3 February 2021 Transfer Pricing Webinar of the Canadian Tax Foundation: Panel I: Transfer Pricing Audits and Competent Authority

S. 247(2)(d) no longer a tool of last resort

• CRA cancelled IC 87-2R “International Transfer Pricing” as it was misleading regarding recharacterization being used only as a “last resort” (it is now being liberally applied to recharacterize hybrid debt transactions) and the order in which it applied s. 247 in relation to other provisions of the Act. Although CRA has not officially ruled out an eventual update to IC 87-2R, it is focusing instead on updating the transfer pricing memoranda. TPM-2, on secondary adjustments and repatriation, which is in its final stages of approval, and CRA is working on TPM-3, dealing with downward adjustments, in conjunction with updates to IC 71-17, Guidance on Competent Authority under Canada’s Tax Conventions.

Canada uses CbC data only for risk assessment (including, sometimes, at the field audit level)

• CRA uses various risk-assessment systems, tools, and algorithms to help it to identify the highest-risk entities, and the CbC information is used at that high-risk level nationally. The information can also be used again for the more detailed field risk-assessment in audits when auditors are preparing their audit plans, but field-use of CbC information is usually restricted, and the International Tax Division provides guidance to ensure that it is used properly.

CASD does not share its APA paper with the taxpayer before submitting it to the other Treaty partner

• CASD has stopped sharing a copy of its APA paper to the taxpayer for comments before sending it to a treaty partner. The APA paper reflects the exchanges between the tax administrations. If there are any differences in the understanding of the facts between the competent authorities which could be of concern, CASD will ask the taxpayer for clarification or confirmation of our understanding.

CASD’s refusal to negotiate s. 247(2)(d) assessments

• Since ss. 247(2)(b) and (d) are part of Canada’s domestic anti-avoidance legislation, CASD will not revisit CRA’s conclusions under s. 247, but will submit the case to the other competent authority who may decide to provide relief on their end. Canada (consistently with OECD guidance) does not consider anti-avoidance adjustments to result in taxation that is not in accordance with the Treaty.

CASD’s willingness to negotiate Treaty anti-abuse provisions

• The CRA will, however, negotiate in cases where the anti-avoidance provision is found in a treaty rather than the Act.

Downward adjustments generally not granted if double non-taxation results

• The general concept animating CRA’s approach to determining whether to exercise its discretion respecting requested downward adjustments is that, while it wishes to avoid double-taxation, it also wishes to avoid double non-taxation.

COVID residency relief has not been extended

• CRA’s COVID-related guidance on corporate residency, permanent establishments, and other similar considerations expired on September 30, 2020, and it has decided not to extend the corporate residency guidance beyond that date, mostly because residency determinations need to be addressed on a case-by-case basis, especially if businesses start adopting new ways of doing business after the pandemic crisis is over.

TPM-17 maintained re CEWS subsidies

• Notwithstanding somewhat different views of the OECD, CRA will continue to evaluate transfer prices in accordance with its guidance on government subsidies in TPM-17.

Meaning of TPRC insufficient documentation notation

• The Transfer Pricing Review Committee typically indicates that “the documentation provided is not sufficient” for the Committee to make the determination as to whether there were reasonable efforts in cases where CRA was considering s. 247(3), which involves factual determinations on whether the taxpayer made reasonable efforts to determine and use arm’s-length prices. These situations are often not as clear-cut as the deeming provisions under s. 247(4). Therefore, that wording is usually used in situations where CRA was seriously considering whether a s. 247(3) penalty would apply, but considered that the information before the Committee was insufficient.