How to Prepare Form T1134: A Worked Example for a Foreign Operating Company
Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates, is one of the most complicated Canadian international tax reporting forms. Getting it wrong also carries significant penalties. For example, basic late filing penalty can reach $2,500 annually per supplement and substantially larger in certain circumstances.
In this article, we'll cover how to prepare Form T1134 for a hypothetical, simple operating company that is a foreign affiliate of a Canadian individual taxpayer for 2025 taxation year.
The current version of Form T1134 applies to taxation years beginning after 2020. Generally, a Canadian resident taxpayer that has a foreign affiliate or controlled foreign affiliate at any time in the year is required to file the form. For taxation years beginning after 2020, the filing deadline is 10 months after the end of the reporting taxpayer's taxation year.
Facts:
John Doe ("Taxpayer") is a Canadian resident individual.
The Taxpayer was not involved in a section 85, 85.1(3), 86.1, 87, nor 88 transactions during 2025.
The Taxpayer has not filed Form T106 for 2025.
The Taxpayer owns 100% in ABC Company, a corporation resident in the US ("USCo"). USCo is not an LLC and is liable to corporate tax in the US.
USCo operates an active business in the US manufacturing and selling shoes to third party US retailers and does not earn any income that is FAPI.
USCo has a December 31 year end.
USCo was incorporated on July 1, 2023. On incorporation, Taxpayer subscribed for 100 common shares for $100.
During 2025, the Taxpayer subscribed for 100 additional common shares for $200. There are no preferred shares issued by USCo and the common shares are not tracking shares.
During 2025, USCo made no distributions.
USCo has not made any loan or advance to the Taxpayer or to any person at all times.
USCo does not own any shares in any other foreign affiliate of the Taxpayer.
USCo has not disposed of any capital property during 2025.
During 2025, The Taxpayer lent $10,000 to the USCo which is outstanding as of December 31, 2025. No elections were filed in respect of this loan.
Assume at all times, CAD and USD is at par.
USCo had three full time employees employed throughout the year.
The Taxpayer has filed Form T1134 in respect of the USCo in 2023 and 2024.
USCo's 2025 Income Statement is below. Interest income is incidental to the active business carried on by USCo and earned from bank deposits.
**The T1134 forms shown below are completed using entirely fictitious information and are provided for illustrative purposes only. They are not intended for filing with the CRA.**
Page 1
Page one is straightforward and requires basic information about the Taxpayer.
Page 2
Page 2 is generally required to be completed if one Form T1134 is completed for a related group. Ability to file a single Form T1134 for a related group is something that was introduced with the new version of Form T1134 effective for taxation years that begin after 2020.
In our case, since there is only a single Taxpayer, this section is not required to be completed. However, if for example, John Doe co-owned the foreign affiliate together with his spouse and both spouses had Form T1134 filing obligations, his spouse's filing obligations may be satisfied by completing this section and other relevant sections of Form T1134.
Page 3 / 4
Per facts, the Taxpayer was not involved in any of the type of transactions listed under section B. Other information' during 2025. The rest of page 3 would remain blank as there are no other relevant entities that hold interest in the foreign affiliate.
Page 4 would also remain blank. Specially, USCo would not meet the conditions of a 'dormant foreign affiliate' (found under the instruction section of Form T1134) given that its gross revenue (and therefore, gross receipt) for 2025 was in excess of CAD $100,000.
Page 5
Page 5 begins with basic information about USCo.
USCo would be a foreign affiliate ("FA") and a controlled foreign affiliate ("CFA") of the Taxpayer. For discussion of the rules surrounding FA and CFA, refer to this article.
93(1) election is a special type of election when there is a disposition of the shares of a FA. There were no such disposition in 2025.
Page 6
The Taxpayer is the sole shareholder of USCo and during 2025, acquired additional share of USCo for $200. Therefore, his ACB in his investment in the USCo would be $300 in total at the end of 2025.
The Taxation year in question here would be the taxation year of the foreign affiliate. At the beginning and end of USCo's 2025 taxation year, the Taxpayer was the sole shareholder of USCo.
Qualifying interest is effectively, direct or indirect ownership of at least 10% of the issued shares having full voting rights and shares worth at least 10% of all issued shares. In this scenario, the Taxpayer owns 100% of USCo and therefore has a qualifying interest in USCo at both the beginning and end of the taxation year. Accordingly, both qualifying interest questions would be answered ‘Yes’.
The Taxpayer had a loan receivable from USCo of $10,000 at the end of 2025.
Remaining questions are beyond the scope of this article but in the current simple scenario, answer would be generally 'No'.
Page 7
This section would not be applicable as there is no Corporation Resident in Canada ("CRIC"). Foreign affiliate dumping rules are beyond the scope of this article.
Given that USCo is a CFA of the Taxpayer, financial statement of USCO needs to be attached to the Form T1134. For a FA that is not a CFA, the obligation exists where the reporting entity holds 20% or more of the voting interest. Refer to CRA's questions and answers about Form T1134 for the CRA's interpretation of the 20% threshold.
With respect to Section 3.A, USCo did not pay any dividends during 2025. Accordingly, the applicable dividend questions would be answered ‘No’ and the dividend amounts would be nil.
Page 8
Detailed discussion of the upstream loan rules are beyond the scope of this article. However, had USCo lent money to the Taxpayer or to someone related to the Taxpayer for example, the rules may apply. The rules are broad and should be carefully considered. In our fact pattern, USCo did not make any loans to any person.
As indicated at the top of this section, this section and beyond are only required to be completed for FAs that are CFAs. As USCo is a CFA of the Taxpayer, the remaining sections of Form T1134 is still required to be completed.
Answers to B.1.1 to B.1.3 are all 'No'. USCo was not liquidated during 2025 and the Taxpayer did not exchange shares or convert debt to shares of USCo.
Answer to B.2 would however, be 'Yes' given that the Taxpayer acquired 100 additional common shares during 2025.
Page 9
Answers to B.2.1 to B.2.5 are all 'No'. These sections are generally applicable when the interest in the FA decreases and/or there are some type of reorganizations that occur with the FA. Detailed discussions of these sections are beyond the scope of this article.
There should be no change in the surplus entitlement percentage nor the equity percentage as the Taxpayer's ownership in the FA does not change.
The remaining questions are 'No' in the current fact pattern.
With respect to the number of employees question, USCo had three full time employees. Therefore, the correct box to answer would be '1 to 5'.
Page 10
This section provides breakdown of revenue.
This section asks various questions about FAPI. In our fact pattern, the answers to these questions would be 'No'. With respect to the interest income of $1,000, given that it is incidental to the active business carried on by USCo, it should generally not be considered FAPI.
Also, given that the FAPI of USCo is CAD $5,000 or less, the Taxpayer's participating percentage is deemed to be nil pursuant to the definition of participating percentage in subsection 95(1) of the Canada's Income Tax Act.
Page 11
With respect to Section 4, there were no income that were recharacterized to active business income in our fact pattern.
Final Thoughts
This example demonstrates that even a relatively straightforward foreign operating company can require significant disclosure on Form T1134. The questions on the form can also identify Canadian tax issues that require further analysis, such as the upstream loan, foreign affiliate dumping, surplus distributions, and more.
In Part 2, we will build on this example by looking at a controlled foreign affiliate that earns investment income and considering how FAPI is reported on Form T1134.
Warm regards,
Francis Do, CPA, CA
Have any questions? Please contact Francis Do at Francis@francisdo.com or 416-572-9633.
Disclaimer: This article is not intended to be a tax advice. Always consult and verify with a tax professional.
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