(Reblog) Transfer Pricing in Canada: Overview

By Robert Robillard - 18 November 2014

pdf format: Transfer Pricing in Canada Overview

This blogpost originally appeared on rbrt.ca.

RBRT Transfer Pricing’s Technical Note
No. 2014-01
(originally released on March 28, 2014)


Since 1997, Canada’s transfer pricing rules have been included in section 247 of the Canadian Income Tax Act (ITA). They are complemented by sections 233.1 ITA, 233.3 ITA and 233.4 ITA, as applicable.

The Canadian transfer pricing rules are administered by the Canada Revenue Agency (CRA). In the province of Quebec, the Agence du revenu du Quebec also conduct transfer pricing compliance audit.

Section 233.1 ITA prescribes the filing of an information return containing the prescribed information (Form T106) for non-arm’s length transactions with non-residents when the total amount of these controlled transactions exceed $1,000,000. Specific penalties apply for failure to comply.

Subsection 247(1) ITA provides various definitions such as “arm’s length allocation”, “arm’s length transfer price” and “transfer price”.

Subsection 247(2) ITA authorizes the adjustment by the CRA of the terms and conditions made or imposed between the participants in a controlled transaction when they differ from those that would have been made between persons dealing at arm’s length.

In essence, subsection 247(2) ITA allows the CRA to adjusts the terms and conditions of a specific controlled transaction to ensure respect of article 9 of the OECD Model Tax Convention on Income and on Capital. Canada has concluded 92 bilateral tax treaties. These tax treaties take precedence on the Canadian Income Tax Act.

In specific cases, paragraph 247(2)(b) ITA enables the CRA to recharacterize a controlled transaction when it can be reasonably considered that such transaction has no other purpose than to obtain a tax benefit.

Subsection 247(3) ITA prescribes the liability to a transfer pricing penalty when there is a lack of reasonable efforts in the determination of an arm’s length price.

Other penalties may also apply when there is failure to comply with either section 247 ITA or sections 233.1 ITA, 233.3 ITA and 233.4 ITA.

Subsection 247(4) ITA describes the documents and records required in answer to a request for contemporaneous documentation issued by the CRA at the commencement of a transfer pricing compliance audit.

Administrative position

The transfer pricing rules included in the Canadian Income Tax act are broad by design. As such, Information Circular IC 87-2R International Transfer Pricing contains the administrative position of the CRA on the Canadian transfer pricing rules.

More information on the administrative position of the CRA is available in the Transfer Pricing Memoranda (TPM) series. The TPM series deals with the request for contemporaneous documentation, the definition of reasonable efforts for the determination of an arm’s length transfer price, the tax consequences of combined and bundled transactions, the recharacterization process of a controlled transaction, and the use of third party information by the CRA, among other subjects.

The OECD Transfer Pricing Guidelines are officially recognized in Canada. The CRA Audit Manual and Information Circular IC 87-2R explicitly refer to the OECD Transfer Pricing Guidelines.

The CRA administrative position also includes guidance on the mutual agreement procedure (MAP) and the Canadian advance pricing arrangement (APA) program.

Transfer pricing compliance audit

The transfer pricing compliance audit is the responsibility of the CRA. It is legally enforced as per section 231.1 ITA. Often times, the compliance tax audit starts with an audit protocol which defines the scope and the issues under audit. In the case of a transfer pricing compliance audit, the process always commence with the request for contemporaneous documentation.

Canadian tax courts

The Canadian tax courts have acknowledged the relevance of the CRA administrative position and of the OECD Transfer Pricing Guidelines in their decisions related to transfer pricing.

However, the Canadian tax courts have given explicit precedence to the notion of “reasonable business person” in the determination of an arm’s length price which may on occasion create subtleties in the interpretation of the proper application of the arm’s length principle in Canada.

Canada and the Base Erosion and Profit Shifting initiative (BEPS)

In February 2013, the OECD released a key document titled Addressing Base Erosion and Profit Shifting. It was followed in July 2013 by the Action Plan on Base Erosion and Profit Shifting which comprises a set of 15 actions.

As an OECD member country, Canada has been deeply involved in the Base Erosion and Profit Shifting initiative (BEPS).

On January 23, 2014, the first OECD webcast on the BEPS initiative highlighted that a first series of deliverables was expected as soon as September 2014 to address hybrid mismatch arrangements, perceived tax treaty abuse, the transfer pricing aspects of intangibles and new transfer pricing documentation rules, among other subjects.


To ensure that you are fully compliant with the Canadian transfer pricing rules, it may be time to re‑examine the transfer pricing policies and procedures of your company. Other business processes may also need to be reconsidered, revised or modified to produce strong operational transfer pricing processes in the MNE group.

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, tax treaties and other international tax matters. Our services include transfer pricing documentation (transfer pricing policies and procedures, BEPS and C-doc), transfer pricing dispute resolution, tax treaty matters including double tax relief, tax treaty-based returns and waivers, 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 tax advice and tax counsel from RBRT Inc. as required.