The T1134 and T1135 are a sample of Canadian foreign information returns such as the U.S. 8938, 5471, or 8865.
A number of Canadians are investing in the U.S. real estate market with a U.S. limited partnership, whose limited partners are solely Canadian residents and the general partner is a U.S. C corporation, whose shareholders are also Canadian residents.
For those who want limited liability protection, this type of investment vehicle is often proposed because the conventional U.S. LLC does not work or is not treaty-friendly for an inbound investment into the United States, from a Canadian perspective. This route has become the norm in recent years as opposed to the Canadian investor investing into the U.S. directly or indirectly through a Canadian corporation and/or a U.S. C corporation which work. However, by doing so, it may raise repatriation tax issues and additional compliance fees. These type of investments have arisen in recent years due to the widespread Canadian investment in depressed U.S. real estate.
Likely Case Situation
Mr. X, a Canadian (non-resident alien for U.S. tax purposes), sets up the U.S. LP. Usually, Mr. X and family members are limited partners and the general partner is a U.S. C corporation wholly-owned by Mr. X or related members. For the C corporation, it would be a foreign affiliate of the Canadian shareholders and in most cases, it would be a controlled foreign affiliate of the taxpayer requiring the filing of CRA Form T1134 (due 15 months after then end of the taxation year of the taxpayer).
The instructions to Form T1134 state that the form is not required where the foreign affiliate is inactive or dormant. The administrative policy threshold for the filing of the T1134 is a function gross receipts of the foreign affiliate, as well as the taxpayer’s share investment in the foreign affiliate and the value of property owned by the foreign affiliate. Where gross receipts are under $25,000 CAD, the share investment is under $100,00 CAD, and the fair market value of the underlying assets of the CFA or FA are not over $1 million CAD, then there is no requirement to file the form for the particular taxation year. However, there still could be a FAPI (Foreign Accrual Property Income) issue. Therefore, one may have to file for some years and not others.
It has recently come to my attention that, although not written in the instructions to the T1134 form nor written in the legislation, a 2012 Windows on Canadian tax document, released on July 8, 2013, issued by CRA, indicates that where there is a foreign affiliate who is a general partner, total gross receipts of the partnership are taken into account and not the general partner’s share. Based on this interpretation, it is more than likely that CRA Form T1134 will be required annually.
The T1135 is a required filing by the U.S. partnership because the partnership is regarded as a “specified Canadian entity” by virtue of its holding U.S. situs property with a cost amount greater than $100,000 CAD and more than 90% of its members are not non-residents of Canada. If the T1135 is not required by the U.S. LP, it may be required by the Canadian partner, if their basis in the partnership is over $100,00 CAD. The T1135 is due 3 months after the end of the taxation year of the U.S. partnership.
Both T1134 and T1135 have no filing extensions available. The minimum penalties not filing for each annual form is $2,500 per year with higher penalties for gross negligence. A number of taxpayers are using the Canadian voluntary disclosure program to submit forms that are past-due of at least one year to waive penalties. The program allows one to go back 10 years. CRA Information Circular Ic00-1R4 outlines the criteria for the program with CRA Form RC199 being the voluntary disclosure application.
Computation of Income for Canada
In addition to not filing the T1134, should the general partner be a controlled foreign affiliate (CFA), FAPI, to the extent of the Canadian investor’s share of the CFA, must be included in their tax return with a corresponding increase in basis of the share investment in the CFA.
Think of this as similar to the U.S. CFC or PFIC rules with a QEF election in place.
On the computation net rental or FAPI, net rental income should be determined under the Canadian Income Tax Act. Therefore, one needs the underlying basis of the property to determine capital cost allowance as opposed to taking the net rental from the IRS Form K-1. This information is required to report the correct net rental income on the Canadian tax returns for the limited partners.
Hopefully you will have that information available to you or even the IRS 1065 partnership tax return. Different results will occur, especially if the U.S. LP happens to own Canadian real estate, which when sold, will require applications for clearance T2062/T2062A. For Canadian clearance, they often ask for supporting documentation, so hopefully information reported in prior years has been done correctly.
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