What makes a foreign company a foreign affiliate?
It is an equity test, not a question of size or activity. A non-resident corporation becomes your foreign affiliate once your interest in its shares reaches the specified level, measured with the interests of certain related persons taken into account rather than yours alone. That last part is what surprises people: a holding that looks too small on its own can cross the line once a relative's shares in the same company are counted. Nothing about the company's business matters to the test. A dormant holding company and a trading business are treated the same way at this stage, and the classification only starts to bite afterwards.
Is a foreign affiliate the same thing as a subsidiary?
No, and the difference is the reason the term exists. A subsidiary is a company you control. A foreign affiliate can be a company you hold a modest stake in alongside other shareholders you have nothing to do with. The Canadian rules use affiliate status as the entry point: once a non-resident corporation is your affiliate, surplus accounting and information reporting attach to it, whether or not you can direct anything it does. Clients who have equated the two often turn out to have obligations in respect of companies they have no influence over and no access to the books of.
Can an individual have a foreign affiliate, not just a company?
Yes. The rules are written in corporate language and they apply to people. An individual resident in Canada who holds shares in a non-resident corporation at the specified level has a foreign affiliate, with everything that follows from that status. This is the most common way the concept goes unnoticed: the shareholding is in a family business abroad, it was acquired long before the move to Canada, and it has never been thought of as a structure at all. The status does not depend on having been advised of it, and it does not wait for a dividend.
Do shares held through a trust or a partnership count?
They can. The test looks to the interest in the foreign corporation's shares, and an interest held through an intermediary is not automatically somebody else's problem. Working out whose interest it is means reading the trust deed or the partnership agreement alongside the share register, because the answer decides who carries the reporting and the surplus accounting. We see two failures here. One is everybody assuming the intermediary deals with it. The other is the intermediary filing where the beneficiaries or partners should have, which leaves the right parties still outstanding.
What does foreign affiliate status actually change for me?
It turns a shareholding into an accounting exercise. Once the corporation is an affiliate, its earnings have to be tracked in pools according to what kind of income they were and where they arose, because those pools decide the Canadian treatment of anything it eventually pays out. Information reporting attaches at the same time. Neither consequence depends on money reaching you, which is the point worth taking away: the obligations begin with the status and then accumulate quietly, while the investment sits there doing nothing in particular.
Is a dormant foreign company still a foreign affiliate?
Yes, while the shares are held and the test is met. Affiliate status turns on the interest in the corporation, so a company with no trade, no staff and a static bank balance is in the same position as an operating one. What changes is the content of the work rather than whether there is any: the surplus pools stay flat and the reporting is evidential, showing that nothing happened. Striking the company off in its home country ends the status going forward, but it does not close out the years in which the company existed.
Do I need to report a foreign business I own?
Almost certainly, and on more than one form. Canada requires reporting of foreign affiliates on the T1134; the United States has a family of returns keyed to the entity type and your level of control, and several carry penalties that apply whether or not any tax is owed. These are information returns, so the obligation follows the ownership rather than the profit. See T1134.
How many days can I spend in a country before I become tax resident?
It depends on the country, and a day count is only ever the start. Many use a threshold in a tax year, some also look at averages across several years, and some have no day test at all and decide on where your home and life are. Two countries can both conclude you are resident, which is what the treaty tie-breaker exists to settle. Counting days without checking the tie-breaker is how people end up filing as resident nowhere. See the residency tie-breaker.
