CRA states that an s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA, nor imply a previous contribution of capital
The Directorate considered that where there was a s. 247(2) transfer pricing adjustment to increase Canco’s income as a result of having undercharged for goods or services provided to a non-resident subsidiary (CFA), s. 247(2) could not also be applied to reduce the exempt surplus or foreign accrual property income of CFA in respect of Canco.
Furthermore, the benefit associated with having undercharged could not be treated as a contribution of capital for purposes of an ACB increase to the CFA shares under s. 53(1)(c). (This CRA comment suggests that the current status of a comment made at the 1987 Annual CTF Roundtable (Q.68) - that on a share subscription, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital provided there is some increase in the value of the taxpayer's shares – may be uncertain.)
In passing, the Directorate indicated that if there were a transfer pricing adjustment under the foreign tax law, there could be a corresponding adjustment to CFA’s surplus, but stated:
[C]onsideration would have to be given to whether subsection 5907(2) … could reverse that foreign tax law adjustment and to the possible impact of any accompanying transfer of assets to effect a so-called “repatriation” payment.