Worldwide transfer pricing reference guide 2014

Canada
Taxing authority and tax law
Taxing authority: The Canada Revenue Agency (CRA) is responsible for ensuring that taxpayers meet the requirements of the law.
Tax law: Section 247 of the Income Tax Act (Canada) (ITA) received Royal Assent on 18 June 1998 and is generally applicable to taxation
years that began after 1997. It constitutes Canada’s transfer pricing legislation and deals with the determination of transfer pricing
adjustments, the re-characterization of transactions, penalties, records/documents required to be made or obtained, contemporaneous
documentation requirements and timing of provision to the Minister when requested, ministerial discretion regarding acceptance of
downward tax adjustment requests, and the application of withholding tax to transfer pricing adjustments.
Relevant regulations and rulings
The CRA does not set out its views and positions on transfer pricing issues by a legal doctrine or by providing detailed examples.
The CRA prefers to outline its views in general principles.
It provides its administrative interpretations and guidance with respect to §247 and its application through the release of Information
Circulars (IC), Transfer Pricing Memoranda (TPM) and pronouncements at public conferences, symposia and conventions. ICs usually
address major subjects from a general perspective, while TPMs typically provide supplementary detailed explanations and guidance on
specific issues related to the major subject.
The CRA’s current key pronouncements on transfer pricing are:
• IC87–2R, International Transfer Pricing, 27 September 1999
• IC94–4R, International Transfer Pricing: Advance Pricing Arrangements (APAs), 16 March 2001
• IC94–4R (Special Release), Advance Pricing Arrangements for Small Businesses, 18 March 2005
• IC71–17R5, Guidance on Competent Authority Assistance Under Canada’s Tax Conventions, 1 January 2005
Additional information and guidance on transfer pricing related matters, including the TPMs, can be obtained from the CRA’s website
(www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/menu-eng.html)
OECD Guidelines treatment
While no mention is made of the OECD Guidelines in §247 of the ITA, the legislative provision is intended to reflect the arm’s length
principle as set out in the OECD Guidelines. The CRA has also endeavored to harmonize its administrative guidance and approach to
transfer pricing, with the OECD Guidelines. As noted in IC 87–2R, the “circular sets out the Department’s views on transfer pricing and
also provides the Department’s position with respect to the application of the OECD Guidelines.”
When dealing with transfer pricing issues domestically, reliance is placed on the relevant Canadian statutory provisions. The CRA’s
related IC’s and other administrative guidance are considered instructive but not definitive. The OECD Guidelines and other OECD reports
are not formally recognized as authoritative; however, courts and other dispute resolution channels (e.g., competent authority) will
usually consider the international principles and standards established by the OECD in reaching a decision.
Priorities/pricing methods
The CRA accepts the transfer pricing methods recommended in the OECD Guidelines, when such methods are applied correctly and result
in an arm’s length price or allocation. The transfer pricing methods specified in IC 87–2 include: CUP, Resale Price, Cost Plus, Profit Split
(residual/contribution) and TNMM methods.
Traditionally, the CRA considered that, notwithstanding the fact that §247 does not so stipulate, there is a natural hierarchy in the application
of the above-noted transfer pricing methods, with the CUP method providing the most reliable indication of an arm’s length transfer price or
allocation, and the Profit Split method providing the least reliable indication of an arm’s length result. Traditionally, the CRA did not require or
impose a “best method” rule.
The CRA believes that the most appropriate method to be used in any situation will be that which provides the highest degree of comparability
between transactions, following an analysis of the hierarchy of methods.
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