You Just Set Up an Indian Subsidiary as a Canadian Company — Here's the CRA Compliance Nobody Warns You About

Canadian companies have been quietly building out Indian operations for years — GCCs in Bengaluru and Pune, manufacturing tie-ups, and IT services subsidiaries supporting Canadian parents. As India-Canada trade ties deepen, more Canadian CFOs sign off on SPICe+ incorporation paperwork without realising that the moment the Indian entity's shares are issued, a second compliance obligation starts running back home — governed by the CRA, not the Ministry of Corporate Affairs.

Most advisory conversations around India incorporation focus on the India side: registration, FEMA reporting, Transfer Pricing under Form 3CEB, and the India-Canada DTAA as a way to reduce withholding on dividends flowing back to Canada.

What rarely gets discussed — until the accountant asks for it during T2 season — is the Canada-side compliance triggered the day a Canadian company acquires an interest in an Indian Pvt Ltd. FAPI, the T1134 foreign affiliate return, the T106 related-party disclosure, and GST/HST self-assessment on intercompany billing are all live obligations from the date of India online company registration — and the DTAA does not make any of them disappear. This article walks through the Canada-side considerations that catch clients out.

Why the DTAA Only Covers Half the Picture

The India-Canada DTAA, in force since 1997, is genuinely useful. Under its dividend article, a Canadian company controlling at least 10% of the voting power in its Indian subsidiary gets a 15% withholding rate on dividends, versus India's domestic rate of roughly 20% plus surcharge and cess (portfolio holders under 10% pay 25%). Royalties and fees for technical services are generally capped at 15%, with a lower 10% rate for equipment royalties. On a ₹50 crore dividend, that gap is real money without proper paperwork.

But none of this touches whether the subsidiary's undistributed profits get pulled into the Canadian parent's return under Canada's own anti-deferral rules, regardless of whether a rupee has been remitted. The DTAA governs withholding on payments actually made; FAPI governs accrual-based inclusion whether or not anything is paid out. Conflating the two is where Canadian companies get their first surprise.

FAPI — Canada's Answer to CFC Rules, and Why It Behaves Differently Than You'd Expect

Every major economy has some version of controlled foreign company (CFC) rules — the US has GILTI/Subpart F, the UK has Part 9A, Japan has its Anti-Tax Haven regime. Canada's version is the Foreign Accrual Property Income rules in the Income Tax Act.

Control test: a non-resident corporation is a "foreign affiliate" once a Canadian taxpayer holds at least 1% of any share class, and the taxpayer plus related parties hold at least 10% overall. It becomes a "controlled foreign affiliate" (CFA) once Canadian residents holding more than 50% control it — which describes almost every wholly owned Canadian-parent Indian subsidiary.

The good news for operating businesses: unlike Japan's and the UK's frameworks, which trigger attribution once the foreign subsidiary's effective tax rate falls below a threshold, Canada's FAPI regime sorts income by character, not by the Indian tax rate paid. Active business income — manufacturing, IT services delivery, consulting, anything with real operations and management on the ground in India — is generally excluded from FAPI entirely. Only passive income — dividends, rents, royalties, interest, and certain taxable capital gains — earned inside the CFA gets pulled into the parent's income annually, distributed or not.

This means a genuine operating Indian subsidiary will typically not generate a FAPI inclusion on its core operating income, regardless of India's ~25.17% effective rate under Section 115BAA. The risk sits with passive income inside the entity: surplus cash in fixed deposits, licensed-out IP royalties, or a holding structure whose main function is holding shares rather than running a business. That income is taxed at ordinary Canadian rates, with a Foreign Accrual Tax deduction for tax already paid in India to avoid full double taxation.

T1134 and T106 — Two Filings That Exist Regardless of Any FAPI Charge

Even where the FAPI analysis produces no additional Canadian tax — because the Indian subsidiary is a genuine active business — the disclosure obligations are separate and unconditional.

Any Canadian-resident taxpayer owning a foreign affiliate at any point in the year must file Form T1134 alongside the T2 return, covering ownership structure, surplus accounts, employee count, revenue by category, and, for controlled affiliates, the FAPI computation with supporting financials. For taxation years beginning after 2020, T1134 is due within 10 months of the parent's year-end — October 31 for a December 31 year-end. That's a sequencing problem for first-time filers: the Indian financials need to be ready well ahead of that date, often earlier than India's own audit timeline requires. Late filing starts at $25/day ($100–$2,500 per supplement), rising to $24,000 per affiliate under a formal CRA demand with gross negligence. It's frequently unknown to companies going through company formation in India until an advisor asks for the Indian financials during T2 prep — by which point the clock has been running for months.

Separately, any Canadian taxpayer with non-arm's-length transactions with a non-resident — including its own Indian subsidiary — must file Form T106 once the total value of those transactions with all related non-residents combined exceeds CAD $1 million in the tax year. This threshold is deceptively easy to cross: reportable transactions include management fees, royalties, intercompany loans, advances, and receivable/payable balances, counted on a gross basis, including amounts advanced and repaid within the same year. A parent that periodically funds its subsidiary's working capital can cross $1 million without any net exposure. T106 is due the same date as the T2 — generally six months after year-end — with a separate slip per non-resident, and late filing runs up to $2,500 per slip. The fix for both filings: track cumulative transaction value and financial-statement readiness through the year, not just at year-end.

The TRC/Form 10F Gap, and the GST/HST Cost Nobody Models

To access the DTAA's 15% dividend or royalty rate at source, the Canadian parent must give the Indian subsidiary two documents before any payment: a Tax Residency Certificate (TRC), issued by the CRA on written request, confirming Canadian tax residency for the year; and Form 10F, a self-declaration filed electronically on India's income tax portal covering the residency period the TRC applies to. Without both in place before the dividend is declared, the subsidiary withholds at the domestic rate (roughly 20% plus surcharge and cess), and the parent is left claiming a foreign tax credit under section 126 of the Income Tax Act. The problem: Canada's credit mechanism generally caps the creditable amount at the treaty rate that should have applied, not the rate actually withheld. The gap becomes a stranded cost, recoverable only through a formal Indian refund application — calendar discipline avoids the problem entirely.

A less-discussed cost sits on the GST/HST side. Under the Excise Tax Act's Division IV rules, a Canadian recipient importing services from a non-resident — including its own Indian subsidiary — generally must self-assess GST (and, in participating provinces, the provincial HST) where those services aren't acquired for at least 90% use in commercial activities. This is filed on Form GST59, applies regardless of whether the Indian subsidiary is GST/HST-registered in Canada (it usually isn't), and doesn't affect the subsidiary's own GST position, since exported services remain zero-rated in India. Where the parent can claim full input tax credits, this is largely a wash; where it has exempt or partly exempt activities, it becomes a genuine, non-recoverable cost that rarely gets modelled during initial India planning.

The Practical Checklist for Canadian Companies With Indian Subsidiaries

Before the first fiscal year closes: confirm the foreign affiliate (1%/10%) and controlled foreign affiliate (>50%) tests; separate active from passive income for the FAPI analysis; calendar the T1134 deadline and start the Indian financial statement request early; begin tracking cumulative intercompany transaction value against the T106 $1 million threshold.

Before each dividend or royalty payment: request a TRC from the CRA; file Form 10F on India's portal; confirm the subsidiary applies the 15% DTAA rate, not the 20%+ domestic rate, at source.

Annually: align the Indian financial statement timeline with T1134/T2 filing; check whether GST/HST self-assessment applies to intercompany billing; reassess the active-versus-passive split as the business evolves.

How Accorp Partners Supports Canadian Companies in India

Accorp Partners works with Canadian companies on india incorporation and the full compliance stack — online registration of company through SPICe+, FEMA reporting, Transfer Pricing, and statutory audit. For Canadian clients, Accorp times the Indian subsidiary's financials to the T1134 calendar, tracks transaction value against the T106 threshold, and manages TRC/Form 10F ahead of each payment so the treaty rate applies at source rather than a later refund claim. The Canada-side analysis itself — FAPI computation, T1134/T106 preparation, GST/HST self-assessment — is coordinated with the Canadian parent's own advisors; Accorp's role is ensuring the Indian books and agreements produce the evidence those filings depend on.

Learn more: https://accorppartners.com/services/incorporation/india-incorporation

The Bottom Line

How to register a company in India is day one of a two-jurisdiction compliance relationship for Canadian companies. The India side — MCA, FEMA, Income Tax, GST, Transfer Pricing — is familiar territory for most advisors. The Canada side — FAPI's active-versus-passive test, the T1134 and T106 filings, TRC/Form 10F discipline, and GST/HST self-assessment — is where clients get caught out, precisely because none of it is visible from the India-side conversation.

The DTAA is valuable, and Canada's FAPI regime is, in fairness, kinder to genuine operating businesses than comparable regimes elsewhere. But "kinder" is not "automatic": the active business exclusion has to be supportable on the facts, the filings still happen every year regardless of tax owed, and the treaty rate only applies if the paperwork is in place before the payment. Plan the Canada side before the Indian entity is incorporated, not after the first T2 comes due.