We have never computed surplus accounts, so where do we start?
With the incorporation date of each foreign affiliate, unfortunately, because the pools are cumulative. The starting point in practice is an inventory: which foreign companies the group holds, what proportion of each runs through which intermediate company, what taxation year end each has, and what financial records survive for each year. That inventory usually shortens the job considerably, because dormant companies and companies that have only ever had active earnings in a treaty country need far less work than the trading ones. Only then is it worth opening a single year's accounts. Starting with the most recent year and working backwards is the common instinct, and it tends to be done twice.
Is retained earnings on the accounts the same as surplus?
No, and treating it as though it were is a frequent source of a wrong dividend deduction. Surplus is a tax computation. It starts from the affiliate's earnings as computed under its own local rules or under Canadian rules depending on the category, adjusts them, splits them by the character of the income that produced them, and keeps each category in a pool of its own. Retained earnings is one number produced under an accounting framework for a different purpose. The two are rarely close, and where they happen to be close it is a coincidence that does not survive the first year with an unusual transaction in it.
Are surplus accounts kept for each company or for the group?
Each company, separately, for each of its taxation years, and in the currency in which its own computation is made. There is no group pool. That is why an organisation chart is the first document we ask for. A group with a dozen foreign companies has a dozen sets of accounts, and a dividend from the bottom of a chain passes through each intermediate company's pools on the way up rather than arriving in Canada straight from the company that earned the money. Groups that have prepared something have usually prepared it at the top company only, which answers a different question from the one that gets asked.
What records do you need to compute foreign affiliate surplus?
Financial statements for every year of every affiliate, the local tax returns and assessments showing what tax was actually paid, the share register and any changes in it, intercompany agreements, and details of every disposition of property and every dividend paid or received. Where a year is missing, the local filing is often recoverable from the foreign tax authority or the former accountant, and that is worth pursuing before resorting to estimates. Estimates are sometimes unavoidable in the oldest years. Where we use one, it is labelled as one in the schedules, so that a reviewer coming to the file later sees exactly what we saw.
What happens if we pay a foreign dividend without computing surplus?
The return still goes in. What goes in with it is a deduction nobody can derive, and the file stays exposed for as long as the year remains open. If the amount is later shown to have come from a pool with less generous treatment, the Canadian inclusion rises and interest runs from the original due date rather than from the day the error was noticed. The harder problem is that the computation gets no easier with time. The year in which a distribution is questioned is usually several years after the records needed to support it were last straightforward to obtain.
Do we need surplus accounts for a dormant foreign company?
A company with no income has nothing accumulating, so the work is small, but it is not nil. Its pools still have to be established as at the date it stopped trading, because a later wind-up or distribution reaches back to them, and because a dormant company in the middle of a chain is a conduit that a dividend from below has to pass through. What we normally do with these is compute them once, to the point where the balances are fixed, and record that they are closed. That is a short schedule, and it takes the company out of every future year's work.
What is a totalization agreement and how do I use one?
A social security agreement that stops you contributing to two systems for the same work, and lets periods in both count towards benefit eligibility in either. Which system you stay in depends on the agreement's rules for your situation — a seconded employee usually remains in the home system for a set period, a locally hired one usually joins the host system. You evidence it with a certificate of coverage obtained before or shortly after the assignment starts. See certificates of coverage.
How does a remittance actually work, and is it taxed?
A remittance is a transfer of money, not a category of income, and moving your own funds between your own accounts is not what creates tax. What can create tax is the income behind the money and the rules of the country it leaves. India, for instance, collects tax at source when a resident individual remits abroad under the Liberalised Remittance Scheme, and requires certification before certain payments leave. The transfer is the trigger for paperwork rather than for tax. See the LRS and tax collected at source.
