The 2017 OECD transfer-pricing guidelines mandate an “accurate-delineation approach” that is contrary to s. 247(2)

The approach taken in the 2017 OECD Guidelines of “accurately delineating” a transaction is, in fact, an approach of departing from the contracts and characterizing the cross-border transaction in accordance with its economic substance. This can be seen, for instance, in the example in para. 1.48 of the 2017 Guidelines respecting a parent which licenses IP to a subsidiary (Company S) but, under the OECD’s accurate-delineation approach, it is found that it “in fact controls the business risk and output of Company S such that it has not transferred risk and function consistent with a licensing agreement, and acts not as the licensor but the principal” so that the “actual transaction” differs from the written contract. It is suggested that:

In contrast, section 247 of the Act was never intended to permit transactions to be characterized or recharacterized on the basis of economic substance. As a result, the accurate-delineation approach under the 2017 guidelines is not permitted under Canadian law where it characterizes or recharacterizes transactions on the basis of economic substance. Nevertheless, the Canadian government has repeatedly stated that it has adopted the 2017 guidelines and that those guidelines merely clarify, and do not significantly change, the arm’s-length principle.

It would be problematic if CRA thus sought to apply an accurate-delineation approach to cross-border transactions with the U.S. For example, in the above example, it is understood that:

the United States would respect the licence and price it accordingly. If Canada treated the entire arrangement as an agency, the dispute would be difficult to resolve through competent authorities.

Neal Armstrong. Summary of Christopher J. Montes and Siobhan A.M. Goguen, “Recharacterization of Transactions Under Section 247: Still an Exceptional Approach,” 2018 Conference Report (Canadian Tax Foundation), 21:1-25 under s. 247(2).