CRA comments on criteria for downward transfer-pricing adjustments, and s. 247(2)(d) adjustments process

Comments made by Alexandra MacLean (DG, ILBD) at a recent CTF transfer-pricing seminar included:

• CRA’s focus respecting when it will consider a downward transfer-pricing adjustment under s. 247(10) to be “appropriate in the circumstances” is on whether there is good evidence that there will be a corresponding upward adjustment in the other jurisdiction (that respects the arm’s length principles), so as to not result in double non-taxation. The International Tax or Audit Division will forward the requested downward adjustment to the Competent Authority Services Division where there is a treaty country on the other side of the transactions.
• Recharacterization under s. 247(2)(d) entails a three-step process.
  • First, audit staff make a submission to the Transfer Pricing Review Committee. If accepted, the taxpayer is notified.
  • The audit team then conducts additional research, and makes a second submission to the TPRC, and a second review by it determines whether the auditor is permitted to propose an adjustment under ss. 247(2)(b) and (d). The taxpayer is then notified and allowed to make a submission..
  • At the third stage, the TPRC meets, along with representatives from Justice, Abusive Tax Avoidance, and Finance, to make a final recommendation.

• BP is not a complete bar to access tax accrual working papers, as indicated by Atlas. The Communiqué on “Obtaining Information for Audit Purposes” contemplates reasonableness and restraint, as the focus is on determining the facts and purpose of the transaction, with CRA then making its own determination of the transaction’s legal effects.

• The threshold for the Audit File Resolution Committee to look at a proposed adjustment is $100 million.

Neal Armstrong. Summaries of 27 March 2019 CTF Seminar - Transfer Pricing under s. 247(10), s. 247(2)(d), s. 233.8(3) and s. 231.1(1)(a).