Transfer Pricing in Canada: A Comprehensive Overview

Canada’s transfer pricing (TP) regime is based on the arm’s length principle and has been in place since 1997. It aims to ensure proper profit allocation among related entities and prevent base erosion.

Transfer Pricing Regulations

Canada’s TP rules are established under Section 247 of the Income Tax Act and apply to cross-border transactions between related parties involving goods, services, royalties, and financing.

References to International Rules

Canada aligns closely with the OECD Transfer Pricing Guidelines and supports BEPS initiatives. It is a member of the Inclusive Framework and implements international tax cooperation standards.

Definition of Related Party

A related party includes entities with common control, direct or indirect ownership, or influence over decision-making.

Transfer Pricing Documentation

Canada requires contemporaneous documentation that must be prepared by the tax return due date. It typically includes Master File and Local File-equivalent content, although not formally termed as such.

Tax Havens & Blacklists

Canada does not maintain a public blacklist, but special reporting rules and penalties apply to transactions with non-cooperative jurisdictions.

Advance Pricing Agreement (APA)

Canada offers unilateral, bilateral, and multilateral APAs administered by the Canada Revenue Agency (CRA). These provide pricing certainty for complex arrangements.

Audit Practice

CRA actively conducts TP audits with a focus on high-value transactions, restructuring, IP, and intercompany services. Canada has been involved in major court cases like GlaxoSmithKline and Cameco.

Documentation Details

TP documentation must cover transaction terms, functional analysis, comparables, and pricing methods. CRA may request it within 3 months of notice.

Country-by-country Reporting (CbCR)

CbCR applies to MNE groups with consolidated revenues of CAD 1 billion or more. Reports must be filed within 12 months of year-end.

Record Keeping

All supporting records, including TP documentation, must be kept for 6 years after the end of the tax year.

Penalties and Interest

Non-compliance can lead to penalties of CAD 500 per week (up to CAD 12,000), transfer pricing adjustments, and interest on underpaid taxes.