CRA announces major changes in T106 reporting: Are you ready?

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Episode 2: CRA announces major changes in T106 reporting: Are you ready?

Release date: June 2, 2009
Guest: Emma Purdy
Running time: 6:29 minutes

The CRA’s newly revised T106 form puts the onus on taxpayers to provide more detail regarding financial instruments and derivative transactions. PwC will help you simplify the process.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.


CRA announces major changes in T106 reporting: Are you ready?

Welcome to this PricewaterhouseCoopers podcast — another in a series on Canadian and international tax issues affecting businesses and individuals in Canada.

Canadian companies that have related foreign companies could face a higher risk of being audited by the Canada Revenue Agency — all because of an expanded form T106.

Form T106 is called Information Return of Non-Arm's Length Transactions with Non-Residents. As the name suggests, it is all about disclosure to the CRA.

Changes to the form at the end of 2008 broaden the disclosure. That gives the CRA more openings for an audit.

I will outline the two kinds of changes and their implications.

First, disclosure is expanded for financing transactions. Instead of these all being in one line, the new form breaks them down into three specific categories:

  • Sales of financial property, including factoring, securitizations and securities;
  • Lease payments; and
  • Securities lending (This includes fees and compensation payments).

There's also a catch-all for everything else.

The second change is the addition of a section for derivative contracts. This new disclosure requirement covers various derivative contracts entered into with related parties. It includes contracts for:

  • Interest rates;
  • Foreign exchange;
  • Credit;
  • Equities; and
  • Commodities and indexes.

The new section also covers fees (including commissions) and other payments or receipts for derivative transactions. That means you would have to disclose tax structures involving instruments with derivatives – whether explicit or embedded – as well as the number of contracts and notional amounts.

Both changes to form T106 could open the door to CRA audits.

Related-party loans, credit guarantees, and accounts receivable factoring arrangements have been under the audit microscope for years. Right now, two important cases are before the Tax Court of Canada on guarantee fees.

The expanded disclosure on derivatives will allow the CRA to make comparisons in the financial services industry. The expectation is that the CRA will focus its audit resources on transactions or organizations that stand out as unusual.

As well, for the CRA, the quality of information disclosed in the T106 is an indicator of the quality of supporting documentation and of the company's financial processes for identifying and capturing intercompany transactions.

The CRA expects tax return software to incorporate the new T106 form by May 2009. What happens in the meantime?

If an old form T106 has already been submitted, the CRA expects you to submit the additional information that the new form requires as soon as possible. If the information is not received by the six-month deadline, we understand that penalties are unlikely, but the CRA will be looking at these situations case by case.

For forms not yet filed but due before the new form is available, the additional information should be attached to the old form.

Once the new form is available electronically, tax returns will have to comply with the new disclosure. However, the January 2009 federal budget provides filers some relief on penalties for late T106s.

Compiling the T106 is really more than an administrative exercise. You should think about what the additional disclosures will tell the CRA. Also consider whether your company's transfer pricing analysis and documentation are sufficiently robust to withstand an audit. The revised form could be just the beginning.

For further information contact your PricewaterhouseCoopers adviser, or Emma Purdy of PwC's Transfer Pricing team.

You may also refer to our beyondBorders newsletter from February 2009 under publications on our website at and on Tax News Network at

Thank you for listening.

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