TPM-05R

Requests for Contemporaneous Documentation

March 28, 2014

Legislative and policy changes

Please note that the following Transfer Pricing Memorandum, although correct at the time of issue, has not been updated to reflect subsequent legislative changes since the date of issue. As a result, some information may no longer be valid.

References and other information

This memorandum does not replace the law found in the Income Tax Act and its Regulations. Since this memorandum may not address your particular situation, you should refer to the Income Tax Act, any applicable Regulation, and relevant case law. For more information, you can contact a Canada Revenue Agency tax services office.


Introduction

1. This memorandum cancels and replaces Transfer Pricing Memorandum TPM-05, Contemporaneous Documentation, dated October 13, 2004. This update clarifies the previous directive.

Background

2. Subsection 247(3) of the Income Tax Act imposes a penalty on the net amount of certain transfer pricing adjustments that exceeds a specific threshold. This is a compliance penalty, focusing on the efforts that a taxpayer makes to determine and use an arm's length transfer price, rather than a penalty on the ultimate accuracy of the transfer price. Therefore, provided a taxpayer makes reasonable efforts to determine and use arm's length transfer prices or allocations, the transfer pricing penalty will generally not apply.

3. Subsection 247(4) of the Income Tax Act deems a taxpayer not to have made reasonable efforts to determine and use arm's length transfer prices or allocations unless the taxpayer has prepared or obtained records or documents which provide a description that is complete and accurate in all material respects of:

  1. the property or services to which the transaction relates;
  2. 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;
  3. the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
  4. the functions performed, the property used or contributed, and the risks assumed for the transaction by the participants in the transaction;
  5. 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, for the transaction; and
  6. the assumptions, strategies, and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contribution to costs, as the case may be, for the transaction.

4. This documentation must be prepared or obtained on or before the taxpayer's documentation-due date (defined in subsection 247(1)) for the tax year or fiscal period in which a transaction was entered into.

5. Taxpayers must provide these records or documents within three months after being served with a written request to do so. If taxpayers do not provide the documents within this three-month period, they will be deemed not to have made reasonable efforts to determine and use arm's length transfer prices or allocations for purposes of the penalty provision in subsection 247(3) of the Income Tax Act for the tax year(s) or fiscal period(s) under review.

6. Although this memorandum focuses on requests for transfer pricing documentation, it also applies to requests for documentation to establish if an arrangement is a qualifying cost contribution arrangement as defined in subsection 247(1) of the Income Tax Act.

7. For the purposes of this memorandum, all references to a "taxpayer" include a partnership.

Policy

8. The objectives of this policy are to:

  • create a consistent approach to transfer pricing audits;
  • facilitate the audit process with regards to transfer pricing;
  • increase transfer pricing compliance; and
  • facilitate the evaluation of reasonable efforts by the Transfer Pricing Review Committee.

9. Requests for contemporaneous documentation must be issued at the stage of initial contact with the taxpayer in all audits where there are transactions (as defined in subsection 247(1) of the Income Tax Act) between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length. Regardless of the length of the tax year or fiscal period, separate requests must be issued to each taxpayer for each tax year or fiscal period under audit or later added to the audit period. If requests were restricted to transactions involving a specific non-resident, additional requests must be issued for other non-residents if the scope of the audit is expanded later.

10. If auditors were not aware of these transactions when they first contacted the taxpayer, they must issue requests for contemporaneous documentation when they first learn about the transactions.

11. Contemporaneous documentation requests must be issued by letter. See Appendix A for a sample letter for requests to Canadian corporations that have transactions with non-residents with whom they do not deal at arm's length. See Appendix B for a sample letter to use when a Canadian permanent establishment or branch of a non-resident carrying on business in Canada has transactions with other non-residents with whom it does not deal at arm's length 1 .

12. A tax services office (TSO) will not issue a request for contemporaneous documentation for the transactions occurring in a tax year or fiscal period that are covered by an Advance Pricing Arrangement (APA), which may also include a rollback period. If the CRA does not accept a taxpayer's request for an APA (which may include a rollback period), the TSO may issue a request for contemporaneous documentation. The TSO may also issue a request for contemporaneous documentation for transactions not covered by a request for an APA or APA rollback.

13. Nonetheless, in all situations where the taxpayer already has an APA, which may or may not include a rollback period, or has made claims to request one, auditors must contact the Competent Authority Services Division before issuing the request for contemporaneous documentation to evaluate whether the request should be issued. See Transfer Pricing Memorandum TPM-11, Advance Pricing Arrangement Rollback, for more detailed information about APAs.

14. The large-file case manager must be informed of all requests for contemporaneous documentation involving large business audit cases and will receive a copy of all requests issued to the taxpayer.

Method of delivery

15. Requests for contemporaneous documentation must be issued by letter and be either hand-delivered to the taxpayer or sent by registered mail.

Three-month deadline

16. If the contemporaneous documentation is not provided within three months after a written request is served, taxpayers will be deemed not to have made reasonable efforts under paragraph 247(4)(c). Taxpayers have three months from the day the letter is received to provide the documentation. The three-month period cannot be extended because the wording of the deeming provision in paragraph 247(4)(c) is specific. However, auditors will accept and review documentation provided after the deadline.

17. The three-month deadline cannot be altered or interpreted as meaning a number of days (such as 90 days or 92 days). Section 28 of the Interpretation Act explains how to calculate the three-month period. Under paragraph 28(c) of the Interpretation Act, the day on which the three-month period expires will bear the same calendar day number as the specified day 2 . If the calendar day does not exist in the month in which the period of time expires, the period will expire on the last day of that month. This addresses the months of the calendar year that do not have days 29, 30, and 31.

18. For example, when a request for contemporaneous documentation is served on April 15, the taxpayer has until July 15 of the same year to provide the documentation. Similarly, when a request is served on April 30, the taxpayer has until July 30 to provide the documentation, not July 31. However, if a request is served on January 31, the taxpayer has until April 30 to provide the documentation because April does not have a 31st day. If a request is served on March 31, the taxpayer has to provide the documentation by June 30. If the request is served on November 30, the taxpayer has to provide the documentation by February 28 of the following calendar year (or February 29 in the case of a leap year).

19. When the last day to comply falls on a holiday, the taxpayer has until the next day that is not a holiday to comply, according to section 26 of the Interpretation Act. A holiday includes statutory and provincial holidays, Saturdays, and Sundays 3 .

20. Any failure on the part of the taxpayer to provide the information (after the three-month deadline) does not relieve the auditor from having to use other methods to obtain it, including requirements to provide documents or information, requirements to provide foreign-based information, or compliance orders where warranted.

Documents provided to the CRA

21. To "provide records or documents" means to supply such information to an individual. For clarity, "provide" means the documents have to be delivered to and received by a CRA office and does not mean "made available."

22. Auditors will respond to the taxpayer once the contemporaneous documentation has been provided. This will be done through an acknowledgement letter. A sample of this letter is in Appendix C of this memorandum. The sole purpose of the acknowledgement letter is to confirm that records or documents have been provided to the CRA. The letter does not assure the taxpayer in any way that reasonable efforts have been made to determine and use arm's length transfer prices or allocations.

23. Where the CRA previously requested contemporaneous documentation relevant to transactions entered into in a prior year, and the documentation was provided, the CRA does not need the documentation to be provided again if it is relevant to a current request. However, the documentation must be specifically referenced and described in a written response from the taxpayer to the auditor, within three months after the current request is served.

24. Documentation provided to the CRA under different circumstances or obligations (such as documentation provided with an application for an APA or information provided in a return) is not considered documentation previously provided to the CRA for the purposes of the current request for contemporaneous documentation. However, the CRA does not need the documentation to be provided again, as long as the documentation is specifically referenced and described in a response from the taxpayer to the auditor, within three months after the current request is served.

25. In both the above situations, the written response from the taxpayer must also state the name of the CRA official (or area) that the documentation was provided to and the date it was provided on. If these conditions are met and the documentation does exist, the documentation will then be considered to have been provided within three months after the request for contemporaneous documentation was served.

26. In accordance with paragraph 247(4)(b), taxpayers still have the responsibility to provide updates to contemporaneous documentation they submitted previously concerning prior audit years. If there have been no material changes, taxpayers must still respond within the three-month period stating that there have been no material changes and give the reasons that support this position.

Reasonable efforts

27. The contemporaneous documentation referred to in subsection 247(4) is not an exhaustive list of the records and documents necessary to substantiate that a taxpayer's transfer pricing is in accordance with the arm's length principle or that a taxpayer has made reasonable efforts to determine and use arm's length transfer prices or allocations.

28. The Transfer Pricing Review Committee (TPRC) has the mandate of determining whether reasonable efforts have been made. The TPRC bases the determination of reasonable efforts on the facts and circumstances of the taxpayer's situation. See TPM-13, Referrals to the Transfer Pricing Review Committee, for more information. The documentation required also depends on the facts and circumstances of the transactions under review, and further requests for information could be made accordingly.

29. Taxpayers may choose to use the Pacific Association of Tax Administrators (PATA) 4 Transfer Pricing Documentation Package in order to avoid the imposition of PATA member transfer pricing penalties with respect to a transaction. The documentation package provides an exhaustive list of documents that the PATA tax administrators view as necessary to provide transfer pricing penalty relief.

Conclusion

30. The Income Tax Act is specific as to the requirements regarding contemporaneous documentation. The onus is on the taxpayer to maintain such documentation and provide it to the CRA as requested. Taxpayers must respond to all requests for contemporaneous documentation regardless of previous CRA involvement.


Appendix A - Sample Contemporaneous Documentation Letter

Date

ABC Canada Inc.
Address
City, Province/State
Postal Code
Country
Attention: Mx. XXX

Dear Mx. XXX:

Subject: Request for Contemporaneous Documentation
               ABC Canada Inc.
               Audit of tax year (or fiscal period) ending on DD Month YYYY

I have been assigned to audit the international transactions of ABC Canada Inc. for the period shown above.

As provided in subsection 247(4) of the Income Tax Act, for the tax year (or fiscal period) ending on DD Month YYYY, of ABC Canada Inc., please provide the following contemporaneous documentation for each transaction in which ABC Canada Inc. and non-residents with whom it does not deal at arm's length (or specify which non-resident) are participants:

(a) Records or documents made or obtained on or before ABC Canada Inc.'s documentation-due date for the taxation year (or fiscal period) in which the transaction was entered into, that provide a description that is complete and accurate in all material respects of:

  1. the property or services to which the transaction relates;
  2. 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;
  3. the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
  4. the functions performed, the property used or contributed, and the risks assumed, in respect of the transaction, by the participants in the transaction;
  5. 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
  6. the assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contribution to costs, as the case may be, in respect of the transaction.

(b) Records or documents, for each subsequent taxation year or fiscal period, if any, in which the transaction continues, made or obtained on or before the documentation-due date for that taxation year (or fiscal period), that completely and accurately describe each material change in the year (or period) to the matters referred to in any of (a)(i) to (vi) above in respect of the transaction.

As specified in paragraph 247(4)(c) of the Income Tax Act, ABC Canada Inc. must provide this documentation to the Canada Revenue Agency (CRA) within three months after service of this request. For clarity, "provide" means the documents have to be delivered to and received by a CRA office and does not mean "made available".

If any of the conditions of subsection 247(4) of the Income Tax Act are not met, ABC Canada Inc. will be deemed to not have made reasonable efforts to determine and use arm's length transfer prices or arm's length allocations in respect of a transaction, or not to have participated in a transaction that is a qualifying cost contribution arrangement, for the purpose of the transfer pricing penalty of subsection 247(3) of the Income Tax Act.

For clarification about documentation previously provided to the CRA or for more information about this request, refer to Transfer Pricing Memorandum TPM-05R, Requests for Contemporaneous Documentation. This document, along with all our Transfer Pricing Memorandum series, can be found at www.cra.gc.ca/tx/nnrsdnts/cmmn/trns/menu-eng.html.

Should you need more information about this request, please do not hesitate to call me at xxx xxx-xxxx.

Yours sincerely,

Auditor Name
International Tax Audit Section
xxx Tax Services Office
Address
City, Province
Postal Code

c.c. Name here, Large File Case Manager (if applicable)


Appendix B - Sample Contemporaneous Documentation Letter for Branch/Permanent Establishments

Date

ABC Foreign Co.
Address
City, Province/State
Postal Code
Country
Attention: Mx. XXX

Dear Mx. XXX:

Subject: Request for Contemporaneous Documentation
               ABC Foreign Co. – Canadian Permanent Establishment
               Audit of tax year (or fiscal period) ending on DD Month YYYY

I have been assigned to audit the Canadian permanent establishment of ABC Foreign Co. for the period shown above.

As provided in subsection 247(4) of the Income Tax Act, for the tax year (or fiscal period) ending on DD Month YYYY, of the Canadian Permanent Establishment of ABC Foreign Co., please provide the following contemporaneous documentation for each transaction that relates to the activities of the Canadian permanent establishment and in which ABC Foreign Co. and non-residents with whom ABC Foreign Co. does not deal at arm's length are participants:

(a) Records or documents made or obtained on or before ABC Foreign Co.'s documentation-due date for the taxation year (or fiscal period) in which the transaction was entered into, that provide a description that is complete and accurate in all material respects of:

  1. the property or services to which the transaction relates;
  2. 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;
  3. the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
  4. the functions performed, the property used or contributed, and the risks assumed, in respect of the transaction, by the participants in the transaction;
  5. 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
  6. the assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contribution to costs, as the case may be, in respect of the transaction.

(b) Records or documents, for each subsequent taxation year or fiscal period, if any, in which the transaction continues, made or obtained on or before the documentation-due date for that taxation year (or fiscal period), that completely and accurately describe each material change in the year (or period) to the matters referred to in any of (a)(i) to (vi) above in respect of the transaction.

As specified in paragraph 247(4)(c) of the Income Tax Act, ABC Foreign Co. must provide this documentation to the CRA within three months after service of this request. For clarity, "provide" means the documents have to be delivered to and received by a CRA office and does not mean "made available".

If any of the conditions of subsection 247(4) of the Income Tax Act are not met, ABC Foreign Co. will be deemed to not have made reasonable efforts to determine and use arm's length transfer prices or arm's length allocations in respect of a transaction, or not to have participated in a transaction that is a qualifying cost contribution arrangement, for the purpose of the transfer pricing penalty of subsection 247(3) of the Income Tax Act.

For clarification about documentation previously provided to the CRA or for more information about this request, refer to Transfer Pricing Memorandum TPM-05R, Requests for Contemporaneous Documentation. This document, along with all our Transfer Pricing Memorandum series, can be found at www.cra.gc.ca/tx/nnrsdnts/cmmn/trns/menu-eng.html..

Should you need more information about this request, please do not hesitate to call me at xxx xxx-xxxx.

Yours sincerely,

Auditor Name
International Tax Audit Section
xxx Tax Services Office
Address
City, Province
Postal Code

c.c. Name here, Large File Case Manager (if applicable)


Appendix C - Sample Acknowledgement of Documentation Letter

Date

ABC Canada Inc.
Address
City, Province/State
Postal Code
Country
Attention: Mx. XXX

Dear Mx. XXX:

Subject: Acknowledgement of Documentation Provided

In connection with the ongoing audit of the taxation year or fiscal period ending on DD Month YYYY, of taxpayer name, and the Canada Revenue Agency's request on date to have taxpayer name provide its contemporaneous documentation, as prescribed by subsection 247(4) of the Income Tax Act, this is to acknowledge that number of files/boxes/binders containing documentation were provided to us on date and location (i.e. city, province).

In acknowledging that the above-noted documentation was provided to us, the Canada Revenue Agency makes no representations as to whether the provision of the documentation satisfies the terms and conditions of subsection 247(4) of the Income Tax Act with respect to the determination of whether a taxpayer is deemed not to have made reasonable efforts. Such a determination can only be made after the Canada Revenue Agency has completed its review of the above-noted documentation. Furthermore, the general determination of whether a taxpayer has made reasonable efforts to determine and use arm's length prices or allocations is a question of fact. It should also be noted that all subsection 247(2) transfer pricing adjustments under consideration that exceed the threshold for penalty consideration in subsection 247(3) will be referred to the Transfer Pricing Review Committee for review.

You can find more information in Part 7 of Information Circular IC87-2R, International Transfer Pricing, available on the Canada Revenue Agency's website.

Thank you for submitting the documents we requested.

Yours sincerely,

Auditor Name
International Tax Audit Section
xxx Tax Services Office
Address
City, Province
Postal Code


1 The information requested in the Appendix B letter does not include intra-company transactions between the non-resident company’s head office and its Canadian branch. Such information should be requested in a separate letter.

2 Specified day is the day on which the request for contemporaneous documentation is served (received).

3 Refer to section 26 and subsection 35(1) (including the notes) of the Interpretation Act.

4 This organization is currently known as the Leeds Castle Group with a larger membership.

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