Dear Clients and Friends,
The transfer pricing regulations are an important component of Canadian Income Tax Laws. These regulations can significantly impact the overall tax burden of taxpayers and may trigger penalties, if the appropriate amount of attention is not given. The overview of the Canadian transfer pricing regulation is discussed below.
Overview of Transfer Pricing
Transfer pricing refers to the pricing of goods or services transferred between a Canadian company and its foreign non-arm’s length party, such a as relative, subsidiary or affiliate.
Transfer pricing ensures that transactions between such non-arm’s length parties occur under an arm’s length basis. This means the goods and services should be priced as if they were to be transferred between unrelated parties.
As a result of these regulations, the taxpayers cannot minimize their tax liability by manipulating the pricing of the transactions between these non-arm’s length parties and shifting profits to jurisdictions with minimal or no income taxes resulting in a loss of tax base in Canada.
Transfer Pricing regulations
Transfer pricing regulations were introduced in 1998 and they affect all Canadian taxpayers who have transactions with foreign non-arm’s length parties.
Canada’s transfer pricing rules apply if:
- 2 or more entities are involved
- at least 1 of the entities is a Canadian taxpayer
- it is a cross-border transaction
- the Canadian taxpayer and at least 1 of the offshore parties are not dealing at arm’s length and
- the parties enter into a transaction or series of transactions
- To help determination an arm’s length price, the Canadian regulations refer to the principles expressed in
- the Organization for Economic Cooperation and Development (“OECD”) guidelines. The various methods
recommended by the OECD consist of:
1. Traditional Methods
a. The Comparable Uncontrolled Price (CUP) – Compares prices of comparable property or services with those that an Arm’s Length Party would charge.
b. The resale price – Begins with the resale price to arm’s length parties (of a product purchased from a non-arm’s length enterprise), reduced by a comparable gross margin.
c. The cost plus price – Begins with the costs incurred by supplier of product or service provided to an non-arm’s length party, and a comparable gross mark-up is then added to those costs.
The resale price and cost-plus methods help establish a markup or margin a taxpayer might expect as a reward for the functions performed, assets used, and risks assumed in each entity.
2. Transactional profit methods
a. The profit split – Determine the total profit earned by the parties from a controlled transaction and split the profit between the parties based on the relative value of their contributions.
b. The transactional net margin (TNM) – Compares the net profit margin of a taxpayer arising from
a non-arm’s length transaction with the net profit margins realized by arm’s length parties from similar transaction.
Taxpayers are expected to select the method based on availability of the data and consider the degree of accuracy with which any necessary adjustments can be made to achieve comparability. Also, the Canadian Revenue Agency (“CRA”) is of the view that there is a natural hierarchy in the method that is selected.
Applicable compliances, timelines and penalties
When transfer pricing is applicable, taxpayers are required to:
| S. No. | Compliances | Timeline |
|---|---|---|
| 1 | Make reasonable efforts to calculate transfer prices | Tied with return filing date |
| 2 | Maintain contemporaneous documentation | Within 90 days of a CRA request |
| 3 | File T106, if the absolute transaction value during the year exceeds $1M at entity level | Tied with return filing date |
| 4 | File T1134, for each foreign affiliate of the taxpayer | Within 10 months of end of tax year |
| 5 | File a Country by Country (“CbC”) Report, applicable for the multinational enterprise groups with more than €750 million in consolidated group revenue in the immediately preceding fiscal year | Within 12 months of end of fiscal year |
Please be aware that there are significant penalties for non-compliances with the filing obligations listed above. As a result, it is in the best interest of taxpayers to be mindful of the filing requirements. The information provided in this publication is a brief overview of transfer pricing. Any multinational corporation that is affected by the above changes should plan for the above. If you would like additional details, including the applicability of these rules to business, please feel free to contact us at 647-969- 7382 or at info@clearhouse.ca
Kindest Regards,
Your Clearhouse LLP Team