On December 22 2008 the Canada Revenue Agency (CRA) released a new version of the information reporting form T106 that includes significantly expanded levels of detail for disclosures of related party transactions. Any taxpayer that enters into a transaction or series of transactions with an aggregate value of C$1 million ($849,577) or more in a given year is required to complete and submit form T106 by the due date for the tax return for that year, disclosing all transactions with non-arm’s length non-residents.
The first change made by the CRA is to allow taxpayers to use functional currency reporting if it is in a permitted currency other than Canadian dollars (Australian dollars, US dollars, UK pounds, or Euros).
The remaining changes relate to financial transactions. Previously, the CRA requested only that the taxpayer separately identify interest, dividends, and insurance transactions on the T106. All other financial transactions were aggregated and reported under the caption “other including derivatives.” In the latest update to the form, the CRA is now requesting greater levels of detail relating to financial transactions.
Part III - Transactions between reporting person/partnership and non-resident has been amended to add three additional areas under the heading financial:
Sale of financial property (including factoring, securitisations and securities);
Lease payments; and
Securities lending (fees and compensation payments).
The line for other financial items has been relabelled as “Other (excluding derivatives - see Part V)” and a new part was added.
The revisions are highlighted in figure 1:
Figure 1
The new Part V - Derivatives requests details related to eight identified categories of derivatives contracts. The required details include revenue and expenditure, as with other transactions, but, in addition, the CRA is requesting the number of contracts and the notional amount of the contracts for each category of derivatives. The categories are:
Interest rate contracts;
Foreign exchange contracts;
Credit contracts;
Equity contracts;
Commodity contracts;
Index contracts;
Fees (including commissions); and
Other payments/receipts.
The new Part V - Derivatives section is presented in figure 2 below.
Figure 2
Given that taxpayers previously had to report all intercompany transactions if the aggregate amount exceeded C$1 million in a particular year, this may not seem to be a significant change, merely a change in the presentation (although numbers of contracts and notional values may not have previously been tracked given that detail was not required). However, the two cases before the Tax Court of Canada at the moment related to financial transactions (GE Capital Canada 2006-1385(IT)G and HSBC 2006-3579(IT)(G),) and these reporting changes together suggest that this is more likely a strong signal to taxpayers that the CRA is placing much greater focus on financial transactions. Taxpayers with intercompany financial transactions should be prepared for greater scrutiny.
Action to take
The CRA has given strong signals to taxpayers by requiring significant additional detail regarding financial transactions to be reported on the form T106 and by forming a financial transactions specialist group to undertake audits of these transactions. Taxpayers should take this opportunity to take a fresh look at the transfer pricing models and documentation related to financial transactions before filing their tax returns this year. This would reduce the likelihood of surprises should the CRA initiate an audit.
Salvador Borraccia (salvador.m.borraccia@bakernet.com) and Christopher Raybould (chris.raybould@bakernet.com) Baker & McKenzie, Toronto
