Transfer Pricing Canada
Transfer Pricing authority and tax law
Section 247 of the Income Tax Act (Canada) (ITA) received Royal Assent on 18 June 1998, and became general y applicable to taxation
years that began after 1997. It constitutes Canada’s transfer pricing legislation and deals with the determination of transfer pricing
adjustments, the recharacterization of transactions, penalties, records/documents required to be made or obtained, contemporaneous
requirements and timing of provision to the Minister when requested, plus ministerial discretion regarding acceptance of downward
The Canada Revenue Agency (CRA) is responsible for ensuring that taxpayers meet the requirements of the law.
Transfer Pricing regulations and rulings
The CRA does not set out its views and positions on transfer pricing issues by legal doctrine or in detailed fashion or examples. The CRA
prefers to outline its views in general principles.
It provides its administrative interpretations and guidance with respect to § 247 and its application through the release of Information
Circulars (IC), Transfer Pricing Memoranda (TPM) and pronouncements at public conferences, symposia and conventions. ICs usual y
address major subjects from a general perspective, while TPMs typical y provide supplementary detailed explanations and guidance on
specific issues related to the major subject.
CRA’s current key pronouncements on transfer pricing are:
- IC87-2R, International Transfer Pricing, 27 September 1999
- IC94-4R, International Transfer Pricing: Advance Pricing Arrangements (APAs), 16 March 2001
- IC94-4R (Special Release), Advance Pricing Arrangements for Small Businesses, 18 March 2005
- IC71-17R5, Guidance on Competent Authority Assistance Under Canada’s Tax Conventions, 1 January 2005
The CRA is a member of the Pacific Association of Tax Administrators (PATA). Relevant guidance is issued by PATA from time to time on
topics of mutual interest, e.g., the PATA Transfer Pricing Documentation Package, released March 2003.
Additional information and guidance on transfer pricing related matters can be obtained from the CRA’s website: www.cra-arc.gc.ca
OECD guidelines of Transfer Pricing
While no mention is made of the OECD guidelines in § 247 of the ITA, the legislative provision is intended to reflect the arm’s length
principle as set out in the OECD guidelines. The CRA has also endeavored to harmonize its administrative guidance and approach to
transfer pricing with the OECD guidelines. As noted in IC87-2R: “This circular sets out the Department’s views on transfer pricing and also
provides the Department’s position with respect to the application of the OECD guidelines.”
When dealing with transfer pricing issues domestical y, reliance is typical y placed on the relevant Canadian statutory provisions. CRA’s
related ICs and other administrative guidance are considered instructive but not definitive. Moreover, the OECD guidelines are not
usual y recognized as authoritative; however, courts and other dispute resolution channels (e.g., competent authority) may consider the
international principles and standards established by the OECD in reaching a decision.
Transfer Pricing methods
The CRA accepts the transfer pricing methods recommended in the OECD guidelines when such methods are applied correctly and result
in an arm’s length price or allocation. These transfer pricing methods include the:
- CUP method
- Resale Price method
- Cost Plus method
- Profit Split method (residual/contribution)
However, the CRA considers the use of the Profit Split method as a method of last resort.
The CRA considers, notwithstanding that § 247 does not so stipulate, that there is a natural hierarchy in the application of the above-
noted transfer pricing methods, with the CUP method providing the most reliable indication of an arm’s length transfer price or allocation
and the Profit Split method providing the least reliable indication of an arm’s length result.
The CRA does not require or impose a “best method” rule. The CRA believes that the most appropriate method to be used in any situation
will be that which provides the highest degree of comparability between transactions, following an analysis of the hierarchy of methods.
Penalties in Transfer Pricing
Subsection 247(3) of the ITA causes a taxpayer to be liable for a penalty of 10% of the net upward transfer pricing adjustments made
under subsection 247(2) of the ITA, if such transfer pricing adjustments exceed the lesser of 10% of the taxpayer’s gross revenue for the
year and CAD 5,000,000.
A taxpayer wil be deemed not to have made reasonable efforts to determine and use arm’s length transfer prices or al ocations unless the
taxpayer has prepared or obtained records or documents which provide a description that is complete and accurate in al material respects
of the items listed in subsection 247(4) of the ITA, and such documentation is in existence as of the tax filing due date. In the case of
Canadian corporate entities, such documentation must exist six months after the year-end. For partnerships, the due date is five months
after the year-end. Further, a taxpayer wil be deemed not to have made reasonable efforts to determine and use arm’s length transfer
prices or al ocations if the taxpayer does not provide the records or documents to the CRA within three months of the issuance of a written
request to do so.
Transfer pricing related penalties are exacted without reference to the taxpayer’s income or loss for the relevant reporting year and are
not tax deductible.
Penalty relief in Transfer Pricing
If a taxpayer, subject to an upward adjustment of its transfer prices or al ocations, was considered to have made reasonable efforts to
determine and use arm’s length transfer prices or al ocations with respect to such adjustments, no penalty would be applicable to such
As required by TPM-07, all proposed reassessments involving transfer pricing penalties are required to be referred to the Transfer Pricing
Review Committee (TPRC) for review and recommendation for final action. The TPRC, after consideration of the facts and circumstances
and representations by the relevant taxpayer, will conclude whether or not a transfer pricing penalty is justified.
No transfer pricing adjustments under subsection 247(2) of the ITA should arise regarding transactions covered by an APA as long as the
APA remains in effect and the taxpayer complies with its terms and conditions.
When the CRA has reassessed a transfer pricing penalty and the Canadian competent authority and relevant foreign counterpart negotiate
a change to the amount of the transfer pricing adjustment, the CRA wil adjust the amount of the Canadian transfer pricing penalty
Transfer Pricing Documentation requirements
Subsection 247(4) of the ITA requires that a taxpayer must have records or documents, as a minimum, that provide a complete and
accurate description, in all material respects, of the following items:
- The property or services to which the transaction relates
- The terms and conditions of the transaction and their relationship, if any, to the terms and conditions of each other transaction entered
into between the persons or partnerships involved in the transaction
- The identity of the persons or partnerships involved in the transaction, and their relationship at the time the transaction was entered into The functions performed, the property used or contributed and the risks assumed by the persons or partnerships involved in the
- The data and methods considered and the analysis performed to determine the transfer prices, the allocations of profits or losses or
contributions to costs for the transaction
- The assumptions, strategies and policies, if any, that influenced the determination of the transfer prices, the al ocations of profits or
losses or contributions to costs for the transaction
In addition, although its views are not law, the CRA indicates in Information Circular 87-2R that it expects a taxpayer’s documentation to
include certain additional information (e.g., details of cost contribution arrangements, translations of foreign documents and other general
The CRA issued TPM 09 on 18 September 2006. The purpose of this memo was to define the meaning of “reasonable efforts” under §
247 of the Act. In practice, TPM 09 has not significantly enhanced clarity with respect to the reasonable efforts standard and, thereby, the
potential application of transfer pricing penalties.
Documentation deadlines for Transfer Pricing
Taxpayers must prepare or obtain records and documents which provide a description that is complete and accurate in all material
respects of the items listed in subsection 247(4) of the ITA, and such documentation must be in existence as of the tax filing due date. In
the case of Canadian corporate entities, such documentation must exist six months after the year-end. For partnerships, the due date is
five months after the year-end.
Taxpayers must provide documentation to the CRA within three months of the issuance of a written request.
Statute of limitations of transfer pricing assessments
Under subsection 152(4) of the ITA, the Minister may not ordinarily reassess after the normal reassessment period as defined in
subsection 152(3.1) of the ITA. For most multinational taxpayers, that period is four years beginning after the earlier of the day of mailing
of a notice of an original assessment for the year and the mailing of an original notification that no tax is payable for the year, unless the
taxpayer has made misrepresentations, committed a fraud or filed a waiver, in which case the Minister may reassess a taxpayer at anytime.
Where a Notice of Reassessment is issued at a later date, the first assessment notice is stil viewed as the original assessment for the
purposes of determining the normal reassessment period under subsection 152(3.1) of the ITA.
With respect to transactions involving non-arm’s length dealings with non-residents, the reassessment period is extended an additional
three years to seven years. This time period may be further extended when taxpayers provide CRA with a waiver, i.e., authorization by the
taxpayer to the CRA to waive the normal reassessment period in respect of a taxation year, as defined in subsection 152(3.1) of the ITA,
within which the Minister may assess, reassess or make additional assessments under subsection 152(4) of the ITA.
Return disclosures/related-party disclosures
Taxpayers are required to file form T106 annual y, reporting the non-arm’s length transactions they had with non-residents during the
taxation year. The form T106 is filed together with the corporate tax return. Data from the T106 is entered into a CRA database and is
used to screen taxpayers for international tax audits.
Transfer Pricing Audit risk/transfer pricing scrutiny
The CRA continues to receive additional funding for its audit of international activities and to focus its audit resources on the examination
of international transactions, especially transfer pricing.
Canadian companies with cross-border dealings with related parties can expect a request from the CRA for their required transfer pricing
documentation prior to or during the course of an audit. As noted in TPM-05, “Contemporaneous Documentation,” effective October
2004, it is mandatory for field auditors to issue a formal written request to taxpayers for their transfer pricing documentation prior to
commencement of the audit or when cross-border non-arm’s length transactions with non-residents are identified during the course of an
Advance Pricing Agreements of tansfer pricing
The CRA launched its APA program in July 1993. As set out in its Information Circular 94-4R, it offers taxpayers the opportunity to pursue
unilateral, bilateral or multilateral APAs. In addition, the CRA has made a smal business APA program available to Canadian taxpayers
under certain conditions. The CRA charges taxpayers only travel costs it incurs in the pursuit of an APA.
On 29 June 2007, the CRA issued TPM 10, which discussed the CRA policy with respect to rol ing an APA back to prior years. The main
limitation imposed by TPM 10 is that APAs may not be rol ed back to years for which a request for contemporaneous documentation has
been issued. Effectively, this means that APAs cannot be rolled back to taxation years under transfer pricing audit.
An updated version of IC94-4R is expected to be released soon.