Canada's Department of Finance releases transfer pricing rules consultation paper

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EY Global

29 Jun 2023
Subject Tax Alert
Categories Transfer Pricing
Jurisdictions Canada
  • The Canadian government invites stakeholders to provide input on a new consultation document aimed at reforming and updating the country's transfer pricing rules.
  • Comments are due by 28 July 2023.
  • This Tax Alert provides a summary of the key points in the consultation paper.

On 6 June 2023, the Department of Finance released "Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules" (the consultation paper), which follows through on the commitment made in the 2021 federal budget to review these rules. The consultation paper includes draft revisions to section 247 of the Income Tax Act (the Act), as well as potential administrative measures. Interested stakeholders are invited to provide comments by 28 July 2023.

This Tax Alert provides a summary of the key points of the consultation paper.

Following the Crown's loss in the Cameco case at both the Tax Court of Canada and Federal Court of Appeal,1 the government committed to a review of the transfer pricing rules in Canada. The consultation paper represents the Department of Finance's opening foray into potential legislative amendments and revised administrative measures applicable to transfer pricing in Canada. It also raises certain streamlined pricing approaches as topics for further discussion.

The consultation paper sets out a series of 23 questions regarding specific elements of the proposals. Draft legislative amendments to implement certain proposed measures are included in Appendix A of the consultation paper.

Proposed legislation

The main legislative proposal concerns possible amendments to the transfer pricing adjustment rules in section 247 of the Act. These potential changes are intended to provide greater clarity on the application of the arm's-length principle in Canada, in part by attempting to better align the language in the provision with that published in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.2

New definitions are proposed. In particular, the new term "economically relevant characteristics" is intended to delineate all of the information ("conditions," with its own interpretive rule) that should be taken into account when setting and analyzing prices in intercompany transactions, with an emphasis on the functions and actual conduct of the parties, to determine the "delineated transaction." This is a much broader undertaking than the existing transfer pricing legislation currently imposes.

Thereafter, as a first element, for purposes of making a transfer pricing adjustment, a comparison is required between the conditions of the delineated transaction and the conditions that would have been included had the parties been dealing at arm's length in comparable circumstances. Where the conditions from this comparison differ, the taxpayer's reported income or expense amount (referred to as the "initial amount") may be adjusted to the quantum or nature that would have been determined if arm's-length conditions had applied.

The second element of the proposed legislative changes introduces new "nonrecognition and replacement" provisions to replace the current "recharacterization" provisions in paragraphs 247(b) and (d) of the Act. Nonrecognition will apply where, taking into consideration the participants' perspectives and the options realistically available to them at the time of entering into the transaction, it is determined that both:

  1. The transaction or series differs from the transaction or series that would have been entered into by arm's-length parties dealing in a commercially rational manner in comparable circumstances.
  2. The delineated transaction or series prevents the determination of a transfer price that would have been acceptable to the participants if they had been acting at arm's length.

Where the Canada Revenue Agency (CRA) determines the nonrecognition-and-replacement rule applies, "the delineated transaction or series is to be disregarded and replaced with an alternative transaction or series that comports as closely as possible with the facts of the delineated transaction or series while achieving an expected result that, had the participants been dealing at arm's length in comparable circumstances, would have been commercially rational."3

This nonrecognition-and-replacement feature appears to be largely directed at addressing difficulties the Crown experienced in supporting its recharacterization position in the Cameco case. The consultation paper makes several references to the Cameco case to explain the Department of Finance's tax policy concerns with respect to the current rules and to illustrate how the proposed nonrecognition-and-replacement rule could have operated in similar circumstances.

Third, the consultation paper proposes to insert a consistency provision, indicating that the Canadian transfer pricing rules are to be applied in a manner so as to achieve consistency with the OECD Transfer Pricing Guidelines.4 An embedded caveat of "unless the context otherwise requires" provides the CRA with leeway in interpretation. Whether the application of the OECD Transfer Pricing Guidelines is to be made using a static or an ambulatory approach to future guidance changes is left open for stakeholder input and later determination.

Administrative measures

The consultation paper invites stakeholders to provide input on administrative matters connected to transfer pricing, such as documentation and penalty provisions and the possibility of adopting more-modern or simplified approaches in specific situations.

The consultation paper notes that these measures are intended to reduce transfer pricing disputes, ease compliance burdens and allow the CRA to focus its resources on transactions that pose a higher risk of base erosion.

Administrative measures considered in the consultation paper include the following potentially significant developments:

  • Increased penalty thresholds: Under the current rules, the transfer pricing penalty provisions employ both an absolute threshold — an adjustment of more than CA$5 million — and a relative threshold — an adjustment greater than 10% of the taxpayer's revenue. A penalty will potentially apply if the adjustment amount is more than the lesser of the two threshold amounts. The consultation paper proposes to increase the absolute threshold from CA$5 million to CA$10 million, as this amount has not been increased since it was introduced in 1997, but to leave the 10% of revenue relative threshold unchanged.
  • Adoption of elements of the OECD Master File/Local File documentation model: The consultation paper proposes to require larger multinational enterprise (MNE) groups already subject to country-by-country reporting requirements to file OECD Master File reports in prescribed form, upon receipt of a request from the CRA. In addition, the government is proposing that Canadian documentation requirements be brought in line with those set out in Chapter V (Documentation) of the OECD Transfer Pricing Guidelines (i.e., Local File documentation requirements).
  • Simplified documentation requirements for lower-value transactions and smaller taxpayers: The consultation paper indicates that the government recognizes the burden that documentation requirements impose on taxpayers, highlighting the need to balance timely and reliable transfer pricing documentation and the cost of providing that documentation. The government recognizes that relief from the compliance burden could be provided by allowing more streamlined documentation requirements for lower-risk transactions and taxpayers. Therefore, the consultation paper considers introducing provisions that would satisfy documentation requirements for certain types of transactions via an annual reporting schedule, which would in part detail the nature and magnitudes of the specified transactions, the methods used and the arm's-length conditions determined.

Streamlined pricing approaches

The consultation paper raises certain streamlined pricing approaches for consideration and stakeholder input without indicating the government's clear directional intent to adopt these approaches.

  • Low-value-adding intra-group services: In line with the OECD Transfer Pricing Guidelines, a number of jurisdictions have adopted an approach under which a 5% safe-harbor markup is considered an acceptable arm's-length return for low-value-adding intra-group services. Different implementation approaches are identified, and the potential for a dollar limitation is posited.
  • Standardized returns for distribution services: The consultation paper notes that distributors that perform relatively routine activities and earn commensurate returns pose relatively low base erosion risk; as such, allowing a safe-harbor return could reduce their compliance burden. The consultation paper notes challenges in defining the applicable scope of activities, and the potential need for a dollar limitation is again noted.
  • Intra-group loan conditions: The consultation paper notes that a wide number of features can be observed in intra-group loans, documenting the arm's-length nature of interest rates on these loans can place a significant burden on taxpayers, and challenging these arrangements can be difficult and resource intensive. The consultation paper discusses limiting acceptable loan conditions, including limiting the loan term (to five years), using the credit rating of the MNE group as a whole to price intra-group financial transactions, and removing subordination features and embedded options.

Consultation process

Stakeholder comments are invited through 28 July 2023. Commentators are asked to advise whether they consent to disclosure of their submission in whole or in part.

EY Canada will review the consultation paper in detail and will provide comments to the Department of Finance.


The substantive elements of Canada's transfer pricing rules have not been revised since their original introduction in 1997. The Department of Finance's consultation paper provides an opportunity for stakeholders to provide input on this important component of Canadian tax law.

While the intention of the Department of Finance is to reduce uncertainty in the interpretation of the transfer pricing rules in Canada, the proposed legislative revisions could create additional avenues of uncertainty and broaden the current landscape for Canadian transfer pricing disputes. In particular, the focus on "economically relevant characteristics" — an inherently subjective concept — could lead to more frequent and broader disputes. This could, in turn, increase the need for more effective dispute resolution mechanisms, a topic that is not addressed in the consultation paper.

The timing and potential application date of revised legislative proposals resulting from the consultation process are uncertain. Nonetheless, given the recurring nature of transfer pricing, taxpayers should review their current transactions and documentation in light of the directional intentions indicated by the government's proposals and consider whether proactive changes and/or improvements are warranted.

Furthermore, the administrative measures discussed in the consultation paper, which are intended to reduce compliance and administrative burdens, are worthy of serious consideration as part of the overall reframing of the Canadian transfer pricing environment. However, it is not clear that the measures under consideration as currently framed are wholly consistent with the legislative proposals and will achieve the stated objectives.

Learn more

To view the full Department of Finance consultation paper, visit: Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules.


For more information, please contact your EY or EY Law advisor or one of the following professionals:

Ernst & Young LLP (Canada), Toronto
  • Marlon Alfred
  • Andrew Clarkson
  • Tara Di Rosa
  • Matthew Sambrook
  • Caton Walker
  • Andrei Tarassov
Ernst & Young LLP (Canada), Ottawa
  • Rene Fleming
  • Paul Mulvihill
  • Tony Wark
  • Kevin O’Reilley
Ernst & Young LLP (Canada), Quebec and Atlantic Canada
  • Wael Tfaily
  • Alfred Zorzi
  • Hélène Vaudrin
Ernst & Young LLP (Canada), British Columbia
  • Tina Berthaudin
  • Greg Noble
  • Adrian Tan
Ernst & Young LLP (Canada), Praries
  • Andreas Ottosson
EY Law
  • Daniel Sandler
  • Angelo Nikolakakis
  • David Robertson
  • Roger Taylor

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.