doing business in canada - Davies Ward Phillips & Vineberg LLP

Conversely, where a Canadian resident corporation has made a loan to a non-resident and it is outstanding forone year or more and the loan does not bear a reasonable rate of interest, interest income calculated at aprescribed rate on the principal amount outstanding is imputed by the Tax Act to the Canadian lender.TRANSFER PRICING RULESCanada, like many other countries, employs transfer pricing rules to protect its tax base. The rules are designedto ensure that the income of Canadian taxpayers (and their corresponding Canadian tax liability) is notartificially reduced through non-arm's length transactions with related non-residents.The transfer pricing rules apply to Canadian residents and to non-residents carrying on business in Canada;therefore, these rules are potentially relevant to both Canadian subsidiaries (and parent companies) andCanadian branches. The pricing of goods and the quantum of management fees, guarantee fees and royaltiesare common matters for transfer pricing scrutiny.Where a Canadian taxpayer or a partnership participates in one or more transactions with a non-arm's lengthnon-resident and either (i) the terms of the transactions differ from those that would have been made by arm'slength persons or (ii) the transactions are not bona fide transactions entered into for non-tax purposes andwould not have been entered into by arm's length persons, then CRA can make adjustments pursuant to thetransfer pricing rules in the Tax Act, including imputing income or denying deductions.In addition, penalties can be levied. Where a taxpayer's transfer pricing adjustments for a year exceed the lesserof $5 million and the taxpayer's gross revenue for the year computed in accordance with the Tax Act, a penaltyequal to 10% of the total transfer pricing adjustments applies unless reasonable efforts were made to applyarm's length terms. For these purposes, a taxpayer will be deemed not to have made reasonable efforts to applyarm's length terms unless the taxpayer makes or obtains complete records of the transactions establishing theappropriateness of the transactions from a transfer pricing perspective no later than the taxpayer's tax returndue date (or in the case of a partnership, its annual information return due date). This rule is often referred toas the contemporaneous documentation requirement.CRA has special audit powers in transfer pricing matters and can require that a taxpayer producecontemporaneous documentation within 90 days of CRA making a formal request. In recent years, CRA hasbecome more aggressive in its auditing of transfer pricing records.TAX INCENTIVES AND SPECIAL REGIMESThe federal government and many provincial governments provide tax incentives for certain business activitiesin the form of tax credits, reduced tax rates and accelerated write-offs of qualifying expenditures. In addition,special tax regimes may apply to certain undertakings, notably, as discussed above, the exploration anddevelopment of resource properties. The applicable rules and eligibility criteria are complex and beyond thescope of this summary; however, some of the more common tax incentives available federally and in Ontario andQuébec are noted below. In addition, the Tax Act provides reduced tax rates and certain other benefits tocorporations that meet the definition of "Canadian-controlled private corporation" or "CCPC", essentially aprivate Canadian corporation that is not controlled directly or indirectly in any way by one or more publiccorporations or non-residents or any combination of them.Scientific Research and Experimental Development IncentivesThe Tax Act contains generous incentives for "scientific research and experimental development" ("SR&ED").SR&ED means systematic investigation or search carried out in a field of science or technology that is basic orapplied research or experimental development, including work with respect to engineering, design, operationsresearch, mathematical analysis and testing. Some activities are explicitly excluded from SR&ED, includingmarketing, quality control, social science research, mineral or oil and gas exploration or production, commercialproduction and routine data collection.88 Tax Considerations