Transfer Pricing Documentation in Canada: OverviewBy Robert Robillard - 28 May 2014
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The OECD Transfer Pricing Guidelines indicates:
“5.3 Each taxpayer should endeavour to determine transfer pricing for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the determination. Thus, a taxpayer ordinarily should give consideration to whether its transfer pricing is appropriate for tax purposes before the pricing is established. For example, it would be reasonable for a taxpayer to have made a determination regarding whether comparable data from uncontrolled transactions are available. The taxpayer also could be expected to examine, based on information reasonably available, whether the conditions used to establish transfer pricing in prior years have changed, if those conditions are to be used to determine transfer pricing for the current year.
5.4 The taxpayer’s process of considering whether transfer pricing is appropriate for tax purposes should be determined in accordance with the same prudent business management principles that would govern the process of evaluating a business decision of a similar level of complexity and importance. It would be expected that the application of these principles will require the taxpayer to prepare or refer to written materials that could serve as documentation of the efforts undertaken to comply with the arm’s length principle, including the information on which the transfer pricing was based, the factors taken into account, and the method selected. It would be reasonable for tax administrations to expect taxpayers when establishing their transfer pricing for a particular business activity to prepare or to obtain such materials regarding the nature of the activity and the transfer pricing, and to retain such material for production if necessary in the course of a tax examination. Such actions should assist taxpayers in filing correct tax returns. Note, however, that there should be no contemporaneous obligation at the time the pricing is determined or the tax return is filed to produce these types of documents or to prepare them for review by a tax administration.
In Canada, Subsection 247(4) of the Income Tax Act states:
“(4) For the purposes of subsection 247(3) and the definition “qualifying cost contribution arrangement” in subsection 247(1), a taxpayer or a partnership is deemed not to 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, unless the taxpayer or the partnership, as the case may be,
(a) makes or obtains, on or before the taxpayer’s or partnership’s documentation-due date for the taxation year or fiscal period, as the case may be, in which the transaction is entered into, records or documents that provide a description that is complete and accurate in all material respects of
(i) the property or services to which the transaction relates,
(ii) 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,
(iii) the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into,
(iv) the functions performed, the property used or contributed and the risks assumed, in respect of the transaction, by the participants in the transaction,
(v) 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
(vi) 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;
(b) for each subsequent taxation year or fiscal period, if any, in which the transaction continues, makes or obtains, on or before the taxpayer’s or partnership’s documentation-due date for that year or period, as the case may be, records or documents that completely and accurately describe each material change in the year or period to the matters referred to in any of subparagraphs 247(4)(a)(i) to 247(4)(a)(vi) in respect of the transaction; and
(c) provides the records or documents described in paragraphs 247(4)(a) and 247(4)(b) to the Minister within 3 months after service, made personally or by registered or certified mail, of a written request therefor.”
For greater certainty, Paragraph 18 of the IC 87-2R International Transfer Pricing explains:
“Subsection 247(4) of the Act deems a taxpayer not to have made reasonable efforts to determine and use arm’s length transfer prices or allocations in respect of a transaction for purposes of the penalty under subsection 247(3) of the Act, unless the taxpayer satisfies the conditions set out in subsection 247(4) of the Act. Taxpayers are required to make or obtain certain records or documents on or before the filing date for the tax year, the “documentation due date” (defined in subsection 247(1)), and provide those records and documents to the Minister within 3 months of the receipt of a written request to do so.”
TPM-05R Contemporaneous Documentation states:
“Effective immediately [October 13, 2004], contemporaneous documentation must be issued at the initial taxpayer contact stage in all cases where there are transactions or arrangements between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length. If the auditors were not aware of these transactions at the initial taxpayer contact stage, they must issue requests for contemporaneous documentation when they first identify the existence of such transactions. These requests should also be issued for each taxation year subsequently added during the audit or when commencing a new audit cycle to cover new transactions that may arise in different taxation years. All requests for contemporaneous documentation involving large files should be routed through the Large File Case Manager prior to being presented to the taxpayer.”
The required transfer pricing documentation should therefore be maintained yearly and updated regularly in order to abide by the Income Tax Act legislative provisions.
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.
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