Use of database for International Audit Presented by Donna O’Connor

Background Introduction of new transfer pricing legislation in 1998 (Section 247) Introduction of required information filing included penalty provisions for non-filers Tools developed by CRA to use information

The following forms related to International taxation are used by the CRA: T106: Information return of non-arm’s length transactions with non-residents T1134 A: Information return relating to foreign affiliates that are not controlled foreign affiliates T1134 B: Information return relating to controlled foreign affiliates T1135: Foreign income verification statement T1141: Information return in respect of transfers or loans to a non-resident trust T1142: Information return in respect of distributions from and indebtedness to a non-resident trust

Foreign Reporting Requirements Management System (FRRMS) The Foreign Reporting Requirements Management System (T106, T1134, T1135, T1141, T1142) is available on-line via a dedicated server located in Ottawa. The use is restricted to the international tax audit section in head quarter as well as in our local Tax Services Offices The Ottawa technology center is responsible to capture in a database (FRRMS) the key fields on these forms and scanned relevant documents enclosed with the forms

T106 forms Purpose The T106 Summary and Slips are annual information returns used to report non- arm’s length transactions between reporting persons or partnerships and non- residents under section of the Income Tax Act. The T106 Summary and Slips are prescribed forms. Who has to file A reporting person has to file T106 documentation for a tax year in respect of reportable transactions in which the reporting person and the non-arm's length non- resident person (or partnership of which that non-resident person is a member) participated in the period. The reporting person has to file the T106 documentation if the total reportable transactions for all the non-residents combined is more than CAN $1,000,000 (i.e. the total of all Box I amounts is more than CAN $1,000,000). What to file Each reporting person or partnership has to file one T106 Summary, as well as a separate T106 Slip for each non-resident. The information reported in the T106 is filed in respect of the corporation, partnership, trust or individual and not by sub- division, cost centre or individual partner.

T1134 A and B forms Who Must Report ? Section of the Income Tax Act requires an information return to be filed by taxpayers resident in Canada, and by certain partnerships, for each foreign affiliate of the taxpayer or partnership that is either a controlled foreign affiliate or a non- controlled foreign affiliate. No reporting is required for inactive or dormant foreign affiliates or second-tiered non- controlled foreign affiliates. What must be reported ? The required information is set out on the returns and, in general, includes details with respect to the: –ownership of the foreign affiliate; –income of the foreign affiliate; –surplus accounts; and –foreign accrual property income (FAPI) of the reporting taxpayer (in the case of a controlled foreign affiliate). –Financial statements of the foreign affiliate should be sent with the form

Foreign Reporting Requirements Management System (FRRMS) Screening with the T1134 forms: –Information on the non resident subsidiary (controlled and non controlled) –Access to financial statements when supplied by the taxpayer are scanned and can be accessed by users of the system

Data Base Uses Specific Audit tool: –Can query database and then the auditor can compare this information with information filed: For example, dividend, interest or royalties for which withholding may apply –Taxpayer specific information: Accumulate all the information filed on this entity (all related parties) in order to assist with the audit

Data Base Uses Specific Audit tool: –Information can be exported to a worksheet to assist the audit When reviewing information in the database, the format is that of the forms from which information is drawn

Data Base Uses Selection of Audit Files: –The database can generate information by choice of screener For example: –Query countries of interest –Query type of payments –Query change of transfer pricing method –Query by industry (ie pharmaceutical, mining, manufacturing etc) –Query by region –Query by period (fiscal years under audit) –Etc…..

Advanced uses of T106 Advanced research for file selection for audit: –Tool can give factors of importance to certain information criteria and question the database and compare files against each other to select the files for audit with the highest risk factors For example: –Query increase in investment in foreign countries in relation to interest expense –Query royalty income and decrease in total revenue –Query countries of interest and type of Canadian expense

T1135 forms Who Must Report? Section of the Income Tax Act requires Canadian residents who own more than $100,000 of foreign investment property (referred to as “specified foreign property”) at any time in the year to file an information return. The return also has to be filed by a partnership that holds more than $100,000 of foreign investment property where the share of income or loss for the period of non-resident members is less than 90%. What Property Must be Reported? Foreign investment property : - foreign bank accounts; - shares in foreign companies; - interests in non-resident trusts, bonds or debentures issued by foreign governments or foreign companies, interests or units in offshore mutual funds; - real estate situated outside Canada; - other income-earning foreign property. Foreign investment property does not include: - personal-use property, that is, any property that is used primarily for personal use and enjoyment such as a vacation property, jewellery, artwork, car or any other such property; - assets used exclusively in an active business, such as the inventory of a business or the equipment and building used in a business.

T1141 form Who Must Report? Section of the Income Tax Act requires Canadian residents who have transferred or loaned property to a non-resident trust which has a Canadian beneficiary (referred to as a “specified foreign trust”) to file an information return. Where the transfer or loan is made by a partnership, the property is deemed to have been transferred or lent by the members of the partnership. As a result, each member of the partnership is required to file the information return. However, the partners can elect for joint filing of the return. What Must be Reported? - identification of the trust, that is, its settlors, trustees, beneficiaries; - trust documents (if filing for the first time), as well as any subsequent changes to the documents or new documents created since the last reporting period; - financial statements of the trust (if the trust prepares financial statements); and - amount of transfers or loans to or distributions from the trust occurring after 1990 and amount of indebtedness owed to and by the trust. (For transfer and loans prior to 1991, only the year of the earliest transfer or loan has to be reported).

T1142 form Who Must Report? Section of the Income Tax Act requires Canadian resident individuals, corporations and trusts, as well as certain partnerships, who are beneficiaries of non- resident trusts to file an information return where they: - receive a distribution from the trust; or - are indebted to the trust. - A non-resident trust deemed to be resident under section 94 of the Income Tax Act for purposes of Part I (discretionary trust) is deemed to be resident for purposes of determining who must file Form T1142. As a result, this type of trust will have to report distribution it receives or amounts it owes to non-resident trusts. However, this type of trust remains a non-resident trust for other purposes. As a result, distributions received from and indebtedness owed to this type of trust will have to be reported on Form T1142. What Must be Reported? - identification of the trust, that is, the name of the trust and the trustees; and - amount of distributions received from the trust and the amount of indebtedness owed to the trust.