17 May 2012 Roundtable, 2012-0444071C6 - Transfer Pricing

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Update on paragraph 247(2) assessments and the role of the CRA's Transfer Pricing Review Committee.

Position: Comments provided.

International Fiscal Association (IFA) Conference
Canada Revenue Agency Roundtable
May 17, 2012

Transfer Pricing Cases

Question

Could you provide us with an update on paragraph 247(2)(b) assessments and the role of the Transfer Pricing Review Committee (TPRC) in reviewing the application of this provision? In addition, could you please provide us the most recent TPRC statistics with respect to both penalty application and re-characterization?

Response

Recharacterization Process

A. Context/Background

Proposed assessments to recharacterize a transaction under paragraph 247(2)(b) and (d) are referred to the Transfer Pricing Review Committee (TPRC) before the assessment is issued, to ensure fair and consistent application.

B. TPRC Membership

In general, the committee will include:

• The director of the International Tax Division (ITD) – the Chairperson of the TPRC
• The Chief Economist from ITD
• Managers of the International Advisory Services Sections (IASS) within ITD
• The manager from the Transfer Pricing Specialty Section in ITD
• A legal representative from the Department of Justice

For final consideration of cases involving the application of paragraphs 247(2)(b) and (d) of the Income Tax Act (ITA), a manager from the Aggressive Tax Planning Division and a senior official from the Tax Policy Branch of the Department of Finance will be asked to participate.

C. Three-Stage Approach

In situations involving the application of paragraphs 247(2)(b) and (d), the TPRC uses a three-stage approach: (1) initial consideration, (2) consideration of a formal referral, and (3) final consideration.

(1) Initial consideration (1st stage)

As soon as it becomes apparent that paragraphs 247(2)(b) and (d) may be recommended as an assessing position, an initial referral is made to the TPRC. The early referral will result in a more timely evaluation of whether the auditor should continue with an in-depth audit of the transaction. If the TPRC considers that recharacterization may be applicable, the auditor will carry out an in-depth examination to determine whether the facts support an application of the recharacterization provision.

(2) Consideration of a formal referral (2nd stage)

Once the audit is complete, but before a proposal letter is issued, the auditor must formally refer the case to the TPRC. The auditor must provide the taxpayer a copy of the fact portion of the referral. This will allow the taxpayer to submit additional information in order to seek agreement on the facts of the case. The taxpayer's representations and the additional information will be taken into consideration when completing the formal referral to the TPRC.

The TPRC members will review the formal referral and discuss whether the facts and circumstances support the application of the recharacterization provision. In cases in which the TPRC decides that the auditor should proceed with recharacterization, the auditor will issue the proposal letter.

(3) Final consideration (3rd stage)

If additional representations are made by the taxpayer in response to the proposal letter, the auditor will forward the additional representations along with the auditor's comments for the TPRC's final consideration. The Assistant Director of Audit of the Tax Services Office will be informed of the final decision and reasons by memorandum.

The three stage process for referrals to the TPRC is a mandatory referral policy when the file is under audit however the issue of whether paragraph 247(2)(b) breaches procedural fairness if added at pleadings, despite not being presented to the TPRC, was considered in two recent cases before the Tax Court of Canada: Cameco and GE Capital Funding. The decision of the Court in both cases found that the administrative guidelines of the CRA are not binding and do not override the Act. Accordingly, the Minister of Justice is not precluded from adding paragraph 247(2)(b) at pleadings even if there has been no referral to the TPRC. It is our understanding that the decision in GE Capital Funding is now before the Federal Court of Appeal.

Statistics

Executive Summary as of April 24, 2012

247(3) PENALTY REFERRALS
Penalty Recommended 152 50.7%
Penalty not Recommended 148 49.3%
Total 247(3) Cases Referred 300 100.0%

247(2)(b) Re-characterizations
Denied / abandoned 34 61.8%
Approved 11 20.0%
Ongoing 10 18.2%
Total Cases Referred 55 100.0%

Jackson MacGillivray
2012-044407