26 November 2021

Canada’s car dealers must file for controlled foreign captives, say accountants

Canadian auto dealerships with interests in captives are being warned of the risk of fines due to increasingly complex reporting requirements. In  an update from accounting and business consulting firm MNP, partner Tim Bloos says those failing to file correctly face penalties of up to $24,000 for each form.

As Bloos explains, in a typical captive arrangement, dealerships hold all the shares in a specific class in the captive, entitling them to the earnings generated.

“While this seems like a relatively simple premise, these investments in captive insurers are being subject to increasingly complex tax reporting requirements where an error can result in extensive penalties,” he writes.

In particular, following the introduction of “tracking interest rules” in the 2018 Federal Budget, many more dealerships are now required to file a Form T1134 regarding captives considered controlled foreign affiliates. The form was also significantly revised for taxation years beginning after December 31, 2020.

The filing due date for the form is ten months after the dealer’s year-end.

“The CRA [Canadian Revenue Agency] has increased their compliance activity in the captive insurance investment area as they look for arrangements caught by the tracking interest rules or where T1134s were not historically filed,” warns Bloos.

Those failing to file face penalties of $25 per day for each missing T1134 up to $2,500 or $1,000 per month to a maximum of $24,000 for each if the CRA issues a demand to file and the taxpayer fails to comply.

“If taxpayers are found to be non-compliant with their filing obligations, penalties can quickly add up,” he adds.