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14 June 2023

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

  • 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.
  • This Tax Alert highlights key aspects of the document.

On 6 June 2023, the Department of Finance released a consultation paper titled "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, includes draft revisions to section 247 of the Income Tax Act (the Act), as well as potential administrative measures, and requests comments from stakeholders by 28 July 2023.

Shortly, EY will release a more extensive Tax Alert reviewing the content of the consultation paper in detail.

The main proposal concerns possible amendments to the transfer pricing adjustment rule in section 247 of the Act. These potential changes are intended to provide greater clarity on applying the arm's-length principle in Canada. In addition, the consultation gives stakeholders the opportunity 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 poses a series of 23 questions requesting specific input from stakeholders. Appendix A of the consultation paper outlines draft legislative measures, some of which would:

  • Revise definitions to improve legislative clarity, including adding new definitions for "economically relevant characteristics" and "multinational enterprise group"
  • Introduce the phrase "comparable circumstances" to limit the hypothetical comparison for the delineated transaction versus what any two (or more) persons dealing at arm's length would have agreed to
  • Increase emphasis on the "conditions" of the delineated transaction or series to allow adjustment where the conditions are different from those that would have been included if the participants had been dealing with each other in comparable circumstances
  • Replace the current "recharacterization" provision in paragraphs 247(2)(b) and (d) of the Act with an explicit "nonrecognition" test
  • Include a "consistency" provision referencing the Organisation for Economic Co-operation and Development's (OECD's) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

Other administrative measures considered in the consultation paper for which input is requested include these potentially significant developments:

  • Introduction of de minimis transaction rules and exemptions for small taxpayers
  • Provision of safe-harbor interest rates or ranges
  • Potential adoption of a standardized OECD-style Master File/Local File model for transfer pricing documentation
  • Increased thresholds for transfer pricing penalties
  • Introduction of streamlined pricing approaches for certain transactions, such as low value-adding intra-group services and distribution

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

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

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

Ernst & Young LLP (Canada), Toronto

Ernst & Young LLP (Canada), Ottawa

Ernst & Young LLP (Canada), Quebec and Atlantic Canada

Ernst & Young LLP (Canada), British Columbia

Ernst & Young LLP (Canada), Prairies

EY Law (Canada)

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

Document ID: 2023-1059

 

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