global transfer pricing & dispute resolution services

By understanding and following Canada’s transfer pricing rules, multinational entities operating in Canada can avoid the risk of incurring costly penalties for noncompliance.

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GLOBAL TRANSFER PRICING & DISPUTE RESOLUTION SERVICES

NEWSFLASH – A SUMMARY OF THE BASICS EVERY TAXPAYER SHOULD KNOWThe basic rules for transfer pricing in Canada are not fully understood by many taxpayers doing business in Canada, which leaves them exposed to potential reassessments and the transfer pricing penalty. This newsflash will summarize these rules in very general terms.

Legislation and guidance

The Canada Revenue Agency (“CRA”) utilizes three platforms to communicate Canada’s transfer pricing legislation, administrative policies and guidance:

• Section 247 of the Income Tax Act (Canada) (“the Act”) contains the legislation governing on transfer pricing

• Information Circular 87-2R (“IC 87-2R”) provides administrative policies and guidance with respect to the application of section 247 of the Act and is cross-referenced to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”)

• Transfer Pricing Memoranda (“TPM”), which are periodically issued and intended to supplement IC 87-2R, provide further guidance on specific aspects of the transfer pricing legislation

Documentation

The CRA has rules requiring transfer pricing documentation:

• Section 247 requires that Canadian taxpayers document non-arm’s length transactions with non-residents and use arm’s length transfer prices

• Section 247 contains a provision that deems the taxpayer not to have made “reasonable efforts” to determine and use arm’s length transfer prices unless the taxpayer has compiled certain information and analyses in the form of contemporaneous documentation

• Taxpayers are required to update the documentation for any material changes, and provide the documentation to the CRA within three months of a written request that is served personally or by registered or certified mail

Audits, adjustments and penalties

Taxpayers face the following risks related to transfer pricing audits, adjustments and penalties:

• The statute of limitations is six years for Canadian-controlled private corporations and seven years for foreign controlled corporations and public corporations

• Section 247 allows the CRA to adjust a Canadian taxpayer’s transfer prices or cost allocations where the transfer prices or cost allocations do not reflect arm’s length pricing

• Where the CRA has made a transfer pricing adjustment, it can also impose penalties in circumstances where a taxpayer has failed to prepare and maintain contemporaneous documentation supporting transfer prices

TRANSFER PRICING RULES IN CANADA

• Transfer pricing adjustments that result in a net increase in income or a net decrease in loss are subject to a 10% penalty, with the following exceptions:

– Penalties will not be applied where the net transfer pricing adjustments do not exceed 10% of the taxpayer’s gross revenue or C$5 million

– Penalties will not be applied where the taxpayer has made reasonable efforts to determine and use arm’s length prices, and documented such by the date its tax return is due for the taxation year (TPM-09 provides information on the CRA’s administrative positions on the meaning of “reasonable efforts”)

• Finally, paragraph 247(2)(b) of the Act provides the CRA with the power to “recharacterize” transactions in certain circumstances

Tax return filings

A reporting entity must file T106 forms if the total reportable transactions for all the non-residents is more than CDN $1,000,000.

The T106 Summary and Slips are prescribed forms and require disclosure of information on the non-resident, the amount and type of transactions, transfer pricing methods applied, and disclosure as to whether contemporaneous documentation has been prepared.

• A failure to file a penalty may be assessed where reporting persons or partnerships knowingly, or under circumstances amounting to gross negligence, fail to file or comply with a request by the CRA for T106 forms

• The minimum penalty is $500 per month to a maximum of $12,000 for each failure to comply

• Where the CRA has served a demand to file T106 forms, the minimum penalty is $1,000 per month to a maximum of $24,000 for each failure to comply

• A false statement or omissions penalty of $24,000 may be assessed where information provided on the T106 Summary or Slip is incomplete or incorrect

To fully understand the details of transfer pricing rules in Canada, and how to ensure your company is compliant with Canada’s transfer pricing legislation, please speak to your BDO representative, or contact a member of the BDO Transfer Pricing team.

Global Transfer Pricing & Dispute Resolution Services | Transfer Pricing Rules in Canada

BDO’S TRANSFER PRICING CONTACT

Dan McGeown 416 369 3127 [email protected]

OUR FIRM’S TRANSFER PRICING TEAM

Please see the attached page highlighting the members of BDO Canada’s team of transfer pricing professionals.

OUR TEAM: CANADA

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GLOBAL TRANSFER PRICING & DISPUTE RESOLUTION SERVICES

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

THERESE GARCIA, HBA(ECON), CMA Senior Manager

Email: [email protected]

Direct line: 416 369 3118

PAVLO SUGOLOV, MA(ECON) Manager



ALISON WALDENBERG, MLS Manager



YESSELI GALLARDO, MIB Manager



CHRIS MANGROBANG, MA (IPED) Senior Consultant


Direct line: 416 865 0200 Ext. 3427

DANIEL McGEOWN, BAS, CGA Associate



RANA AHMAD, MSC Senior Consultant


Direct line: 416 865 0200 Ext. 3255

MELISSA YONG, MA (ECON) Junior Consultant


Direct line: 416 865 0200 Ext. 3447

STEPHANIE WILKINSON Junior Administrative Assistant


Direct line: 416 865 0200 Ext. 3243

global transfer pricing & dispute resolution services

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