1. By understanding and following
Canada’s transfer pricing rules,
multinational entities operating
in Canada can avoid the risk
of incurring costly penalties
for noncompliance.
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GLOBAL TRANSFER PRICING & DISPUTE RESOLUTION SERVICES
NEWSFLASH–ASUMMARYOFTHEBASICSEVERYTAXPAYERSHOULDKNOW
The basic rules for transfer pricing in Canada are not fully understood by many taxpayers doing
business in Canada, which leaves them exposed to potential reassessments and the transfer pricing
penalty. This newsflash will summarize these rules in very general terms.
Legislation and guidance
The Canada Revenue Agency (“CRA”) utilizes three platforms to communicate Canada’s transfer
pricing legislation, administrative policies and guidance:
• Section 247 of the Income Tax Act (Canada) (“the Act”) contains the legislation governing
on transfer pricing
• Information Circular 87-2R (“IC 87-2R”) provides administrative policies and guidance with
respect to the application of section 247 of the Act and is cross-referenced to the OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”)
• Transfer Pricing Memoranda (“TPM”), which are periodically issued and intended to supplement
IC 87-2R, provide further guidance on specific aspects of the transfer pricing legislation
Documentation
The CRA has rules requiring transfer pricing documentation:
• Section 247 requires that Canadian taxpayers document non-arm’s length transactions with
non-residents and use arm’s length transfer prices
• Section 247 contains a provision that deems the taxpayer not to have made “reasonable efforts”
to determine and use arm’s length transfer prices unless the taxpayer has compiled certain
information and analyses in the form of contemporaneous documentation
• Taxpayers are required to update the documentation for any material changes, and provide the
documentation to the CRA within three months of a written request that is served personally
or by registered or certified mail
Audits, adjustments and penalties
Taxpayers face the following risks related to transfer pricing audits, adjustments and penalties:
• The statute of limitations is six years for Canadian-controlled private corporations and seven years
for foreign controlled corporations and public corporations
• Section 247 allows the CRA to adjust a Canadian taxpayer’s transfer prices or cost allocations where
the transfer prices or cost allocations do not reflect arm’s length pricing
• Where the CRA has made a transfer pricing adjustment, it can also impose penalties in circumstances
where a taxpayer has failed to prepare and maintain contemporaneous documentation supporting
transfer prices
TRANSFERPRICINGRULES
INCANADA

2. • Transfer pricing adjustments that result in a net increase in income or
a net decrease in loss are subject to a 10% penalty, with the following
exceptions:
–– Penalties will not be applied where the net transfer pricing
adjustments do not exceed 10% of the taxpayer’s gross revenue
or C$5 million
–– Penalties will not be applied where the taxpayer has made reasonable
efforts to determine and use arm’s length prices, and documented
such by the date its tax return is due for the taxation year (TPM-09
provides information on the CRA’s administrative positions on the
meaning of “reasonable efforts”)
• Finally, paragraph 247(2)(b) of the Act provides the CRA with the power
to “recharacterize” transactions in certain circumstances
Tax return filings
A reporting entity must file T106 forms if the total reportable transactions
for all the non-residents is more than CDN $1,000,000.
The T106 Summary and Slips are prescribed forms and require disclosure
of information on the non-resident, the amount and type of transactions,
transfer pricing methods applied, and disclosure as to whether
contemporaneous documentation has been prepared.
• A failure to file a penalty may be assessed where reporting persons
or partnerships knowingly, or under circumstances amounting to
gross negligence, fail to file or comply with a request by the CRA
for T106 forms
• 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 forms, the minimum
penalty is $1,000 per month to a maximum of $24,000 for each failure
to comply
• A false statement or omissions penalty of $24,000 may be assessed
where information provided on the T106 Summary or Slip is incomplete
or incorrect
To fully understand the details of transfer pricing rules in Canada, and
how to ensure your company is compliant with Canada’s transfer pricing
legislation, please speak to your BDO representative, or contact a member
of the BDO Transfer Pricing team.
Global Transfer Pricing & Dispute Resolution Services | Transfer Pricing Rules in Canada
BDO’S TRANSFER PRICING CONTACT
Dan McGeown
416 369 3127
dmcgeown@bdo.ca
OUR FIRM’S TRANSFER PRICING TEAM
Please see the attached page highlighting the members of
BDO Canada’s team of transfer pricing professionals.