Joint Committee discusses uncertainties created by new transfer pricing override rule

Comments of the Joint Committee on draft s. 247(2.1) (which is a revised version of former draft s. 247(1.1) and whose general premise is that s. 247(2) applies in priority to all other provisions of the Act) included:

• If s. 247(2) was intended to apply to a contribution of capital made by a Canadian parent to a non-resident subsidiary, or to a gift by a Canadian-resident individual to a non-resident relation, this would result in the need to comply with transfer pricing documentation requirements (which would, for example, be impossible for gifts) and the potential application of transfer pricing penalties. On the other hand, if the transfer pricing rules should be “read down” to avoid such a result, there would be a resulting unexpected and undefined narrowing of the transfer pricing rules’ scope.
• If s. 247(2) was intended to apply before the rollover rules (e.g., s. 85(1)(e.2)) would this mean, for example, that the non-resident transferor would be deemed to have received more shares, thereby ousting s. 85(1)(e.2) to any other adverse consequences – or if s. 247(2) deemed there to be additional boot, would this mean that the safe harbor from s. 85(1)(e.2) no longer was available?
• S. 17(1) would be rendered redundant as between non-arm’s length parties even though such non-arm’s length circumstances were “front and centre” in the design of the s. 17(1) rules – and any “safe harbour” contained in s. 17 or other specific rules may be rendered moot by the prior application of s. 247(2).

Neal Armstrong. Summary of 5 November 2019 Joint Committee letter entitled “Transfer Pricing Amendments” under s. 247(2.1).