The 'arm's-length principle' has been part of Canada's federal legislative corpus since 1938, when it was first integrated into the Income War Tax Act2 to apply strictly to payments made to non-residents by Canadian residents carrying on business. Sixty years later, on 1 January 1998, transfer pricing principles, inspired by and harmonised with the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines), were integrated into the Income Tax Act (ITA or the Act)3 when Parliament enacted Section 247 of the ITA,4 which is found in Part XVI.1 of the Act.

Canada's transfer pricing5 regime is and has always been entrenched in the arm's-length principle, and as such, the ITA does not provide for a 'stand-alone' transfer pricing regime. Rather, it provides for the application of this principle to all types of transactions between Canadian residents and non-residents. In fact, Section 247 does not levy taxes on its own. It allows the Canada Revenue Agency (CRA), the federal taxing authority,6 to determine, modify and even recharacterise certain amounts (as to their quantum or nature) for the purposes of computing tax under the ITA so that they arguably reflect arm's-length conditions.

The Canadian transfer pricing regime is built around three important and integrated components: the Minister's power to impose adjustments to the quantum or recharacterise the nature of transfer prices, automatic and independent penalty regime where the transfer pricing adjustments are above a certain statutory threshold, and an obligation to contemporaneously document all transfer pricing aspects.

Transfer pricing adjustments determined by the CRA apply for all purposes of the Act and target all types of taxpayers7 and partnerships.8 The rules found in Section 247 apply to both income and capital transactions. The charging provision, namely Subsection 247(2), provides that the Minister may adjust any amounts where: a taxpayer and a non-resident person with whom the taxpayer is not dealing at arm's length9 are participants in a transaction and (1) either the terms and conditions differ from those that would have been made between persons dealing at arm's length or (2) the transaction would simply not have been entered into by persons dealing at arm's length and it can be said that the transaction was not entered into primarily for purposes other than to obtain a tax benefit. Subsection 247(3) details the penalty regime applicable. Finally, Subsection 247(4) provides the requirements with respect to contemporaneous documentation.

Since Section 247 does not impose taxes on its own, transfer pricing adjustments are generally followed by secondary adjustments that give rise to tax consequences. From a litigation perspective, both the primary and secondary adjustments are usually subject to disputes, which benefit from various alternative dispute resolution mechanisms at each stage and consequently have generated some case law.


Canada has a self-reporting tax system, and taxpayers are expected, pursuant to Section 150, to annually produce a return of income that is in a prescribed form and contains prescribed information. For the purposes of transfer pricing compliance, Section 233.1 requires taxpayers resident in Canada and non-residents who carry on business in Canada to provide information on their non-arm's length transactions with non-residents for each taxation year (reportable transactions).10 The information must be provided in form T106 Information Return of Non Arm's Length Transactions with Non-Residents and filed within the taxpayer's filing due date for the year, which is typically six months after the end of the financial year for corporations and 90 days from the end of the year for trusts and estates. A different form must be filed for each non-arm's length non-resident with whom the taxpayer has reportable transactions.

The information return must contain, inter alia, nominal information on the non-resident, whether the 'reporting person' controls or is controlled by the non-resident and the various transactions entered into by the reporting person and non-resident.11 The reporting person must also declare whether it has prepared or obtained contemporaneous documents as described in Subsection 247(4) for the taxation year of filing.

To file complete T106 forms and avoid penalties under Subsection 247(3), taxpayers must prepare complete and accurate contemporaneous documentation with respect to their use of arm's-length transfer prices and allocations in respect of the transactions entered into. This fundamental element of the transfer pricing regime is discussed in Sections III and VIII.


i Pricing methods

The ITA is silent on the question of transfer pricing methods: it does not provide for the use of a particular method, it does not specifically refer to the OECD Guidelines and it does not require the use of a transactional or year-end analysis. The ITA only requires that the terms and conditions of transactions entered into by non-arm's length parties be the same as those that would have been agreed to between arm's-length parties.

In Canada v. GlaxoSmithKline Inc,12 the Supreme Court of Canada (SCC) had the opportunity to review Canada's transfer pricing regime and for the first time provide judicial guidelines for its application.13 In that decision, the SCC established that '[The OECD] Guidelines are not controlling as if they were a Canadian statute' and that ultimately, transfer prices must be determined according to the wording of the ITA rather than any particular methodology or commentary set out in the OECD Guidelines.14 The SCC also confirmed that there is no hierarchy of methods in Canada, a position that is in line with the latest OECD Guidelines.

The court further recognised that the ITA and the OECD Guidelines do not require a transaction-by-transaction approach, and that: 'Where there are no related transactions or where related transactions are not relevant to the determination of the reasonableness of the price in issue, a transaction-by-transaction approach may be appropriate.'15

According to Information Circular IC87-2R, International Transfer Pricing,16 the CRA officially follows the OECD Guidelines for transfer pricing methods and the absence of hierarchy. The CRA has, however, shown a preference for the comparable uncontrolled price (CUP) method and states in Transfer Pricing Memorandum TPM-1417 that:

the Guidelines continue to suggest that there exists a natural hierarchy to the methods, as referred to in Paragraph 2.3. The CRA agrees that the focus of determining the method to use should be the method that will provide the most direct view of arm's-length behaviour and pricing. IC87-2R states that a natural hierarchy exists in the methods. Both IC87-2R and Paragraph 2.3 of the 2010 version of the Guidelines state that the traditional transaction methods (e.g., CUP) are preferred over a transactional profit method. For the CRA, these changes do not firmly de-emphasise the natural hierarchy but they refocus the topic on what is truly relevant – the degree of comparability available under each of the methods and the availability and reliability of the data.

The court further stated that relevant to the analysis framework are the economic characteristics of the situations being compared and the consideration of other transactions impacting the transfer price should be considered. In Canadian law, it is a well-established principle that economic substance is important but cannot override legal relationships unless it is specifically provided for in the legislation18 and 'tax consequences flow from the legal relationships or transactions established by taxpayers'.19 The transfer pricing regime specifically provides the possibility to depart from those principles.

After reviewing the transactions, if the CRA establishes that the pricing or the terms and conditions used between the parties do not correspond to arm's-length parameters, it may, depending on the circumstances, use one of two mechanisms specifically provided in Subsection 247(2), namely the adjustment or the recharacterisation. When the terms and conditions made in respect of a transaction differ from those that would have been made by persons dealing at arm's length, the CRA may adjust the terms and conditions of the transaction to terms that arguably would have been made were the parties dealing at arm's length.20 However, when non-arm's length parties enter into a transaction primarily to obtain a tax benefit21 and the terms and conditions of the transactions do not reflect arm's-length transactions, the CRA is allowed to recharacterise the transactions to terms that would have otherwise been made between arm's-length parties.22

According to the OECD Guidelines and pursuant to the CRA's administrative position,23 the recharacterisation of transactions should be done in exceptional circumstances only and should be viewed as a last-resort solution. However, the wording of the ITA does not provide any limitations, restrictions or guidelines for the use of recharacterisation of transactions by the CRA. Prior to 2018, all Canadian judicial cases that dealt with transfer pricing rules24 involved the adjustment of terms and conditions as opposed to recharacterisation of transactions. However, on 26 September 2018, the Tax Court of Canada rendered its decision in Cameco Corporation v. The Queen,25 addressing the recharacterisation rules for the first time.

ii Authority scrutiny and evidence gathering

The CRA's audit approach with respect to evidence is largely based on the gathering and analysing of documents required to be kept and produced by taxpayers. In addition to the obligation of filing reportable transactions under Section 233.1 specifically for transfer pricing purposes, the ITA confers on the CRA vast and general audit powers. Under Section 231.1, an auditor may, for any purpose related to the administration of the ITA, inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer (or of any other person) that relates to the information that is or should be in the books and records of the taxpayer or to any amount payable by the taxpayer under the ITA. Furthermore, under Section 231.6, the CRA may request from a person resident in Canada, or a non-resident person carrying on a business in Canada, to provide any foreign-based information, which is defined as 'any information or document that is available or located outside Canada and that may be relevant to the administration or enforcement of the ITA'.

Section 247 also requires that taxpayers prepare, make available or obtain and, when required, provide contemporaneous documentation with respect to their transfer price. Contemporaneous documentation is the second cornerstone of the Canadian transfer pricing regime. Failure to prepare or provide contemporaneous documentation when requested may lead to the imposition of penalties.

Pursuant to Paragraph 247(3)(c), the CRA may request access to taxpayers' contemporaneous documentation. Upon written request, taxpayers must provide such documentation within three months of the request. The term 'contemporaneous documentation' is not specifically defined in the ITA; however, pursuant to Subsection 247(4), documents and records subject to requests are those that provide a description that is complete and accurate in all material aspects of the:

  1. property or services to which the transaction relates;
  2. terms and conditions of the transaction and their relationship, if any, to the terms and conditions of each other transaction entered into between the participants in the transaction;
  3. identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
  4. functions performed, the property used or contributed and the risks assumed, in respect of the transaction, by the participants in the transaction;
  5. data and methods considered and the analysis performed to determine the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction; and
  6. assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction.

When a taxpayer fails to make or obtain complete and accurate contemporaneous documentation, the taxpayer is deemed not to have made reasonable efforts to determine and use arm's-length transfer prices for the purposes of the Subsection 247(3) transfer pricing penalty. The CRA's approach to reasonability is that it has to be determined on a case-by-case basis, depending on the facts and circumstances of each case, and that inconsistencies in methods, data and factual representations can undermine the reliability of the documentation.26

In addition to taxpayers' obligations and the CRA's broad power to collect information, country-by-country reporting was recently introduced in the ITA.27 The country-by-country reporting requirements generally align with the OECD Guidelines, particularly with respect to consolidated revenue thresholds applicable to multinational enterprise groups.28

It will also be interesting to monitor Canadian taxpayers' reporting obligations in light of the BP Canada Energy Company v. Canada (National Revenue)29 decision, in which the Federal Court of Appeal (FCA) unanimously held that taxpayers cannot be compelled to reveal their 'soft spots' to auditors.


The ITA does not provide for distinct or specific transfer pricing rules applicable to intangible assets. In GlaxoSmithKline Inc, the SCC acknowledged that an intangible asset may be attached to a tangible asset and enhance its value, and that therefore the valuation or pricing must take into account all relevant business circumstances and considerable weight must be given to the business relationships.30

The CRA's position is that arm's-length pricing for the transfer of intangible property must take into account the perspective of both the transferor of the property and the transferee.31 When comparable data on intangible assets exists, the CRA's preferred transaction method is generally a traditional one (CUP or resale method).32 However, it recognises that it is difficult to find an exact comparable for valuable or unique intangible assets, especially because intangibles are difficult to value in the first place. The CRA's recommended approach for non-arm's length transactions involving unique or highly valuable intangible assets is the transactional net margin method (TNMM).33

A qualifying cost contribution arrangement (QCCA), which is defined in Subsection 247(1), is often concluded by arm's-length parties for the development of intangible property. A QCCA is 'an arrangement whereby two or more parties share the costs and risks of producing, developing, or acquiring any property, or acquiring or performing any services, in proportion to the benefits which each participant is reasonably expected to derive from the property or services as a result of the arrangement'.34 A participant's share of the overall contributions to the QCCA must be in proportion to the share of the overall benefits it expects to derive from the arrangement, taking into account the economic circumstances and its contractual terms. The OECD Guidelines' DEMPE functions35 with respect to intangible property are, to some extent, integrated in the Canadian transfer pricing regime through QCCAs.


Settlements are an essential part of the functioning of a viable tax system.36 The Canadian jurisprudence with respect to transfer pricing is limited, and that is largely because of the various alternative dispute resolution solutions provided to taxpayers, through advance pricing arrangements (APA) and settlements, whether they occur at the audit, objection or judicial stage.

APAs are formal and binding agreements between the CRA and a taxpayer who is carrying non-arm's length transactions with a non-resident person and therefore subject to Subsection 247(2). The APA programme allows a taxpayer and the CRA to avoid future transfer pricing disputes by entering into a prospective agreement for a term of three to five years.37 By entering into an APA, taxpayers are provided with some degree of certainty on their transfer prices. Canadian taxpayers may seek unilateral or multilateral APAs.38 In a multilateral APA, the CRA (the Canadian competent authority) will enter into an APA with the foreign competent authority under the mutual agreement procedure article provided by the applicable tax treaty. APAs generally start with the taxpayer providing information (pre-filing) and involve many steps,39 which require the CRA to, inter alia, review and take a position on the taxpayer's file, enter into government-to-government negotiations and document and conclude the APA with the taxpayer, and the foreign competent authority. Taxpayers do not participate in government-to-government negotiations.

The terms and contents of an APA may not be introduced (by the CRA or a taxpayer) as evidence in any administrative or judicial proceeding in relation to any taxation year, transaction or person covered by the APA. Once an APA has been entered into, taxpayers must report accordingly and must maintain books and records that allow the CRA, through an audit, to determine their compliance with the APA. When the parties to an APA disagree on its interpretation, or when the CRA establishes that a taxpayer does not comply with the terms of the APA, for example, because the given transaction is not a covered transaction, or because a taxpayer has not retained the proper records, the CRA may propose certain adjustments. If the taxpayer disagrees with the adjustments, an internal review process is available, pursuant to which the Director General of the International Tax Directorate will issue a decision. Alternatively, the disagreeing taxpayer could file tax returns inconsistent with the terms of the APA, risk the revocation or cancellation of the APA and contest the adjustments through the usual appeals process as if the APA never existed.40

During the audit stage, it is possible for settlements to be reached through APAs. APAs concluded are generally prospective in that they apply to future taxation years. Further, when a taxpayer concludes (and complies with) an APA, it is possible to request that the APA cover transactions that occurred in non-statute-barred taxation years (rollback).41 In addition to certainty of transactions and transfer prices, a rollback provides that the past transactions, now covered by the APA, will not be subject to a penalty under Subsection 247(3).

Settlements may also be reached during the objection stage,42 when the CRA has issued a notice of reassessment and the taxpayer has filed a notice of objection. Upon receipt of the notice of objection, an appeals officer must, with all due dispatch, conduct an independent review of the file and decide whether to confirm, vary or vacate the reassessment. Settlements through APAs are less likely to occur because generally discussions and negotiations with respect to a possible agreement or APA, if any, have already occurred and have not succeeded.

Settlements often occur at the judicial stage, and they are often reached after examinations for discovery have been held 'when the parties have formed a more accurate picture of the strengths or weaknesses of their respective cases or how their witnesses will stand up under cross-examination in the heat of trial'.43 There is also an additional incentive for the parties to try to settle at the judicial level. In exercising its discretionary power to award costs, the Tax Court of Canada (TCC) may consider any offer of settlement made in writing. If a taxpayer makes an offer of settlement and obtains a judgment as favourable as or more favourable than the terms of the offer of settlement, it is entitled to party costs and substantial indemnity costs44 after the date of the written settlement offer.45

Independent of the timing or stage at which a settlement occurs, a transfer pricing settlement, and any tax settlement for that matter, must be 'principled' to be binding to the CRA, meaning that the settlement must reflect the correct application of the law to the facts and cannot be solely based on 'compromise' or cost-benefit analysis alone.46

In Sifto Canada Corp v. The Queen,47 the TCC found that a settlement agreement entered into under the mutual agreement procedure (MAP)48 under the Canada–United States tax treaty was binding on the CRA and that CRA had to assess the taxpayer in accordance with the agreement. The TCC ruled that CRA was precluded from issuing the subsequent additional reassessments based on an upward transfer price adjustments because they were issued in contravention of the agreement.


Transfer pricing disputes, as with other tax disputes, generally begin with the CRA investigating a taxpayer through an audit, issuing a proposed reassessment and finally a formal reassessment. Transfer pricing investigations will often start with the CRA serving the taxpayer a formal Paragraph 247(4)(c) request for contemporaneous documentation. As previously mentioned, the CRA may also request books, records and documents pursuant to Section 231.1 and 231.6.

By virtue of Subsection 247(11), rules applicable to audits, assessments and objections under Part I of the ITA are made applicable to Part XVI.1 (which comprises Section 247). The period within which the CRA is expected to carry out its tax audit and issue a reassessment is the 'normal reassessment period', defined under Subsections 152(3.1) and 152(4). The normal reassessment period starts with the issuance of a first assessment, which is usually issued shortly after the filing of an income tax return by a taxpayer pursuant to Section 150. Depending upon the taxpayer's status and the nature of the transactions under review, the normal reassessment period ends three (for an individual or private corporation), four (for a public corporation) or seven (for transactions involving a non-resident) years later. Within the normal reassessment period, the CRA can issue as many reassessments as it sees fit and the subsequent reassessment cancels the previous one, unless it is an additional assessment.

Pursuant to Subsections 152(4) and 152(4.01), the CRA can issue a reassessment beyond the normal reassessment period only if the reassessment can reasonably be regarded as relating from misrepresentation49 in the taxpayer's return attributable to neglect, carelessness or wilful default or fraud. The CRA has the burden of proof with respect to the misrepresentation, which must be proved on the balance of probabilities. Further, the limitation period provided for in tax treaties does not apply to Part XIII reassessments issued for transfer pricing adjustments.50

When a taxpayer disagrees with an assessment issued by the CRA, a notice of objection to an assessment must be served within 90 days of the date of issuance of the assessment pursuant to Section 165. The notice of objection triggers an independent review of the assessment file by a CRA appeals officer.

After March 2018, the CRA does not accept applications relating to transfer pricing matters as part of the Voluntary Disclosure Program (VDP). The VDP provides taxpayers with the opportunity to correct mistakes or omissions in filing tax returns while avoiding in certain cases prosecution or penalties that would otherwise be applicable. Transfer pricing matters are instead referred to the Transfer Pricing Review Committee.


i Procedure

Pursuant to Section 169, where a taxpayer has served a notice of objection to an assessment pursuant to Section 165, the taxpayer may appeal to the TCC to have the assessment vacated or varied within 90 days of the CRA having confirmed the assessment or reassessed. The TCC's jurisdiction is limited to Section 171, which states that it may dispose of an appeal by dismissing it or allowing it and vacating the assessment, varying the assessment or referring the assessment back to the CRA for reconsideration and reassessment.

An appeal is instituted by a notice of appeal prepared in accordance with Section 21 of the Tax Court Rules. The taxpayer's notice of appeal must summarise the relevant facts, state the question at issue, list the relevant statutory provisions relied upon, state the taxpayer's arguments and, finally, the relief sought. Within 60 days (subject to an extension), the CRA has to file a reply to the notice of appeal in accordance with Sections 44 to 49 of the rules. The reply contains the same items as the notice of appeal, in addition to a section containing the assumptions based on which the assessment was made by the CRA. This section is of utmost importance to the whole tax litigation process because the assumptions will determine what the taxpayer will have to demonstrate to quash the assessment.51

Once the reply is filed, the parties have to agree on a timetable for the remaining steps of the litigation: the exchange of lists of documents (partial or integral), the examination for discovery, the satisfaction of undertakings made at discovery and the request for a hearing date. Once the hearing date is scheduled by the hearings coordinator, the parties have 90 days from that date to serve their expert reports, which is common practice in transfer pricing cases.

ii Recent cases

Although the first transfer pricing provisions were introduced to Canadian legislation almost 80 years ago, only five major cases have dealt with transfer pricing provisions. Certain cases have been decided under the former Subsection 69(2), and others under the current Section 247.

Canada v. GlaxoSmithKline Inc [2012] 3 SCR 3, 2012 SCC 52

GlaxoSmithKline Inc is the only decision rendered by the SCC on transfer pricing and, as such, is significant in terms of the guidance it provides. Pursuant to a licensing agreement allowing Glaxo Canada to sell Glaxo World's drugs portfolio, Glaxo Canada paid a 6 per cent royalty and was required to purchase ingredients from suppliers chosen by Glaxo World. The issue related to the purchase price paid by Glaxo Canada for a key ingredient necessary for the Zantac drug, under a parallel supply agreement with a supplier, one of Glaxo World's Swiss subsidiaries. The key ingredient was bought by Glaxo Canada at a price five times higher than the generic drug companies were paying. The CRA reassessed Glaxo Canada and reduced Glaxo's purchase price to a price closer to the one paid by generic drug companies for the ingredient, pursuant to Subsection 69(2). The SCC concluded that, under the circumstances, the price paid was reasonable given the rights of the parties pursuant to the various agreements they entered into. The SCC allowed Glaxo's appeal and referred the matter back to the TCC for redetermination, on the basis that the rights and obligations found in all relevant agreements must be considered.

Even if the decision was issued under former Subsection 69(2), the guidance offered by the SCC is particularly relevant, in that the court established the following principles:

  1. binding agreements between related parties must be considered together;
  2. the OECD Guidelines are not binding in Canadian law but may be of assistance to the courts; and
  3. transfer pricing is not an exact science and as long as transfer prices are reasonable, no adjustments should be made.

Canada v. General Electric Capital Canada Inc 2010 FCA 344

The General Electric Capital Canada Inc case is of some importance because of the comments on the weight of expert evidence and opinions in transfer pricing matters. In this case, the issue was whether a 1 per cent guarantee fee paid to GE's parent (based in the United States) was appropriate, given that without the guarantee from its parent, its borrowing cost would have been higher. The FCA upheld the TCC decision that the guarantee fee paid did not exceed an arm's-length price. The FCA also concluded that implicit support had to be taken into account because determining arm's-length pricing 'involves taking into account all the circumstances which bear on the price whether they arise from the relationship or otherwise'.

The TCC decision provides relevant comments on the role of expert witness testimony and report in determining the outcome of a case.52 The TCC judge noted that it is the court's role to ensure that experts are acting in conformity with their role and ensure that expert opinions are 'unbiased' and 'relevant to the subject matter of the case', and, ultimately, not prejudicial to the interest of justice.53

McKesson Canada Corporation v. The Queen, 2013 TCC 404

McKesson was the first decision to have been decided after the GlaxoSmithKline Inc case. The primary issue related to the reasonable amount of discount for receivables sold by McKesson Canada to a non-arm's length corporation pursuant to receivable sales agreement. The secondary issue was McKesson Canada's liability under the ITA for its failure to withhold and remit to the CRA an amount equal to the Part XIII non-resident withholding tax resulting from the disallowed amounts.

The disagreement between the CRA and McKesson related to the discount rate applicable to the receivables sold. The TCC had to determine whether the discount rate agreed upon in the agreement was different from a rate negotiated under non-arm's length conditions. The court concluded that the rate used by the parties was outside what could be considered reasonable for parties dealing at arm's length, and that the CRA was justified in readjusting the rate. The court also held that the Part XIII secondary adjustment issued by virtue of Paragraph 214(3)(a) and Subsection 15(1) were valid as well. McKesson appealed the decision to the Federal Court of Canada, but the appeal was discontinued.54

Alberta Printed Circuits Ltd v. The Queen, 2011 TCC 232

The Alberta Printed Circuits Ltd (APC) decision was rendered before GlaxoSmithKline Inc. The dispute arose when APC moved its 'setup operations' to Barbados, which were to be carried on by a related corporation, APCI. Pursuant to their agreement, APCI charged APC a fixed fee for the setup services and a square-inch fee for non-setup services. The CRA reassessed APC and made an adjustment pursuant to Subsection 247(2) on the basis that the fees paid were not consistent with the arm's-length approach. The TCC based its analysis on the CUP method as suggested by APC, and rejected the CRA's proposed transactional net margin method.55 The TCC decision is of interest because of its comments on the transaction-by-transaction basis and the importance of unbundling transactions for transfer pricing purposes.

Marzen Artistic Aluminum Ltd v. Canada, 2016 FCA 34

In Marzen Artistic Aluminium Ltd, the CRA disallowed the markup paid and deducted by Marzen to its Barbados subsidiary under a marketing and sales support agreement. The evidence revealed that the Barbados entity did not perform any marketing or support function, but acted as an intermediary between Marzen and its US affiliate by subcontracting the marketing and sales support to the US entity. The Barbados entity charged a substantial markup to its costs of contracting out the functions. The TCC rejected Marzen's appeal and upheld the disallowance of the deduction claimed by Marzen for the costs paid to the Barbados entity. Furthermore, the Court determined that Marzen did not make a reasonable effort to use comparables or to reasonably determine and use arm's-length transfer prices because of the lack of contemporaneous documentation and upheld the Subsection 247(3) transfer pricing penalty. The decision was upheld by the Federal Court of Appeal.

Cameco Corporation v. The Queen, 2018 TCC 195

In Cameco Corporation, the CRA had reassessed Cameco to include an additional amount of C$500 million in its income for three taxation years, on the basis that the transactions it entered into with its subsidiaries in the context of its uranium business were a sham or that, in the alternative, the transactions warranted the application of transfer pricing adjustments (under both the recharacterisation rule and the standard pricing adjustments). The TCC held that even if Cameco's international corporate structure reorganisation was undertaken for, inter alia, tax reasons, the transactions were legally binding and did not present an element of deceit, such that the sham doctrine could not be successfully invoked by the CRA. With respect to the transfer pricing rules, the TCC held that there was no basis to recharacterise the transactions as the reorganisation had a bona fide profit-earning purpose, and the tax savings did not alter that purpose. With respect to the pricing adjustment method, the TCC rejected the cost-plus method put forward by the CRA, in favour of Cameco's CUP method. The TCC therefore allowed Cameco's appeal of the reassessments. This case is currently being appealed by the CRA before the FCA.


i Secondary adjustments

In most transfer pricing cases, when primary adjustments are made under Subsection 247(2), the amount of excess paid by the Canadian taxpayer to the non-resident may result in a secondary adjustment. Secondary adjustments are usually issued pursuant to Part XIII of the ITA, which provides for a withholding tax on payments (and deemed payments) made to non-residents of Canada.56

For example, in the case of primary adjustment resulting in an excess amount paid by a resident corporation to a non-resident, Subsection 247(12) will deem the payment of a dividend by the resident corporation to the non-resident. In fact, the wording of Subsection 212(2) deems the dividend to have been received by the non-resident entity to the transaction. A deemed dividend pursuant to Subsection 247(12) will result in a secondary assessment under Subsection 212(2), which provides for a withholding tax on dividends paid by resident corporations to non-residents.

In circumstances where Subsections 247(12) and 212(2) do not apply,57 a deemed dividend of payment may be triggered by the application Paragraph 214(3)(a)58 in combination with Subsections 15(1) and 15(9) with respect to shareholder's benefit; Subsection 56(2) with respect to indirect payments and transfers; and Subsection 246(1) with respect to benefits conferred on another person. This would also result in a Part XIII secondary assessment of withholding tax.59

Generally, the CRA's position is to the effect that there will be no deferral of Part XIII assessments pending the final resolution of the transfer pricing issue. Canadian taxpayers may nevertheless be relieved from Part XIII tax if the amounts are repatriated (i.e., paid back by the non-resident) within 180 days, pursuant to Subsection 247(13). Subsection 247(14) also provides the Minister with the discretion to reduce interest otherwise payable with respect to a Part XIII reassessment.

ii Penalties

The specific penalty regime applicable to transfer pricing adjustments under the ITA is the third cornerstone of the Canadian transfer pricing regime. Subsection 247(3) provides for a 10 per cent penalty to taxpayers when the amount of the transfer pricing adjustment determined pursuant to Subsection 247(2) exceeds the lesser of: 10 per cent of the taxpayer's gross revenue for the year or C$5 million. The transfer pricing penalty is applicable on amounts of adjustments, save for the de minimis exception, and not on the amount of additional taxes payable with respect to a secondary adjustment. Therefore, it is possible that, in certain situations, transfer pricing adjustments result in a penalty even if there are no additional taxes payable.60

Taxpayers can avoid the Subsection 247(3) penalty if they can prove they have made 'reasonable efforts' in determining and utilising arm's-length transfer prices. The burden that lies on taxpayers is dual: reasonable efforts must be made to determine and use the transfer prices. If a taxpayer is not in a position to prove its compliance with both obligations, it could be exposed to penalties. In addition, for the purposes of the penalty, Subsection 247(4) contains a deeming rule that deems taxpayers not to have made reasonable efforts in cases where the documentation referred to in this Subsection is incomplete, inaccurate or not prepared contemporaneously, or if a taxpayer fails to provide this information in the three-month period when requested pursuant to Paragraph 247(4)(c).

All transfer pricing adjustments in excess of the de minimis threshold are referred to the CRA's transfer pricing review committee, which decides whether or not the imposition of a penalty is appropriate in the circumstances.61


i Diverted profits tax and other supplementary measures

Canada does not have a diverted profit tax per se (neither proposed, nor in force), unlike many common law jurisdictions such as the United Kingdom and Australia. However, certain provisions of specific application found in the ITA are intended to apply in specific cases where tax could be diverted to foreign jurisdictions. These specific rules would generally apply in priority to the transfer pricing provisions. For example, there are specific statutory provisions covering the taxation of foreign affiliates,62 and specific rules for non-resident trusts,63 back-to-back loans64 and unreasonable deductions65 (whether or not with an arm's-length party).

ii Double taxation

In some cases, double taxation might arise as a result of proposed transfer pricing adjustments in Canada when there is no corresponding adjustment in the other country. In such cases, taxpayers may request competent authority consideration under the mutual agreement article provided for in most of Canada's tax treaties. Taxpayers must make a formal application within the notification deadline provided by the applicable tax treaty.66 Deadlines may vary in different tax treaties.

The CRA will generally answer an initial request within 30 days, letting the taxpayer know whether the request for assistance is granted or not. When the CRA denies a request, written reasons must be provided with the decision.

When a mutual agreement procedure request is accepted by the CRA, it will enter into negotiation with the foreign competent authority. Even if an agreement is reached between the competent authorities, taxpayers may decline the agreement and refuse to comply with it. Where this is the case, taxpayers will most likely have to argue their case to the TCC following a reassessment. When transfer pricing issues are resolved judicially, the CRA will present the adjustments provided in the court's decision to the foreign competent authority, which may accept or reject the adjustments provided. In the event of rejection, double taxation would likely occur.

iii Consequential impact for other taxes

Transfer pricing adjustments may have an impact on goods and services tax (GST)67 otherwise applicable to transactions. GST is a value added tax charged on most supplies made in Canada of goods, services, real property and intangible property. GST is charged at a rate of 5 per cent on the value of the consideration for a given taxable supply. Residents and non-residents who are registered and who make taxable supplies in Canada must collect GST and remit GST net of input tax credits claimed. Transfer pricing adjustments to the price of taxable supply sold will result in a modification of the value of the consideration for a given taxable supply, and may require amendments to GST returns. In a case where transfer prices are increased, there may be additional GST payable on a transaction, which may cause under-collection and result in unremitted amounts of GST.

Adjustments to transfer prices may also affect values used for customs duty purposes. Even if the rules governing the customs valuation and the income tax rules are distinct, the Canada Border Security Agency will generally accept a transfer price as the basis for customs valuation if the price is based on an OECD-approved method.68 However, subsequent to transfer pricing adjustments, taxpayers might be required to amend their customs filings to reflect the adjustment to import prices, which could lead to underpayments, and hence, assessments of duties, taxes interest and penalties.69


Canadian transfer pricing is fundamentally composed of three integrated components: the determination or recharacterisation by the tax authorities, a strict penalty regime and an obligation by taxpayers to document the utilisation of their transfer prices. With transfer pricing matters, in most instances, the difficulty does not lie with the application or interpretation of the statutory provisions, but rather with complete, continuous and accurate compliance. As such, the difficulty lies with understanding the legal relationships within a group of interrelated companies in several jurisdictions and as many legal traditions; finding accurate comparables; determining the most accurate method; and establishing reliable and complete contemporaneous documentation on a regular basis. Tax law is notoriously complex70 and transfer pricing is no exception.

Transfer pricing disputes are generally lengthy and costly because they are considered to be evidence-heavy and, in most cases, courts generally require extensive assistance from expert witnesses. The limited Canadian jurisprudence in that respect, under both the former and the new transfer pricing regime, is a testament to the complexity of this endeavour, but also to the place and importance given to alternative dispute resolution mechanisms, whether at the audit stage, the objection stage or through mutual agreement procedures and through advance transfer pricing arrangements.


1 Dominic C Belley is a partner and Jonathan Lafrance is an associate at Norton Rose Fulbright Canada LLP.

2 R.S.C. 1917, c. 97, repealed.

3 R.S.C. , 1985, c. 1 (5th Supp.)

4 Unless provided otherwise, all legislative references in this text are to the ITA.

5 In Canada, taxation is a shared jurisdiction. Certain provinces, such as Quebec, Alberta and Ontario, have enacted tax measures that comprise, inter alia, transfer pricing legislation. However, such measures, which are harmonised with the federal regime, do not provide for distinct or additional transfer pricing penalties, and are solely intended to provide for equivalent transfer prices adjustments for provincial tax purposes.

6 Acting for the Minister of National Revenue (the Minister). The CRA is also the competent authority for the purposes of international tax conventions.

7 Individual, corporations and trusts.

8 For the purposes of this chapter, unless otherwise provided, references to taxpayers in the context of the application of Section 247 ITA will also refer to partnerships.

9 The ITA does not provide a definition for the arm's-length concept. Paragraph 251(1)(a) provides that 'related persons shall be deemed not to deal with each other at arm's length'. The term 'related persons' is extensively defined in Section 251. In addition, Paragraph 251(1)(c) provides a de facto test for determining whether related persons are dealing at arm's length.

10 Subsection 233.1(4) provides a de minimis exception for reporting taxpayers whose total fair market value of reportable transactions for a taxation year with non-residents is under C$1 million.

11 Because of the scope and degree of detail required in form T106, the CRA will generally use the T106 filed by taxpayers to initiate a transfer pricing audit.

12 GlaxoSmithKline Inc, [2012] 3 SCR 3, 2012 SCC 52 (GlaxoSmithKline Inc).

13 In GlaxoSmithKline Inc, the appeal concerned the application of former Section 69, which contained the pre-1998 transfer pricing provisions. However, the SCC's comments with respect to the OECD Guidelines and the Canadian transfer pricing regime are applicable to Section 247.

14 GlaxoSmithKline Inc, at Paragraph 20.

15 ibid., at Paragraph 42.

16 At Paragraph 8.

17 Transfer Pricing Memorandum TPM-14, 2010 Update of the OECD Transfer Pricing Guidelines.

18 Shell Canada Ltd v. Canada, [1999] 3 SCR 622, at Paragraphs 39–40 and Singleton v. Canada, [2001] 2 SCR 1046, 2001 SCC 61, at Paragraph 27, and Quebec (Agence du revenu) v. Services Environnementaux AES Inc, [2013] 3 SCR 838, 2013 SCC 65 at Paragraph 45.

19 Jean Coutu Group (PJC) Inc v. Canada (Attorney General), 2016 SCC 55, at Paragraph 41.

20 Pursuant to Paragraph 247(2)(a) and (c).

21 The term 'tax benefit' is defined in Subsection 245(1). Section 245 provides for the general anti-avoidance rule (GAAR).

22 Pursuant to Paragraph 247(2)(b) and (d).

23 Information Circular IC87-2R, International Transfer Pricing, at Paragraph 44 [IC-87R2]. See also OECD Transfer Pricing Guidelines, Guideline 1.37.

24 Whether with respect to former Subsection 69(2) or Section 247.

25 2018 TCC 195.

26 Transfer Pricing Memorandum TPM-09, Reasonable efforts under Section 247 of the Income Tax Act.

27 Section 233.8 was introduced in December 2015 pursuant to Bill C-59.

28 Pursuant to Subsection 233.8(1), multinational enterprise groups with a total consolidated group revenue of less than €750 million during the fiscal year immediately preceding the particular fiscal year will not be subject to the Subsection 233.8 reporting rules.

29 2017 FCA 61, at Paragraph 82.

30 GlaxoSmithKline Inc, at Paragraph 52.

31 IC-87R2, at Paragraph 140.

32 ibid., at Paragraph 143.

33 ibid., at Paragraph 95.

34 ibid., at Paragraph 120.

35 Functions of developing, enhancing, maintaining, protecting and exploiting the intangibles.

36 Donald G H Bowman, The Settlement of Tax Disputes in Canada, at p. 1.

37 Information Circular IC94-4R, International Transfer Pricing: Advance Pricing Arrangements, at Paragraph 55 [IC94-4R].

38 Multilateral APAs are entered into with more than one tax authority, through the mutual agreement procedure (MAP) included in most income tax treaties. Unilateral APAs are agreements between the taxpayer and the government only.

39 As per IC94-4R at Paragraph 10: pre-filing meeting(s); the APA request; the acceptance letter; the APA submission; preliminary review of the APA submission and establishment of a case plan; review, analysis, and evaluation; negotiations; agreements; the post-settlement meeting; and APA compliance.

40 IC94-4R, at Paragraph 92.

41 Transfer Pricing Memorandum TMP-11, Advance Pricing Arrangement (APA) Rollback.

42 When a reassessment has been issued pursuant to the ITA and a taxpayer files a notice of objection within 90 days of the issuance of the reassessments pursuant to Section 165.

43 The Settlement of Tax Disputes in Canada, p. 4.

44 Substantial indemnity costs means 80 per cent of solicitor and client costs.

45 Pursuant to Section 147(1) of the Tax Court of Canada Rules (General Procedure) (SOR /90-688a) (the Tax Court Rules).

46 Canadian Tax Foundation, Daniel Sandler and Colin Campbell, 'Catch-22: A Principled Basis for the Settlement of Tax Appeals', Canadian Tax Journal (2009) Vol. 57, No. 4, 762–86.

47 Sifto Canada Corp. v. The Queen, 2017 TCC 37.

48 Tax Treaties Canada has entered into generally provide MAP to assist taxpayers in resolving cases of double taxation involving Canada and a treaty partner, occurring , inter alia, as a consequence of unilateral transfer pricing adjustments by Canada. The MAP aims to resolve cases of double taxation that are not in accordance with the Tax Treaties and that are generally occurring because of the international nature of transfer pricing.

49 The misrepresentation must take place when filing the return, not at another time. See Vachon v. The Queen, 2014 FCA 224.

50 McKesson Canada Corporation v. The Queen, 2013 TCC 404, starting at Paragraph 378.

51 Hickman Motors Ltd. v. Canada, [1997] 2 SCR 336.

52 General Electric Capital Canada Inc. v. The Queen, 2009 TCC 563.

53 ibid., at Paragraph 226.

54 Files A-48-14 and A-49-14.

55 The decision was based on the 1995 OECD Guidelines, which shows a preference for traditional transaction methods and cites the CUP method as providing the highest degree of comparability.

56 Section 212 provides for a 25 per cent withholding tax on payments. Tax treaties entered into by Canada usually reduce the amount of withholding tax. Canada has entered into international tax conventions with the following countries: Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belgium, Brazil, Bulgaria, Cameroon, Chile, China, Colombia, Croatia, Cyprus, the Czech Republic, Denmark, the Dominican Republic, Ecuador, Egypt, Estonia, Finland, France, Gabon, Germany, Greece, Guyana, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, the Ivory Coast, Jamaica, Japan, Jordan, Kazakhstan, Kenya, the Republic of Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, the Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Portugal, Romania, Russia, Senegal, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uzbekistan, Venezuela, Vietnam, Zambia and Zimbabwe. This list does not include treaties signed but not in force, treaties under negotiations or tax information exchange agreements.

57 Subsection 247(15).

58 Both provisions are found in Part XIII of the ITA.

59 To avoid double taxation, Subsection 247(16) provides that Section 15, Subsection 56(2) or Section 246 will not apply when Subsection 247(12) deems a dividend to have been paid.

60 For example, if there are losses, deductions or credits to offset the additional taxes otherwise payable.

61 Transfer Pricing Memorandum TPM-13, Referrals to the Transfer Pricing Review Committee.

62 For example, foreign accrued property income (FAPI) and surplus rules found in Section 95.

63 Section 94.

64 Section 17.

65 Section 67.

66 Details with respect to applications are set out in Information Circular IC-71-17R5.

67 And its provincial equivalents, the harmonised sales tax and the Quebec sales tax.

68 Canada Border Services Agency, Memorandum D13-4-5, Transaction Value Method for Related Persons.

69 Under the Customs Act (R.S.C., 1985, c. 1 (2nd Supp.)).

70 Guindon v. Canada [2015] 3 SCR 3, 2015 SCC 41, at Paragraph 1.