T1134 and T106: Foreign Affiliate and Non-Arms-Length Reporting

Most Canadian business owners learn about Canada's foreign information returns the hard way — a CRA letter, an accountant's late-stage question, or a financing due-diligence request that surfaces a foreign subsidiary nobody flagged. The two returns that catch businesses are Form T1134, the information return for foreign affiliates, and Form T106, the information return for non-arm's-length transactions with non-residents. Neither return is itself a tax. They are disclosure forms — the CRA's way of seeing what Canadian taxpayers own and do offshore so it can decide whether the underlying income has been taxed correctly. But the penalties for getting them wrong are real, they accrue per form and per day, and they apply whether or not any tax was actually owing.

Why these returns matter

Canada taxes its residents on worldwide income, and it backs that up with a web of foreign-reporting rules. Three returns sit close together and are easy to confuse. Form T1135 (the Foreign Income Verification Statement) covers specified foreign property held by any taxpayer once the cost crosses CAD$100,000 — that is the one most individuals know, and we cover it on our foreign property reporting guide. Form T1134 is different: it is about foreign affiliates — foreign corporations a Canadian taxpayer has a meaningful equity stake in — and it asks for far more detail. Form T106 is different again: it is about the flow of transactions between a Canadian taxpayer and the related non-residents it deals with. A single Canadian company that owns a U.S. operating subsidiary and buys from or lends to it can easily need all three.

The reason the CRA cares is that a foreign corporation is a separate legal person whose income normally is not taxed in Canada until it is paid up as a dividend. That gap is precisely where planning — and abuse — happens. The foreign-affiliate and transfer-pricing rules exist to make sure passive income earned inside a controlled foreign corporation cannot simply sit offshore untaxed, and that prices charged between related parties across the border are not used to shift profit out of Canada. T1134 and T106 are the windows the CRA uses to police both.

Form T1134: foreign affiliates and controlled foreign affiliates

A foreign affiliate of a Canadian taxpayer is, in general terms, a non-resident corporation in which the taxpayer owns an equity percentage of at least 1% and in which the taxpayer together with related persons owns an equity percentage of at least 10% of any class of shares. In plainer language: if you and your related family or corporate group hold 10% or more of a foreign company, and you personally hold at least 1%, that company is likely your foreign affiliate and a T1134 is in play.

A controlled foreign affiliate (CFA) is a foreign affiliate that the Canadian taxpayer controls — broadly, where control rests with the taxpayer, related parties, and up to four other arm's-length Canadian residents (and their related parties) combined. The CFA distinction matters because it triggers the foreign accrual property income (FAPI) rules in section 91 of the Income Tax Act: certain passive income earned inside a CFA — investment income, rents, some related-party services income — is attributed back to the Canadian shareholder and taxed in Canada on an accrual basis, even though no dividend was paid. The T1134 is where the CRA collects the data it needs to test FAPI, so the affiliate's income, surplus accounts, and activities all get reported. We explain the income side in detail in our note on foreign accrual property income.

Each Canadian reporting entity files one T1134 summary and a supplement for each foreign affiliate. For tax years that begin after 2020, the return is due 10 months after the end of the tax year — a tightening from the former 15-month and then 12-month deadlines, and a change that surprises filers who relied on the old timetable. There is relief for small, inactive holdings: a foreign affiliate that is dormant or inactive is generally exempt from the detailed supplement where the cost amount of the interest stayed under CAD$100,000, the affiliate's assets never exceeded CAD$1,000,000 in fair market value, and its gross receipts were under CAD$100,000 for the year. These thresholds were raised for tax years beginning after 2020 and are now applied at the individual entity level, so verify the current criteria against your specific year before relying on the exemption.

Form T106: non-arm's-length transactions with non-residents

Where T1134 looks at ownership, T106 looks at dealings. A Canadian resident person or partnership must file the T106 information return when the total of its reportable transactions with all non-arm's-length non-residents exceeds CAD$1,000,000 in the tax year or fiscal period. "Transactions" is broad: sales and purchases of goods and services, rents, royalties, management fees, interest, and loans or other indebtedness all count. The $1,000,000 figure is an aggregate test across every related non-resident, not a per-party test.

Within the return, there is a separate de minimis rule for which individual relationships have to be detailed. For tax years or fiscal periods beginning in 2022 and later, transactions with a particular non-resident totalling under CAD$100,000 need not be reported in detail on that non-resident's slip; for periods before 2022 the figure was CAD$25,000. The T106 is due six months after the corporation's year-end (partnerships follow the partnership-return due date), so it can fall due before the T1134 — another reason the two are better planned together rather than separately.

Section 247: transfer pricing behind the forms

The T106 is not just a list — it is the on-ramp to Canada's transfer-pricing regime in section 247 of the Income Tax Act. Subsection 247(2) lets the CRA adjust the terms of a cross-border related-party transaction to what arm's-length parties would have agreed, and in some cases to recharacterize the transaction entirely. If the CRA reprices an intercompany loan, a management fee, or a transfer of goods, the Canadian taxpayer's income goes up — and so, potentially, does its tax.

In addition to the adjustment, subsection 247(3) imposes a transfer-pricing penalty of 10% of the net amount of certain adjustments. That penalty is triggered when the net adjustment exceeds a threshold — broadly, the lesser of CAD$5,000,000 and 10% of the taxpayer's gross revenue — and, critically, it can apply even where the adjustment is later reduced or settled, because it is a penalty for not making reasonable efforts, not for being wrong. The defence is documentation. Subsection 247(4) deems a taxpayer not to have made reasonable efforts unless it prepared contemporaneous documentation — a written record of the transactions, the parties, the functions and risks, and the basis for the pricing — by the return's documentation-due date, and provides it to the CRA within three months of a written request. In practice, the documentation should exist by the time the T106 is filed, not be assembled after an auditor asks. Our broader discussion of transfer pricing walks through the methods and the reasonable-efforts standard in more depth.

How the Canada-US treaty interacts

For a business with U.S. operations, the same numbers ripple through the U.S. system and the Canada-United States tax treaty. The treaty's arm's-length principle (reflected in Article IX, on associated enterprises) lines up conceptually with section 247, but Canada and the United States can still reach different conclusions on the same intercompany price — and a U.S. adjustment plus an unreversed Canadian position is economic double taxation. The treaty's mutual agreement procedure (Article XXVI) and the relief mechanisms in Article XXIV exist to resolve that, but they take time and require that the underlying information returns were filed.

The reporting itself does not stop at the border. A Canadian company with a U.S. subsidiary will often face U.S. filings such as Form 5471 (U.S. persons with interests in foreign corporations) running the opposite direction, and a U.S. shareholder of a Canadian corporation pulls in U.S. anti-deferral rules including Subpart F and GILTI. Where U.S. owners or U.S.-person shareholders are involved, the Canadian foreign-affiliate analysis has to be done alongside the U.S. one; doing only half leaves penalties live on the other side. Our FATCA and FBAR compliance page covers the personal-account reporting that frequently sits beside these corporate returns.

Common traps

Assuming a small or dormant subsidiary is exempt. The dormant exemption from the T1134 supplement is conditional on cost, asset value, and gross-receipts tests; the summary itself can still be required, and a holding that grew past the thresholds loses the exemption for that year.

Confusing T1134, T1135, and T106. They answer different questions — ownership of a foreign corporation, ownership of specified foreign property, and the volume of related-party transactions — and a single structure can require all three. Filing one does not satisfy the others.

Counting only the operating company. A Canadian holding company, a family trust, and individual shareholders can each have their own filing obligation for the same foreign affiliate. The 10% test reaches related-party holdings, so structures spread across a family group need to be mapped as a whole.

Treating intercompany loans as invisible. Interest-free or low-interest advances to a related non-resident are exactly the kind of item section 247 reprices, and the loan balance counts toward the T106 thresholds even if no cash moved this year.

Leaving documentation until audit. Because the 247(3) penalty turns on reasonable efforts measured at the documentation-due date, building the file after the CRA writes is too late — the penalty can stand even on a defensible price.

Missing the new deadlines. The shift to a 10-month T1134 deadline (versus the six-month T106) means the two forms now fall due at different times; calendars built on the old 12- or 15-month rule produce late filings.

How Barrett Tax Law approaches T1134 and T106 reporting

We start by mapping the structure — every entity, who owns what percentage, which holdings are related, and where the cross-border transactions flow — so the filing obligations are identified at the group level rather than one company at a time. From there we work out which returns are actually required for the year in question, test the dormant and de minimis thresholds against the current rules, and pull together the contemporaneous transfer-pricing documentation that supports the related-party pricing before the return goes in. Where filings were missed in earlier years, we assess whether the Voluntary Disclosures Program is available to limit penalties, and where the foreign affiliate also raises FAPI or trust issues we coordinate with our cross-border trusts analysis. The cross-border practice is led by Simone Barrett, who is admitted in Ontario and Florida, so the Canadian and U.S. sides of a structure are considered together. If you are unsure whether your foreign holdings or related-party dealings trigger a T1134 or T106, we offer a free initial consultation to scope the obligation before a deadline or an audit forces the question. You can also start with our cross-border tax overview or the broader cross-border tax hub, and our U.S. IRS and Florida representation page for the U.S.-side filings that often accompany these returns.

This page is general information, not legal or tax advice. Foreign-reporting obligations, transfer-pricing exposure, and the interaction of the Canadian and U.S. rules depend on the specific facts and on both countries' laws as they stand for the year in question; thresholds and deadlines change. Speak with a qualified adviser about your own situation before acting.