation does not exist, the response should be “no.”
The CRA is serious about compliance when it comes to reporting of transactions with non-arm’s length nonresidents so it is critical that the T106 Return be accurately prepared. There are potential late filing penalties of up to CAD 2,500 per late-filed T106 Slip. Where the reporting person or partnership knowingly or through negligence fails to file the T106 Return, a non-filing penalty of up to CAD 12,000 per return may be assessed, and may be doubled if the failure persists after a formal demand by the CRA. There are also potential penalties of CAD 24,000 where the T106 Summary or Slip is incomplete or incorrect due to a false statement or omission. Finally, there are potential third-party civil penalties that may be levied against a professional advisor equal to the sum of the professional fees charged, plus CAD 100,000, where the information reported contains a false statement or omission and the professional advisor was directly or indirectly involved, knowingly or through negligence, with making the false statement.
The most important changes made to the T106 Return are as follows:
Under the PLOI rules, if the loan carries an interest rate less than the rate prescribed by the CRA, the CRIC must include deemed interest income in its taxable income. This information is provided for context, and any further discussion of the PLOI regime is beyond the scope of this article, but suffice to say it is complex. The amount of the PLOI election must now be reported on the appliable T106 Slip. There is some controversy about this new requirement because the PLOI election is not a “transaction” between the reporting entity and the non-arm’s length nonresident.
In summary, it appears the CRA may be requesting additional information for screening and audit selection purposes. It is important that every effort be made to ensure T106s are completed accurately.