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This resource provides background information on the Canadian transfer pricing regime. Last updated on March 6, 2017.

The Law

Canadian legislation, in Section 247 of the Federal Income Tax Act, adopts the arm’s length standard, enabling the Canada Revenue Agency (CRA) to make transfer pricing adjustments if the terms or conditions of related-party cross-border transactions differ from those that would apply between arm’s length parties. 

Legislative for country-by-country reporting requirements is in Section 233.8 of the Federal Income Tax Act. The legislation is consistent with the OECD Action 13 of its base erosion and profit shifting initiative, with the addition of administrative penalties for gross negligence or failure to file the country-by-country form. Country-by-country reporting is applicable for fiscal years beginning after 2015 for Canadian-resident parents of multinational enterprises that have consolidated revenues of at least €750 million. The legislation allows a surrogate parent entity to file a country-by-country report. The prescribed reporting form RC4649 can be found here (pdf) at the CRA website. In addition, the CRA has released a guide on country-by-country reporting in early March, 2017.

Canadian Government Transfer Pricing Releases

Information Circular 87-2R, titled International Transfer Pricing (IC 87-2R), sets out the Canada Revenue Agency’s (CRA) interpretation and administrative position regarding Section 247 of the Act. It does not have the force of law. The Courts are left with the responsibility of resolving any difference in interpretation between taxpayers and the CRA. You can find IC 87-2R at the CRA website.

In addition to the IC 87-2R, the CRA has released a series of item specific transfer pricing memorandums. Similar to IC 87-2R, it also does not have the force of law, but provides additional insight on current administrative practices of the CRA. The listing and content of these transfer pricing memorandum can be found at the CRA website.

Canadian Transfer Pricing Forms

A corporation, trust, partnership or individual who is resident in Canada at any time during the year, and has non-arm's-length transactions non-residents, in total, that exceed CAD 1,000,000 is required to prepare a Form T106, Information Return of Non-Arm’s-length Transactions with Non-Residents on an annual basis. The form has to be filed at the time the taxpayer files their tax return. The CRA uses the information provided on the Form T106 for multiple purposes, including the identification of taxpayers for review and audit. A copy of this form can be found at the CRA website.

The penalties applicable to the Form T106 include:

  • Late filing penalties: assessed under subsection 162(7) of the Act where T106 documentation is filed after the due date. The penalty is equal to the greater of $100 or $25 per day, for each day that the failure to file continues, to a maximum of 100 days. Failure to file penalties: assessed under subsection 162(10) of the Income Tax Act where reporting persons or partnerships knowingly, or under circumstances amounting to gross negligence, fail to file or fail to comply with a request by the CRA for T106 documentation. The minimum penalty is a $500 per month, to a maximum of $12,000 for each failure to comply. Where the CRA has served a demand to file T106 documentation, the minimum penalty is $1,000 per month, to a maximum of $24,000 for each failure to comply.
  • False statement or omissions penalties: assessed under subsection 163(2.4) of the Income Tax Act where information provided on the T106 is incomplete or incorrect. The penalty is $24,000.

The T106 form asks for the North American Industrial Classification System (NAICS) codes for the transactions reported, whether any income or deductions are affected by requests for competent authority assistance or by assessment by foreign tax administrations, and whether an advance pricing arrangement in either country governs the transfer pricing methodology.

A separate T106 form is required for each related non-resident that transacted with the Canadian taxpayer. Each form asks if contemporaneous documentation has been prepared for transactions with that related non-resident.

For every type of transaction (tangible property, services, royalty arrangements, etc.) the transfer pricing methodology used must be identified using a numerical code from the following list:

  1. comparable uncontrolled price (CUP);
  2. cost plus;
  3. resale price;
  4. profit split;
  5. transactional net margin method (TNMM);
  6. qualifying cost-contribution arrangement; or
  7. other.

Documentation Requirements and Penalties

Section 247 of the Act incorporates a penalty of 10% of any transfer pricing adjustment which exceeds the lesser of 10% of gross revenue and $5 million. The penalty and any related interest is non-deductible for tax purposes. The penalty does not apply to transactions for which the taxpayer made reasonable efforts to determine arm’s length prices. At a minimum, a “reasonable effort” requires that contemporaneous documentation be available within six months after the year-end and must be provided to the CRA within three months of its request.

Contemporaneous documentation requires a complete and accurate description 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 contributions to costs, as the case may be, in respect of the transaction.

Transfer Pricing Memorandum 09, titled Reasonable Efforts Under Section 247 of the Income Tax Act, provides guidance as to what constitutes reasonable efforts and provides a number of examples on how to present and incorporate specific aspects of documentation. This specific transfer pricing memorandum can be found at the CRA website.