Canadian contemporaneous documentation – Are you ready?

Canadian transfer pricing compliance

Canadian contemporaneous documentation – Are you ready?

Canadian transfer pricing compliance
  • Are you a multinational group with international operations and intercompany cross‑border transactions?
  • Do you transact with your related entities on a regular basis?
  • Do you have a transfer pricing policy and pricing basis that is up to date and reflective of your business realities?
  • Has the pricing basis adopted on intercompany transactions been documented, and is it compliant with Canadian and international transfer pricing rules?

If you answer yes to any of these questions, then keep reading.

As year-end tax and accounting obligations approach, it is essential for multinational groups with international intercompany transactions to prepare contemporaneous transfer pricing documentation.

The Canada Income Tax Act (“the Act”) requires taxpayers to maintain specific documentation showing they have made reasonable efforts to determine and use arm’s length transfer prices or allocations. Assuming reasonable efforts to determine and use arm’s length prices were made, any adjustments by the Canada Revenue Agency (“the CRA”) will not be subject to penalties.

This is especially relevant for multinational groups with Canadian subsidiaries or Canadian‑headquartered multinational groups with reportable intercompany transactions of $1 million CDN or more in a financial year. Transaction amounts are based on a gross basis (not net of income and expenses), reportable on Form T106 (related party disclosure filed with annual corporate tax return).

While the Act does not specifically define contemporaneous, the CRA’s administrative guidance clarifies its position as:

“In light of the obligations set out in subsection 247(4), taxpayers will generally produce or obtain the required documentation at the time the transaction is entered into.”

and

“Taxpayers may, after a transaction has occurred but before the filing‑due date, recognize that the transfer price recorded for that particular transaction does not represent an arm’s length price.”

At a minimum, contemporaneous documentation must be completed within six months after the year‑end. Where taxpayers have such contemporaneous documentation prepared, they may respond “YES” to Question 7 on Form T106 (related party disclosure, shown below) which forms part of the Canadian T2 (annual corporate tax return).



Select Penalties for non‑compliance

Under section 247, if the terms or conditions of controlled transactions differ from those that would have been made between persons dealing at arm’s length, the CRA may adjust so the amounts paid reflect those that would have been paid between arm’s length persons. As such, the Act contains a penalty provision under subsection 247(3).

Subsection 247(3) of the Act imposes a penalty equal to 10% of the net result of certain adjustments calculated as follows:

  • The total of the transfer pricing income and capital adjustments (upward adjustments, whether there are reasonable efforts or not);

  • less:

  • The total of transfer pricing income and capital adjustments for which a taxpayer has made reasonable efforts to determine and use arm’s length transfer prices or allocations (upward adjustments for which there are reasonable efforts); and
  • The total of transfer pricing income and capital setoff adjustments for which a taxpayer has made reasonable efforts to determine and use arm’s length transfer prices or allocations (downward adjustments for which there are reasonable efforts).

If the documentation described in subsection 247(4) is not prepared, and/or obtained by the documentation‑due date, the taxpayer is deemed not to have made reasonable efforts for the purposes of the penalty in accordance with subsection 247(3) of the Act, therefore resulting in penalties should a transfer pricing adjustment be made by the CRA.


Segal’s Transfer Pricing team

Led by Partner & Practice Leader Avinash S. Tukrel, our team assists multinational groups with all aspects of the transfer pricing lifecycle, including policy and planning, implementation, compliance and documentation, as well as local country tax authority audit support.

If you have any questions, simply contact Avinash for a complimentary preliminary discussion to determine your next steps. Alternatively, you can contact your Segal advisor who will be happy to connect you with our Transfer Pricing team.

Proactively compliant, eliminating uncertainty

For more information:

Avinash S. Tukrel
Partner & Practice Leader – Transfer Pricing
416.774.2446

ATukrel@segalgcse.com

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