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Canada – Transfer Pricing (2025)

Canada’s domestic transfer pricing framework is founded on Section 247 of the Income Tax Act, RSC 1985, c 1 (5th Supp) (the ITA). The Canada Revenue Agency (CRA) publishes policies and guidance on its public website. The Supreme Court of Canada has referred to the OECD Transfer Pricing Guidelines (TPG) in case law, notably in Canada v. GlaxoSmithKline Inc., 2012 SCC 52, evidencing the TPG’s persuasive interpretative role. Nevertheless, the TPG are not law in Canada; they are endorsed and used as administrative guidance (TPM-14, 2010 Update of the OECD Transfer Pricing Guidelines).

Arm’s length principle and role of the OECD Guidelines

Canada, as an OECD member, endorses the OECD Transfer Pricing Guidelines and refers to them in administrative guidance and jurisprudence. The CRA’s published guidance reflects adoption of relevant TPG chapters, including the approach to methods and comparability, but the TPG do not have binding legal force; they operate as a key interpretative source for the application of Section 247 (TPM-14).

Related persons for transfer pricing purposes are defined in the ITA. Subsection 251(2) contains the definition of “related persons” and paragraph 251(1)(a) deems related persons not to deal with each other at arm’s length regardless of how they actually transact. Paragraph 251(2)(a) identifies individuals connected by blood relationship, marriage, common-law partnership, or adoption. Paragraph 251(2)(b) sets out when a corporation is related to another person: where that person controls the corporation, is a member of a related group that controls it, or is related to a person described in the foregoing. Paragraph 251(2)(c) details six scenarios in which two corporations will be related, listing clauses (i) through (vi) that cover shared control, related controllers, and relatedness across controlling groups. Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm’s Length, provides further administrative detail on practical application.

Methods and application criteria

Canadian statute does not specify mandatory transfer pricing methods for related-party transactions; however, CRA administrative guidance reflects endorsement of Chapter II of the TPG. The CRA recognizes both a hierarchy of methods and the “most appropriate method” concept: methods are selected based on the facts and circumstances, following the TPG approach (TPM-14). Therefore, while the law does not prescribe particular methods, CRA guidance governs method selection in practice.

Comparability and ranges

The CRA follows the comparability analysis set out in Chapter III of the TPG (TPM-14). There is an administrative preference for domestic comparables when the Canadian taxpayer is the tested party, as domestic comparables are generally presumed more reliable, but foreign comparables are also acceptable if they meet the same comparability standards. Canada’s legislation allows the Minister to use all information available, including “secret comparables” (TPM-04, Third Party Information); administratively, however, secret comparables are relied upon as a last resort for assessments.

With respect to statistical measures and ranges, while the statute does not refer explicitly to ranges or statistical tools, CRA guidance permits the use of arm’s length ranges but instructs taxpayers not to use interquartile ranges or multiple-year averages to determine arm’s length prices (TPM-16, Role of Multiple Year Data in Transfer Pricing Analyses). Multi-year averages may nevertheless be informative for APAs, although transfer prices are verified on a year-by-year basis. Comparability adjustments are not mandated by statute but must be made where appropriate and where reliable adjustments are feasible.

Documentation and reporting

Canada requires various transfer pricing and offshore-related filings. The framework includes a country-by-country report consistent with Annex III to Chapter V of the TPG and a set of specific transfer pricing returns and information filings. Taxpayers are not required to file contemporaneous documentation with their tax returns; however, they must have prepared or obtained records that provide a complete and accurate description in all material respects of the items listed in subparagraphs 247(4)(a)(i) through (vi). Such documentation must be prepared or obtained on or before the documentation-due date for the tax year or fiscal period in which the transaction was entered into, and must be provided to the CRA within three months of a written request (subsections 247(3) and 247(4) of the ITA; TPM-05R, TPM-09). Failure to make reasonable efforts to determine and use arm’s length prices can trigger transfer pricing penalties if adjustments exceed the thresholds specified in subsection 247(3) of the ITA.

Relevant filings and information returns include T2 Schedule 19 (Non Resident Shareholder Information), T2 Schedule 22 (Non Resident Discretionary Trust), T2 Schedule 25 (Investment in Foreign Affiliates), T2 Schedule 29 (Payments to Non-Residents), T2 Schedule 44 (Non-Arm’s Length Transactions), T2 Schedule 97 (Additional Information on Non-resident Corporations in Canada), T106 (Information Return of Non-Arm’s Length Transactions with Non-Residents), T1134 (Information Return Relating to Controlled and Not-Controlled Foreign Affiliates), T1135 (Foreign Income Verification Statement), T1141 (Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities) and T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust). The CRA may still assess penalties where the documentation provided is judged insufficient, even if provided within prescribed timelines (TPM-09).

Safe harbours and simplification measures

The country profile indicates that Canada does not provide sectoral safe harbours or general simplification measures of the type queried; no such safe harbours are identified in the profile. Exemption from documentation obligations is not provided in Canada’s framework according to the profile.

APAs, MAP and dispute resolution

Mechanisms available to prevent and resolve transfer pricing disputes in Canada include rulings, Advance Pricing Agreements (unilateral, bilateral and multilateral), the International Compliance Assurance Programme (ICAP), Mutual Agreement Procedures (MAP) under tax treaties, and appeals to the CRA Appeals Division and the Canadian courts. Canada’s MAP practice generally does not permit simultaneous pursuit of domestic remedies and the MAP on the same issues; taxpayers will be required to select one process and suspend or terminate the other. Some tax treaties provide for arbitration in unresolved MAP cases.

Secondary adjustments, downward adjustments and year-end adjustments

Sub-section 247(12) of the ITA provides for secondary transfer pricing adjustments by deeming the adjusted amount to be a dividend, making withholding tax potentially applicable in accordance with applicable treaty rates, while sub-section 247(13) sets out relief available in certain circumstances. TPM-02R addresses secondary adjustments, repatriation and Part XIII assessments. Subsection 247(10) allows downward corresponding adjustments where, in the opinion of the Minister, such an adjustment is appropriate (TPM-03R). Year-end adjustments are permitted and are one way for taxpayers to align related-party pricing with the arm’s length principle; they are not mandatory by statute but are allowed for meeting arm’s length requirements.

Attribution of profits to permanent establishments

With respect to Article 7 of the OECD Model Tax Convention, Canada has three tax treaties containing an Article 7 broadly in line with the 2010 OECD Model and 91 treaties containing an Article 7 as it read before 2010. Where a treaty contains the pre-2010 Article 7, Canada does not apply the Authorized OECD Approach (AOA) in the absence of the updated Article 7. The profile does not state that Canada follows AOA across the board and indicates no implementation of the AOA for treaties that do not contain the new Article 7.

Other relevant information

The CRA’s Transfer Pricing Review Committee provides administrative oversight of certain transfer pricing assessments (TPM-13). Subsection 247(2.1) clarifies the interaction of subsection 247(2) with other provisions of the ITA by prescribing an ordering for the application of transfer pricing adjustments in the context of the Act: the transfer pricing rules apply in priority to the application of other provisions where relevant. Canada operates a thin capitalisation regime capping the proportion of related-party cross-border interest deductible at a debt-to-equity ratio of 1.5:1. Starting in 2023, Canada introduced rules to limit interest deductions consistent with the BEPS Action 4 recommendations and implemented anti-hybrid rules consistent with BEPS Action 2. The profile also notes that Canada has announced intentions to update its transfer pricing rules (Budget 2021).

Notably, the profile indicates the absence of domestic specific guidance in several areas: the transfer pricing framework does not contain domestic guidance specific to commodities, intangibles, hard-to-value intangibles (HTVI), low value-adding intra-group services simplifications, or financial transactions; where the domestic framework lacks specific guidance, the CRA refers to OECD guidance and to other provisions of the Income Tax Act and regulations as applicable.

Conclusion

Canada’s transfer pricing regime rests on Section 247 of the ITA and a comprehensive set of CRA administrative policies that adopt the OECD Transfer Pricing Guidelines as interpretative guidance. The legal framework provides detailed rules on related-party definitions and administrative procedures for adjustments, documentation, and dispute resolution. While the statute does not prescribe specific methods, CRA guidance follows the TPG approach to method selection, comparability, documentation and APAs. The Canadian regime includes substantive interaction with broader international initiatives such as BEPS, operates a thin capitalisation rule and provides mechanisms for secondary and downward adjustments, as well as a robust set of information filing obligations.

References

For a consolidated view of country transfer pricing profiles, see: https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html

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