The primary source of Canada’s transfer pricing rules is Section 247 of the Income Tax Act (ITA). Under Subsection 247(2) of the ITA, transactions (or series of transactions) in which Canadian taxpayers and non-arm’s length non-resident persons are participants must adhere to terms and conditions that are comparable to those that would have been established if the participants were dealing at arm’s length. If the terms and conditions of these transactions do not adhere to the arm’s length principle, adjustments are to be made for purposes of the ITA.

When the Canada Revenue Agency (CRA) makes an upward transfer-pricing adjustment under Subsection 247(2) of the ITA (known as the “primary adjustment”), there may be a secondary adjustment subject to non-resident withholding tax. This secondary adjustment is based on the premise that a benefit has been provided to a non-resident person due to the excess amount paid to them or the insufficient amount received from them. 

There is a body of transfer pricing case law under Section 247 – and the prior transfer pricing rule in former Subsection 69(2) – which also forms part of Canada’s transfer rules. The OECD Transfer Pricing Guidelines (the “OECD Guidelines”) have been referred to by the courts as secondary sources and interpretive aids. The draft amendments discussed below propose to make Canada’s rules consistent with OECD Guidelines (see also 9.1 Alignment and Differences).

The CRA also issues administrative guidance on its interpretation and application of Canada’s transfer pricing rules through the issuance of information circulars and Transfer Pricing Memoranda (TPM). CRA’s longstanding Information Circular IC 87-2R (IC 87-2R) was cancelled in 2019 and has not been replaced. The CRA’s stated rationale for the cancellation was to align its administrative guidance with the OECD Guidelines. IC 87-2R provided the CRA’s administrative guidance on a broad set of transfer pricing issues. While there are TPMs on specific issues, the cancellation of IC 87-2R leaves considerable gaps.

Section 247 of the ITA was introduced in 1997 to align with the OECD Guidelines arm's length principle. Before that, transfer pricing in Canada was primarily governed by Subsection 69(2) of the ITA.

The current version of Subsection 247 has two branches: a traditional pricing rule that adjusts the terms and conditions of transactions or series that do not satisfy the arm’s length principle, and a “recharacterisation” rule that provides for the substitution of an alternative transaction or series with arm’s length terms and conditions, if the actual transaction or series would not have been entered into by arm’s length parties and was entered into primarily to achieve a tax benefit. Each branch has a different test for its application and different consequences. The traditional pricing rule in paragraphs 247(2)(a) and (c) has been interpreted and applied in several court cases, such as GE Capital and GlaxosmithKline. The second branch in paragraphs 247(2)(b) and (d) has been less frequently considered, but recent cases including Cameco have clarified its scope and limits. These cases are discussed in 14.2 Significant Court Rulings.

On 6 June 2023, Canada launched a transfer pricing consultation (the “Consultation Paper”) including draft amendments to Section 247 that, amongst other things, would introduce a consistency rule with the 2022 OECD Guidelines. The draft amendments represent the first substantial rewrite of Section 247 since the provision was first enacted and are intended to address perceived issues arising from the courts’ guidance in the Cameco case, which was decided in favour of the taxpayer. The draft amendments would keep the adjustment of non-arm’s length dealings for tax purposes, but would use a new concept of a “delineated transaction or series” based on the parties’ “actual conduct” and other factors to compare to arm’s length conditions. The draft amendments would also introduce a new non-recognition and replacement rule, representing a new approach to the recharacterisation rule in current paragraphs 247(2)(b) and (d).

The concept of “dealing at arm’s length” is central to the application of Canada’s transfer pricing rules. Section 251 of the ITA defines this relationship in two ways.

First, persons who are “related” are deemed not to deal at arm’s length, regardless of the nature of their dealings and the actual terms and conditions of their transactions. In the context of corporate groups, the question of whether persons are related turns on the standards for “control”. Generally, control means ownership of shares having more than 50% of the voting rights in the election of the board of directors of a corporation. Corporations are related if one controls the other or they are both controlled by the same person. This means that the transfer pricing rules apply to transactions between a Canadian-resident and non-resident corporation, where one is either the parent or controlling shareholder of the other or both are subsidiaries of a common parent.

Second, Section 251 of the ITA states that it is a question of fact whether persons who are not related deal at arm’s length. The determination that unrelated persons are factually not dealing at arm’s length has been made if, in fact, they do not act independently of one another or they are influenced by some common interest, connection, or scheme.

Section 247 establishes the relevant standard, being the arm’s length principle, but does not prescribe specific methods to comply with that standard.

The Consultation Paper requests input on whether Canada should adopt the approach to pricing low value-adding intra-group services (ie, cost plus 5%) introduced in the 2017 OECD Guidelines, either as a mandatory approach or a safe harbour. The Consultation Paper also indicates that Canada will consider the implementation of Amount B of Pillar One of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) once the proposals are finalised.

To apply the arm’s length principle, the CRA recommends using one of the five methods endorsed by the OECD, namely:

• the comparable uncontrolled price (CUP) method, which compares the price of a transaction between related parties with the price of a similar transaction between independent parties;
• the resale price method, which deducts an appropriate gross margin from the resale price of a product or service purchased from a related party and resold to an independent party;
• the cost plus method, which adds an appropriate mark-up to the costs incurred by a supplier of a product or service to a related party;
• the transactional net margin method (TNMM), which compares the net profit margin of a transaction between related parties with the net profit margin of a comparable transaction between independent parties; and
• the transactional profit split method, which allocates the combined profit or loss of a transaction between related parties according to their relative contributions to the value creation.

No particular transfer pricing methods are specified in the transfer pricing provisions of the ITA. In addition to the OECD methods described in 3.1 Transfer Pricing Methods, the CRA recognises that other methods may be appropriate in some cases, as long as they are consistent with the arm’s length principle and are well supported by facts and analysis. The CRA may challenge the use of unspecified methods and adjust the transfer prices if it considers that the method does not comply with the arm’s length principle or does not produce a reasonable result. Therefore, the taxpayer should exercise caution before using an unspecified method. Canadian courts have accepted and used non-OECD methods in transfer pricing cases. For example, in McKesson (2013 TCC 404) the Tax Court accepted the taxpayer’s “other” method for pricing the discount for a factoring financing transaction, although it disagreed on some factors and risks that influenced the ultimate discount rate. Similarly in GE Capital (discussed in 14.2 Significant Court Rulings), the court used the yield approach to price a financial guarantee.

Canada does not have a formal hierarchy of methods for transfer pricing purposes, but rather a flexible approach that aims at finding the most appropriate method for each case, consistent with the OECD Guidelines. TPM-14 2010 Update of the OECD Transfer Pricing Guidelines (31 October 2012) (TPM-14) addresses the changes made in the 2010 OECD Guidelines to replace the previous recommendation of a hierarchy of methods in the 1995 OECD Guidelines with a more flexible approach that considers the specific facts and circumstances of each case. In TPM-14, CRA has indicated that it considers the changes in the 2010 OECD Guidelines to support a “natural hierarchy” of methods, which reflects the relative reliability and availability of data for different methods (traditional transaction methods such as CUP are preferred over transactional profit methods).

Canada does not require the use of ranges or statistical measures in transfer pricing, but rather accepts the use of the most appropriate transfer pricing method and the most reliable comparable data for each case.

In GlaxoSmithKline (discussed in 14.2 Significant Court Rulings), the Supreme Court of Canada acknowledged that a transfer price is acceptable if it is within an arm’s length range. The CRA has previously accepted the use of a “range of results”.

However, IC 87-2R cautioned against the use of ranges or statistical measures, stating specifically that CRA “does not endorse the use of statistic measures”. However, that circular has been cancelled and the comments in GlaxoSmithKline imply that taxpayers can use any point within an arm’s length range, and are not limited to the median or the interquartile range.

Canada’s transfer pricing provisions do not require comparability adjustments, but the CRA endorses the approach to performing comparability analysis in the OECD Guidelines in TPM-14. Canadian courts have expressly acknowledged the validity of comparability adjustments. In Cameco, one of the taxpayer’s experts used comparability adjustments to account for differences in the terms and conditions of contracts under the CUP method. The Crown argued that the adjustments were unreliable and distorted the price, but the Tax Court found them to be appropriate and in line with OECD guidance.

Canada does not have specific rules relating to the transfer pricing of intangibles.

Canada does not have specific rules relating to hard-to-value intangibles. The Consultation Paper includes a discussion of the approach to “hard-to-value intangibles” introduced in the 2017 OECD Guidelines. The Consultation Paper states that the Canadian government thinks the draft amendments to Section 247 and the guidance in the 2022 OECD Guidelines (which is consistent with the 2017 revisions) are sufficient, and that Canada does not need specific rules relating to hard-to-value intangibles.

Canada recognises cost sharing/cost contribution arrangements. The general transfer pricing rules in Section 247, which are used to evaluate if a transaction is at arm’s length, apply to such arrangements. An arrangement that is a “qualifying cost contribution arrangement” as defined in Section 247 is not subject to a transfer pricing penalty, even if an adjustment is made to the terms and conditions of such an arrangement under Subsection 247(2). See 8.1 Transfer Pricing Penalties and Defences.

The ITA permits a taxpayer to make affirmative transfer pricing adjustments after filing tax returns, but such adjustments are subject to the Minister’s discretion and, in the case of adjustments that increase the taxpayer’s liability under the ITA, may also give rise to interest and penalties.

While the Minister is required to assess a taxpayer’s initial return “with all due dispatch”, any reassessment after the Minister has done so is discretionary; the Minister may reassess a taxpayer within certain defined limitation periods (for transfer pricing adjustments, this is generally seven years after the issuance of an original notice of assessment). Therefore, the Minister is not required to reassess a taxpayer to reflect a requested adjustment after filing the initial return, but may do so. If the Minister does reassess a taxpayer for any reason (eg, to process audit adjustment(s)), then the taxpayer is entitled to object to the reassessment, including on a basis that diverges from the position taken by the taxpayer in its return. The Minister is, in that circumstance, effectively required to reassess the taxpayer to reflect the resolution of the objection either by the Appeals Division of the CRA or the courts.

Taxpayer-requested adjustments that have the effect of increasing the taxpayer’s tax liability (“upward” adjustments) may give rise to interest and applicable penalties. The CRA has discretion to waive interest and penalties within a statutory limitation period on application by the taxpayer. In certain circumstances, the taxpayer may pursue an affirmative adjustment through the CRA’s Voluntary Disclosures Program, and interest and penalties may be cancelled or waived through that process. 

“Downward” transfer pricing adjustments that have the effect of reducing the taxpayer’s liability for tax under the ITA are subject to Ministerial discretion under Subsection 247(10) of the ITA. Such adjustments are to be made only if, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.

Canada has an extensive treaty network consisting of in-force bilateral tax treaties with 94 jurisdictions, and is a party to the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) as well as bilateral tax information exchange agreements (TIEAs) in force with 24 jurisdictions. Canada’s bilateral treaties and TIEAs generally provide for the exchange of information relevant to the administration or enforcement of domestic tax laws and the protection of confidentiality of same, while the CRA relies on the MAAC to support a broad platform of information exchanges including the automatic exchange of information under Country-by-Country Reporting and the exchange of financial account information under the Common Reporting Standard. 

Canada has an advance pricing arrangements (APA) programme, to which taxpayers may be eligible to apply if they are subject to the transfer pricing rules or are carrying on business through a permanent establishment in Canada or in a jurisdiction with which Canada has a treaty.

The Competent Authority Services Division of the CRA (CASD) administers both the APA programme and the Mutual Agreement Procedure (MAP) programme.

Both the APA and MAP programmes are administered by CASD, and a taxpayer seeking advance certainty, as well as a resolution of past years’ adjustments in respect of the same jurisdiction, may pursue both processes concurrently. There is no formal co-ordination between the two programmes, but generally CASD will try to achieve efficiencies; eg, by assigning the same team to both processes, issuing queries common to both processes, and conducting a single set of site visits/functional interviews.

Any taxpayer seeking to resolve transfer pricing issues on a prospective basis may apply for APA consideration, but the CRA may determine that a request is not suitable for the APA programme. In IC94-4R2, International Transfer Pricing: Advance Pricing Arrangements (22 February 2024) (APA Circular), the CRA provides guidance on its administration of the APA programme, including the circumstances in which it may determine that a taxpayer and its proposed covered transactions are not suitable for APA. Although the APA Circular emphasises that each request is evaluated based upon its individual facts and circumstances, it lists the following common reasons why a case may not be suitable for APA:

• the CRA has concerns that the transactions involve tax avoidance or BEPS;
• the business recently underwent (before the APA term) or is expected to undergo (during the APA term) a significant transformation;
• aspects of the transactions are not expected to stay consistent (for reasons other than inflation or significant changes in the economic environment);
• the business has not been carried on long enough to complete an economic analysis of taxation years for which tax returns have been filed;
• the taxpayer chooses not to include all cross-border intragroup transactions in their request without sufficient reasons, or where CASD believes they should be included and the taxpayer disagrees;
• the legal contracts are not aligned with the “actual conduct” of the parties;
• there is current litigation involving the transaction for past years;
• the transaction requires a determination that does not involve a treaty article;
• the taxpayer is seeking a permanent establishment (PE) determination under a treaty or the request requires allocation of profits to a PE under specific circumstances;
• the transactions involve a business restructuring, shifting or eliminating functions, selling or transferring assets, closing plants or allocating extraordinary gains and losses (which may be one time in nature); and
• for transactions involving intangibles, the ownership and development of the intangibles is unclear, there is no business purpose for holding the intangibles in a specific entity or jurisdiction, or the intangibles are hard to value.

The APA Circular also states CRA’s preference for bilateral (BAPA) or multilateral (MAPA) APAs, but acknowledges that there may be cases where a unilateral APA remains appropriate, such as where the related party operates in a non-treaty jurisdiction, the covered transaction is not sufficiently material to justify a BAPA or MAPA, the foreign competent authority does not have an APA programme, or the taxpayer’s request to the foreign competent authority was rejected.

Under the CRA’s administrative policy, CASD must have received a complete APA “prefiling package” providing sufficient details about the tax period to be covered, the parties, the proposed covered transaction and transfer pricing methodology (TPM) within 180 days after the end of the first tax year that is to be covered by an APA. If a complete prefiling package is not received by that date, the first taxation year will not be considered as an APA year but may be considered a rollback year (see 7.8 Retroactive Effect for APAs).

There is no user fee for access to the APA programme. However, the CRA (or foreign tax authority) may ask for the opinion of an independent expert to help evaluate an APA submission, at the taxpayer’s expense. There may also be circumstances in which the taxpayer will be asked to bear costs for exceptional items such as data and analysis that is available only at a considerable cost. The APA Circular notes that such circumstances will be rare.

There is no definitive guidance with respect to the duration of an APA, but it is typical for an APA to cover five taxation years that are APA years. As described in 7.5 APA Application Deadlines, the earliest APA year must have ended no more than 180 days prior to submission of a complete prefiling package. Additionally, the APA may cover rollback years (see 7.8 Retroactive Effect for APAs).

A taxpayer may request for an APA to cover non-statute barred taxation years that are prior to the APA period. These are referred to as rollback years. CRA guidance in TPM-11, Advance Pricing Arrangement (APA) Rollback (28 October 2008) states that the CRA will usually agree to APA rollback where a request for contemporaneous documentation has not been issued by the taxpayer’s field auditors (referred to as the tax services office or TSO), the facts and circumstances are the same as the APA years, the foreign tax administration and TSO have both agreed to accept the APA rollback request, and the taxpayer has filed appropriate waivers of the statutory limitation period for reassessing the requested rollback years.

A penalty equal to 10% of the total transfer pricing adjustment for a taxation year applies under Subsection 247(3) of the ITA if such adjustment exceeds the lesser of CAD5 million and 10% of the taxpayer’s gross revenue for the year. The Consultation Paper proposes to increase the absolute threshold for penalties to CAD10 million, noting that the current CAD5 million threshold has not been adjusted since the penalty was introduced in 1997.

A taxpayer is not liable for the transfer pricing penalty if it made reasonable efforts to determine and use arm’s length pricing for the transaction giving rise to the adjustment, or if the transaction is a “qualifying cost contribution arrangement” (which amongst other conditions requires the participants to have made reasonable efforts to establish a basis for contributing to certain costs). To date there has been no judicial guidance on what constitutes “reasonable efforts”, although the CRA has issued guidance in TPM-09 Reasonable efforts under Section 247 of the Income Tax Act (18 September 2006).

A taxpayer that does not meet the contemporaneous documentation requirements set out in Subsection 247(4) of the ITA in respect of a transaction is deemed not to have made reasonable efforts to determine and use arm’s length pricing or to have a qualifying cost contribution arrangement. Subsection 247(4) requires the taxpayer to make or obtain, on or before the documentation due date (generally the due date for the taxpayer’s tax return for the year), records or documents providing a description that is complete and accurate in all material respects of:

• 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 participants in the transaction;
• the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
• the functions performed, the property used or contributed and the risks assumed, in respect of the transaction, by the participants in the transaction;
• the data and methods considered and the analysis performed to determine the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction; and
• the assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction.

Where a transaction occurs in more than one taxation year or fiscal period, the documentation must be updated to reflect material changes on or before the documentation due date for each period in which a change occurs.

In addition to making or obtaining the documentation described in Subsection 247(4) by the documentation due date, in order to avoid the transfer pricing penalty, a taxpayer must provide such documentation within three months of a request by the CRA. No extensions are contemplated by the statute. In practice, a contemporaneous documentation request letter initiates a transfer pricing audit and triggers this strict three-month deadline.

The ITA includes country-by-country (CbC) reporting requirements in line with Chapter V (Documentation) of the OECD Guidelines. In general, a Canadian-resident ultimate parent entity of a multinational enterprise (MNE) group, or in certain circumstances a Canadian-resident constituent entity of an MNE group, is required to file a CbC report if the total consolidated revenue of the MNE group for the prior fiscal year is at least EUR750 million.

The documentation required in Subsection 247(4) of the ITA (see 8.1 Transfer Pricing Penalties and Defences) is broadly similar to the local file contemplated by the OECD Guidelines, with some distinctions. One notable difference is that Subsection 247(4) does not contain an exception for immaterial transactions. In the Consultation Paper, the government proposes to bring the content required in Canada’s documentation requirements in line with the OECD local file, except that in place of the materiality threshold it proposes reduced documentation requirements for low-risk transactions.

Canada does not currently require a master file. The Consultation Paper proposes to require members of MNE groups that are subject to the CbC reporting requirements to file the OECD master file in prescribed form on request by the CRA.

In general, Canada’s transfer pricing rules incorporate the arm’s length principle, and the CRA administers the rules with a view to adhering to the OECD Guidelines, the OECD transfer pricing methods, OECD documentation requirements, and the OECD dispute resolution mechanisms. Canada supplements the arm’s length principle with additional domestic rules and guidance on specific issues, such as recharacterisation, penalties and secondary adjustments.

Although the CRA, taxpayers and the courts look to the OECD Guidelines for interpretative guidance on the application of the arm’s length principle, it should be noted that they do not currently have the force of law in Canada. Canadian courts have acknowledged that the OECD Guidelines can be useful in interpreting Section 247 of the ITA, but only the statute itself has legal authority. Under the current regime, the OECD Guidelines are an interpretive aid or secondary source that can assist courts in applying the arm’s length principle in a consistent and reasonable manner.

The draft amendments in the Consultation Paper would introduce a “consistency rule” that would require Canada’s transfer pricing rules to be applied to achieve consistency with the amounts determined under the OECD Guidelines (defined as the 2022 edition, or any other text prescribed by regulation), unless the context otherwise requires.

Canada’s transfer pricing rules are based on the arm’s length principle and do not depart from it – eg, by using formulary apportionment.

The Consultation Paper states that the primary goal of the proposals is to align Canada’s rules with international consensus on the arm’s length principle. The Consultation Paper asserts that the existing transfer pricing rules in Section 247 lack specificity and fail to provide explicit guidance on the application of the arm’s length principle. However, one of the proposals introduced for consultation is to introduce a set of “guardrails” that would require intercompany loans to be priced by reference to a limited range of conditions, including limiting the terms of such loans to five years, requiring the use of the credit rating of the MNE group as a whole and removing subordination features and embedded options. Described in the Consultation Paper as a “streamlined approach”, this proposal departs from the arm’s length principle and the OECD Guidelines.

Other streamlined approaches proposed in the Consultation Paper are the approach to pricing low value-adding intra-group services in the OECD Guidelines and standardised returns for distribution activities (Amount B), both of which arguably represent departures from the arm’s length principle but are incorporated in the OECD Guidelines.

Canada has been an active participant and supporter of the BEPS project, and has implemented or committed to implement several of the BEPS actions. In 2016, Canada adopted CbC reporting to align with the BEPS minimum standards and has supported elements of the BEPS project related to transfer pricing.

Canada is a signatory to the OECD/G20’s Inclusive Framework BEPS statement in respect of the two pillar framework.

• Pillar One, which would give more taxing rights to source or market jurisdictions where multinational enterprises (MNEs) have significant economic presence or generate revenue from digital services, regardless of their physical presence or nexus.
• Pillar Two, which would introduce a global minimum tax (GMT) of 15% on the income of MNEs, to ensure that they pay a fair share of tax wherever they operate and to prevent the erosion of the tax base of other jurisdictions.

As a backstop to Pillar One, Canada has introduced the Digital Sales Tax Act (DSTA), which would impose a 3% tax on certain revenue earned by large businesses (both domestic and foreign) from select digital services and the sale or licensing of certain Canadian user data. The DSTA is included in legislation before Parliament for approval and has a proposed coming into force date of 1 January 2024, with retroactive effect to 1 January 2022. The DSTA would apply to online marketplace services, online advertising services, social media services, and user data. However, the DSTA may be repealed or modified once a multilateral agreement on Pillar One is reached and implemented, which the OECD is still targeting for 2025.

Canada has also released draft legislation to implement Pillar Two. The Global Minimum Tax Act (GMTA) would apply to fiscal years beginning on or after 31 December 2023. The GMTA implements two aspects from Pillar Two: the income inclusion rule (IIR) and the qualified domestic minimum tax test (QDMTT). The IIR would impose a top-up tax on MNE groups headquartered in Canada where the effective tax rate is below the minimum 15% rate. The QDMTT would apply to low-tax income of Canadian entities. The third rule, the undertaxed profits rule, which is to come into effect one year later, is a backstop that can apply to low-taxed income not brought into charge under the other Pillar Two rules.

In general, transfer pricing analyses in Canada are conducted on the basis of the functions performed, assets owned, and risks assumed by the participants to the cross-border transaction or series, having regard to the substantive legal rights and obligations defined by the applicable commercial law. This includes relevant intercompany agreements.

The UN Practical Manual on Transfer Pricing (the “UN Manual”) has little relevance or influence on transfer pricing practice or enforcement in Canada. While the UN Manual could be referred to as an interpretive aid or secondary source, it is expected that this document would be given less weight than the OECD Guidelines (which are more closely tied to the legislative process enacting Canada’s transfer pricing rules).

Canada does not currently use or support any transfer pricing safe harbours. However, the transfer pricing consultation released in June 2023 discusses various simplified methods and safe harbour options. This includes streamlined pricing approaches for low value-adding intra-group services, standardised returns for distribution activities and intra-group loan conditions. With respect to low value-adding intra-group services and standardised returns for distribution activities (Amount B), it is uncertain whether Canada will introduce these either as mandatory simplified methods or as safe harbours. Intra-group loan conditions (discussed at 9.2 Arm’s-Length Principle) are currently proposed not as a safe harbour, but as a set of guardrails on intercompany financing.

There are no specific rules in Canada that apply to savings that arise from operating in Canada.

Canada has two notable rules that apply generally to the financing of foreign subsidiaries’ active business activities by Canadian corporations. Subsection 247(7) of the ITA exempts the interest on certain loans made by Canadian-resident corporations to their controlled foreign affiliates from transfer pricing adjustments under Subsection 247(2). Similarly, Subsection 247(7.1) exempts a guarantee provided by a Canadian-resident corporation to lenders for the repayment of loans owing by controlled foreign affiliates. In the case of each exemption, the loan proceeds must generally be used by the controlled foreign affiliate in an active business.

While there is some co-ordination between transfer pricing and customs valuation, the price used for income tax purposes may not be the same as the price used for custom purposes.

The CRA administers the ITA, which requires taxpayers to use the arm’s length principle and the most appropriate transfer pricing method to determine the income or loss from transactions with non-resident related parties. The Canada Border Services Agency (CBSA) administers the Customs Act, which requires importers to declare the correct value of imported goods on a transactional basis for customs duty and tax purposes.

In IC 06-1 Income Tax Transfer Pricing and Customs Valuation (5 October 2006) (IC 06-1), CRA addressed the different considerations and adjustments that may apply to each regime.

For customs purposes, the preferred method of valuation is the transaction value method, which is based on the price paid or payable (ie, the invoice price) for the imported goods when sold for export to Canada, subject to certain additions and deductions. For related parties, the transfer price is the starting point for determining the transaction value, but it may not be the same as the final value declared to customs.

For income tax purposes, the transfer price is the amount that would have been charged or paid by unrelated parties dealing at arm’s length for the same or similar transactions, under the same or similar circumstances. The transfer price may be subject to adjustments based on the functional analysis, the comparability analysis, the arm’s length range, and the transfer pricing documentation.

IC 06-1 notes that the transaction value method for customs is similar to the CUP method for transfer pricing, as both rely on the comparison of prices between related and unrelated parties. However, the circular also acknowledges that there may be situations where the CUP method is not the most appropriate method for transfer pricing, or where the transaction value method is not applicable for customs.

A taxpayer that disputes an adjustment made following a transfer pricing audit has 90 days from the notice of reassessment to file a notice of objection, which will be considered by the Appeals Division of the CRA (CRA Appeals). Most corporate taxpayers are required to pay (or, if accepted by the CRA, to post adequate security for) 50% of the aggregate amount of tax, interest and penalty in dispute notwithstanding the filing of an objection. In the case of an assessment of non-resident withholding tax pursuant to a secondary adjustment, 100% of the amount assessed may be collected up-front.

The mandate of CRA Appeals is to provide an impartial review, which may result in confirmation, reversal, or variance of the reassessment under objection. If CRA Appeals confirms the reassessment (or varies it only in part), or if more than 90 days have elapsed since the filing of an objection and CRA Appeals has not informed the taxpayer of its decision, then the taxpayer may appeal the reassessment to the Tax Court of Canada. The Tax Court of Canada has exclusive original jurisdiction to hear and determine appeals of assessments made under the ITA.

Some matters arising in respect of the Minister’s exercise of duties and powers under the ITA fall within the jurisdiction of the Federal Court of Canada rather than the Tax Court. The Federal Court hears applications for judicial review of many discretionary decisions made by the Minister. In this regard, the case of Dow Chemical Canada ULC deals with the proper forum for challenging the Minister’s denial of a taxpayer’s request for a downward transfer pricing adjustment in reassessing the taxpayer. The Tax Court of Canada (2020 TCC 139) determined that it was empowered to review the Minister’s decision under its exclusive jurisdiction to hear appeals from assessments under the ITA. The Federal Court of Appeal (2022 FCA 70) reversed that decision, finding that the matter was more properly for judicial review in the Federal Court, which has the power to quash the Minister’s opinion, if appropriate. The Supreme Court of Canada (SCC File No 40276) heard the taxpayer’s appeal on 9 November 2023; its decision is under reserve.

Decisions of the Tax Court and the Federal Court may be appealed to the Federal Court of Appeal, while decisions of the Federal Court of Appeal may be appealed to the Supreme Court of Canada only with leave. Leave to appeal is generally granted only in cases of public importance.

Tax disputes in general may be resolved by settlement at any stage in the process, but such settlements are enforceable against the Minister only if they are principled in the sense of producing an outcome that could have been ordered by a court based on an application of the law to the agreed facts. “Compromise” settlements that do not reflect a plausible application of the ITA are unenforceable. In practice, the vast majority of transfer pricing disputes are resolved at the CRA Appeals stage or by way of MAP.

A request for competent authority relief (ie, MAP) may be made in applicable cases and within the timeline provided for in the applicable treaty. Where a taxpayer intends to seek MAP, it is advisable to file a notice of objection within the ordinary deadline to preserve the taxpayer’s right to seek relief through the Canadian courts in the event the MAP is unsuccessful. CASD will consider a request for MAP provided that the taxpayer’s domestic dispute is placed in abeyance pending the MAP outcome.

Because most transfer pricing cases are resolved at the audit, objection, or MAP stage, the body of Canadian judicial precedent on transfer pricing is somewhat limited. The adjudicated pricing outcomes that have emerged over the past three decades have been heavily dependent on their individual facts and circumstances and as such are of limited predictive value in determining arm’s length pricing for particular transactions. However, the reported decisions do provide guidance on the interpretation of the transfer pricing provisions of the ITA and the framework for their application. 

The most significant judicial decisions in respect of the Canadian transfer pricing rules are GE Capital, GlaxoSmithKline and Cameco.

• In General Electric Capital Canada Inc v Her Majesty the Queen, 2010 FCA 344 (GE Capital), the Federal Court of Appeal held that “implicit support” of a core subsidiary may factor into the arm’s length pricing of a financing guarantee. For purposes of applying the arm’s length principle to the guarantee fee charged to the Canadian-resident subsidiary (Canco) by its US-resident parent, the appellate court held that the appropriate framework is to situate Canco as a core subsidiary of a multinational group with the same salient features (eg, the parent company’s credit rating) as the actual group of which it is a member, as these factors would be relevant to an arm’s length guarantor.
• In GlaxoSmithKline Inc v Her Majesty the Queen, 2012 SCC 52, the Supreme Court of Canada considered the pricing of an active pharmaceutical ingredient (API) acquired by the Canadian-resident distributor (Canco) from its non-resident affiliate (Seller). Canco enjoyed intellectual property rights (including patent, trade mark and know-how) under a licence agreement with its parent company (IP owner) to distribute the branded pharmaceutical product along with a suite of other products developed and owned by the IP owner, subject to certain restrictions, including, effectively, a requirement to purchase API from the Seller. The court held that the arm’s length price for the API must be evaluated having regard to all of the “economically relevant characteristics” of the transaction, which, in this circumstance, included the requirement to purchase API from the Seller, as this was a requirement that would be equally applicable to an arm’s length distributor seeking to sell the branded product.
• In Cameco v Her Majesty the Queen, 2020 FCA 112, the Federal Court of Appeal considered the “recharacterisation” branch of the transfer pricing provision, holding that a transaction or series may be subject to recharacterisation only if no arm’s length party would have entered into that transaction or series of transactions. The Crown had failed to demonstrate that this condition was met with respect to the taxpayer’s sales of uranium it produced to its Swiss affiliate, which sold that uranium along with uranium purchased pursuant to long-term agreements with certain arm’s length parties at a time when market prices had increased. The Crown’s application for leave to appeal to the Supreme Court of Canada was denied.

Canada’s transfer pricing rules do not restrict outbound payments relating to uncontrolled transactions.

Canada’s transfer pricing rules do not restrict outbound payments relating to controlled transactions.

Canada’s transfer pricing rules are silent as to the effect of other countries’ legal restrictions.

The CRA publishes an annual report on its MAP programme, including such items as statistical information regarding its case inventory, the average time to complete a negotiable case, and aggregated information regarding the outcomes of such cases. A similar report is published in respect of the APA programme with programme statistics.

The Canadian transfer pricing provisions do not prohibit the use of “secret comparables”. The ITA empowers the CRA to collect confidential information from third parties in the context of an audit, and the CRA’s position is that it may use such information for the purpose of forming the basis of a transfer pricing adjustment (ie, as “secret comparables”) as a last resort, after every effort has been made to develop an assessing position based on publicly available information. See in this regard TPM-04 Third-Party Information (27 October 2003).

Although it may provide such information as is necessary for the taxpayer to understand the basis of the assessment and as such does not directly or indirectly reveal the identity of the third party, the CRA maintains the confidentiality of third-party information unless and until the taxpayer files an appeal with the Tax Court of Canada. At that stage, the CRA will contact the third party prior to releasing the information to allow the third party to pursue a confidentiality order from the court.