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- What is transfer pricing?
- Documentation requirements
- Reporting obligations to the CRA
- Is your intercompany transfer pricing reasonable?
- Dispute resolution
- Guidelines and legislation
If you and another entity within your multinational group agree to buy or sell goods or services with each other, these transactions must be priced properly to ensure the appropriate amount of profit is reported in Canada. Transfer pricing legislation requires that these transactions occur under arm’s length terms and conditions.
The arm’s length principle
For tax purposes, the arm's length principle means that the terms and conditions should be identical whether you are dealing with parties at arm’s length or not. For example, transactions between a parent company and its related parties are subject to transfer pricing rules. Applying the arm's length principle is generally based on a comparison of the prices, or profit margins, that non-arm's length parties use or obtain, with those of arm's length parties engaged in similar transactions.
Canada’s transfer pricing rules apply if:
- two or more entities are involved
- at least one of the entities is a taxpayer for Canadian tax purposes (an entity can be non-resident but still be a taxpayer for Canadian income tax purposes)
- it is a cross-border transaction involving Canada
- the Canadian taxpayer and at least one of the offshore parties are not dealing at arm's length and
- the parties enter into a transaction or series of transactions
You must keep all records of non-arm’s length transactions with non-residents. You are not considered to have made “reasonable efforts” to determine and use arm’s length transfer prices unless you compile certain information, known as contemporaneous documentation. See TPM-05R.
The due date to prepare or obtain contemporaneous documentation is the filing-due date for the corporation, trust, individual or partnership’s tax return. Do not send the contemporaneous documentation with your return. You will have to provide it to the CRA within three months of a written request. Written requests are served personally or by registered or certified mail.
The Income Tax Act allows the CRA to adjust a Canadian taxpayer’s transfer prices or cost allocations if they do not reflect arm’s length terms and conditions. Should the CRA adjust your transfer prices, you may be subject to penalties if you did not make reasonable efforts to determine and use arm’s length transfer prices. The transfer pricing penalty is equal to 10% of certain adjustments made under the Income Tax Act. See TPM-13 Referrals to the Transfer Pricing Review Committee.
We strongly recommend making your financial decisions clear to the CRA to reduce the risk of potential interest and penalties by clearly documenting compliance with the arm’s length principle.
These are the forms required to report tax obligations:
- Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates must be filed for each foreign affiliate (non-resident corporation or non-resident trust) of the taxpayer or partnership that is either a controlled foreign affiliate or a non-controlled foreign affiliate.
- Form T1134 is due within 15 months after the end of the taxation year or fiscal period. Tax measures in Budget 2018 contain a change to the filing deadline to align it with the taxpayer’s income tax return deadline.
- Form T106, Information Return of Non-Arm’s Length Transactions with Non-Residents is an annual information return where a reporting person (corporation, trust or individual) or partnership reports its non-arm’s length activities with non-residents.
The Income Tax Act sets out Canada’s legislation on country-by-country (CbC) reporting. The CbC report is a template for multinational enterprise groups to report annually for each tax jurisdiction where they do business. Multinational enterprise groups with more than €750 million in consolidated group revenue in the immediately preceding fiscal year have to file a CbC Report, which is due 12 months after the last day of the reporting fiscal year.
- See Form RC4649, Country-by-Country Report to determine if it applies to your operations.
- See Guide RC4651, Guidance on Country-by-Country Reporting in Canada to assist you in completing the report.
Late filing, not filing, making false statements or omitting information from returns may result in penalties.
In general, the CRA can reassess tax returns for individuals, trusts and Canadian-controlled private corporations within three years from the original notice of assessment. For all other taxpayers, the reassessment period is four years from the original notice of assessment. The reassessment period is extended three more years in certain circumstances, including when there is a transaction between a Canadian taxpayer and a non-arm’s length non-resident.
Although this three-year extension currently applies to many transactions involving foreign affiliates, it does not apply in all relevant circumstances. Tax measures in Budget 2018 propose to extend the reassessment period for a taxpayer by three years in respect of income arising in connection with a foreign affiliate of the taxpayer.
There are a number of internationally accepted methods to determine if your transfer prices comply with the arm's length principle. They involve comparing your prices or profit margins to arm’s length prices or margins with the same or similar terms and conditions. Go to Methods – Application of the Arm's Length Principle.
Advance pricing arrangements
The CRA has an Advance Pricing Arrangement (APA) program to help taxpayers determine appropriate transfer pricing methods for transactions or arrangements they have with non-resident persons with whom they do not deal at arm's length. The APA program provides a cooperative process for resolving transfer pricing issues prospectively. There is no legal requirement to enter into an APA; the CRA provides this as an administrative service.
Competent Authority Services – The CRA provides a free service called competent authority assistance as part of Canada's tax treaty obligations. It aims to resolve situations where taxpayers are subject to tax as a result of an audit adjustment that is not in accordance with the provisions of the relevant tax convention, including situations of double taxation.
Appeals – If you think the CRA has misinterpreted the facts or applied the law incorrectly, you have the right to object to income tax assessments and reassessments.
- Section 247 of the Income Tax Act
- IC87-2R International Transfer Pricing – This document outlines the CRA’s administrative policies and guidance on the application of section 247 of the Income Tax Act. Note that transfer pricing memoranda (TPMs) are issued periodically to supplement and update CRA’s transfer pricing policy, and provide further, and more current guidance on specific aspects of the transfer pricing legislation.
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations – Canadian transfer pricing legislation and administrative guidelines are generally consistent with the Organisation for Economic Co-operation and Development (OECD).
- Tax treaties – Canada has income tax conventions or agreements—commonly known as tax treaties—with many countries. These treaties are in place to avoid double taxation and to prevent tax evasion.
- Permanent Establishments – Refer to TPM-08 The Dudney Decision.
- T1134 Information Return Relating To Controlled and Not-Controlled Foreign Affiliates
- T106 Information Return of Non-Arm's Length Transactions with Non-Residents
- RC4649 Country-by-Country Report
- TPM-02 – Repatriation of funds by Non-residents – Part XIII
- TPM-03 – Downward Transfer Pricing Adjustments under Subsection 247(2)
- TPM-04 – Third Party Information
- TPM-05R – Requests for Contemporaneous Documentation
- TPM-06 – Bundled Transactions
- TPM-08 – The Dudney Decision: Effects on Fixed Base or Permanent Establishment Audits and Regulation 105 Treaty-Based Waiver Guidelines
- TPM-09 – Reasonable efforts under section 247 of the Income Tax Act
- TPM-11 – Advance Pricing Arrangement (APA) Rollback
- TPM-12 – Accelerated Competent Authority Procedure (ACAP)
- TPM-13 – Referrals to the Transfer Pricing Review Committee
- TPM-14 – 2010 Update of the OECD Transfer Pricing Guidelines
- TPM-15 – Intra-group services and section 247 of the Income Tax Act
- TPM-16 – Role of Multiple Year Data in Transfer Pricing Analyses
- TPM-17 – The Impact of Government Assistance on Transfer Pricing
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