(Reblog) Transfer Pricing in Canada: Reporting of Non-Arm’s Length Transactions with Non-ResidentsBy Robert Robillard - 20 November 2014
This blogpost originally appeared on rbrt.ca.
RBRT Transfer Pricing’s Technical Note
(originally released on March 31, 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.
Paragraph 233.1(4) 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.
However, the De minimis Administrative Policy of the Canada Revenue Agency (CRA) explains:
“Before the 1998 amendments to section 233.1 of the Income Tax Act, the Canada Revenue Agency (CRA) required taxpayers to report detailed information on a T106 return only when their transactions with particular non-residents amounted to $25,000 or more. The 1998 amendments [paragraph 233.1(4) ITA] introduced a de minimis rule that eliminated reporting unless the total amount of non-arm’s length transactions with all non-residents exceeded $1,000,000 in a reporting period. Since this overall de minimis threshold exempted a significant number of smaller taxpayers from the reporting requirement, the CRA removed the $25,000 individual threshold.
Even though the $1,000,000 threshold eliminates reporting for many taxpayers, it creates an administrative burden for others. Once taxpayers exceed the threshold, they must report all their non-arm’s length transactions with non-residents. As a result, some taxpayers must prepare detailed information returns even when their total transactions with particular non-residents fall well below the previous $25,000 threshold.
To reduce this administrative burden, the $25,000 threshold for non-arm’s length transactions with each non-resident person is once again applicable. Taxpayers must still file Form T106 to report other information, but they do not need to report detailed information where their total transactions with a particular non-resident are below the $25,000 threshold. In other words, taxpayers are no longer required to report these transactions in Part III of the form.”
T106 reporting rules
The instructions in form T106 Information Return of Non-Arm’s Length Transactions with Non-Residents include detail on how to report these transactions. In accordance with section 233.1 ITA:
“A reporting person (or partnership) has to file T106 documentation for a tax year in respect of reportable transactions in which the reporting person and the non-arm’s length non-resident person (or partnership of which that non-resident person is a member) participated in the period.”
A T106 form must be filed for each non-resident with which the reporting person (or partnership) has had non-arm’s length transactions. One T106 Summary must also be filed to provide an overview of the nature and materiality of the reported non-arm’s length transactions.
In the case of a corporation, the T106 documentation must be filed six months after the end of the taxation year at the latest. For partnerships, the due date is the same as the due date for filing a partnership information return.
The instructions in form T106 Information Return of Non-Arm’s Length Transactions with Non-Residents also indicate that “T106 documentation has to be mailed to the Ottawa Technology Centre, Validation and Verification Division, Other Programs Unit, 875 Heron Road, Ottawa ON K1A 1A2. T106 documentation has to be filed separately from the income tax return. Do not attach T106 documentation to your income tax return.”
T106 reporting penalties
The Canadian Income Tax Act prescribes numerous penalties for failure to comply with the reporting obligations of non-arm’s length transactions with non-residents as highlighted in the T106 form’s instructions:
- “Late Filing – A late filing penalty, or multiple late filing penalties for more than one T106 Slip may be assessed under subsection 162(7) of the Income Tax Act where T106 documentation is filed after the due date. The penalty is equal to the greater of $100 and $25 per day, as long as the failure to file continues, to a maximum of 100 days.
- Failure to file – A failure to file penalty may be 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 Canada Revenue Agency (CRA) for T106 documentation. The minimum penalty is $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 omission – A false statement or omissions penalty may be assessed under subsection 163(2.4) of the Income Tax Act where information provided on the T106 Summary or Slip is incomplete or incorrect. The penalty is $24,000.”
T106 reporting and the Base Erosion and Profit Shifting initiative (BEPS)
In February 2013, the OECD released the 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. Action # 13 pertains to transfer pricing documentation (“Re-examine transfer pricing documentation”).
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 transfer pricing documentation, among other subjects.
As it pertains to transfer pricing documentation, country-by-country (CbC) reporting is being considered.
The rules included in the Discussion Draft on Transfer Pricing Documentation and CbC Reporting, released on January 30, 2014 for public consultation, would implement significant reporting obligations, for each entity resident in each country (Annex III to Chapter V: A Model Template of Country-by-Country Reporting) related to:
- Earnings before income tax;
- Income tax paid;
- Total withholding tax paid;
- Stated capital and accumulated earnings;
- Number of employees;
- Total employee expense;
- Tangible assets other than cash and cash equivalents;
- Royalties paid and received;
- Interest paid and received;
- Service fees paid and received.
Such an initiative may increase the reporting obligations of Canadian taxpayers in the near future.
To ensure that you are fully compliant with the Canadian reporting transfer pricing rules and get ready for the upcoming changes, 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 generate strong operational transfer pricing processes in the MNE group.
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.