CRA likes transfer-pricing recharacterization

Comments made by CRA in a morning transfer-pricing panel at the CTF transfer-pricing webinar held on February 2, 2021 included:

  • 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.
  • CASD does not share its APA paper with the taxpayer before submitting it to the other Treaty partner.
  • The revised IC 71-17 (re competent authority assistance) will remove the requirement that taxpayers provide their views on any possible basis on which to resolve the issues in MAP cases. This removal relates to efforts to standardize MAP document requirements under BEPS Action 14 - CASD wanted to ensure that this would not become a barrier for MAP requests to be eligible, and taxpayer views are still welcomed.
  • 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. The CRA will, however, negotiate in cases where the anti-avoidance provision is found in a treaty rather than the Act.
  • 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. CRA at this juncture is not prepared to comment on Dow Chemical.
  • 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 is over.
  • 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.

Neal Armstrong. Summaries of 3 February 2021 Transfer Pricing Webinar of the Canadian Tax Foundation: Panel I: Transfer Pricing Audits and Competent Authority under s. 247(2)(d), s. 247(2)(a), s. 247(3), s. 247(10), Treaties – Income Tax Conventions – Art. 26, s. 271(1) and s. 2(1).