Multinational companies operating in Canada must navigate complex transfer pricing rules to satisfy the Canada Revenue Agency (CRA). These rules follow the OECD’s arm’s length principle, meaning transactions between related entities must be priced as if the parties were unrelated. Non-compliance can trigger costly audits, adjustments, and penalties. This article summarizes the CRA’s expectations around intercompany pricing under Canadian federal law. At Taxpayer Law, our experienced tax lawyers in Toronto regularly advise corporate tax teams on transfer pricing compliance and represent businesses in CRA disputes.
Multinational corporations with Canadian operations must carefully comply with federal transfer pricing rules under Section 247 of the Income Tax Act. Prices for goods, services, royalties, or loans between a Canadian company and its foreign affiliate should match what independent parties would agree to.
Accepted Transfer Pricing Methods
The CRA recognizes the same methods set out in the OECD Guidelines. These include traditional transaction methods—Comparable Uncontrolled Price, Resale Price, and Cost-Plus—and profit-based methods such as the Transactional Net Margin Method and Profit Split Method.
Taxpayers must select the most appropriate method based on available data, with a preference for traditional methods where reliable comparables exist. The reasoning and calculations must be documented so that the CRA can see how arm’s length pricing was determined. Documenting the chosen method’s rationale is important, as contemporaneous documentation should detail the data and methods used in determining the transfer price
Documentation Requirements
The CRA expects taxpayers to prepare documentation proving “reasonable efforts” were made to price related-party transactions appropriately. The due date to prepare or obtain contemporaneous documentation is the filing-due date for the corporation, trust, individual or partnership’s tax return.
Taxpayers must file Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates for each foreign affiliate of the taxpayer. Form T106 is also to be a requirement where a reporting person or partnership reports its non-arm’s length activities with non-residents. Failure to accurately disclose required information, falsify statements or inadequately maintaining documentation can lead to penalties under the Income Tax Act.
Adjustments and Penalties
If the CRA concludes that intercompany prices do not reflect arm’s length terms, it can make transfer pricing adjustments under subsection 247(2). This can increase Canadian tax liability significantly. The penalty regime also reinforces the importance of documentation. Taxpayers face severe transfer pricing penalties as it is equal to 10% of certain adjustments made under the Income Tax Act. Adequate contemporaneous documentation will typically prevent such penalties, as the law requires reasonable efforts to documentation.
CRA Audits and Dispute Resolution
Transfer pricing is a priority area for CRA audits, especially where transactions involve intellectual property, payments to low-tax jurisdictions, or management fees. The CRA can reassess tax returns within three or four years, depending on the taxpayer. This period is extended to seven years for transactions involving a non-arm’s length non-resident.
If the CRA makes adjustments, taxpayers may file a Notice of Objection to challenge the reassessment. If unresolved, the dispute can proceed to the Tax Court of Canada. Relief from double taxation is often pursued under Canada’s Mutual Agreement Procedure (MAP) provisions in its tax treaties, where Canadian and foreign authorities work together to settle the issue. For companies seeking certainty, the CRA also offers Advance Pricing Arrangements (APAs), which allow taxpayers to agree in advance with the CRA on a transfer pricing methodology for future years.
Best Practices for Multinationals
Effective transfer pricing compliance requires more than simply meeting filing deadlines. Companies should establish robust policies and consistent pricing methods, regularly benchmark intercompany pricing against industry data, and carefully document high-risk transactions such as royalties, management fees, and restructurings. APAs should be considered where ongoing certainty is valuable.
Contact our firm to learn how our experienced tax lawyers can help safeguard your business against transfer pricing risks and provide certainty in your Canadian operations.
We appreciate the contribution of Gurleen Ghotra in the development of this article.
