Transfer pricing in Canada at a glance
|Regulation Type||National regulations|
|Are there specific transfer pricing regulations?||Yes|
|Submission deadline||Corporate Income Tax deadline (6 months after taxation years-end|
|Submission deadline upon request||6 months|
|Annual update required||Yes|
|Official language requirements||English or French|
|Potential impact of penalties||10 % of adjustments|
Canadian tax law
Rules for transfer pricing in Canada are based upon:
- Income Tax Act Section 247
- Canada Revenue Agency (CRA) Information Circular 87-2R, International Transfer Pricing
- Transfer Pricing Memorandum (TPM)-16, Role of Multiple Year Data in Transfer Pricing Analyses
Canada is not an OECD member but Canada generally follows the OECD Transfer Pricing Guidelines.
Accepted methods are:
- The comparable uncontrolled price method
- The resale price method
- The cost plus method
- The profit split method
- The transactional net margin method
Besides the methods shown above, taxpayers in Canada are free to choose any other reasonable method.
Priority of methods
Rules for transfer pricing in Canada prescribe that the most appropriate method should be used.
Multiple year data
On February 13, 2015 the CRA has published TPM-16 that deals with the use of multiple year data for transfer pricing analysis. As can be derived from this memorandum, it is the CRA’s policy that transfer prices for a given tax year should be evaluated based on the results of a single year of data from the tested party and from each comparable. As such, neither the results of controlled transactions nor the comparables’ results should be averaged over multiple years for the purpose of improving comparability.
TPM-16 states, furthermore, that statistical tools, such as the interquartile range, do not improve a comparability analysis, and the TPM emphasises a preference for quality of the comparables over the size of the sample. The CRA makes it clear that it continues to endorse the use of the full range of results as the arm’s length range, and goes on to state that it “will not make a transfer pricing adjustment if the price or margin of a transaction is within the arm’s length range.” The TPM further states that when selecting a point within the range “the most appropriate point may be determined by using the average”.
Information that should be included in the documentation:
- 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 persons or partnerships involved in the transaction
- The identity of the persons or partnerships involved in the transaction, and their relationship at the time the transaction was entered into
- The functions performed, the property used or contributed and the risks assumed by the persons or partnerships involved in the transaction
- The data and methods considered and the analysis performed to determine the transfer prices, the allocation of profits or losses or contributions to costs for the transaction
- The assumptions, strategies and policies, if any, that influenced the determination of the transfer prices, the allocation of profits or losses, or contributions to costs for the transaction
Canada, as a bilingual country, accepts both its national languages for transfer pricing documentation to be submitted in, meaning documentation can be submitted either English or French.
Requirements to prepare documentation annually
For each taxation year or fiscal period, if any, in which a transaction continues from a prior year, and contemporaneous documentation regarding that transaction had previously been provided to the tax authorities, records or documents that completely and accurately describe each material change in the year or period regarding these transactions must be retained.
Taxpayers are also required to perform an annual sanity check on the transactions carried on from prior years. Furthermore rules for transfer pricing in Canada prescribe that all new transactions should be fully documented.
Submission deadline upon request by tax authorities
Upon request of the tax authorities, a taxpayer has six months to submit its documentation.
Advance Pricing Agreements
Under rules for transfer pricing in Canada it is possible to obtain multilateral, bilateral and unilateral Advanced Pricing Agreements (APA). The aforementioned TPM states that multiple year data may be used for APAs, where the averaging of historical outcomes of comparable transactions over multiple years may be relevant to establishing reasonable expectations of outcomes in future years. However, the established transfer prices will still be verified against the terms of the arrangement on a year-by-year basis.
The term for which an APA can be agreed upon is generally three to five years.
Rules for transfer pricing in Canada provides for a transfer pricing penalty of 10% of the net upward transfer pricing adjustments. These penalties are applicable if such adjustments exceed the lesser of 10% of the taxpayer’s gross revenue for the year or CAD 5 million, and if the taxpayer has not made reasonable efforts to determine and use arm’s length transfer prices.