Worldwide transfer pricing reference guide 2014

Canada (continued)
Priorities/pricing methods (continued)
In 2012, following the 2010 revisions to the OECD Guidelines, which the CRA endorsed, TPM–14 was published. While not wholly abandoning
the concept of a natural hierarchy of methods, it indicated that acceptance of the preferred method in a particular circumstance would
depend on the degree of comparability available under each of the methods and the availability and reliability of the data.
Transfer pricing penalties
Subsection 247(3) of the ITA imposes a penalty of 10% of the net upward transfer pricing adjustments. These penalties are applicable if
such adjustments exceed the lesser of 10% of the taxpayer’s gross revenue for the year or CAD5 million, and the taxpayer has not made
reasonable efforts to determine and use arm’s length transfer prices.
As set out in by TPM–07, all proposed reassessments involving potential transfer pricing penalties are required to be referred to the
Transfer Pricing Review Committee (TPRC) for review and recommendation for final action. The TPRC, after consideration of the facts
and circumstances and the taxpayer’s representations, will conclude whether or not a transfer pricing penalty is justified.
A taxpayer will be deemed not to have made reasonable efforts to determine and use arm’s length transfer prices or allocations unless
the taxpayer has prepared or obtained records or documents that provide a description, that is complete and accurate in all material
respects of the items listed in subsection 247(4) of the ITA (see below), and such documentation is in existence as of the due date of the
tax filing. In the case of corporations, such documentation must exist six months after the year end. For partnerships, the due date is five
months after the year end. Further, a taxpayer will be deemed not to have made reasonable efforts to determine and use arm’s length
transfer prices or allocations if the taxpayer does not provide the records or documents to the CRA within three months of the issuance
of a written request to do so.
Transfer pricing related penalties are assessed without reference to the taxpayer’s income or loss for the relevant reporting year and are
not tax deductible.
Penalty relief
If a taxpayer is considered to have made reasonable efforts to determine and use arm’s length transfer prices or allocations with respect
to adjusted non-arm’s length transactions, no penalty is assessed.
No transfer pricing penalties under subsection 247(3) of the ITA should arise with respect to transactions covered by an APA, as long as
the APA remains in effect and the taxpayer complies with its terms and conditions.
When the CRA has reassessed a transfer pricing penalty, and the Canadian competent authority and relevant foreign counterpart
negotiate a change to the amount of the transfer pricing adjustment, the CRA will adjust the amount of the Canadian transfer pricing
penalty accordingly. If the result of the change is that the adjustment no longer exceeds the penalty threshold, the penalty is rescinded.
Documentation requirements
Subsection 247(4) of the ITA requires that a taxpayer must have records or documents that, at a minimum, provide a complete and
accurate description, in all material respects, of the following items:
• The property or services to which the transaction relates
• The terms and conditions of the transaction and their relationship, if any, to the terms and conditions of transaction entered into
between the persons or partnerships involved in the transaction
• The identity of the persons or partnerships involved in the transaction, and their relationship at the time the transaction was entered into
• The functions performed, the property used or contributed and the risks assumed by the persons or partnerships involved in the
transaction
• The data and methods considered and the analysis performed to determine the transfer prices, the allocations of profits or losses, or
contributions to costs for the transaction
• The assumptions, strategies and policies, if any, that influenced the determination of the transfer prices, the allocations of profits or
losses, or contributions to costs for the transaction
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