Managing Foreign Affiliate and Surplus Reporting in a Changing Environment – an Interview with Loretta Matteo

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Episode 22: Managing Foreign Affiliate and Surplus Reporting in a Changing Environment – an Interview with Loretta Matteo

Release date: June 1, 2010
Guest: Loretta Matteo
Running time: 8:42 minutes

Tax directors always struggle with the myriad of tax compliance responsibilities, particularly those pertaining to reporting of foreign affiliates and surplus computations. In this episode, PwC’s Loretta Matteo shares her experiences working with clients who have significant foreign affiliate and surplus reporting obligations. She focuses on the problems when managing this process, how to best deal with the large amount of pending legislation and tips on how to use external advisors.

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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.


Managing Foreign Affiliate and Surplus Reporting in a Changing Environment – an Interview with Loretta Matteo

You’re listening to another episode of PwC’s Tax Tracks at This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandowski: Here with us today is Loretta Matteo, a senior member of PwC Canada’s International tax practice based in Toronto and a specialist in foreign affiliate and surplus reporting for Canadian multinational companies. Loretta has been with PwC Canada for eight years and provides Canadian international tax services to Canadian-based multinationals with operations in the US and around the world. Loretta will share with us some of her insights and experiences working with tax directors in managing foreign affiliates and surplus reporting projects in a complex environment.

Thanks for joining us Loretta.

Loretta: Great to be here.

Gerry: Loretta, what do we mean by foreign affiliate and surplus reporting and who is responsible for meeting these obligations?

Loretta: Canadian based multinationals with foreign subsidiaries may be required to file information returns with the Canada Revenue Agency or CRA.

Generally, where a Canadian company has an interest of at least 10% in a foreign affiliate, the Canadian co is required to annually file a T1134 information return within 15 months after the fiscal year end of the Canadian taxpayer.

It’s important for our clients to be aware that the returns are reviewed by the CRA to identify passive-type income earned by the foreign company or subsidiaries that may be taxable in Canada on an accrual basis as foreign accrual property income – referred to as FAPI.

The information returns include general information about the non resident such as its country of residence, business activity, sources of income, as well as any reorganization transactions.

The information returns disclose any FAPI for controlled foreign affiliates (that is a non resident corporation that a Canadian taxpayer directly or indirectly controls) and other filing positions with respect to any passive income earned by a foreign affiliate.

These surplus computations of a foreign affiliate should be reported and filed along with the information returns that I just described where a foreign affiliate of a Canadian taxpayer has paid a dividend directly to the Canadian taxpayer.

These surplus computations should also be completed with the T2 corporate tax return filed by the Canadian taxpayer to help determine whether the dividend income it received from its foreign affiliate is taxable for Canadian purposes. It is also required for tax provision purposes.

Generally, we advise our clients to prepare and update their surplus computations annually for purposes of tracking the Canadian taxpayers tax attributes in the foreign subsidiary (such as surplus, and the cost base).

This is relevant, for example, for any future tax planning or reorganizations involving a foreign subsidiary that is directly or indirectly held by a Canadian taxpayer.

Gerry: In your experience, what are some of the common problems in managing this process?

Loretta: Some of our clients don’t realize or understand what their reporting obligations are. What we are seeing with some of our clients is that reporting obligations and timelines are often missed or overlooked simply because of resource limitations and/or the lack of tracking filing due dates and gathering the financial data required from their for subsidiaries.

In some cases, the FAPI analysis for foreign subsidiaries is not completed annually or timely for purposes of completing the Canadian corporate tax returns. Rather it may be completed only when the T1134 information returns are due which is a year and a half later.

This can result in having to file amended corporate returns with significant interest and penalties to our clients.

What we are also seeing is that some of our clients deal with these reporting obligations and surplus computations as merely compliance obligations, and they may not really appreciate the importance of identifying their FAPI exposures and tax attributes early on in the process.

We advise our clients to take more of a coordinated effort approach by identifying any FAPI exposures early on in this process such as part of the quarterly or annual tax provision review process.

This would simplify completing the Canadian corporate tax return, the T1134 and surplus reporting requirements.

Gerry: What should tax directors be doing to better manage these foreign affiliate and surplus reporting obligations in order to control fees paid to external advisors?

Loretta: Our clients really need to be more proactive rather than reactive when managing their foreign affiliates.

More time should be invested up front as part of an annual due diligence process. In some cases, a FAPI and surplus review of key transactions is not completed until after year end, which leads to additional costs and overruns by us and the client. In some instances, a FAPI review may be completed but not the surplus implications of transactions, which can be very different.

An annual process should be put into practice to manage the entire process from beginning to end; by obtaining the information required from their foreign operations early on and to complete a due diligence FAPI/surplus review and to update surplus balances more efficiently.

Our clients should be working with their advisors to come up with an annual process that adds value for them client and ultimately minimize costs for external advisors.

Gerry: Loretta, as you know, it is common for tax directors to maintain that they don’t have proper resources to manage these reporting obligations. From your experience how can tax directors better utilize the services of external tax advisors?

Loretta: In many cases, we have coached our clients on establishing a process that works for their factual circumstances for purposes of managing their foreign reporting obligations. We have also assisted our clients in customizing an annual process to meet their particular filing requirements.

We’ve also developed a surplus preparation course to assist our clients to do more of the calculations and updates themselves.

The course has allowed our clients to train more of their junior tax staff or accounting staff to gather the information required and to draft the surplus calculations. In some instances, it may be beneficial for the foreign subsidiaries to draft the surplus templates since they have all the financial data and the tax returns are in a foreign language and the Canadian tax group to review the surplus calculations.

We have added value for our clients by reviewing the surplus calculations and documentation prepared by them and provided assistance where required such as considering the surplus and FAPI effects of any reorganizations transactions that occurred in the foreign affiliate group.

Gerry: There’s a lot of pending legislation or amendments that have not been enacted in respect of foreign affiliates and surplus. How best should a tax director be dealing with these amendments that have not been enacted?

Loretta: Dealing with draft legislation is always a challenge. Some of the draft legislation can go as far back as 10 years.

Generally, the CRA expects taxpayers to be preparing their surplus calculations and relevant elections based on proposed law rather than currently enacted legislation.

In December 2009, the Minister of Finance issued proposed law that eliminated or modified previous draft legislation. Many elections have been filed by taxpayers based on previous proposals. As a result, many elections may need to be amended, such as the 93(1) election whereby all or a portion of a capital gain can realized on a share of the foreign affiliate be treated as a tax-free inter-corporate dividend.

Some of the tax elections may be in respect of taxation years that are now statute barred. Taxpayers should be working closely with their advisors in dealing with draft legislation as well as assessing the tax effect of any transaction based on current legislation as well since current legislation is applicable for the year end audit provision.

Gerry: Thank you for listening. For additional information or to contact PwC’s tax practice, please visit

Thank you for tuning into Tax Tracks at

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