Canada
Julian A. Emmanuel & Joe Moëd
by Julian A. Emmanuel & Joe Moëd
Canada’s transfer pricing rules, found in Section 247 of the Income Tax Act (ITA), apply to Canadian taxpayers who enter into transactions with non-arm’s-length non-residents.
The legislation is supplemented by various transfer pricing memoranda (TPM) issued by the Canada Revenue Agency (CRA). However, in the case of a dispute, the guidance in the TPMs is not binding on the courts.
The transfer pricing legislation does not contain any concept of materiality, or a threshold below which transactions are exempt.
Canada’s domestic legislation does not specify any particular method to be used to determine arm’s length transfer prices. However, the domestic guidance generally accepts any of the methods found in the OECD Transfer Pricing Guidelines (TPG), namely:
Comparable uncontrolled price
Resale price
Cost plus
Transaction net margin
Profit split
While not enshrined in legislation, various CRA guidance has outlined the CRA’s view, consistent with the TPG, that the traditional transaction methods (1, 2, and 3 above) are preferred over the transactional profit methods (4 and 5), provided sufficient reliable comparable data is available.
As a member of the OECD, Canada’s transfer pricing rules generally conform to the OECD TPG, and encourage the use of TPG methodologies to ensure transactions are treated at arm’s length. However, while Canada’s transfer pricing rules encourage the use of the OECD TPG, the TPG has no legal force in Canada, and is for guidance only.
Taxpayers are not required to submit their transfer pricing documentation to the CRA in the normal course of filing their annual corporate tax return.
However, where transactions with non-arm’s-length non-residents exceed CAD 1 million in aggregate, taxpayers must file Form T106 (Information Return of Non-Arm's-Length Transactions with Non-Residents) within 6 months of their year-end, reporting the transactions and balances with the applicable non-resident.
On this form, taxpayers also certify that they have prepared “contemporaneous documentation” with respect to the reported transactions, which must be provided to CRA within three months upon written request. It is therefore important that this contemporaneous documentation (as set out in II.a below) be maintained so that it can be provided on request.
Finally, taxpayers with consolidated group revenues of at least EUR 750 million must also file Country-by-Country Reporting (CbCR) within 12 months of their year-end. Canadian CbCR reporting legislation generally conforms to OECD model legislation.
a. Preparation of transfer pricing documentation
The requirements to prepare and maintain transfer pricing documentation, commonly referred to as “contemporaneous documentation”, are contained in Subsection 247(4) of the ITA.
This “contemporaneous documentation” must contain a description of the transactions that is complete and accurate in all material respects, including:
The property or services to which the transaction relates;
The terms and conditions of the transaction;
The identity of the participants in the transaction and their relationship to each other;
The functions performed, the property used or contributed, and the risks assumed for the transaction by the participants in the transaction;
The data and methods considered and the analysis performed to determine the arm’s length transfer prices for the transaction; and
The assumptions, strategies, and policies, if any, that influenced the determination of the arm’s length transfer prices for the transaction.
b. Master and “Canada” local file
Canada’s domestic transfer pricing regulations do not require the preparation of a Master and Local file in accordance with Annex I & II respectively of Chapter V of the TPG.
c. Penalties
Under the ITA, the CRA may adjust a taxpayer’s transfer prices if it is determined the transfer prices do not reflect the terms and conditions that would exist between persons dealing at arm's length.
If the net result of these adjustments exceeds the lesser of 10% of the gross revenue for the year and CAD 5 million, the taxpayer is liable to a penalty of 10% of the amount of the adjustments.
Furthermore, a late-filed T106 attracts penalties of CAD 25 per day to a maximum of CAD 2,500 for each individual T106 slip required.
In general, the CRA can review and reassess a corporation’s tax return within three years from the original notice of assessment if the corporation is a Canadian-controlled private corporation, or within four years for all other types of corporation.
However, these reassessment periods are extended for three more years in the case of transactions between a Canadian taxpayer and a non-arm’s-length non-resident, and accordingly, care must be taken to maintain appropriate documentation for at least 6 years.
The arm’s length principle contained in the OECD TPG is enshrined in Section 247 of the ITA, where an arm’s length transfer price is defined as “an amount that would have been a transfer price in respect of the transaction if the participants in the transaction had been dealing at arm’s length with each other”.
In general, the CRA’s guidelines and the TPMs regarding economic analysis and how to demonstrate an arm’s length result follow the principles set out in the OECD TPG.
The CRA runs an Advance Pricing Arrangement (APA) programme which assists taxpayers to determine appropriate transfer pricing methods for transactions with non-arm’s-length non-residents. The APA is entirely voluntary, and there is no legal requirement to enter into an APA with the CRA. The objective of the programme is to provide taxpayers with increased certainty regarding their transfer pricing arrangements. According to the 2021 annual report prepared by the APA, the average time to conclude a bilateral APA with the CRA was 49.4 months.
If a taxpayer believes the CRA has misinterpreted the facts or applied the law incorrectly, the taxpayer has the right to object within 90 days of the receipt of the relevant notice of assessment or reassessment. The objection should include a detailed description of why the taxpayer disagrees, as well as relevant facts and supporting documentation.
Kanish & Partners LLP provides audit, accounting, tax, and business advisory services. Our focus is on advising clients for success. We bring practical solutions to clients, whether they're seeking growth opportunities, or looking for increased efficiency and long-term sustainability.
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Julian A. Emmanuel, CPA, CA, CGA is Partner with Kanish & Partners. He has been providing high-quality service to growth-oriented businesses since co-founding the firm in 2000, including strategic planning, auditing, and accounting. He is dedicated to community service, serving as treasurer and board member of various non-profits and cultural organisations.Contact Julian.
Joe Moëd CPA, CA is Manager, Tax & Assurance with Kanish & Partners. He trained as a CA in the UK, and qualified as a Canadian CPA upon moving to Toronto in 2014. He provides advisory and taxation services across a range of industries, with a focus on inbound businesses into Canada. When not at work he enjoys playing guitar, logic puzzles, and ravine walks with his family.Contact Joe.
