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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

Segal names six new Partners

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Positioning itself for continued growth and expansion in 2024, Segal is pleased to announce the promotion to Partner of six distinguished individuals from across the firm’s multidisciplinary advisory team, effective Jan. 1, 2024.

This newly appointed group of Partners includes: Natalia Glavina, Rishma Jessa, Stephen Lanni, Carlo Rodriguez, Matthew Schneider and Avinash S. Tukrel. Each of these highly regarded professionals brings not only their unique scope of expertise and experience to our Partner group, but also a shared commitment to our firm’s mission and values.

"Within their specific practice areas ⁠–⁠ which span virtually every aspect of our advisory services ⁠–⁠ Natalia, Rishma, Stephen, Carlo, Matthew and Avinash have all clearly proven their capabilities," says Segal Managing Partner Dan Natale. "As Partners, they represent our firm’s deep commitment to fostering the next generation of leaders. We are excited they will now have the opportunity to make an even greater impact on our growth trajectory, and most importantly, the success of our clients."

These new appointments are a direct reflection of the impressive evolution our firm has seen, further strengthening our position as a leading provider of assurance, tax and advisory solutions. Ultimately, this new group of leaders reinforces our firm’s bright outlook for the future, as well as our ability to seize new and emerging opportunities.

Rising to new heights

For more information:

Lavanya Sarathchandran
Marketing and Communications Manager
416.798.6929
LSarathchandran@segalgcse.com

Segal GCSE serves as advisor for several recent transactions and valuations

Recently, our Valuation & Transaction Advisory (VTA) team has been quite busy, executing several transactions and valuations for clients in a diverse range of industries across Canada. In this edition of our Insider blog, we look at the services provided by our VTA team, as well as some client success stories. For confidentiality, identifying names and details have been removed.

Transaction advisory

We work closely with clients throughout the buying/selling process to optimize efficiency and value. For those seeking to divest of business interests, we help ensure a seamless transaction. Our support includes identifying potential acquirers, preparing marketing materials, negotiating price and structure and managing due diligence. Drawing on our deep experience and knowledge of the sales process, we were instrumental in the following transactions:

  • Advised shareholders of a top janitorial services provider on the sale of shares to a multinational, private equity‑backed acquirer
  • Advised the owner of an Ontario‑based boat and recreational vehicle retailer during negotiations with a potential purchaser
  • Advised shareholders of an engineering company on price, structure and other transaction matters in connection to a U.S.‑based strategic acquirer
  • Assisted shareholders of a food ingredients company in connection with a sale of their shares to a financial buyer

Business valuation

We provide clients with an objective perspective on their business. Our advisory team has evaluated hundreds of sole proprietors, partnerships, corporations and franchises. In each case, we thoroughly assess the entity to determine the most accurate appraisal, eliminating uncertainty or surprises down the road. Our recent business valuation work includes:

  • For tax purposes, valuation of a large operating company in the landscaping space with intellectual property and operations across North America
  • For tax purposes related to charitable disbursement requirements, valuation of a large land development company held by a foundation
  • For matrimonial purposes, valuation of a franchisee in the home improvement industry
  • Valuation of a rapidly growing niche consulting company to facilitate development of an employee stock option plan
  • For strategic planning purposes, valuation of a branded fashion company selling into the U.S. and Canadian markets
  • For transaction support purposes, valuation of a commercial business controlled by a not‑for‑profit entity
  • For strategic planning purposes, valuation of a geographically diverse niche professional services and technology company

Ultimately, whether it’s transaction or valuation advisory, we understand no two situations are the same. Each client is unique and treated as such by our dedicated team of professionals. Should you have any questions about the transaction and/or valuation process, simply contact us.

Nothing is more valuable than sound advice

For more information:

Nathan Treitel
Practice Lead, VTA Team
Phone: 416-798-6916
NTreitel@segaladvisory.com

2023/24 Tax Series for Accountants

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It’s that time of year again! Segal GCSE is excited to present the 2023/24 Tax Series for Accountants, hosted by tax partner Howard L. Wasserman. This is the seventh consecutive year of this professional development program, encompassing a diverse array of tax, financial and business subjects. This unique series will be invaluable to all tax and finance professionals, and each seminar counts as two hours of PD time for attendees.

2023/24 Tax Series for Accountants event dates:

Select feature topics:

Note: The first two sessions will be held online. Depending on participation levels, the final two sessions may be conducted in‑person.

Sharpen your skills

Canada Releases Consultation on Transfer Pricing Rules

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The Department of Finance Canada, on June 6, 2023, released the much-awaited transfer pricing public consultation paper Consultation on Reforming and Modernizing Canada’s Transfer Pricing Rules. The Federal Budget 2021 previously announced the Government’s intention to consult on Canada’s transfer pricing rules to protect the tax system’s integrity while preserving Canada’s attractiveness as a destination for new investment and business activity. The consultation paper includes proposed draft revisions to Section 247 of the Canada Income Tax Act (“the Act”) and potential changes to administrative measures.

The catalyst for these changes and consultation is the view that Canada’s existing transfer pricing legislation does not provide clear guidance on applying the arm’s length principle, and the rules have not been revised since their introduction in 1997. In comparison, other countries have updated their transfer pricing rules to align with international tax reform and related developments with detailed guidance and provisions.

CLICK HERE to read the full article and to learn more!

Segal GCSE will continue to review the consultation paper and monitor related developments in the coming months to provide inputs on what is likely to be a key milestone in Canada’s transfer pricing legislative reform at a crucial time for taxpayers in an ever-evolving complex international tax landscape.

This consultation process allows key stakeholders to actively participate and shape a transfer pricing framework that is robust and sustainable for the future. Comments and responses are invited to 23 questions from various stakeholders by July 28, 2023.

For more information:

Avinash S. Tukrel
Principal & Transfer Pricing Leader
ATukrel@segalgcse.com

Lavanya Sarathchandran
Marketing and Communications Manager
Segal GCSE LLP
Phone: 416-798-6929
LSarathchandran@segalgcse.com   

About Segal GCSE LLP

At Segal GCSE LLP, we embrace an ambitious firm philosophy: to provide our valued clients with an expansive service experience that enables greater opportunities for growth and prosperity. From innovative practices to specialty services, our agile team is on a journey to not just meet your audit, accounting, tax and business needs, but transform your entire portfolio.

For more than 45 years, we have employed a collaborative approach, leveraging the shared knowledge and expertise of our multi-disciplinary professionals, to inspire and drive enhanced client success. Additionally, we augment our specialized offering with an international association with Moore Global – one of the world’s leading accounting and advisory networks.

segalgcse.com