The s. 247 transfer-pricing rules should not apply to transactions between non-residents none of whom is within the ITA charging provisions
A textual, contextual, and purposive analysis of s. 247 and other Canadian transfer-pricing provisions, e.g., ss. 69(1) and 17(1), suggests that, contrary to 2017-0691191C6, s. 247 applies to a transaction between two parties that are non-residents of Canada only to the extent that at least one of the parties carries on business in Canada or disposes of taxable Canadian property, and only where the transfer-pricing analysis is relevant to one of those activities or transactions.
Factors suggestive of this conclusion include:
- Jurisprudence supports the general proposition that a person is not a "taxpayer" unless the person comes within the charging provisions of the Act - that is, the person is resident in Canada, carries on business in Canada, or disposes of taxable Canadian property.
- Analysis of contemporaneous external sources suggests that there was no intent to expand the scope of the parties to which the transfer-pricing rules apply when, on the replacement of ss. 69(2) and (3) by s. 247 in 1998, the reference to a "taxpayer carrying on business in Canada" in subsections 69(2) and (3) was replaced by a reference to only a "taxpayer."
- It appears unlikely that the change in 2009 from the computation of income “as though the affiliate were resident in Canada” in the predecessor to s. 95(2)(f), to the deemed Canadian residence of an affiliate in the current version, was intended to require the current s. 95(2)(f) to be taken into account in applying s. 247. For example, in the context of a transaction between a foreign affiliate and a Canadian taxpayer that gives rise to FAPI, if s. 95(2)(f) is taken into account for the purposes of s. 247 to deem the foreign affiliate to be resident in Canada, paradoxically s. 247 cannot apply because there will then be no "non-resident person" for the purposes of s. 247.
- A more expansive interpretation generates difficulties. To give one example:
[W]here a foreign affiliate has earnings from an active business and the affiliate is required under the tax law of its country of residence, or the tax law of the country in which the business is carried on, to compute income, the affiliate's earnings are computed in accordance with that foreign law. Such earnings computed under foreign law are then adjusted in accordance with the items listed in regulation 5907(2), none of which relate to transfer-pricing adjustments under Canadian law. If subsection 247(2) could apply to interaffiliate transactions, it appears that earnings and surplus adjustments could be made only in respect of earnings of the foreign affiliate computed under Canadian tax rules, and not, for example, in respect of active business earnings computed under foreign law. It is not apparent why a transfer-pricing adjustment under subsection 247(2) should affect the computation of surplus in the former circumstance but not the latter.
Neal Armstrong. Summary of Byron Beswick, “Transfer Pricing and Transactions Between Foreign Entities,” Canadian Tax Journal, (2019) 67:1, 187-208 under s. 247(2).