CRA considers that it has ample transfer-pricing tools

Comments made by CRA at the afternoon panel on selected topics at the CTF transfer-pricing webinar held on February 2, 2021 included:

• CRA asserted that the new s. 247(2.1) ordering rule is a clarifying amendment. Admittedly, the CRA might have considered it to represent a change if it had been asked 15 years ago, but the new wording accords with CRA’s current positions.
• Where a taxpayer makes a loan to a non-arm’s length non-resident, to which s. 17 would apply, at less than the prescribed interest rate, and the arm’s length rate would be even higher, the s. 247 penalty will be calculated on the full difference between the arm’s-length rate and the rate actually charged (rather than only the excess over the prescribed rate).
• Paragraph 10.13 of BEPS chapter 10 references a cross-border loan made in an amount in excess of the maximum amount that an unrelated lender would have been willing to advance, and indicates that the excess loan amount would not be “delineated” as a loan. In Canada, CRA would be inclined to agree that this approach effectively is one of partial recharacterization.
• That said, CRA is not diffident about recharacterizing – it is no longer CRA’s position that ss. 247(2)(b) and (d) are a last resort.
• In its July 2019 Notice to Tax Professionals, CRA referred to an inbound hybrid debt structure - in which USco lent to a Canadian operating subsidiary (“Canco”) which it held through a U.S. LLC, but with there being back-to-back agreements between USco and LLC, and between LLC and Canco, under which LLC had committed under a forward subscription agreement with Canco to fund the interest payments under the loan, and USco had committed to make matching capital contributions to LLC – with CRA indicating that it had “resolved” this file “on the basis that paragraphs 247(2)(b) and (d) … and transfer pricing penalties applied.” In now explaining this position, CRA indicated that it had concluded that arm’s length parties would not have entered into this kind of arrangement, and that the closest arm’s-length analogue would be a (100%) equity transaction rather than a debt transaction.
• Regarding the finding in 2017-0691191C6 that the transfer pricing rules can apply in determining the FAPI of a Canadian taxpayer even if the transaction is solely between two non-resident persons, or the proposition that s. 247 could apply to a transaction between two Canadian residents if a foreign affiliate happens to be involved in the series of transactions, CRA indicated that a non-resident is a “taxpayer,” so that, for example, a taxi-driver in Switzerland is probably a “taxpayer,” although that may have no significance. That said, CRA generally would only seek to apply s. 247 in this context where there is some tax avoidance involved, e.g., shifting taxable to exempt surplus.

Neal Armstrong. Summaries of 3 February 2021 Transfer Pricing Webinar of the Canadian Tax Foundation: Panel IV: Selected Topics in Transfer Pricing under s. 247(2.1), s. 247(2)(d), s. 247(2)(a) and Treaties – Income Tax Conventions – Art. 26.