Transfer Pricing Memorandum TPM-06, “Bundled Transactions” 16 May 2005

Even though there is no explicit reference to a bundled transaction or a requirement to separately price property or services in the Act (other than section 68, which provides for the specific allocation of consideration between the disposition of property and the provision of services), bundling can result in a transfer pricing adjustment if the terms and conditions of the bundled transaction fail to meet the arm's length standard. An example would be the provision of installation services in combination with the sale of tangible property. If the taxpayer's transfer price amounted to what would have been paid for the tangible property alone, an adjustment would be appropriate to include the arm's length price of the installation services.

CRA then refers to Information Circular IC87-2R, International Transfer Pricing, stating that "in particular, paragraphs 36 to 42 are relevant to bundling and unbundling."

After noting the exemption in Art. 12 of the Canada-U.S. Tratyu for payments for the use of or right to use know-how, but not for the provision of services, and before referring to the OECD Commentaries on this distinction, CRA stated:

The distinction between know-how and other royalties/services is not always clear so it is important to give special consideration to these types of transactions between non-arm's length parties in Canada and the United States. Generally, know-how is the confidential technical information that is necessary to reproduce a product or process and may provide a competitive and/or comparative advantage. An example includes the narrative description and diagrams of a secret manufacturing process such as those used in pharmaceutical drug development.

Know-how differs from the provision of services in that the technical information, which already exists, is disclosed to another party for use of their own account. Other than providing the information, the payee's contractual obligation will not be substantial, and they retain an interest to the information provided (that is, the payer will be subject to a confidentiality agreement). On the other hand, a service provider undertakes and performs a task for the other party without necessarily transferring to them pre-existing knowledge, skills, or expertise.