TPM-02R Secondary Transfer Pricing Adjustments, Repatriation and Part XIII Tax Assessments 1 June 2021

Scope of secondary adjustments

• Where a taxpayer (including for TPM-02R purposes, a partnership) is subject to a “primary adjustment” under s. 247(2) regarding its participation in a transaction or series with a non-arm’s length non-resident, a secondary adjustment (usually, a deemed dividend) is generally required to account for the benefit conferred on the non-arm’s length non-resident, namely, the excess amount paid to, or insufficient amount received from, such non-resident (para. 5).
• However, secondary adjustments do not apply where the benefit conferred on a controlled foreign affiliate as defined in s. 17(15), as the benefit “is more akin to a capital contribution” (para. 6).
• Although s. 247(12) only applies (effective after March 28, 2012) to Canadian resident corporations, other taxpayers (individuals and trusts) are subject to secondary (deemed dividend) adjustments under ss. 15 and 214(3) (if the non-resident was a shareholder), ss. 56(2) and 214(3) (where it was not), or s. 246(1)(b) (paras. 7, 10-12).

Timing of secondary adjustments

• Although s. 15(1) or 56(2) benefits are deemed by s. 214(3.1) to be paid at the time of the event or transaction generating the benefit, “to be consistent with the principles of subsections 247(12) to (15)” such dividend will instead be regarded as being paid immediately before the end of the taxation year of those transaction(s) (para. 14).

Canadian branches

• When a transfer pricing adjustment arises on transaction(s) between a Canadian branch of a non-resident corporation and another non-arm’s length non-resident person, CRA will generally not impose Part XIII tax on any resulting benefit conferred on the other non-arm’s length non-resident given that the transfer pricing adjustment will generally result in an increase to the base amount which is subject to Part XIV tax (para. 15).

Computation of Part XIII tax on the secondary adjustment

• A non-resident that is not a direct shareholder of the taxpayer will not qualify for a Treaty-reduced rate on a deemed dividend arising on a secondary adjustment where the Treaty reduction stipulates a shareholding threshold (para. 16).
• Where a transfer pricing adjustment occurs on a transaction previously subjected to Part XIII tax, the Part XIII tax previously remitted may be taken into account in the subsequent secondary adjustment, as a form of administrative relief. Where a lower amount of Part XIII tax would be due when compared to the amount previously remitted, a refund may be considered if requested within two years from the end of the calendar year in which the withholding tax was initially remitted, as per s. 227(6) (para. 17).

Secondary adjustments arise at year end

• Although s. 15(1) or 56(2) benefits are deemed by s. 214(3.1) to be paid at the time of the event or transaction generating the benefit, “to be consistent with the principles of subsections 247(12) to (15)” such dividends arising as a secondary adjustment for non-corporate Canadian taxpayers will instead be regarded as being paid immediately before the end of the taxation year of those transaction(s), so that the Part XIII withholding obligation will only arise at that time (para. 14).

Requirements of CRA repatriation policy

• CRA will apply the following administrative repatriation policy to all taxpayers (not only those to whom s. 247(13) applies (para. 23):

24. The CRA may provide relief from Part XIII tax when the non-arm’s length non-resident repatriates the amount, or a portion of the amount, of the primary transfer pricing adjustment(s) to the taxpayer, if the taxpayer has made a bona fide attempt at determining an arm’s length price for the transaction(s) or series of transactions.

25. The CRA will not provide relief from Part XIII tax in the following cases:

• the Transfer Pricing Review Committee has approved the application of paragraphs 247(2)(b) and (d) of the ITA;
• the General Anti-Avoidance Rule Committee has approved the application of the general anti-avoidance rule under subsection 245(2) as an assessing position;
• other anti-avoidance provisions of the ITA are applicable to the transaction(s) or series of transactions (for example, subsections 17(2), 247(9), etc.);
• the taxpayer or a non-arm’s length non-resident has failed to honour a requirement or compliance order issued under the ITA relating to the transaction(s) or series of transactions; or
• any other circumstance in which the Minister does not concur with the repatriation.

26. Where the CRA determines that the option to repatriate is available to the taxpayer, the auditor must advise the taxpayer in writing of the option to repatriate and of the conditions that must be met. It is up to the taxpayer whether to accept the offer to repatriate. The conditions that must be met include all of the following:

• The taxpayer agrees in writing to the proposed transfer pricing adjustment(s)^{Footnote 8}.
• The taxpayer and the non-arm’s length non-resident agree to the terms and conditions of the repatriation agreement.
• The non-arm’s length non-resident either
  
  • immediately repatriates the funds equivalent to the gross amount, or a portion of it, arising from the transfer pricing adjustment(s), or
  • agrees in writing with the taxpayer to the repatriation and to the completion of all appropriate transfers and entries in the financial records of the taxpayer within 90 days from the signing of the repatriation agreement.
• An unconditional waiver of the right to object to and appeal the transfer pricing adjustment(s) is obtained prior to granting relief for the repatriation. If the taxpayer decides not to waive its right of objection or appeal at the audit stage, the CRA’s Appeals Branch may still consider a request for repatriation during the objection process. Signing the waiver does not prevent the taxpayer from seeking assistance from the Competent Authority Services Division (CASD

Effecting of repatriation

• Repatriation can be accomplished by making a cash payment, offsetting the taxpayer’s inter-company liability account with the non-arm’s length non-resident at the time of repatriation (i.e. the date the repatriation agreement is signed), creating or adjusting an inter-company receivable account at the time of repatriation (which may engage s. 80.4 or s. 15(2) in conjunction with s. 214(3)(a)) or offsetting against a separate downward transfer pricing adjustment that relates to the same non-arm’s length non-resident, for the same taxation year (para. 27).
• A sample repatriation agreement is in Appendix B.
• The settlement of the repatriation must be completed within 90 days of the repatriation agreement’s signing (para. 31).

Interest not applied if repatriation agreement accepted

35. Subsection 247(14) of the ITA provides that if the non-arm’s length non-resident has repatriated an amount, interest under subsection 227(8.3) on the Part XIII tax liability may be reduced to the amount that the Minister considers appropriate, having regard to all the circumstances, including whether the country of the non-resident provides reciprocal treatment. Barring extraordinary or abusive situations, the CRA will generally not assess interest under paragraph 247(13)(b) (i.e. interest on the Part XIII tax amount or the applicable part of it) when a repatriation agreement has been accepted.

36. Where a dividend is deemed to have been paid under subsection 247(12), paragraph 227(8.5)(b) provides that no penalty for failure to deduct or withhold under subsection 227(8) will be assessed, whether or not the taxpayer chooses to repatriate. Paragraph 227(8.5)(b) is effective for tax years that end after March 28, 2012.

37. It is the CRA’s policy that no penalty under subsection 227(8) for failure to deduct or withhold will be assessed on any secondary adjustment resulting in either a Part XIII tax assessment or in a repatriation settlement if the primary adjustment is a transfer pricing adjustment.

36. Where a dividend is deemed to have been paid under subsection 247(12), paragraph 227(8.5)(b) provides that no penalty for failure to deduct or withhold under subsection 227(8) will be assessed, whether or not the taxpayer chooses to repatriate. Paragraph 227(8.5)(b) is effective for tax years that end after March 28, 2012.

37. It is the CRA’s policy that no penalty under subsection 227(8) for failure to deduct or withhold will be assessed on any secondary adjustment resulting in either a Part XIII tax assessment or in a repatriation settlement if the primary adjustment is a transfer pricing adjustment.