Canada: CRA releases TPM-17 The Impact of Government Assistance on Transfer Pricing

Par Robert Robillard - 21 mars 2016

This blogpost originally appeared on

On March 2nd, 2016, the CRA issued TPM-17 The Impact of Government Assistance on Transfer Pricing.

The new TPM-17 is available here.

Paragraph 3 explains:

« A Canadian resident corporation (CanCo) provides products or services to a non-arm’s length non-resident corporation (ForCo);
CanCo is considered the tested party [3] and the transfer price for this transaction is tested using a cost-based method;[omitted] CanCo receives financial assistance from one or more government agencies or programs;
In calculating the cost base for transfer pricing purposes, CanCo reduces the cost base by an amount equal to the government assistance received. »

Paragraph 4 indicates:

« When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm’s length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm’s length parties would have done so given the specific facts and circumstances. Refer to the Appendix for an example that illustrates this policy. »

The Appendix of TPM-17 illustrate the CRA administrative position on this fairly contentious matter in Canada:

« As filed by the taxpayer – markup applied on net costs

A.3  The MNE establishes the transfer price between CanCo and ForCo by applying a mark-up to CanCo’s costs (net of the government assistance received) incurred to perform the R&D services.

A.4  For example, CanCo incurs R&D costs of $60 and other costs of $40, receives government assistance of $10, and applies a 10% mark-up to the net cost base. The MNE determines the transfer price as follows:

Example of a transfer price and net income calculation as determined by a taxpayer
Transfer price calculation CanCo income statement
R&D costs  $60 Revenue (transfer price to ForCo)  $99
Less: government assistance  $(10) R&D costs  $60
Other costs  $40 Government assistance  $(10)
Total costs  $90 Other costs  $40
Add 10% mark-up  $9 Total costs  $90
Transfer price to ForCo  $99 Net income  $9

A.5  The issue is whether the tax credits received or receivable should reduce the transfer price by reducing the cost base by the amount of tax credits. When there is no evidence to support independent enterprises allocating government assistance, it is presumed that CanCo, the company that received the assistance, will keep the assistance.

A.6  The following shows the CRA‘s approach when it has determined that the government assistance should not be netted against the R&D costs incurred. It also shows the impact on the transfer price CanCo receives from ForCo when government assistance is included in the cost base.

CRA approach – markup applied on gross costs

A.7  In the context of a transactional net margin method, using return on total costs as a profit level indicator, this presumption translates into the use of gross costs as shown below:

Example of a transfer price and net income calculation as determined by the CRA
Transfer price calculation CanCo income statement
R&D costs  $60 Revenue (transfer price to ForCo)  $110
Other costs  $40 R&D costs  $60
Total costs  $100 Government assistance  $(10)
Add 10% mark-up  $10 Other costs  $40
Transfer price to ForCo  $110 Total costs  $90
Net income  $20

A.8  In this situation, the transfer pricing adjustment would be $11, which is the difference between the transfer price used of $99 (as filed by the taxpayer) and the revised transfer price of $110 (as calculated by the CRA). »

From a transfer pricing audit perspective, TPM-17 is indeed a meaningful development in Canada.

Based on our past life as a CRA official, we can unfortunately states that TPM-17 clearly signals blurry waters ahead.

A meaningful number of Canadian companies may have to revisit their current transfer pricing arrangements to ensure proper structuring, implementation, documentation and justification of their transfer pricing policies.

The library on Transfer Pricing in Canada is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard « at »

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. 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. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.