3 February 2025 Internal T.I. 2021-0885561I7 - TPCA and TPIA

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: When there is a transfer pricing adjustment which increases the proceeds of disposition of a non-depreciable asset under subsection 247(2) of the Act, whether or not there is an inconsistency for the transfer pricing penalty under subsection 247(3) and the secondary adjustment under subsection 247(12), compared to a transfer pricing adjustment which reduces the adjusted cost base under subsection 247(2) of the Act?

Position: There is an inconsistency for the deemed dividend under subsection 247(12) of the Act since a transfer pricing income adjustment that increases the proceeds of disposition of a non-depreciable asset would only be for the amount of the taxable capital gain in the example provided.

Reasons: Wording of the legislation.

Nicolas Bilodeau							2021-088556
Manager							      Catherine Zhang
XXXXXXXXXX				   			   	Income Tax Rulings Directorate
International and Large Business Directorate				   

February 3, 2025

Dear Mr. Bilodeau:

Re: Transfer Pricing Capital Adjustment and Transfer Pricing Income Adjustment

We are writing in response to your request in which you asked for our views on what transfer pricing income adjustment (“TPIA”) and transfer pricing capital adjustment (“TPCA”), as defined in subsection 247(1) of the Act, results from the two scenarios set out below and what incidence that has on the penalty under subsection 247(3) and on a correlative Part XIII adjustment.

All statutory references are to the Act, unless otherwise indicated.

Background

The two scenarios described in your request are as follows:

1. A Canadian resident taxpayer purchased in 2021 a non-depreciable capital property from a non-arm’s length non-resident parent for $20 million but the arm’s length price is $15 million. There is a transfer pricing adjustment under subsection 247(2) to decrease the adjusted cost base (“ACB”) of the capital property by $5 million.

2. A Canadian resident taxpayer sold in 2021 a non-depreciable capital property to a non-arm’s length non-resident parent for $15 million but the arm’s length price was $20 million. There is a transfer pricing adjustment under subsection 247(2) to increase the proceeds of disposition of the capital property by $5 million.

Another scenario involving a transfer pricing income adjustment has since been raised:

3. A Canadian resident taxpayer made a non-interest bearing loan of $100 million to its non-arm’s length non-resident parent and included in their income, in their 2016 taxation year, a deemed interest of 1% in their income (i.e., $1 million) pursuant to section 17. It is determined that the arm’s length interest rate on that loan should have been of 3% in the circumstances.

Our Comments

Subsection 247(3) Penalty

Subsection 247(3) provides that a taxpayer is liable to a transfer pricing penalty equal to the total TPCA and TPIA less certain other amounts for the year where that total exceeds the lesser of $5,000,000 and 10% of the taxpayer’s gross revenue for the year.

A TPCA is the sum of a number of amounts, one of which is “1/2 (footnote 1) of the amount […] by which the [ACB] to the taxpayer of a capital property (other than a depreciable property) is reduced in the year because of an adjustment made under subsection [247(2)]”.

The TPCA in Scenario 1 above is $2.5 million (1/2 of the $5 million ACB reduction).

A TPIA is “the total of all amounts each of which is the amount […] by which an adjustment made under subsection 247(2) […] would result in an increase in the taxpayer’s income for the year or a decrease in a loss of the taxpayer for the year from a source if that adjustment were the only adjustment made under subsection 247(2)”. In Scenario 2, the amount of the primary adjustment under subsection 247(2) is $5 million. As a result and to paraphrase that provision, “any amounts […] that would be determined for the purposes of applying the provisions of this Act […] in respect of the taxpayer or the partnership for a taxation year or fiscal period shall be adjusted […] to the quantum or nature of the” adjustment. More specifically, the proceeds of disposition for the purposes of subsection 40(1) would be increased by $5 million under subsection 247(2), resulting in a capital gain increased by that much. Pursuant to section 3 of the Act, taxable capital gains as established under paragraph 38(a), being the taxable portion of a capital gain from the disposition of property, is the amount that is included in the computation of the income of a taxpayer for a taxation year.

Consequently, in determining the TPIA in Scenario 2, although the amount of the adjustment under subsection 247(2) is $5 million, the amount “by which an adjustment made under subsection 247(2) result[s] in an increase in the [Canadian] taxpayer’s income [on the sale to the non-resident]” is $2.5 million. In order to conclude that the amount is $5 million, the sentence would have to refer to the amount “that” results in an increase, which is not how the provision is worded.

Scenario 3 results in a TPIA equal to $2 million since the increase in the taxpayer’s income is the difference between the amount of the adjustment under subsection 247(2) which is $3 million less the amount of $1 million that was already included in the taxpayer’s income for the year.

Subsection 247(12) Secondary Adjustments

Generally, when there is a transfer pricing adjustment made on a transaction involving non-residents, a “secondary adjustment” is required under Part XIII to account for the benefit conferred on the non-resident. Subsection 247(12) was introduced by Budget 2012 to confirm the treatment of secondary adjustments. More specifically, Budget 2012 stated that:

“a number of provisions in the Income Tax Act, such as section 15 and paragraph 214(3)(a), can apply to treat a benefit conferred on a non-resident as a dividend subject to withholding tax under Part XIII of the Act and it is the policy of the CRA to assess these secondary adjustments. There is, however, no specific provision in the transfer pricing rules regarding secondary adjustments. […] Budget 2012 proposes to amend section 247 of the Income Tax Act to confirm that secondary adjustments will be treated as dividends for Part XIII tax purposes.”

Subsection 247(12) provides that in certain circumstances, a dividend is deemed for the purposes of Part XIII to have been paid by a corporation and received by a non-resident person that does not deal at arm’s length with it. Generally speaking, that rule applies where the Canadian resident corporation undertakes a transaction or series of transactions in which the non-resident was a participant. The provision reads as follows:

“if a particular corporation that is a resident of Canada for the purposes of Part XIII would have a [TPCA] or a [TPIA] for a taxation year, if the particular corporation, or a partnership of which the particular corporation is a member, had undertaken no transactions or series of transactions other than those in which a particular non-resident person, or a partnership of which the particular non-resident person is a member, that does not deal at arm’s length with the particular corporation (other than a corporation that was for the purposes of section 17 a controlled foreign affiliate of the particular corporation throughout the period during which the transaction or series of transactions occurred) was a participant,

(a) a dividend is deemed to have been paid by the particular corporation and received by the particular non-resident person immediately before the end of the taxation year;”

Paragraph 247(12)(b) determines the amount of the deemed dividend related to the transaction with such non-resident person to be equal to the aggregate of: (i) double of the TPCA balance (reversing the 50% ratio); and (ii) the TPIAs. That total is reduced by other amounts that are not relevant to the scenarios discussed in this letter.

In Scenario 1, the amount of deemed dividend under subsection 247(12) is $5 million (double the amount of the TPCA).

In Scenario 2 the amount of the deemed dividend under subsection 247(12) is $2.5 million (the TPIA).

Since the objective of subsection 247(12) is to account for the benefit received by the non-resident through applying Part XIII to a deemed dividend calculated under subsection 247(12), it is not entirely clear from a policy perspective why the amounts of secondary adjustment should differ in Scenarios 1 and 2 given the fact that the amount of the primary adjustment is the same. Receiving cash in excess of fair market value in Scenario 1 or buying for less and keeping the extra money in Scenario 2 arguably results in the same economic benefit to the non-resident.

Nevertheless, based on the wording of the provision, the economic benefit to the non-resident would be fully taxed under Part XIII in the form of a deemed dividend under subsection 247(12) in Scenario 1 but only to the extent of $2.5 million under subsection 247(12) in Scenario 2. Given that subsection 247(12) applies to the secondary adjustment under Scenario 2, the various benefit rules listed under subsection 247(15) would not apply under that scenario.

In Scenario 3, the amount of the deemed dividend under subsection 247(12) is equal to the TPIA which in turn is determined by the additional income inclusion of $2 million as described above.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust that these comments will be of assistance to you.

Yours truly,

Yves Grondin
Section Chief
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The September 23, 2024 Notice of Ways and Means would have amended the inclusion rate to 2/3 of the amount as a result of the 2024 federal budget. On January 31, 2025, it was announced that the federal government was deferring—from June 25, 2024 to January 1, 2026—the date on which the capital gains inclusion rate would have increased from one-half to two-thirds on capital gains. On March 21, 2025, the federal government announced that it did not intend to proceed with the proposed increase to the capital gains inclusion rate.