CRA finds that when Canco confers a benefit on its NR parent by selling a capital property at an undervalue, the s. 247(12) deemed dividend is only half of the benefit

In 2021, the Canadian-resident taxpayer purchased a non-depreciable capital property from its non-resident parent for $20 million, when the arm's length price was $15 million (Situation 1). Alternatively, the taxpayer sold a non-depreciable capital property to the parent for $15 million, when the arm's length price was $20 million (Situation 2).

In Situation 1, the transfer pricing capital adjustment (TPCA) was $2.5 million, which is half of the $5 million transfer pricing adjustment. In Situation 2, the transfer pricing income adjustment (TPIA) is $2.5 million, as to which the Directorate stated (quoting the TPIA definition):

[A]lthough the amount of the adjustment under s. 247(2) is $5 million, the amount “by which an adjustment made under s. 247(2) result[s] in an increase in the [Canadian] taxpayer’s income [on the sale to the non-resident]” is $2.5 million.

In Situation 1, the deemed dividend under s. 247(12)(b), being the imputed benefit to the parent, would be computed as twice the TPCA of $2.5 million. In Situation 2, the amount of the deemed dividend would be stipulated by s. 247(12)(b)(ii) to equal the TPIA of $2.5 million, rather than the $5 million deemed dividend that the CRA presumably would have assessed as a secondary benefit under s. 214(3)(a) prior to the introduction of s. 247(12) in 2012.

CRA indicated that it was “not entirely clear from a policy perspective why the amounts of secondary adjustment should differ” in the two Situations.

Neal Armstrong. Summaries of 3 February 2025 Internal T.I. 2021-0885561I7 under s. 247(1) – TPIA, and s. 247(12).