Subsection 247(2)


AgraCity Ltd v. Canada, 2016 DTC 5006 [at 6525], 2015 FCA 288

boundary between ss. 247(2)(a) and (b) is unresolved/inconsistent assessments of related taxpayers

The taxpayer (“AgraCity”) was wholly-owned by Jason Mann. A Barbados corporation ("NewAgco-Barbados") was wholly-owned by a second Canadian-resident corporation (“SaskCo”), which was indirectly owned by Jason and his brother. In its returns, NewAgco-Barbados reported substantial profits from the sale of a herbicide (ClearOut) to Canadian farmers, and deducted amounts paid to AgraCity as service fees. The Crown’s reply to an appeal by AgraCity pled that NewAgco-Barbados did not sell any ClearOut, and that the fair market value of the fees received by AgraCity should be increased by all of the profit reported by NewAgco-Barbados. In the reply filed by the Crown to a related appeal of SaskCo, it pled that NewAgco-Barbados bought ClearOut and sold it to AgraCity, thereby giving rise to FAPI under s. 95(2)(a.1) to SaskCo. After noting (at para. 8) that the two Crown pleadings were “irreconcilable,” Webb JA stated (at para. 19):

AgraCity and SaskCo, although they are related persons…, are two separate persons. … Because each taxpayer is assessed (or reassessed) separately, this can result in inconsistent assessments (Peterson v. The Queen, 2005 FCA 263…at paragraph 4). If the Minister has issued inconsistent assessments, this will lead to inconsistent pleadings, if the taxpayers appeal to the Tax Court of Canada. In this case the Crown acknowledges that the assessments and hence the pleadings are inconsistent and that the Crown does not seek to have both assessments upheld.

Webb J. found (at para. 34) that it had been wrong to strike paragraphs 247(2)(a) and (c) of the Act, consistent with Cameco Corp. v. The Queen, 2015 FCA 143, [2015] F.C.J. No. 774, which stated (at para. 51):

No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike (Hunt at paras. 18, 28 and 43). The question whether a nil price can give rise to the application of paragraphs 247(2)(a) and (c) -- in addition to paragraphs 247(2)(b) and (d) -- is best left to be decided by the trial judge in the fullness of the evidence.

Canada v. GlaxoSmithKline Inc., 2012 DTC 5147 [at 7338], 2012 SCC 52, [2012] 3 S.C.R. 3

premium purchase price based on licence

The taxpayer purchased an active pharmaceutical ingredient from an affiliated non-resident corporation ("Adechsa") for approximately five times the amount that was paid by Canadian generic drug manufacturers for that (chemically identical) ingredient. The taxpayer then used the ingredient to produce pills or other delivery mechanisms, and marketed the product under the applicable brand name. The trial judge found that, for the purpose of deducting its ingredient costs, the taxpayer should be deemed under s. 69(2) to have paid the lower generic rate. However, the taxpayer had been licensed by another affiliated non-resident (the "Glaxo Group") to among other things use the drug's brand-name in its marketing, but was required under this licence agreement to buy the active ingredient from Adechsa or another affiliate at the elevated price.

After noting (at para. 47) that an arm's length distributor of the Glaxo Group might well be faced with the same requirement under a licence agreement to purchase from these Glaxo affiliates, Rothstein J. found (at para. 52) that the licence agreement was clearly relevant to determining whether some level of premium pricing under the Adechsa supply agreement still resulted in a price that would have been reasonable in the circumstances if the taxpayer and Adechsa had been dealing at arm's length:

Considering the Licence and Supply agreements together offers a realistic picture of the profits of Glaxo Canada. ... The prices paid by Glaxo Canada to Adechsa were a payment for a bundle of at least some rights and benefits under the Licence Agreement and product under the Supply Agreement.

He also noted (at para. 42) that this approach was consistent with the 1995 OECD Transfer Pricing Guidelines, para. 1.15, which indicated that:

[A] proper application of the arm's length principle requires that regard be had for the 'economically relevant characteristics" of the arm's length and non-arm's length circumstances to ensure they are "sufficiently comparable".

The Court also denied the taxpayer's cross-appeal, which had advanced the position that the Minister's assumptions had been "demolished," so that the Minister's reassessment should be set aside rather than referring the matter back to the Tax Court for determination of a reasonable price in light of the now-established relevance of the licensing agreement. Although a price above the generic rate may have been justified, it did not necessarily follow that a price five times the generic rate was reasonable.

Canada v. General Electric Capital Canada Inc., 2011 DTC 5011 [at 5558], 2010 FCA 344

interest savings exceeded 1% guarantee fee

The Minister disallowed the deduction by the taxpayer of guarantee fees paid by it to its US parent. The fees were calculated as 1% of the face amount of the commercial paper and other debts of the taxpayer that were guaranteed.

Noel J.A. accepted the submission of the Crown that the determination of an arm's length guarantee fee for purposes of ss. 247(2)(a) and (c) (and for purposes of s. 69(2) for the earlier taxation years in question) should take into account the fact that even without a guarantee, there would have been "implicit support" by the US parent of the taxpayer, i.e., the market would take into account reputational pressures on the US parent to support its subsidiary. It was necessary to take "into account all the circumstances which bear on the price whether they arise from the relationship" between the taxpayer and its non-resident contracting party or otherwise (para. 54). However, even taking into account the implicit support, the interest rate savings to the taxpayer as a result of receiving the guarantee exceeded the guarantee fees, so that the Tax Court had correctly found that amount of the guarantee fees did not exceed the amount that would have been agreed to by parties dealing at arm's length in the same circumstances.

See Also

Chevron Australia Holdings Pty Ltd v Commissioner of Taxation, [2017] FCAFC 62

cross-border loan made on arm’s length terms would have benefited from a parent guarantee or other security

The U.S. subsidiary (“CFC”) of the taxpayer (“CAHPL” – which was an Australian subsidiary in the Chevron multinational group) borrowed in the U.S. commercial paper market at a borrowing cost of about 1.2% with the benefit of a guarantee from their ultimate U.S. parent, and on-lent U.S.$2.45 billion of such funds under an unsecured Australian-dollar credit facility to CAHPL at about a 9% interest rate. CAHPL deducted such interest in computing its income for Australian purposes, and received tax-free dividends from CFC of most of CFC’s profits (based on the 7.8% spread).

The Commissioners initially denied much of CAHPL’s interest deductions for its 2004 to 2008 tax years under the sui generis domestic transfer pricing (Division 13) rule contained in the 1936 Australian Act. However, in 2012 (i.e., after the tax years in question) a new (Division 815) transfer pricing rule was enacted in the 1997 Act, but with retroactive effect to tax years starting after July 1, 2004. The Division 815 Rule essentially incorporated by reference into domestic law the Associated Enterprises Article of the relevant Treaty (here, the Australia-U.S. Convention), so that assessments could be made for departures from the Art. 9 standard. The Commissioners issued replacement assessments for the 2006 to 2008 tax years based on the Division 815 rule.

In dealing first with the Division 13 rule, Pagone J (with whom Allsop CJ agreed and whose reasons were adopted by Perram J) stated (at paras 124, 132, 133):

… The evidence found by his Honour was that the borrowing by CAHPL would not have been sustainable if obtained from an independent party. … As a standalone company, severed from the financial strength of its ultimate parent and corporate group, CAHPL could not secure a loan for an amount equivalent to $US2.5 billion at the rate obtained by its subsidiary with the backing of the ultimate parent.

The evidence...amply supported...the reasonable expectation of a borrowing by CAHPL being supported by security. …

An alternative submission made by CAHPL, however, does have some force. The alternative submission was that the hypothetical acquisition would need to assume that CAHPL had paid a fee to its parent for the provision of security on the hypothetical loan.

Turning to the Division 815 rule and, thus, Art. 9 of the Australia-U.S. Treaty, he stated (at para. 156):

His Honour was correct to assume...that what might be expected to operate between independent enterprises dealing wholly independently with each other was a loan by [sic] CAHPL with security provided by its parent at a lower interest rate.

In the (essentially) concurring reasons of Allsop CJ, he stated (at paras. 92-95):

92 The conditions operating between CAHPL and CFC if they were independent of each other would not include the direction by Chevron Treasury of the officers of both for the benefit of the group as a whole. The conditions between mutually independent CFC and CAHPL could, however, include CAHPL situated within the Chevron group and CAHPL being subject to the direction of Chevron for the benefit of the Chevron group.

93 In such circumstances, were CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available.

94 In the light of the evidence as to Chevron’s policy concerning external funding and its willingness to provide a guarantee to achieve that end the above is the natural and commercially rational comparative analysis when one removes the controlled conditions operating between CAHPL and CFC and replaces them with the condition of mutual independence.

95 In the circumstances there would have been a borrowing cost conformable with Chevron’s AA rating, which, on the evidence, would have been significantly below 9%.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 9 cross-border loan interest improperly reflected lack of security 367
Tax Topics - Statutory Interpretation - Retroactivity/Retrospectivity retroactive tax was constitutional if it could be judicially challenged based on the facts 448

Sifto Canada Corp. v. The Queen, 2017 TCC 37

TNMN method was reasonable

CRA accepted a voluntary disclosure by Sifto Canada that it had undercharged on its sales of rock salt to a U.S. affiliate, and reassessed accordingly. Sifto Canada and the parent of its U.S. affiliate (which used consolidated returns) then applied to the Canadian and U.S. competent authorities for the higher transfer price to be accepted, so that the income of the U.S. parent could be reduced accordingly. The two competent authorities agreed to this, and CRA then entered into a letter agreement with Sifto Canada where it agreed with the adjustment. Before finding that this agreement was binding on CRA on the basis, inter alia, that it did not represent an indefensible interpretation of the transfer pricing rules, Owen J stated (at para. 143):

[T]he TNMM method applied by the Apellant and accepted by the Minister and the USCA [U.S. competent authority] is certainly one reasonable way in which to determine an arm’s length transfer price. The fact that the net margin chosen by the Appellant and reassessed by the Minister was at the lower end of the comparable range is certainly no basis on which to conclude that the price was indefensible on the facts and the law.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 9 agreement with the U.S. competent authority re a VDP-adjusted transfer price binds CRA even if it had not yet audited the taxpayer 569
Tax Topics - Income Tax Act - Section 115.1 - Subsection 115.1(1) 115.1 not germane to subsequent inconsistent CRA assessment 197
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) MAP agreement concurred in by taxpayer was binding on the Minister as it was not “indefensible” 255

Suncor Energy Inc. v. The Queen, 2014-4179(IT)G

Petro-Canada U.K. Limited (“PCUK”), which carried on its energy business in the U.K., was wholly owned by Holdings UK, which was wholly-owned by 3908968 Canada Inc, which was wholly-owned by Petro-Canada (“PC”). On June 18, 2004, PCUK closed the acquisition of the shares of the Intrepid group of companies, which had a 29.9% interest in the North Sea Buzzard oilfield, and on January 1, 2005, PCUK acquired the Buzzard assets from the Intrepid group of companies. In April and May 2004, Petro-Canada entered into a forward sale with Morgan Stanley and Deutsche Bank, for 28,000 barrels of Brent Crude per day for the period from July 1, 2007 to December 31, 2010, under which Petro-Canada was obligated to receive a fixed price of U.S.$931 million and was obligated to pay the spot price of Brent Crude at the time of each monthly closeout of each trade. Petro-Canada made monthly close-out payments to the end of 2007 totalling US$287 million, and closed out all of its post-2007 obligations in November and December 2007 for a settlement payment of US$1.72 billion. Petro-Canada deducted the (Cdn.$2.02 billion) sum of the monthly close-out payments and the settlement amount on income account in its 2007 return.

The Minister reassessed Petro-Canada to include Cdn.$2.02 billion pursuant to s. 247(2)(c) in the 2007 income of Petro-Canada as an imputed reimbursement to Petro-Canada by PCUK of the settlement payments, and assessed a s. 247(3) penalty for failure to prepare contemporaneous documentation in connection with the imputed reimbursement. The Reply states that “at arm’s length…PCUK would have reimbursed PC for the hedging losses in the amount of $2,016,385,409.”

ENMAX Energy Corp. v. Alberta, 2016 ABQB 334

arm's length comparables for intercompany interest rate not dispositive

An Alberta utility (EEC) was required to make payments to the province equal to the provincial and federal income tax to which it would have been subject had it not been tax-exempt. In order to minimize this pseudo-tax liability of EEC, EEC's parent capitalized it mostly with a subordinated note bearing interest at 11.5%, whereas the Alberta government denied the interest deduction over 5.42% as being in excess of the “reasonable amount” referenced in s. 20(1)(c).

Poelman J found (at para. 240) that the imputed credit rating of EEC (otherwise no higher than BB-) should not:

allow consideration of implicit support to influence opinions about reasonable interest rates… . The intercompany notes allow for no parental support, because the lender and the implicit supporter are the same.

He also accepted submissions that various qualitative “fundamental factors” and savings in transactions costs should increase the benchmark arm’s length interest rate by 50 and 44 basis points, respectively, so that an arm’s length interest rate for the 2004 note might fall in the range of 7.97% to 8.77%.

However, after referencing a Gabco-derived test as to “whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred,” and concluded that the interest was fully deductible. He also stated (at para. 268):

[I]ntercompany debt is not rated… . Further… the intercompany notes [here] were burdened with a number of conditions, such as the level of debt and stripping of cash flow to the parent, which would have made them very difficult to sell on the market without significant changes. These observations reinforce the weakness of putting too much emphasis on artificially constructed arm’s length comparators… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) 11.5% interest rate on unsecured intercompany note was reasonable under s. 20(1)(c) notwithstanding that this exceeded an arm’s length rate of around 8.5% 483
Tax Topics - Income Tax Act - Section 67 Gabco test implies a range 110

Re Nortel Networks Corp., 2014 ONSC 6973

provision, under multinational agreement for residual profit split method, for unilateral bearing of restructuring costs, represented appropriate ex ante risk allocation

Under Nortel's transfer pricing methodology, the entities performing R&D, including Nortel itself and a UK subsidiary, were entitled to all residual profits after payment of returns to the Nortel subsidiaries that performed sales and distribution functions. The related agreement specified that restructuring costs incurred by each R&D subsidiary were not to be shared.

Following Nortel's insolvency, Newbould J. rejected various submissions made by the administrators of the pension plan for the UK subsidiary respecting transfer pricing, including that this arrangement failed to properly compensate the UK subsidiary for its restructuring costs. He accepted the monitor's position that "Chapter 9 of the OECD Guidelines explicitly frames the issue of restructuring costs and benefits as a question of ex ante risk allocation by way of an intercompany contract, rather than an ex post examination of who should bear the realization of a risk (i.e., restructuring costs)." Furthermore, the approach of the claimants' expert that "one starts with the economic substance and then looks to see if the legal form follows the economic substance" was "the opposite of what the OECD Guidelines call for."

See summary under Treaties – Art. 9.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 9 provision, under multinational agreement for residual profit split method, for unilateral bearing of restructuring costs, represented appropriate ex ante risk allocation 446

AgraCity Ltd. v. The Queen, docket 2014-1537

factual allegation that foreign affiliate did nothing was fatal to ss. 247(2)(a) and (c) pleadings but not ss. 247(2)(b) and (d)

In her Reply, the Minister alleged that a Barbados corporation ("NewAgco") which did not deal at arm's length with the taxpayer, took over a business of selling a product ("ClearOut") to Canadian farmers, and that NewAgco agreed to pay services fees to the taxpayer amounting to approximately $1 million for its 2007 and 2008 fiscal periods as contrasted to net profits of Barbados from sales of ClearOut for those years of $2.4 million and $3.6 million.

C. Miller J found (at para. 16) that if he took the Minister's pleadings "that NewAgco had no role in selling ClearOut as true," there was "no basis upon which the Minister can successfully apply section 247(2)(a)." Accordingly, he struck the Minister's pleading, that the terms of the agreement between the taxpayer and NewAgco differed from arm's length terms. However, he did not strike pleading directed at ss. 247(2)(b) and (d) as that provision:

...does not limit the Minister to a comparison of a particular transaction (the service agreement) between the non arm's length parties at issue and fictional arm's length parties, but allows the much broader view of the series of transactions and the recharacterization into what would or would not arm's length parties have done (para. 20).

He noted (at para. 17) that, if supporting evidence emerged at trial, the Minister could advance ss. 247(2)(a) and (c) as alternative arguments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) Reply must explain specific bases on which a penalty was imposed 240
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 53 argument inconsistent with assumed facts struck from pleadings, but might be reintroduced at trial as an alternative argument 168

McKesson Canada Corporation v. The Queen, 2014 DTC 1197 [at 3749], 2014 TCC 266

highly discounted receivables purchased by non-resident affiliate were not "pig in a poke"

Boyle J, after finding in McKesson that the taxpayer had been selling its trade receivable to its immediate Luxembourg parent (MIH) at discounts which were excessive from a transfer pricing perspective, recused himself from consideration of residual issues (respecting costs and the disposition of sealed documents) on the ground that he might no longer be considered to be impartial, as McKesson Canada, in its factum filed with the Federal Court of Appeal, had alleged that he was "untruthful and deceitful" in his reasons, stated "clear untruths" about him and alleged that he was not impartial (numerous paras. beginning at 4).

His explanation of the untruths included quotes from the extensive exchanges from the bench at trial:

  • There, he expressed concern about the taxpayer, which began with a cost of funds of nearing 5%, quadrupling this cost on the basis of laying off risk to MIH (para. 54).
  • The taxpayer's approach, that (ignoring MIH's knowledge and control as parent) MIH was "buying a pig in a poke," so that it was taking on a lot of risk, would mean that "virtually every Canadian subsidiary…[could] be re-pricing to 5 year junk rates" (para. 65).
  • However, in his trial reasons, it had not been necessary to rely on the likely law that this parent-subsiadary relationship could be taken into account as under the terms of the receivables purchase agreement, MIH had an out once the collection performance began to deteriorate (para. 19).

Marzen Artistic Aluminum Ltd. v. The Queen, 2014 DTC 1145 [at 3433], 2014 TCC 194, aff'd 2016 DTC 5018 [at 6600], 2016 FCA 34

separate entity approach endorsed

In 2000 and 2001 the Canadian-resident taxpayer, which manufactured windows in British Columbia, paid Cdn.$4.2M and Cdn.$7.8M in fees under a "Marketing Services and Sales Agreement" ("MSSA") to a wholly owned Barbados subsidiary ("SII"), including a "bonus" in the case of 2001 of U.S.$2M. SII in turn paid US$1.4M (Cdn.$2.1M) and US$1.8M (Cdn.$2.8M) to a Washington subsidiary of the taxpayer ("SWI") for the provision of SWI's employees to perform services for SII at cost plus 10%. SII, which had minimal expenses other than the fees paid to SWI, declared exempt dividends to the taxpayer which essentially were equal to its earnings. The taxpayer had approximately nil operating income after deduction of the "marketing fees" so that these dividends represented essentially all of its profits. SWI, which sold windows principally in California, purchased the windows from the taxpayer at a cost equal to its selling price so that it as well had no significant operating profit.

The Minister reassessed the taxpayer under the transfer pricing rules to limit the taxpayer's deduction of MSSA fees to the amount of the SWI "secondment fees," and imposed s. 247(3) penalties.

Sheridan J found that as SII had insubstantial assets and no personnel other than its managing director, who lacked the marketing experience and know-how of the key managers of SWI and the taxpayer, SII provided nothing of value to the taxpayer beyond the services provided by SWI's employees, and the relatively minor value of the services provided by its managing director (for which she adjusted on the basis that the amounts paid to him were the relevant comparable uncontrolled price). Although SII's managing director may have provided useful advice, such as suggesting moving into the California market, he did so in his personal capacity rather than through SII. In rejecting the approach of the taxpayer's expert, which was to treat SWI and SII as an "amalgam" so that their combined contribution was analysed, Sheridan J found (at para. 191) that the OECD Guidelines (which she found at Para. 208 should be applied in their 1995 rather than 2010 form) instead endorsed a separate entity approach.

In the Court of Appeal, Scott JA stated (at para. 18) that the (1995) OECD Guidelines "are not controlling as if they were a Canadian statute but they are useful in determining the amount a reasonable business person, who was party to the transaction, would have paid if it had been dealing at arm’s length," found that Sheridan J had not erred in applying the principles outlined in ss. 247(2)(a) and(c) and had identified the proper transaction and then, in response to the taxpayer's submission (at para. 40) "that the Judge erred in under-valuing the amounts paid by SII to SWI," stated (at para. 53), that "I cannot find any evidence that was challenge the Minister’s assumption that the price for the seconded US employees, set on a cost plus 10% basis, was not an arm’s length price."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(4) no explanation of derivation of pricing 109

McKesson Canada Corporation v. The Queen, 2014 DTC 1040 [at 2723], 2013 TCC 404

terms adjusted within framework of transaction chosen by taxpayer

With "the predominant purpose...of...the reduction of its Canadian tax on its profits" (para. 18), the taxpayer, which was an indirect Canadian subsidiary of McKesson Corporation (a U.S. public company), entered into an agreement (the "RSA") for the sale of its trade receivables, as they arose (mostly from sales by it of pharmaceutical products to Canadian drug stores and hospitals), at a discount to its immediate Luxembourg parent ("MIH"). The initial receivable balance sold was $460M. The receivables were required to be sold on a serviced basis (with the taxpayer charging a fixed servicing fee which was not challenged) and on a non-recourse basis (except for the ability of MIH to put them back to the taxpayer for the amount collected by the taxpayer.) All receivables were sold at a fixed discount from their face amount of 2.206% (which worked out to an annualized rate of 27% given an average of 30 days until collection) and the Minister reassessed on the basis that the discount should be 1.013% (corresponding to an annualized effective financing rate of around 12.5%) thereby resulting in an upward transfer pricing adjustment to the taxpayer's 2003 taxation year (the first affected year) of $26.61M together with Part XIII tax on a deemed dividend based on a correlative conferral of a benefit on MIH.

In finding that the taxpayer's evidence did not make out a prima facie case to demolish the assumptions of fact underlying the Minister's choice of a 1.013% discount rate, so that the taxpayer's appeal was dismissed, Boyle J made the following findings and observations:

  • The appropriate approach under ss. 247(2)(a) and (c) was "to follow the structure of the RSA that the McKesson Group chose to enter into…and consider whether the terms and conditions which affect the Discount Rate pricing differ from what arm's length terms and conditions would be expected to provide" (para. 270) – rather than to look at the pricing that would have applied to a different structure, e.g., a sale of the receivables on a recourse basis, with such recourse secured by a reserve (para. 166).
  • Contrary to the actual terms, arm's length parties would have reduced the discount rate applied on the initially sold receivables to reflect that they were on average only 16 days away from being collected (paras. 70, 291).
  • The component of the discount rate to reflect potential bad debt losses should be reduced so as to only reflect the historic loss performance of the taxpayer's receivables pool (of 0.04%) plus a 50% to 100% premium over this (increasing this component to 0.06% to 0.08%) to reflect a risk of this experience deteriorating (paras. 306, 311-312) – rather than using a much higher imputed loss rate based on the proposition that the sales customers did not have bond ratings ("I can not reasonably conclude that a company that does not have a bond rating can be assumed to be hiding a bad implicit rating from the public" (para. 298, see also para. 245).)
  • Only a modest additional discount (of 0.17% to 0.25%) would be needed to account for a risk that an arm's length purchaser might have to incur additional costs to hire a replacement servicer if a termination event occurred and the taxpayer no longer was suitable (para. 333).
  • Although it was odd that "the parties to the RSA provided that prompt payment discounts are not treated as deemed receipts but are instead at the purchaser's risk," Boyle J accepted "that arm's length parties might agree to such a term" (para. 334). However, rather than their agreeing to a fixed discount spread to reflect the risk that an increasing number of customers would take prompt-payment discounts (as was done here), they would instead adopt "a three or four month, or annual floating dynamic payment component to the Discount Spread component…to fully capture…the risk of change" (para. 338).
  • The interest discount should not be increased by an assumed cost of funds that would be associated with MIH financing 100% of the purchase price by issuing junk bonds, as there was no basis to suggest that the taxpayer would be driven to seek receivables financing from a high cost factoring company rather than a major financial player. Adding a modest additional interest discount of 0.0% to 0.08% (reflecting the investment grade credit rating of the US parent) was appropriate (para. 349).
  • The Court…should consider "notional continued control type rights in appropriate circumstances," as "if these were to be ignored ... companies within wholly controlled corporate groups could enter into skeletal agreements conferring few rights and obligations to the non-resident participant ... all with the view to obtaining a more favourable transfer price..." (para. 132).

Extract from 10K of McKesson Corporation for year ended 31 March 2015

We have received reassessments from the Canada Revenue Agency ("CRA") related to a transfer pricing matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of 2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003 through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter and do not expect it to have a material impact to income tax expense.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence expert reports without testimony 46
Tax Topics - General Concepts - Purpose/Intention tax purpose v. commercial result 78
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(4) advocacy 3rd-party report not read by taxpayer 149
Tax Topics - Treaties - Income Tax Conventions - Article 9 5-year limitation did not apply to secondary Part XIII assessment 190

Burlington Resources Finance Company v. The Queen, 2013 DTC 1190, 2013 TCC 231

This decision concerned motions to amend or strike pleadings.

The taxpayer, a Nova Scotia unlimited liability company, raised U.S.$3 billion in capital by issuing notes to arm's-length parties. The notes were guaranteed by its US parent ("BRI"). The Minister disallowed the deduction of $82 million in guarantee fees under inter alia ss. 247(2)(a) and (c), but also "invoked" ss. 247(2)(b) and (d).

Hogan J found that it was "manifestly incorrect" for the Minister's Reply to refer to the "consideration for the guarantee fee" rather than "consideration for the guarantee" (para. 29). After noting that the Reply apparently had been framed this way in order to avoid compromising a theory that an arm's length person would have refused to enter into the guarantee agreement, Hogan J stated (at para. 32) that acknowledging the guarantee's existence did not contradict an argument "that an arm's length person would not have entered into the same agreement if placed in the circumstances of the parties."

Although he ordered the Minister to amend her reply, Hogan J further emphasized that doing so did not seriously undermine the potential merit of her case:

  • It was legitimate for the Minister to question the value of a guarantee to an NSULC from its principal, given that a shareholder of an NSULC is liable for the NSULC's unpaid debts on a winding-up (para. 40).
  • The mere fact that the guarantee arrangement may have had a bona fide non-tax purpose (i.e. obtain a guarantee to enable the taxpayer to secure financing) was not conclusive as to the primary purpose of the transaction (para. 45).

Alberta Printed Circuits Ltd. v. The Queen, 2011 DTC 1177 [at 967], 2011 TCC 232

internal CUP applied over TNMM

The Canadian taxpayer was in the business of printing custom electronic circuits. Pizzitelli J. found that the taxpayer was not dealing at arm's length with a Barbados corporation from which it received circuit printing set-up services, software, and web site design and maintenance.

Because the taxpayer was actually selling set-up services to third parties in Canada, and was in turn purchasing those services at the same price from the Barbados company, Pizzitelli J. found that the taxpayer had established comparable unrestrained prices between the taxpayer and one external party ("internal CUP") (paras. 185-86). The Minister's valuation method relied on the transactional net margin method ("TNMM"). Because internal CUP trumps TNMM on the hierarchy of pricing methods to be applied under s. 247(2), and the only higher method (external CUP) was not verifiable, the taxpayer's internal CUP comparable prevailed - it had therefore established arm's length prices on the set-up fees, and was entitled to deduct them in full.

The taxpayer's deductions of fees paid for software and web services were denied, as the taxpayer had not met the burden of proving that parties at arm's length would have dealt on those terms.

Ford Motor Co. of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, 2004 DTC 6224 (Ont. Sup. Ct. of J.)

In the context of a determination of what was the fair value of shares held by minority shareholders of a Canadian auto subsidiary ("Ford Canada") at the time of a going-private transaction, Cumming J. found that the U.S. parent ("Ford U.S.") was charging more than a fair price for automobiles sold by it to Ford Canada under a system which gave to Ford U.S. a fixed mark-up over its costs of manufacturing and assembling such vehicles and a pro rata recovery of design costs. He stated (at p. 6256) that:

"No arm's length purchaser would agree to buy vehicles, parts and intangibles ... . at a higher cost than the reasonably anticipated revenue from the sale of those vehicles and parts in the Canadian market ... . The simple reality is that Ford Canada could not pass on all of its increased costs (imposed by the transfer price system) to its dealers because the dealers had to remain competitive in the very competitive Canadian market."

Cumming J. instead found (at p. 6266) that the profit split approach contained in the analysis of one of the experts "provides adjusted results that are more reasonable than the reported results of Ford Canada and Ford U.S."

Safety Boss Ltd. v. The Queen, 2000 DTC 1767 (TCC)

Because of the reputation and the prior personal contacts of the taxpayer's shareholder ("Miller") with officials of the Kuwait Oil Company, in February 28, 1991 the Kuwaiti government entered into an agreement with the taxpayer for it to extinguish oil well fires which were expected to be ignited by the retreating Iraqi troops. On June 28, 1991 a Bermuda company ("SBIL") was incorporated and capitalized by the taxpayer and on August 2, 1991 Miller departed Canada and became a Bermuda resident. On August 30, 1991 the taxpayer declared (and subsequently paid) a $3 million bonus to Miller. Miller included 155/185 of this amount in his Canadian income based on the proportion of the days between February 28 and August 30 when he was resident in Canada. Effective September 1, 1991 the taxpayer commenced paying SBIL a monthly services fee of $800,000 for the duration of the work in Kuwait. The Minister disallowed pursuant to s. 69(2) the deduction of the fees paid to SBIL and of the portion of the bonus attributable to the period when Miller was not resident in Canada, in each case, to the extent that the amount exceeded $2,250 per day while Miller was in Kuwait and $750 per day when he was not ($2,250 being the $1,500 per day paid to another employee plus an additional $750). The Minister also assessed under Part XIII tax on the basis that the disallowed amount represented a benefit conferred on Miller.

In allowing the taxpayer's appeal, Bowman TCJ. noted that it was Miller who predominantly contributed to the taxpayer's profit and that Miller had accepted no or reduced remuneration in the previous lean years to keep the taxpayer afloat. After comparing the wording of ss.69(2) and 67, he stated (at p. 1770) that "if there is a difference between the concepts in the two provisions it is not readily apparent".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) conferral on corp increasing its value is benefit conferred on shareholder 143
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. 51

Administrative Policy

27 October 2017 Internal T.I. 2017-0694231I7 - Subsection 247(2), surplus, and FAPI

s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA

Where, as a result of an s. 247(2) transfer pricing adjustment respecting a transaction between Canco and CFA for the sale of goods or provision of services, an amount is included in computing Canco’s income, would s. 247(2) also apply to reduce the exempt surplus or foreign accrual property income (“FAPI”) of CFA in respect of Canco? In finding that s. 247(2) “cannot be applied independently to CFA to adjust CFA’s surplus or FAPI in respect of Canco,” CRA stated:

[T]o interpret subsection 247(2) as having such a two-sided effect could give inconsistent results as compared to where a foreign affiliate computes its surplus and FAPI in respect of a related Canadian corporation and not in respect of the taxpayer with whom the foreign affiliate is transacting. …[I]n order for subsection 247(2) to apply in the computation of a foreign affiliate’s surplus and FAPI, the foreign affiliate itself must be the taxpayer to which subsection 247(2) is applied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(c) sale of goods at undervalue to sub does not imply a contribution of capital 168
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(2) effect on surplus balances of foreign transfer-pricing adjustment might be reversed under Reg. 5907(2) 145
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Earnings - Paragraph (a) surplus could be adjusted by transfer-pricing adjustment 128

26 April 2017 IFA Roundtable Q. 2, 2017-0691191C6 - Subsection 247(2) and FAPI

s. 247(2) not applied to a CFA earning FAPI if the transaction has been vetted under foreign OECD-based transfer pricing rules

Does s. 247 apply in computing a foreign affiliate’s foreign accrual property income a transaction between it and another nonresident person?

CRA indicated generally “yes,” but that, in a transaction between a foreign affiliate and another non-resident impacting the foreign affiliate’s FAPI, CRA would generally not challenge the pricing of that transaction if:

  • the pricing is reviewed by the tax authority of the country in which the foreign affiliate is resident;
  • the pricing is determined to be in accordance with the transfer pricing legislation or guidelines of that country; and
  • that legislation (and guidelines) adopt the arm’s-length principle.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f) s. 247(2) applies for FAPI purposes 93

RC4651 “Guidance on Country-By-Country Reporting in Canada” 2 March 2017

CbCR data not used directly in assessing

Appropriate use of CbCR information

The BEPS Action 13 Final Report sets out three permitted uses for information contained in CbC reports, namely:

  • to assess high level transfer pricing risk;
  • to assess other BEPS-related risks; and
  • for economic and statistical analysis.

…CRA will not use CbCR information, by itself, to make reassessments to the income of a taxpayer for the purposes of the Act.

14 September 2016 Internal T.I. 2016-0631631I7 - Transfer pricing capital adjustment

s. 247(2) ACB adjustment can be made in statute-barred year

In Year X , Canco buys a non-depreciable capital property from its non-resident parent (Forco) for $10,000,000, sells the property for $15,000,000 to an arm’s length buyer in Year X+7 and in Year X+9 (which is still open for reassessment), CRA on audit determines that an arm’s length purchase price of the property in Year X (which now is statute-barred) would have been $1,000,000.

Can the Minister make an adjustment to the property’s adjusted cost base pursuant to s.247(2) even though the non-arm’s length purchase was made in Year X? Can the Minister reassess Canco so as to increase its capital gain for the Year X+7 taxation year? CRA responded:

[T]here is no impediment to assessing the higher capital gains tax in Year X+7. …[T]he “mid-amble” of subsection 247(2) contemplates an adjustment to any amount for any taxation year of Canco, and not just the year in which the transaction arises. This view is based on an approach whereby the amount initially adjusted under subsection 247(2) is the “adjusted cost base” (“ACB”) of the property in Year X which would then lead to a consequential increase to the capital gain in Year X+7.

Thus, a tax attribute, such as the ACB of a capital property, which was reported by Canco as being higher than the arm’s length price as a result of a non-arm’s length transaction that took place in a taxation year that is statute-barred, can, in our view, be adjusted for the purposes of reassessing a non-statute-barred taxation year, in this case the Year X+7 taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(3) no statute-barring applies to initial assessments of transfer-pricing penalties 314
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(11) s. 152(4) limits apply to additional s. 247(3) assessments 155

16 November 2016 Toronto Centre Canada Revenue Agency & Tax Professionals Seminar on International Tax Issues

TPM-15 to be revised, s. 247(2)(d) assessments are outliers

Points included:

  • BEPS Actions 8 to 10 (re transfer pricing) were examined and determined to not require any changes to the s. 247 rules, and the Action 8 DEMPE (“Development, Enhancement, Maintenance, Protection, and Exploitation”) guidelines respecting of intangible assets are generally reflective of the things CRA already was looking at. However, CRA considers that there are changes in direction respecting: the risk-free rates of return, e.g., to the bare IP owner (which is something the OECD is still working on); and the treatment of low-value-added services.
  • Respecting Action 13 (re documentation), Canada expects to have between 100 to 120 Canadian multinational parents reporting under the Country-by-Country Reporting (CbCR) rules.
  • The U.S. has not yet “signed on” to the automatic CbCR exchange, and CRA and Finance are coming up with a policy as to how to deal with that.
  • Most of the CbCR reporting received in Canada from other countries will be centered in the Head Office and used to assist in tier-1 risk assessment.
  • CRA considers that the CbCR information received is confidential information that is protected under ITA s. 241, and thus to be used only in the same way as information exchanged under competent authority. However, “there are jurisdictions suggesting that they would make this information public,” and CRA is awaiting their final decision on this point.
  • CRA internally reorganized, so that CRA International and Avoidance specialists are now embedded within large case-file audits and report directly to the large case manager. However, all of the economists, who have a significant effect on transfer pricing audits, are in Ottawa.
  • BEPS is causing CRA to review TPM-15 on intra-group services given the new guidelines on low value-added services.
  • CRA has increased its scrutiny of business “restructurings” (including changes to contracts) in order to get a complete picture of the situation before and after, and may do a “fulsome” audit regarding the change.
  • The penalty recommendations by the Transfer Pricing Review Committee have declined from 51% (for referrals received up to 2012) to 44% thereafter – there is more and better contemporaneous documentation.
  • Ss. 247(2)(b) and(d) "recharacterizations aren’t done on a regular basis. They are the outliers."

2015 Ruling 2014-0542411R3 - Carrying on business in Canada and PE

no mark-up on cross-border payroll reimbursement represented to accord with s. 247

Various ForCo employees are key to large construction “Projects” of its Canadian sister. They will be “seconded” to the ForCo, so that they will be treated as CanCo employees, notwithstanding that they will stay on the ForCo payroll. CRA ruled that there will be no Reg. 105 withholding on the payroll reimbursement payments made by CanCo to ForCo, which will be made without any mark-up. ForCo representeed that:

Transfer prices for transactions between CanCo and ForCo will be determined in accordance with the arm’s length principle reflecting the functions and risks of both parties and will be supported by proper documentation.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 5 PE in Canada of ForCo avoided through seconding employees to its Cdn sister and meeting in Canada up to 90 days annually only offsite 513
Tax Topics - Income Tax Regulations - Regulation 102 payroll reimbursement payments under employee secondment arrangement not subject to Reg. 105 199
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) seconded employees respected as employees notwithstanding their payroll is paid by (and reimbursed to) ForCo 57

TPM-17 “The Impact of Government Assistance on Transfer Pricing” 2 March 2016

a Canadian enterprise may not pass along the benefit of government assistance to a non-resident affiliate in its transfer pricing unless evidence that this is arm's length

4. When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm's length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm's length parties would have done so given the specific facts and circumstances. ...

Appendix - Example

A.2 …CanCo…performs research and development (R&D) in Canada for a foreign affiliated company (ForCo). ...

A.3 The MNE establishes the transfer price between CanCo and ForCo by applying a mark-up to CanCo's costs (net of the government assistance received) incurred to perform the R&D services.

A.4 For example, CanCo incurs R&D costs of $60 and other costs of $40, receives government assistance [tax credits] of $10, and applies a 10% mark-up to the net cost base. ...

[Tables show that CRA increases the transfer price from $99 (110% of $90) to $110 (110% of $100) “when there is no evidence to support independent enterprises allocating government assistance… .”]

A.8 In this situation, the transfer pricing adjustment would be $11, which is the difference between the transfer price used of $99 (as filed by the taxpayer) and the revised transfer price of $110 (as calculated by the CRA).

A.9 …[W]hen the total amount of government assistance is passed on to ForCo, the profit CanCo sees as a result may be less than it would be had it received no government assistance. In addition, the amount of government assistance received may exceed the mark-up on the reduced cost base. In this case, the key profit-driving function of CanCo would be the business of obtaining government assistance rather than providing services to ForCo. Such a result would probably not meet the arm's length principle, since it is unlikely that arm's length parties are in the business of obtaining government assistance.

23 February 2016 Toronto Centre Tax Professionals Seminar under “Perception that BEPS is Being Applied”

no BEPS effect

In response to a question respecting a “perception that BEPS is already in the process of being applied by auditors,” CRA stated orally:

[T]here hasn't been a policy change in the application of, for example, section 247 and transfer pricing rules and transfer pricing penalties. Our current policy is available, and it's included on the CRA website in the transfer pricing memorandums… . So as far as I am concerned, there has not been a change in policy… .

1 September 2015 Internal T.I. 2013-0507381I7 - Transfer pricing adjustments and gross revenue

[s. 247(2) increases to gross revenues]

CRA considered that an upward adjustment to a Canadian resident’s sales proceeds – but not a downward adjustment to its purchase price for goods – increased its gross revenue for provincial income allocation purposes. See summary under Reg. 402(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 402 - Subsection 402(3) s. 247(2) increases to proceeds (but not downward adjustments to purchase prices) increase gross revenue for provincial allocation purposes 215
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Gross Revenue sales (but not purchases) transfer pricing adjustments to gross revenue 39

TPM-16 "Role of Multiple Year Data in Transfer Pricing Analyses" 29 January 29 2015

Selecting the most appropriate point in the range

28. When several comparable transactions or results are acceptable, an arm's length range will usually be established by the CRA. In accordance with paragraph 3.60 of the Guidelines, the CRA will not make a transfer pricing adjustment if the price or margin of a transaction is within the arm's length range. If, however, the price or margin falls outside the established range, the CRA will determine the most appropriate point within the range using the most suitable measure of central tendency under the circumstances. Where no further distinction can be made on the basis of comparability, the most appropriate point may usually be determined by using the average.


–permissible use of multi-year data

29. While multiple years of data may be useful to select, reject, or determine the degree of comparability of potentially comparable transactions, transfer prices for a given year should be determined based on the results of a single year of data from each of the comparable transactions. Therefore, taxpayers should not average results over multiple years for the purpose of substantiating their transfer prices in an audit context. The CRA will look at the results for comparable data and apply them on a year-by-year basis.

TPM-15 "Intra-group services and section 247 of the Income Tax Act" 29 January 2015

Direct v. indirect charges

10. The direct charge method attaches a specific charge to each identifiable service. The indirect charge method involves an allocation of centralized service costs to particular entities using a basis or allocation key designed to reflect the proportionate benefit received.

11. … As long as the indirect charge results in an allocation that is commensurate with the expected benefit, the OECD accepts such indirect charge methods except in cases where the services are a main business activity of the provider and are also provided to third parties, in which case the direct charge method is preferable.

12. The [OECD] Guidelines also specify certain situations where an indirect charge method would likely be appropriate:

  • where the direct charge method is difficult to apply because the comparative services that the entity provides to third parties are only occasional or marginal (paragraph 7.21);
  • where the proportionate benefit received by each entity can only be estimated, not precisely quantified (paragraph 7.24); and
  • where the analysis and record keeping required to separately track or identify the benefit received by each entity is onerous in relation to the activity itself (paragraph 7.24).
Shareholder costs

27. [After largely repeating IC 87-2R, paras. 166-170:] Costs of auditing and fundraising for the acquisition of an interest would not be allowed unless the funds were raised on behalf of another member of the group to acquire a new company. 27

28. ...Sarbanes-Oxley costs…should be reviewed and if the taxpayer can demonstrate that there is a benefit to the taxpayer associated with the charge/expense, it could be allowed as a deduction. …

Allocation of corporate group costs

36. … It may be preferable to implement a multiple allocation basis for intra-group services to better reflect the benefits received. … For example, time spent could be an appropriate allocation basis to allocate costs of the tax services, legal services, data processing, and the usage cost of a corporate jet, while the number of employees may be an appropriate basis on which to allocate the costs of the human resources department. …

Duplicate costs

38. …[C]osts allocated to a Canadian entity in cases where the Canadian entity is self-sufficient are not allowable, but the costs of activities for which the assistance of the foreign entity is necessary or beneficial to the Canadian operations are allowable.

40. …[D]ouble dipping of expenses, is also a concern to the CRA…. Some examples are: Directors' fees and management fees…Royalty payment and management fees…Interest expense and management fees… .

Looking through management fees to underlying non-deductible/withholdable items

45. Where the management fee charged is an arm's length amount, and where the type of management fee contract is normally found in dealings between arm's length parties, it may, where circumstances warrant, be acceptable not to ask for a breakdown of the items included in the management fee.

46. On the other hand, where the type of contract is not usually found in dealings between arm's length parties, auditors may look through the management fee to determine exactly what the Canadian entity is paying for. Under section 247…, if an arm's length party would not pay for the transactions, there should be no reason for the charge to the Canadian entity. In addition, looking through the management fee charged may identify expenses that are not deductible under specific sections of the Income Tax Actor or to which Part XIII withholding tax applies.

Standby charges

50. Stand-by charges for service availability would not be expected in circumstances where:

  • there is little likelihood that the service will be needed;
  • there is no real advantage in having the services available; and/or
  • the services could likely be obtained promptly without a stand-by arrangement.
Services fees mark-ups

70. ... [A]lthough an enterprise providing services at arm's length would typically expect to generate a profit, such a profit element should not be regarded as automatic. A mark-up would not be appropriate in certain transactions… .

71. Furthermore, even where a mark-up or profit element can be supported by reference to comparable transactions at arm's length, auditors must consider whether all of that profit should be attributable to the service provider. In particular, in cases where an activity has been centralized in an MNE to generate cost savings for the participants, it is important to consider whether the participants have fairly shared in any costs savings that should accrue to them as a result of the shared service arrangement. See paragraph 9.156 of Chapter IX of the [OECD] Guidelines… .

Agency services

75. …[I]t will often make more sense to relate the compensation of the purchasing entity to its costs incurred as a facilitator or to the size of the discount it obtains rather than to the value of the goods purchased….

3 October 2014 Internal T.I. 2014-0532051I7 - Rent and Part XIII Tax

non-commercial arrangement not subject to s. 247

A non-resident individual not carrying on business in Canada leases a Canadian property to a related resident individual at less than fair market value rent What is the incidence of Part XIII tax? The Directorate stated:

[T]he fact that the amount of rent…is below… fair market value would… not…impact the amount subject to withholding tax under paragraph 212(1)(d). … [T]he transfer pricing rules in section 247… would generally not be applied to adjust the amount of rent under the circumstances… .

See summary under s. 212(1)(d).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) non-commercial arrangement not subject to s. 247 but is subject to Part XIII/property taxes included in rent/no Part XII tax on imputed rent 233
Tax Topics - Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit rents from personal rental property not required to be reported 100

10 October 2014 APFF Roundtable Q. 26, 2014-0538201C6 F - 2014 APFF Roundtable, Q. 26 - Cost of property

arm's length transfer price prevails over FMV

On a non-arm's length transfer of capital property by a non-resident in favour of a resident Canadian, whether by donation or disposition, what value should be used in any adjustment to the property's deemed cost? CRA responded (TaxInterpretations translation):

[I]f a non-resident disposes or makes a gift of taxable Canadian property in favour of a person with whom it does not deal at arm's length, the disposition is deemed to be made at FMV in accordance with section 116. On the other hand, in the transfer pricing context, when the conditions for the application of subsection 247(2) are satisfied, the arm's length transfer price is used. … As for FMV, it generally represents the highest price obtainable for a property on a sale in a free and open market between two willing, informed and prudent persons acting independently. In a transfer pricing context where these values are different, subsection 247(8) confirms…that if the transfer price is adjusted pursuant to the application of subsection 247(2), subsections 69(1) and (1.2) are not applicable. Thus, the arm's length transfer price generally would be used… .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares definition of FMV, which may differ from the s. 247 arm's length price 176
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(3) - Subparagraph 247(3)(a) - Subparagraph 247(3)(a)(iii) general requirement for penalty elimination re transfer pricing capital setoff adjustment 140

15 November 2013 Internal T.I. 2013-0478621I7 F - Transfer of intangibles - TP adjustments

group sale with Canco not charging for intangibles should engage s. 247(2)

Pursuant to a sales agreement between Canco, its immediate non-resident parent (Parent) and the ultimate U.S. parent of Canco (Pubco), as vendors, and an arm's length purchaser (Acquireco1), for the sale of Division 1 for a sum of U.S.$XX, Canco disposed of assets of Division 1 to a subsidiary of Acquireco1 for their book value. The Montreal TSO took the view that the Division 1 assets included intangible assets whose value was not reflected in this selling price. Similar transactions occurred for the sale of Division 2 to Acquireco2.

CRA stated (TaxInterpretations translation) in indicating that a higher sale price should be imputed to Canco:

[A]fter consideration of various provisions of the Act, such as section 68 and 69 as well as subsections 14(1), 56(2) and 247(8), it appears to us that the primary adjustments respecting Canco should, where appropriate, be through an application of subsection 247(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) secondary adjustment re group sale with Canco not charging for intangibles 240
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) s. 69(4) inapplicable where grandchild Canco undercharges for asset sale, enhancing sales proceeds received by ultimate U.S. parent 166

31 October 2012 TPM-14 "2010 Update of the OECD Transfer Pricing Guidelines"

After noting that in the 2010 version of the OECD Transfer Pricing Guidelines "there is no strict hierarchy to be applied to the selection of a transfer pricing method," CRA stated that:

These changes do not firmly de-emphasize the natural hierarchy but they refocus the topic on what is truly relevant – the degree of comparability available under each of the methods and the availability and reliability of the data.

After indicating that the 2010 version of the Guidelines will be applied to all years including for transactions that were completed before the July 22, 2010 release of the revised Guidelines, CRA stated:

Since the revisions are intended to increase clarity in the application of the arm's length principle, the revisions should apply to all treaties, including treaties concluded prior to the release of the revised Guidelines.

6 December 2011 TEI-CRA Liason Meeting Roundtable Q. 11, 2011-04273091C6 -

As many treaties have limitation periods for making assessments, CRA considers it inadvisable to delay making a Part XII tax assessment arising from a transfer pricing adjustment (e.g.. a secondary adjustment arising under s. 214(3)(a)) until the transfer pricing issue has been resolved. However, a:

Part XIII collection policy has been adopted and applied by CRA in recognition of the OECD guidelines on Transfer Prcing by allowing MNE's to post acceptable security in lieu of the 100% payments required by the Income Tax Act.

6 December 2011 TEI-CRA Liason Meeting Roundtable Q. 6, 2011-0427261C6 - 2011 TEI-CRA Liaison Meeting: Qu. 6

As part of a discussion of the advance pricing agreement program, CRA stated:

We have determined that business restructuring cases are not suitable for an APA as they do not cover recurring and unchanging transactions where the underlying assumptions that form the basis of an APA transfer pricing methodology do not change over the duration of both the immediate pre-APA period and the APA period itself.

6 December 2011 TEI-CRA Liason Meeting Roundtable Q. 10, 2011-0427291C6 - 2011 TEI-CRA Liaison Meeting: Qu. 10

As part of a response to a query that noted that CRA auditors often raise potential transfer pricing adjustments simply because it is easy to do so and proposed that CRA develop a coordinated approach to transfer pricing audits with the IRS, CRA stated:

The fact that a multinational enterprise (MNE) has documented its analysis of arm's length prices and has not attempted to reduce its overall tax liability is not proper assurance that all facts and circumstances have been considered and that income has been adequately allocated between jurisdictions.

6 December 2011 TEI-CRA Liason Meeting Roundtable Q. 12, 2011-0427311C6 - 2011 TEI-CRA Liaison Meeting: Qu.12

After noting that (in comparison to the 1995 version) the 2010 version of the OECD Transfer Pricing Guidelines did not so much de-emphasize the hierarchy of transfer pricing methods (e.g., the comparable uncontrolled price method when available being preferable to the resale price method) as focusing on the degree of comparability under each mehod and the reliability of the available data, and that the 2010 Guidelines "are more direct about the need to use data segmentation rather than company-wide data for testing net profit from a controlled transaction," CRA stated that it "endorses the application of the arm's length principle and the 2010 version of the TPG for the administration of the Income Tax Act in transfer pricing matters."

TPM-06 "Bundled Transactions" 16 May 16 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."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 166

1999 TEI Roundtable, 1999-0010070 -

Where a Canadian parent corporation and its U.S. subsidiary participate in a shared credit facility and each guarantees the loan made to the other, the Canadian parent will be deemed to receive a fair market value guarantee fee.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 62


Brian Mustard, Sam Maruca, Charles Thériault, Richard Tremblay, "Transfer Pricing: What Are 'Reasonable Efforts,' and When should Penalties Apply?", Canadian Tax Foundation, 2015 Conference Report, 32:1-33

Alignment with OECD Guidelines (pp. 32:2-3)

[N]o Canadian legislation could explicitly refer to [the OECD] guidelines, nor indeed to any other requirements or guidance that a tax authority, Finance, or Canada as the tax jurisdiction could not technically control. For this reason, the legislation uses words that accomplish alignment with the OECD guidelines without referring specifically to them. The guidance that accompanied the legislation stated that the government recognized that preparing documentation should not impose an undue burden on taxpayers and that a balance must be struck between benefits for taxpayers and the CRA. and the timely preparation of transfer-pricing information….

Justice Marshall Rothstein, "An Overview of the Supreme Court of Canada", Bulletin for International Taxation (IBFD), January/February 2016, p. 20.

OECD guidelines (p. 24)

The OECD Guidelines do, however, have persuasive force in Canada. In Glaxo [2012 SCC 52], the provision of the Income Tax Act did not itself provide guidance in defining the "reasonable amount" paid in an arm's length context, so the Court turned to the OECD Guidelines. The Court referred to the OECD Guidelines (1979) and the OECD Guidelines (1995) to consider different transfer pricing methods. These in turn informed the Court's decision under the Income Tax Act.

Derek G. Alty, Brian M. Studniberg, "The Corporate Capital Structure: Thin Capitalization and the ‘Recharacterization' Rules in Paragraphs 247(2)(b) and (d)", Canadian Tax Journal, (2014) 62:4, 1159-1202.

Dropping of explicit "recharacterization" reference and addition of non-tax purpose test to revised s. 247(2) (p. 1168)

In response to criticism from commentators of the September 1997 draft, the final version of the legislation prepared by the Department of Finance eliminated the right to "recharacterize" (but retained the right to "adjust... the quantum or nature" of intercompany payments, which might be recharacterization by another name, and explains why the rule is conventionally referred to as the recharacterization rule). The final version also included the stipulations that the transaction would not have been entered into by persons dealing at arm's length and the transaction "can reasonably be considered not to have been entered into primarily for bona fide purpose other than to obtain a tax benefit."

Per OECD, Art. 9 permits recharacterizing debt where it is equity in economic substance (pp. 11176-7)

[T]he [Canada Revenue Agency] information circular [87-2R] notes that "Section 247 is intended to reflect the arm's length principle expressed in the OECD Guidelines." It also states the following:…

As a general rule, specific provisions of the Act—relating to loans and other indebtedness to or from non-residents, which are contained in sections 17 and 80.4, subsections 15(2) and 18(4)—would be applied before considering the more general provisions of section 247. These specific provisions deal with situations in which a Canadian corporate taxpayer:…

  • is thinly capitalized

As noted in the CRA's information circular, the Canadian recharacterization provisions are intended to encompass the concept of recharacterization set out by the OECD in the 1995 transfer-pricing guidelines. The relevant portions of the guidelines (taken from the 2010 version) read as follows:…

[I]n other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them….

However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form….An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstance of the borrowing company, the investment would not be expected to be structured in this way….

The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a. result of future research for the term of the contract…

A non-resident parent's decision to (re)capitalize a Cdn. Sub lacks the attributes of an arm's length transaction, so that this unexceptional transaction should be addressed solely by the thin cap rule (p. 1192)

[R]egardless of the initial capital structure choices, it could be argued that it is always possible to recapitalize the Canadian subsidiary to the maximum extent permitted under subsection 18(4). A parent company's decision to capitalize a subsidiary corporation is not something that could (ever) be undertaken by arm's-length parties; this explains why the Act provides for annual testing of the deductibility of the subsidiary's interest under subsection 18(4) in accordance with the then-prevailing policy of the Department of Finance regarding the permitted debt-to-equity ratio.

Because the Canadian thin capitalization rules use an arbitrary ratio, there will necessarily be some winners and some losers on the basis of industry norms (leaving aside a treaty-based argument when a Canadian borrower is underleveraged by industry standards but otherwise restricted by the thin capitalization rules). We believe that there is a strong argument to be made when the Canadian borrower is overleveraged by industry standards (and there is no issue with the character of the equity), but is compliant with the thin capitalization rules, there is little scope for paragraph 247(2)(b) or (d) to adjust the nature of the interest payment on the intercompany debt. If this were not the case, the application of paragraph 247(2)(b) or (d) would have the effect of indirectly modifying the statutory ratio.

Would the arm's length version of a (recharacterized) transaction change post-implementation (p. 1201)?

[T]he CRA would not be concerned with an increase in the Canadian subsidiary's equity on account of greater retained earnings (regardless of their cause, whether better-than-expected market performance or improved operating conditions). It is therefore difficult to see why declines in the equity value on account of the inverse of these types of factors should matter (as long as they do not represent returns of capital to a non-resident shareholder).

In discussing advance pricing arrangements at paragraph 4.125 of the 2010 transfer-pricing guidelines, the OECD states that it would not be reasonable to assert that an arm's-length short-term borrowing rate for a certain company's intragroup debt would remain at the same rate during the entire term of an advance pricing arrangement. Similarly, regardless of the rationale for a particular capital structure when implemented, if the arm's-length version of the structure would have changed over time, the OECD's view can arguably be extended to require a dynamic approach to recharacterization.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 9 770

Ilana Ludwin, "Application of the Transactional Profit Split Method in Canada", Tax Management International Journal, 2015, p. 98.

Release of OECD Discussion Draft of TPSM (p. 98)

The Organisation for Economic Co-operation and Development (OECD) recently released its draft public discussion paper on the application of the Transactional Profit Split Method (TPSM) to global value chains… .

[T]he TPSM is intended to divide the profits between the parties on the basis of how much value each party contributed to the transaction, which is presumed to reflect an arm's-length division.

Code s. 482 accommodation of transfer pricing at entity level (p. 100)

Unlike the Canadian transfer pricing provision, the American provision only requires the taxing authority to conclude that an allocation of amounts is necessary to prevent evasion or to clearly reflect the parties' income or profit. No specific terms or conditions relating to individual transactions need be identified; the situation can be assessed on an aggregate entity profit level.

OECD Model, Art. 9 accommodation of considering overall commercial relations (p.101)

As with the American provision, Article 9 does not require consideration of particular transactions but rather the overall commercial or financial relations between two enterprises. The requirement under the Canadian provision that specific terms and conditions in relation to individual transactions be identified and adjusted present a potential barrier to using the TPSM in the Canadian context.…

Incompatibility of ss. 247(2)(a) and (c) with TPSM (p. 101)

[I]n the complex transactions for which the TPSM is particularly suited, it will not always be possible to use the TPSM to reverse-engineer specific prices, terms, and conditions for each transaction and participant in the manner required by paragraphs 247(2)(a) and (c)….

Although the TPSM is theoretically applicable to individual transactions, in practice it is often sought to be applied to assess profits and contributions at an aggregate transaction or even enterprise level due to the lack of granularity in the available financial data. In such cases, it will often be unsuitable for use as a primary method in the Canadian context as it will fail to comply with the requirements of paragraphs 247(2)(a) and (c) to provide transactions or series-of-transactions level data….

Mark D. Brender, Marc Richardson Arnould, Patrick Marley, "Cross-Border Cash-Pooling Arrangements Involving Canadian Subsidiaries: A Technical Minefield", Tax Management International Journal, 2014, p. 345.

Cash pooling description (p.345)

[W]e will examine a typical cash-pooling arrangement involving a Canadian subsidiary of a multinational group. Under such an arrangement, each member of the pool, including the Canadian subsidiary ("Canco"), transfers funds to, and/or receives funds from, a group member that is designated as the pool head, in this case a foreign subsidiary ("Forco") of the foreign parent corporation, resulting in intragroup payables and receivables between the pool members, including Canco and the pool head.

Primacy of specific provisions per IC 87-2R (p. 346)

[T]he transfer pricing provisions of the Act should not generally apply if the more specific provisions of the Act apply….

The CRA has interpreted that statement as meaning that the more specific provisions should be applied first before considering the application of §247. [fn 6: …2003-0033891E5] This statement is not to be taken to mean that there is an automatic exemption from the transfer pricing rules because of the mere existence of a specific provision that targets certain intra-group financing arrangements in a cross-border context; rather, the more specific provisions should be applied first and, if they do not apply, the application of the transfer pricing rules should be considered. For example, the CRA was of the view that §247(2) could apply to an outbound loan to which §17(1) did not apply by virtue of the fact that the indebtedness was not outstanding for more than one year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 17 - Subsection 17(7) 256

J. Harold McClure, "Evaluating Whether a Distribution Affiliate Pays Arm's-Length Prices for Mining Products", Journal of International Taxation, July 2014, p. 33.

Development of Berry ratio (p. 37)

E.I. DuPont de Nemours & Co., 608 F.2d 445 (Ct. CL, 1979), was an influential transfer pricing case. As an expert witness for the U.S. government, Dr. Charles Berry said that the gross margin of a distributor under arm's length prices depends on its value-added expenses as a percentage of sales. The taxpayer argued that its Swiss distribution affiliate deserved a 25% gross margin; simply because most publicly traded distributors in their sector had gross margins near 25%. While these publicly traded distributors tended to have extensive functions with operating expense-to-sales ratios near 20%, the Swiss distribution affiliate performed limited functions, with operating expenses being only 8% of sales. Dr. Berry said that since the ratio of gross profits to operating expenses for the publicly traded distributors was around the gross margin for the Swiss affiliate should be 1.25 times 8% or 10%.

Application of Berry ratio to related distributor with lower operating costs (p. 38)

Clark Chandler and Irving Plotkin discussed the use of the Berry ratio: [fn 14: "Economic issues in Intercompany Transfer Pricing" BNA Transfer Pricing Rep't. October 20, 1993]

  • One problem often encountered in using gross margin data obtained from independent distributors to determine transfer prices in related-party transactions is that independent distributors may incur operating costs that are significantly higher or lower than those of the related party. Such differences in operating costs may occur because of differences in the range; of functions performed, the intensity with which they are performed, efficiency considerations (e.g., economies of scale) Or access to unique intangibles...[T]he Berry Ratio approach assumes that distributors' capital requirements vary in direct proportion to their operating expenses. While Dr. Berry makes this assumption due to the difficulty often encountered in measuring economic assets, the Berry Ratio approach is appropriate only if there is specific reason to believe that operating expenses and capital requirements are closely related. In many cases, they are not.
Off-take agreements to transfer risk to distributor (p.41)

[O]ff-take agreements are sometimes entered into to guarantee the owner of natural resources that his future revenues will provide a reasonable return on investment. The buying entity in off-take agreements agrees to pay a certain future price to the producing entity for its production. These agreements are normally negotiated prior to the construction of a facility, such as a mine, to secure a market for the future output of the facility.

The discussion above treated the producer as the entrepreneur entitled to the economic rents from the ownership of natural resources. Thus, the analysis of transfer pricing methodology treated the distributor as the tested party. In an off-take agreement, the distributor becomes the entrepreneur. Since the distributor takes the downside risk that spot prices will be below the agreed on future price, it also should receive the upside potential. Off-take agreements can, therefore, be seen as reversing which entity should be the tested party.

Examples of off-take agreemnts (pp. 41-2)

A recent example…is the arrangement between Glencore and Orbitae Aluinae Inc. …The agreement says that Glencore will purchase all of smelter-grade alumina from Orbite's proposed polan in Quebec for the first ten years of production. Glencore also recently entered into an off-take agreement with Sirius Petroleum… .Off-take agreements are widely used in the mining and oil sectors. … In other situations, they are between independent parties.

Cameco lititgation (p. 42)
Cameco Corp v. The Queen

is a transfer pricing dispute between a Canadian-based producer of uranium and the: Canadian Revenue Agency for 2003-2012 and could involve C$1.6 billion in taxes. [fn 21: Can. Tax Ct, No. 2009-2430(IT)G. See Menyasz, "Canada Tax Court Orders More Disclosure in Cameco Corp.'s Transfer Pricing Dispute," BNA Int'l Tax Monitor, February 26. 2014.] A Swiss affiliate, Cameco Europe Ltd., purchased uranium from the Canadian producer at $10 per pound under a 1999 intercompany agreement in which .this price was fixed for a 17-year period. During the commodity boom, the market price of uranium rose dramatically, peaking at $140 a pound before reverting to approximately $40 a pound.

Veritas Investment Research discussed this transfer pricing issue and its tax implications in an April 2, 2013, report. The report said that Cameco's long-term contract with its Swiss marketing affiliate exposed the Swiss affiliate to the downside risk when uranium prices were low as well as the upside potential if uranium prices rose. This point is consistent with the argument herein that off-take arrangements may shift such risk to the marketing entity and away from the producer….

Jules Lewy, Joel A. Nitikman, "Important Developments in Canadian Transfer Pricing", CCH Tax Topics, Number 2185, January 23, 2014, p. 1

Commissions charged by Elk to Japanese affiliate for securing logs (p.4)

Elk Trading [fn 5: Joel A. Nitikman was counsel for Elk.]

This appeal was filed in 2012 [fn 6: TCC Appeal No. 2012-3423(IT)G.]...[fn 7: ...In addition, the Minister assessed Elk...for a failure to withhold 5% of the dividends deemed to have been paid to Emachu... .]... Elk was a Canadian company. It was related to and, hence, not dealing at arm's length with a Japanese company, Emachu. Emachu purchased logs and lumber from around the world and resold it in Japan. In 1973, Emachu had established Elk in Canada to assist in finding Canadian logs and lumber.

…For each business segment, Emachu would specify the exact logs or lumber required and the price. Elk would find that material at that price, purchase it in Canada, and then resell it to Emachu. For these services, Elk charged a commission equal to a percentage of all costs incurred in reselling the logs and lumber, including the original purchase price, insurance, freight, etc….

CRA reassessed Elk by applying transactional net margin method (p.4)

The Minister reassessed Elk. However, rather than specify what the arm's length commission should have been, the Minister applied the TNMM. As a first step, the Minister did a database search…This resulted in exactly one comparable company, a US, publicly listed company that arranged for the delivery of automobiles ("USco"). The Minister then calculated USco's Return on Total Costs ("ROTC", being the profit USco earned as a percentage of its total costs. The Minister then increased Elk's gross revenue in each taxation year until its ROTC equaled USco's ROTC.

The case law in Canada is clear that because paragraphs 247(2)(a) and (c) refer to the "terms and conditions" of a transaction, the Crown is not permitted simply to plead that the taxpayer's prices are not arm's length prices. The Crown must go further and specify exactly what the arm's length prices should have been in the taxpayer's situation. [fn 8: See ... General Electric ... .]

Implicit CRA acceptance of commission approach (p. 4)

...Elk filed a Notice of Motion...on the basis that the Crown's Reply had no reasonable prospect of success.

The Crown has now filed a Consent to judgment allowing the appeal in full, with costs. This is, essentially, an admission that the TNMM, at least in the manner in which it is used in this case, cannot apply under the "terms and conditions" rule in paragraphs 247(2)(a) and (c)….

Brian Bloom, François Vincent, "Canada's (Two) Transfer-Pricing Rules: A Tax Policy and Legal Analysis", 2011 CTF Conference Report, 20:1-40.

Objective of s. 247

20:3 The main objective in introducing new part XVI.1 [of the Act] was to enshrine the ALP [arm's length principle] in the Act's TPRs [transfer-pricing rules], thereby leaving no doubt about the standard by which the Act prices, and thus measures a taxpayer's income from, controlled transactions.

20:4 Taken literally, the ALP establishes an unattainable goal: in the absence of a Star-Trek-like holographic simulator or a quantum leap in game theory computer modelling, it is not possible to determine how the parties to the transaction would have priced the transaction had they been dealing with each other at arm's length.

Absence of "in the circumstances"

20:5 In this regard, one rather notable omission that distinguishes subsection 247(2) from its predecessors is the lack of any explicit reference to the price that would have been used "in the circumstances" had the parties to the controlled transaction been dealing with each other at arm's length. The reason for this omission, we submit, is that the quoted words are implicit in the comparative exercise mandated by the explicit adoption of the ALP in subsection 247(2).

Exclusion of non-commercial transactions

20:8 Article 9 of the OECD model convention is concerned with the pricing of "commercial" and "financial" transactions, and the guidance provided by the OECD with respect to article 9 and the ALP is aimed at those kinds of transactions. Accordingly, part XVI.1 of the Act, in our view, is not intended to apply to transactions that take place outside of a commercial context (such as cross-border gifts between siblings), despite the fact that, on its face, subsection 247(2) makes no distinction between commercial and personal transactions. Finance had contemplated expressly limiting subsection 247(2) to "commercial" transactions but feared that any such limitation could be exploited by taxpayers and, in any case, had been assured by the CRA that the TPRs would be applied only in a commercial setting.

Scope of recharacterization provision

20:17-18 The OECD guidelines state that there are two circumstances in which it may, exceptionally, be appropriate for tax administrators to recharacterize controlled transactions: ...

The first such circumstance arises where the economic substance of a transaction differs from its legal form. ... We understand that the incorporation of such a test into the TPRs was considered by Finance and rejected for a number of reasons.

The main reason for eschewing an economic substance test in the transfer-pricing context was that it conflicted with the way Canada generally taxed under the Act.

20:19 The second circumstance identified by the OECD guidelines occurs where "the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational madder and the actual structure practically impedes the tax administration from determining an appropriate transfer price.

The second circumstance thus has two components. First, the transaction must be one that, when viewed as a whole, would not have been entered into by independent enterprises behaving in a commercially rational manner. In other words, the transaction must be one that is manifestly contrary to the commercial interests of the relevant party. Second, the transaction must have been structured in this commercially irrational manner in order to impede the tax authorities' ability to determine an arm's-length price under normal TPRs or to achieve some other tax benefit for the party. The application of normal TPRs is impeded because there are no arm's length comparables upon which to base a transfer-pricing assessment.

20:24-25 [T]he recharacterization rule in paragraph's 247(2)(b) and (d) is an exceptional or abnormal one. To employ the normal TPR in paragraphs 247(2)(a) and (c) to effectively recharacterize transactions would turn the integrated scheme of the TPRs, the Act, and the MAP provisions of Canada's tax treaties on its head. Unfortunately–despite the negative ramifications of using paragraphs 247(2)(a) and (c) to recharacterize transactions, despite the fact that TPRs are basically intended to price (actual) controlled transactions, despite the clear statement in the OECD guidelines that recharacterization is an exceptional remedy, despite the apparent symmetry between the OECD guidelines' second circumstance and the conditions of paragraph 247(2)(b), and despite the juxtaposition of paragraphs 247(2)(a) and (c) with an overt recharacterization rule in paragraphs 247(2)(b) and (c)– that appears to be precisely what the CRA is doing... .

20:32-33 Indeed, if the CRA can recharacterize a transaction simply by adjusting the "nature" of amounts pursuant to paragraphs 247(2)(a) and (c), then recourse to the specific recharacterization provisions of section 247 and compliance with the conditions of paragraph 247(2)(b) become unnecessary. Clearly, this approach would constitute an unauthorized and unprincipled unification of Canada's dualistic transfer-pricing regime.

Robert Couzin, "Policy Forum: The End of Transfer Pricing?", Canadian Tax Journal, (2013) 61:1, 159-78, at 172: He compares the approach to recharacterization in s. 247 of the Act and by the OECD:

[There is] the occasional need to "recharacterize" a transaction, as is permitted under the OECD guidelines where the transaction differs from what independent enterprises would do and it cannot be priced according to the arm's-length principle. [fn 36: OECD Transfer Pricing Guidelines, see for example, Organisation for Economic Co-operation and Development, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Paris: OECD, July 2010), at paragraph 4.8, and Canada Revenue Agency, Transfer Pricing Memorandum TPM-09, "Reasonable Efforts Under Section 247 of the Income Tax Act," September 18, 206, at paragraph 1:65] In such a case, the tax administration may disregard the actual transaction and recast it as the one that arm's-length parties would reasonably be expected to have done. [fn 37: Paragraph 247(2)(b) of the Canadian Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended, enacts a slightly different rule, substituting a "dominant tax benefit" test for the OECD's "unpriceability," although whether these are really different is a good question. The OECD guidelines do not refer to tax avoidance in this context, but the text seems to suggest it. What about bona fide commercial transactions that have no equivalent outside the MNE? If tax authorities can neither recharacterize transactions nor apply the arm's-length principle, what are they called upon to do?] In a simple comparison case (sale or lease, for example), this sounds almost plausible, but in most cases it is sophistry.

Robert Feinschreiber, Margaret Kent, "OECD Transfer Pricing Guidelines and the 'Highly Uncertain' Valuation of Intangibles", Journal of International Taxation, February 2012, p. 47

Includes in Exhibit 2 a list of transfer pricing issues for the pharmaceutical industry which the OECD should address.

Richard G. Tremblay, "Canadian Transfer Pricing - The Arm's-Length Principle - Filling in the Blanks - Does an Arm's Length Price Ever Differ From Fair Market Value?", Tax Management International Journal, 2011, p. 599

The answer is "yes."

Johan Mayles, "CRA to Adopt OECD's Revised Transfer Pricing Guidelines", CCH Tax Topics, No. 2036, 17 March 2011, p.1

Review of comments of Jennifer Ryan, Director of International Tax division of the CRA at 24 February 2011 OBA section meeting - "CRA adheres to the guidelines of the OECD and therefore it will be updating its current position in respect of the hierarchy of methodologies."

Danny Oosterhoff, Bo Wingerter, "The New OECD Guidelines: The Good, the Bad and the Ugly", International Transfer Pricing Journal, Vol. 18, No. 2, March/April 2011, p. 103.

Janice McCart, "Repatriation in Lieu of Secondary Adjustments", International Transfer Pricing Journal, Vol. 17, No. 1, January/February 2010, p. 65

Giammarco, Cottani, "OAC Discussion Draft on Transfer Pricing Aspects of Business Restructurings", Summary of Business Comments and Issues for Discussion", International Transfer Pricing Journal, Vol. 16, No. 4, 2009, p. 231.

Jennifer Rhee, "Unmasking 'Management Fees' - What's in a Name?", CCH Tax Topics, No. 1897, July 17, 2008, p. 1.

Brian Bloom, "Paragraph 247(2)(b) Demystified", CCH Tax Topics, 11 May 2006, No. 1783, p. 1.

Muris Dujsic, Matthew Billings, "Establishing Interest Rates in Intercompany Contacts", International Transfer Pricing Journal, Vol. 11, No. 6, November/December 2004, p. 247.

Todd Miller, Ryan Morris, "Canadian Subsidiary Guarantees for Foreign Parent Borrowings", Tax Notes International Vol. 34, No. 1, 5 April 2004, p. 63.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(2) 0

Bruce Sinclair, Robert Kopstein, "Guaranteed to Enlighten: The Impact of Guarantees on Financing Arrangements", 2000 Conference Report, c. 22.

Richard G. Tremblay, James Fuller, "Tax Consequences of Cross-Border Guarantee Fees", International Tax Planning, Vol. X, No. 3, 2001, p. 716.

Ivan Williams, "Contract Manufacturing Strategies: Tax-Saving Options for Intercompany Profit Allocation", Tax Topics, 21 March 2002, No. 1567, p. 1.

Robert Turner, "Cost Contribution Agreements", International Transfer Pricing Journal, 2001 Vol. 8, No. 3, p. 89.

Robert Turr, "Practical Application of Transactional Profit Methods", International Transfer Pricing Journal, Vol. 7, No. 5, September/October 2000, p. 184.

Jack Bernstein, "Transfer Pricing in Canada", Bulletin for International Fiscal Documentation, Vol. 53, No. 12, 1999, p. 570.

Janice McCart, Emma Purday, "What's The Deal? - Canada's New Rules on Arm's Length Pricing and Bundled Transactions", Tax Management International Journal, Vol. 28, No. 10, 8 October 1999, p. 633.

F. Vincent, I.M. Freedman, "Transfer Pricing in Canada: The Arm's Length Principle and the New Rules", 1997 Canadian Tax Journal, Vol. 45, No. 6, p. 1213.

Tipping, "British Bankers Comment on OECD's Draft on Global Trading of Financial Instruments", Tax Notes International, Vol. 15, No. 14, 6 October 1997, p. 1119.

Subsection 247(3)

Administrative Policy

14 September 2016 Internal T.I. 2016-0631631I7 - Transfer pricing capital adjustment

no statute-barring applies to initial assessments of transfer-pricing penalties

In Year X , Canco buys a non-depreciable capital property from its non-resident parent (Forco) for $10,000,000, sells the property for $15,000,000 to an arm’s length buyer in Year X+7 and in Year X+9 (which is still open for reassessment), CRA on audit determines that an arm’s length purchase price of the property in Year X (which now is statute-barred) would have been $1,000,000.

If an s. 247(3) penalty otherwise is applicable due to an absence of reasonable efforts to determine an arm’s length transfer price for the purchase in Year X, does it apply to the adjustment in Year X or in Year X+7, and if it applies to the “transfer pricing capital adjustment” (“TPCA”) in Year X, is it statute-barred? CRA responded:

[A] TPCA, representing the reduction of the ACB of the capital property acquired by Canco in Year X, can be made at any time in respect of Canco’s Year X taxation year. Also, since the increased income amount resulting from the capital gain realized in Year X+7 would be exactly the same as the amount of the TPCA, there would be no separate TPIA in respect of the Year X+7 taxation year. [A s. 247(3)] penalty… assessed now in respect of Canco’s Year X acquisition…is assessed under Part XVI.1…and is not in any way constrained by the limitation periods set out in subsection 152(4) in respect of assessments of Canco under Part I. Thus, an initial assessment under subsection 247(3) can be made at any time. However, pursuant to subsection 247(11), any additional assessment under subsection 247(3) for the year of the TPCA (Year X) would be subject to restriction based on an application of subsection 152(4) with respect to Year X and Part XVI.1. …

[T]he only significance of the fact that the penalty is assessable in respect of Year X and not Year X+7 is… the de minimis rule in paragraph 247(3)(b)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) s. 247(2) ACB adjustment can be made in statute-barred year 261
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(11) s. 152(4) limits apply to additional s. 247(3) assessments 155

TPM-09 Reasonable efforts under section 247 of the Income Tax Act, September 18, 2006

  • When preparing documentation the taxpayer should attempt to weigh the significance of the transactions in relation to their business with the additional administrative costs required to prepare or obtain such documentation. The obligation of finding comparable transactions for applying the arm's length principle is not an absolute one. The cost and likelihood of finding such comparables relative to the significance of the transactions to the taxpayer should be taken into account.
  • Taxpayers are not required to go beyond what is reasonable in terms of documentation. What is reasonable is determined on the basis of what a reasonable business person in the taxpayer's circumstances would do, having regard to the complexity and importance of the transfer pricing issues that arise in the taxpayer's case.


Brian Mustard, Sam Maruca, Charles Thériault, Richard Tremblay, "Transfer Pricing: What Are 'Reasonable Efforts,' and When should Penalties Apply?", Canadian Tax Foundation, 2015 Conference Report, 32:1-33

Unlikelihood of a s. 247(4)(a) safe harbour (p. 32:7)

[T]he qualitative assessment of the adequacy of the actions described in subsection 247(4) lies entirely within the ambit of subsection 247(3). In other words, subsection 247(4) seems to require only a recitation of the facts that demonstrate the effort made; subsection 247(3) is where the efforts are analyzed to determine whether they were reasonable. The fact that paragraph 247(4)(a) only requires taxpayers to document what work they in fact did to determine the arm's-length transfer price or allocation—regardless whether such work represents reasonable efforts—will likely make courts reluctant to view paragraph 247(4)(a) as establishing a safe harbour.

Dichotomy between arm’s length prices and arm’s length allocation (pp. 32:7-8)

"[R]easonable efforts" in subsection 247(3) refers to the determination and use of arm's-length transfer prices or arm's-length allocations, and not to arm's-length terms and conditions, which are the subject of the main transfer-pricing provision in subsection 247(2). The term "arm's length allocation" is defined in subsection 247(1) to mean "an allocation of profit or loss that would have occurred between the participants in the transaction if they had been dealing at arm's length with each other [emphasis added]." However, the "allocation" wording is not found in subsection 247(2); it is only used in subsections 247(3) and (4). ...

Regardless whether profit allocations can be used under subsection 247(2) in circumstances where they do not permit the determination of specific terms and conditions in respect of a transaction, it is clear that they can be used as a defence against the application of transfer-pricing penalties. So if it makes sense for economic or other reasons to prepare a profit-split analysis rather than a more granular pricing analysis, and assuming that the profit allocation can be defended as flowing from the making of reasonable efforts, penalties should not be applied.

Historical reason for penalty (p. 32:8)

The historical reason for Canada's transfer-pricing penalty is clear. The United States introduced a transfer-pricing penalty before Canada did, and it was not trivial. As a result, when taxpayers were involved in cross-border trade involving Canada and the United States, they would favour recognizing more income in the United States and less in Canada, all things being equal. It was therefore necessary for Canada to level the playing field...

HSBC: Relevance of past CRA audit practices to penalty (p. 32:10)

In HSBC Bank [2007 TCC 307], the taxpayer alleged in its notice of appeal that it had used a transfer price for a decade, and despite annual audits, the CRA never challenged it until the reassessment that led to the appeal….Bowman CJ refused to strike the paragraph because, although previous years are not relevant to the issue of whether there should be a transfer pricing adjustment in a subsequent taxation year, it was not clear and obvious to him that events in previous years would not be relevant to determining whether there should be a transfer-pricing penalty in a subsequent year….

[I]n cases where a subsection 247(4) request for documentation was made, and the CRA expressed no concern with the documentation, it is entirely reasonable in those circumstances for a taxpayer to believe that it had met the acceptable standard and to continue producing similar contemporaneous documentation for subsequent years….To permit the penalty to be applied in such a case would be inappropriate and contrary to the principles of certainty, predictability, and fairness…

Reluxicorp: reasonable efforts if no carelessness (p. 32:11)

[In] Reluxicorp…Lamarre J noted that "there will be carelessness if the person failed to make reasonable efforts to comply with the Act….A technical reading of the statement also suggests that failure to make reasonable efforts is a more grievous offence than carelessness, since the existence of the former necessarily implies the existence of the latter. As a result, if a taxpayer can show that he or she was not careless, the reasonable efforts requirement should be satisfied.

Jurisprudence on “reasonable efforts” (pp. 32:12)

[I]n Barrett, the Federal Court of Appeal determined that "reasonable efforts" is a higher standard than "good faith." …

In Royal Oak Mines [[1996] 1 S.C.R. 369], the Supreme Court of Canada concluded that "reasonable effort" is an objective standard that can be assessed by reference to "comparable standards and practices within the particular industry." …

Rossiter v. Chiasson, [1950] OWN 265 (HCJ)…[stated] the party need not "go to absurd, whimsical or unwarranted lengths" since "reasonable" means " 'logical,' 'sensible' and 'fair.' " …

Crown Employees [1997 CarswellOnt 6197] explicitly held that

reasonable efforts does not mean "all efforts." It does not mean "efforts to the point of undue hardship." It does not mean "every effort." What it means is efforts that are reasonable in the circumstances all things considered. What is reasonable in the circumstances will, obviously, depend on the facts of particular cases.

Informing s. 247 penalty with OECD Guidelines (pp. 32:12-13]

[T]he fact that the CRA and the Department of Finance have both indicated that the section 247 provisions were meant to import the principles of the OECD guidelines into the Act may in some cases provide taxpayers with a basis for interpreting section 247 provisions in a manner that is less demanding than the CRA's publications would otherwise suggest. …

For example, chapter IV of the 2010 OECD guidelines provides…

[I]mposition of a sizable "no-fault" penalty based on the mere existence of an understatement of a certain amount would be unduly harsh when it is attributable to good faith error rather than negligence or an actual intent to avoid tax. …

The CRA addresses some of these points in TPM-09 but indicates, for example, that a penalty would "not likely" be imposed for failure to use data that were not available to the taxpayer. I would argue that the guidelines do not require taxpayers to spend large sums to gain access to private databases that are not otherwise available to them.

This example, along with the CRA's use of the expression "all reasonable efforts" [rather than “reasonable efforts”] and other differences noted above, demonstrates how the CRA guidance perhaps inadvertently imposes a higher threshold for the avoidance of a transfer-pricing penalty than Parliament intended….

Questionable TPM-09 Guidelines (p. 32:14)

The TPM states that the TPRC may take into consideration whether the taxpayer provided all of the items requested under section 231.6 or 231.2…

It is difficult to understand how the compliance or non-compliance of a taxpayer with requirements issued long after transfer-pricing documents were prepared could possibly have any relevance to the reasonable efforts inquiry under subsection 247(3). …

[F]rom informal discussions with CRA personnel, it appears that the TPRC will consider a large adjustment to constitute almost presumptive evidence of non-compliance with subsection 247(3)….

Inappropriateness of penalties where s. 247(2)(d) recharacterization (p. 32:16)

[I] do not believe that transfer-pricing penalties should be imposed merely because recharacterization has been invoked. More importantly, I think it is contrary to the Act for the CRA to conclude otherwise. As I read the words of subsections 247(3) and (4), a penalty can arise only in respect of failure to document the transactions that were actually carried out by taxpayers. The CRA itself admits that paragraphs 247(2)(b) and (d) do not in fact recharacterize the transactions in question. Paragraph 247(2)(d) merely permits the determination of "amounts" based on a different hypothetical transaction, without deeming that transaction to have taken place or to have replaced the actual one. In contrast, the penalty provisions in subsections 247(3) and (4) are entirely based on the transactions actually undertaken by taxpayers. Assuming that the taxpayer has made reasonable efforts to determine and use an arm’s length price or allocation in respect of those actual transactions, subsection 247(3) should not apply.

Appropriateness of avoiding penalties where reliance on expert reports (p. 32:18)

[In DHL Corporation and Subsidiaries v CIR, 285 F. 3d 1210 (9th Cir. 2002); aff'g, in part, rev'g, in part, and remanding 76 TCM 1122 (1998)] the taxpayer ("DHL") hired Bain & Co., Inc. ("Bain") a well known global management consulting firm, to conduct a valuation. The US Tax Court held that it was not reasonable for DHL to rely on that valuation because DHL worked with Bain to arrive at its desired value, and the court imposed a penalty on the taxpayer as a result. The Court of Appeals, Ninth Circuit, reversed the penalty, stating that Bain was a "respected financial firm" and that "[t]here is no evidence that DHL manipulated Bain's appraisal or that Bain blindly affirmed DHL's desired figure.

Words and Phrases
reasonable efforts

Michael Colborne, Michael McLaren, Mark Barbour, "Subsection 247(3): What are "Reasonable Efforts"?", Canadian Tax Journal, (2016) 64:1, 229-43

Dictionary meaning of “reasonable efforts” (p. 236)

On the basis of these definitions, we believe that the ordinary meaning of "reasonable efforts" is "sensible, moderate, yet determined attempts."…

Context of s. 247(3) (pp. 236-7)

As a contextual matter, subsection 247(3) was enacted as part of the 1995-1997 technical bill that added section 247 to the Act—which, as we have noted, was intended to harmonize Canada's, transfer-pricing rules with the arm's-length standard described in the 1995 OECD guidelines….

Subsection 247(3) and all related rules in section 246, including subsection 247(2), should also be viewed in the context of a taxpayer's liability under section 151 to "estimate the amount of tax payable" when the taxpayer files its tax return….[T]his statutory context suggests that in interpreting "reasonable efforts," one should emphasize the "sensible" and "moderate" aspects of the ordinary meaning of "reasonable."

1997 budget and 1995 OECD guidelines referenced therein (pp. 238-9)

The [1997] budget plan indicates that the 1995 OECD guidelines provided the inspiration for the changes to the transfer-pricing rules, including the penalty provisions….

[C]hapter 5 [of the OECD Guidelines] provides that

[t]axpayers should make reasonable efforts at the time transfer pricing is established to determine whether the transfer pricing is appropriate for tax purposes in accordance with the arm's length principle. . . . [The] extensiveness of this process should be determined in accordance with the same prudent business management principles that would govern the process of evaluating a business of a similar level of complexity and importance. [fn 31: … 1995 OECD guidelines, at paragraph 5.28 (emphasis added). …

the need for the documents should be balanced by the costs and administrative burdens, particularly where this process suggests the creation of documents that would not otherwise be prepared or referred to in the absence of tax considerations.

CRA position on reasonable efforts (p. 241)

[T]PM-09 also states:

A reasonable effort means the degree of effort that an independent and competent person engaged in the same line of business or endeavour would exercise under similar circumstances. What is reasonable is based on what a reasonable business person in the taxpayer's circumstances would do, having regard to the complexity and importance of the transfer pricing issues that arise in the taxpayer's case. …

[R]egardless, we have seen the CRA assert penalties in circumstances where it ought to be uncontroversial that reasonable efforts were made.

Conclusion (p. 243)

Application of the textual, contextual, and purposive approach to statutory interpretation mandated by the Supreme Court of Canada supports the conclusion that Parliament intended the phrase "reasonable efforts" in subsection 247(3) to require a determination of whether a taxpayer attempted to establish an arm-length price as a prudent business person would do in the same circumstances….

Words and Phrases
reasonable efforts

Subparagraph 247(3)(a)

Subparagraph 247(3)(a)(iii)

Administrative Policy

10 October 2014 APFF Roundtable Q. 26, 2014-0538201C6 F - 2014 APFF Roundtable, Q. 26 - Cost of property

general requirement for penalty elimination re transfer pricing capital setoff adjustment

After responding to a question on the interrelationship between ss. 69 and 247 respecting a cross-border non-arm's length purchase by a Canadian resident of a capital property at a price less than its fair market value, CRA added the following general comment:

For the purposes of the transfer pricing penalty pursuant to subsection 247(3) and the calculation of the threshold for the application of the penalty, any transfer pricing capital setoff adjustment will reduce the total of transfer pricing capital or income adjustments only if it is determined that the taxpayer or partnership of which the taxpayer is a member has made serious efforts to determine arm's length transfer prices for this setoff adjustment. In the situation where the taxpayer has no other transfer pricing adjustment, a transfer pricing capital setoff adjustment would not be subject to the transfer pricing penalty under subsection 247(3).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares definition of FMV, which may differ from the s. 247 arm's length price 176
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) arm's length transfer price prevails over FMV 176

Subsection 247(4)

See Also

Marzen Artistic Aluminum Ltd. v. The Queen, 2014 DTC 1145 [at 3433], 2014 TCC 194, aff'd 2016 DTC 5018 [at 6600], 2016 FCA 34

no explanation of derivation of pricing

"Marketing fees" paid by taxpayer to its Barbados subsidiary were found to be well in excess of the arm's length amount mandated by s. 247(2). When CRA requested contemporaneous documentation under s. 247(4)(c), taxpayer's counsel provided copies of agreements creating the Barbados structure, correspondence regarding the fees and a study as to how to increase sales in the U.S. These documents did not show how the quantum of the fees was arrived at, and Sheridan J found that the requirements of s. 247(4)(a)(v)and (vi) had not been satisfied. Accordingly the taxpayer was deemed not to have made reasonable efforts, and was liable to a penalty under s. 247(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) separate entity approach endorsed 489

McKesson Canada Corporation v. The Queen, 2014 DTC 1040 [at 2723], 2013 TCC 404

advocacy 3rd-party report not read by taxpayer

FCA appeal settled.

The only documentary support for the discount at which the taxpayer sold receivables to its Luxembourg parent (which Boyle J later found was over twice what could be supported under s. 247(2)) was a study prepared by a securitization specialist (TDSI), which was engaged shortly before the receivables sale agreement was finalized. After noting that no 10% transfer pricing penalty was imposed by CRA, Boyle J stated (at para. 50, f.n. 20):

Given that the TDSI Reports were the only contemporaneous documentation, and given my observations, comments and conclusions on those opinions and the role of TDSI, it appears to me that CRA may need to review its threshold criteria with respect to subsection 247(4). I would not have expected last minute, rushed, not fully informed, paid advocacy that was not made available to the Canadian taxpayer and not read by its parent, could easily satisfy the contemporaneous documentation requirements.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence expert reports without testimony 46
Tax Topics - General Concepts - Purpose/Intention tax purpose v. commercial result 78
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) terms adjusted within framework of transaction chosen by taxpayer 894
Tax Topics - Treaties - Income Tax Conventions - Article 9 5-year limitation did not apply to secondary Part XIII assessment 190

Administrative Policy

29 November 2016 CTF Roundtable Q. 9, 2016-0669801C6 - BEPS Action Item 13

BEPS 13 has no effect on the s. 247 documentation requirements

Does CRA expect that the “reasonable efforts” that a taxpayer must make to determine and use arm’s length transfer prices include the preparation of transfer pricing documentation consistent with the BEPS Action 13 (i.e. Master File and Local File transfer pricing documentation)?

CRA indicated that BEPS Action Item 13 had been dealt with by the introduction of proposed s. 233.8 (respecting country-by-country reporting), which has no direct relation to s. 247 (including the contemporaneous documentation requirement in s. 247(4)) and does not include a requirement to produce a Local File or a Master File. Accordingly, CRA has not altered its criteria regarding whether a taxpayer has made reasonable efforts to determine and use arm’s length transfer pricing.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 233.8 - Subsection 233.8(3) no requirement to produce a Local or Master File 75

TPM-05R – Requests for Contemporaneous Documentation 28 March 2014

9. [issuance of requests] Requests for contemporaneous documentation must be issued at the stage of initial contact with the taxpayer in all audits where there are transactions (as defined in subsection 247(1) of the Income Tax Act) between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length….

11. [by letter] Contemporaneous documentation requests must be issued by letter….

13. [APA coordination] [I]n all situations where the taxpayer already has an APA, which may or may not include a rollback period, or has made claims to request one, auditors must contact the Competent Authority Services Division before issuing the request for contemporaneous documentation to evaluate whether the request should be issued….

17. [s. 247(4)(c): "within 3 months"] Under paragraph 28(c) of the Interpretation Act, the day on which the three-month period expires will bear the same calendar day number as the specified day….

18. [ "within 3 months" examples] [W]hen a request is served on April 30, the taxpayer has until July 30 to provide the documentation, not July 31. However, if a request is served on January 31, the taxpayer has until April 30 to provide the documentation… If the request is served on November 30, the taxpayer has to provide the documentation by February 28 of the following calendar year (or February 29 in the case of a leap year).

19. [extension if holiday] When the last day to comply falls on a holiday, the taxpayer has until the next day that is not a holiday to comply, according to section 26 of the Interpretation Act. A holiday includes statutory and provincial holidays, Saturdays, and Sundays….

26. [updating responsibility] In accordance with paragraph 247(4)(b), taxpayers still have the responsibility to provide updates to contemporaneous documentation they submitted previously concerning prior audit years. If there have been no material changes, taxpayers must still respond within the three-month period stating that there have been no material changes and give the reasons that support this position.

29. [PATA] Taxpayers may choose to use the Pacific Association of Tax Administrators (PATA) Transfer Pricing Documentation Package in order to avoid the imposition of PATA member transfer pricing penalties with respect to a transaction. The documentation package provides an exhaustive list of documents that the PATA tax administrators view as necessary to provide transfer pricing penalty relief.


Michael Colborne, Michael McLaren, Mark Barbour, "Subsection 247(3): What are "Reasonable Efforts"?", Canadian Tax Journal, (2016) 64:1, 229-43

Standalone report not required/may be no assumptions and policies (p. 232)

[T]he statute does not require that the taxpayer condense all of the information in a single standalone document or report. Instead, the rule only requires the taxpayer to make or obtain, by the relevant time, records or documents that contain the prescribed information….

[B]y employing the phrase "if any," the rule expressly contemplates situations where no assumptions, strategies, and policies exist as well as circumstances in which assumptions, strategies, and policies have no effect on the transfer price….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(3) 433

Martin Przysuski, Srini Lalapet, "Appropriate Canadian Transfer Pricing Documentation", Tax Notes International, 3 October 2005, p. 55.

Paragraph 247(4)(a)


Brian Mustard, Sam Maruca, Charles Thériault, Richard Tremblay, "Transfer Pricing: What Are 'Reasonable Efforts,' and When should Penalties Apply?", Canadian Tax Foundation, 2015 Conference Report, 32:1-33

Minor subsequent corrections (p. 32:8)

[I]t may, of course, happen that a transfer-pricing report is substantially completed by the documentation-due date, but minor corrections are required thereafter. It does not appear that the CRA has been taking a hard line on this point, and although every effort should be made to have the report prepared and finalized before the deadline, taxpayers should not assume that such minor corrections will invalidate a report. The document that is required to exist by the deadline need only be complete and accurate in all material respects.

Subsection 247(7)

Administrative Policy

26 April 2017 IFA Roundtable Q. 1, 2017-0691071C6 - Interaction between s17 and s247

s. 247(2) generally applies to boost the imputed cross-border interest arising under s. 17

(a) A non-interest bearing loan made by a corporation resident in Canada to a wholly-owned non-resident subsidiary remains outstanding for more than one year and does not qualify for the controlled foreign affiliate exception in subsection 17(8). Would s. 247(2) apply?

b) What if the loan is outstanding for less than a year but would have qualified for the s. 17(8) exception if it had been outstanding for more than a year?

(a) CRA indicated that the fact that s. 17(1) could apply to the amount of interest does not preclude the potential application of s. 247(2). Thus, even if s. 17(1) would result in a 1% inclusion in income, the total income inclusion would be 3% if that were the arm’s length rate.

(b) CRA indicated that notwithstanding that s. 247(7) would not apply (because s. 17 would not potentially apply), because this particular loan is the type of loan contemplated by s. 17(8) (and s. 247(7)), s. 247(2) would not be applicable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 17 - Subsection 17(1.1) s. 17(1) does not oust application of s. 247(2) 87


Brian Bloom, "A Policy of Disengagement: How Subsection 247(2) Relates to the Act's Income- Modifying Rules", CCH Tax Topics, No. 1957, 10 September 2009, p. 1.

Subsection 247(7.1)

Administrative Policy

31 March 2014 External T.I. 2013-0515661E5 - Subsection 247(7.1) coming into-force rule

"that day" in transitional election refers to Royal assent

The election [in the coming-into-force provision] is intended to provide a taxpayer the benefit of an exception to the transfer price adjustment required by subsection 247(2) of the Act to a statute-barred year that it would have been entitled to had the legislation been enacted as of its effective date. As such, the phrase "that day" in paragraph 88(2)(a) of the coming into-force rules must be in reference to the date the legislation was enacted.


Geoffrey S. Turner, "Downstream Loan Guarantees and Subsection 247(7.1) Transfer Pricing Relief", CCH Tax Topics, No. 2166, September 12, 2013, p.1:

Narrowness of (active business) requirement of s. 247(5.1) (p. 2)

The proposed subsection 247(7.1) relief from transfer pricing requirements will, of course, be very helpful in many foreign affiliate financings guaranteed by the Canadian parent company. However, the "active business" conditions of subsection 17(8) are strict and not always possible to satisfy. For instance, a foreign affiliate borrowing used to pay a dividend would not qualify for the relief nor would a loan used to refinance a prior borrowing not directly traceable to a qualifying purpose (e.g., a prior borrowing incurred by the foreign affiliate before it was acquired by the Canadian parent, when the Canadian rules were not relevant to it).

Lack of neutrality compared to on-loan structure (pp. 2-3)

If the Canadian transfer pricing rules insist on payment of a guarantee fee where the borrowing is made directly by the foreign affiliate with credit support from the parent, the Canadian parent would suffer an additional income inclusion that would not be incurred if the borrowing were made in Canada and advanced to the foreign affiliate. In many cases, the guarantee fee requirement would lead the Canadian parent to prefer a borrowing in Canada followed by an advance to the foreign affiliate. In this way, the constrained scope of the exemption in subsection 247(7.1) leads to a distortion, or non-neutrality, in the financing decision and may discourage borrowings in the foreign country in favour of borrowings in Canada.

Protection of Canadian tax base even where no-fee guarantee for debt of CFA earning FAP (p.3)

After providing an example to illustrate this point, Geoff stated:

In other words, with the Canadian parent guarantee of a controlled foreign affiliate borrowing to earn FAPI, the corporate group as a whole is economically better off by virtue of the interest rate savings, and these savings are captured in the Canadian tax base with or without payment of a guarantee fee to the Canadian parent. Accordingly, it is not clear why the relief in subsection 247(7.1) should be constrained so as to effectively force the payment of a guarantee fee when the borrowed funds are not deployed in an active business.

CRA's position in GE cases is favourable where the parent is Canadian rather that U.S. (p.4)

The significance of these General Electric cases is that throughout this period, and despite losses at the Tax Court of Canada and the Federal Court of Appeal, the CRA has continued to aggressively assert its position that the US parent guarantee of the debt of the Canadian subsidiaries had at most nominal value, because the Canadian subsidiaries already benefited in any event from the implicit guarantees of the US parent.

In light of the CRA's consistently advanced position with respect to the negligible or nil value of parent guarantees, it would be inconsistent for the CRA to assert transfer pricing adjustments or penalties where there is no contemporaneous documentation, against any Canadian parent corporation that has guaranteed the debt of its foreign affiliate, even if the guarantee is outside the scope of the exemption in proposed subsection 247(7.1).

Subsection 247(8)

Administrative Policy

19 December 2013 Internal T.I. 2013-0490751I7 - Adjustment to a taxpayer`s CDA

s. 247(2) trumps s. 69(1)

The taxpayer, which was a private corporation, disposed of eligible capital property to a non-arm's-length non-resident sister company ("SisterCo") within the same multinational group in consideration for a promissory note. Audit proposed to apply s. 69(1) or s. 247(2) to increase the proceeds from the disposition. In suggesting s. 247(2), the Directorate stated:

[S]ubsection 247(8) specifically provides that subsection 69(1) shall not apply where subsection 247(2) is applied to adjust the terms and conditions of the transaction under review.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account s. 247(2) increase to ecp proceeds increased CDA on transaction effective date 81

Subsection 247(10)

Administrative Policy

Update - Competent Authority Services Division, 20 December 2013

using MAP

Where a Canadian entity requests a reduction of its Canadian taxable income (downward transfer pricing adjustment) where the request relates to a self-initiated (that is, not initiated by a tax authority) adjustment to increase the income of a related entity in another country (upward adjustment), the Canadian competent authority will accept the case under the Mutual Agreement Procedure in these circumstances:

  • The upward adjustment has been accepted for consideration by the foreign tax authority;
  • The foreign competent authority tries to resolve the case under the MAP. That is, the foreign country reviews the case, provides the Canadian competent authority with a detailed analysis as to why the foreign authority agrees with the adjustment and agrees to negotiate the case.
  • The request for competent authority assistance is made within the time limits of the applicable treaty; and
  • The issue is not one that the Canadian competent authority has decided, as a matter of policy, not to consider.

If one of these requirements is not met:

The Canadian competent authority will close its MAP case. The taxpayer will then have the option to apply to the Audit Division of the local tax services office to ask for a downward adjustment, in accordance with...TPM-03... .

Memorandum TPM-03 "Downward Transfer Pricing Adjustments Under Subsection 247(2)," 20 October 2003

When s. 247(10) discretion exercised

The Minister may decide not to exercise discretion under s. 247(10) where a Canadian company requests a decrease in the transfer price of sales to a non-arm's length non-resident without repatriation, and s. 15(1) does not apply to the amount. ("This situation may be considered abusive because the Canadian taxpayer has turned an otherwise taxable receipt of monies into a non-taxable amount.") Conversely, when a Canadian parent company requests and receive a decrease in the transfer price of sales to a non-resident subsidiary without repatriation, this is not considered abusive, because s. 15(1) would apply and offset the downward adjustment.

Effecting repatriation

Repatriation can be accomplished by:

  • offsetting inter-company accounts receivable from the non-resident – It should be remembered that this method of repatriation might have an effect on other items. For example, interest charges may have to be adjusted on a going-forward basis to reflect the revised inter-company balances;
  • the transfer of money or its equivalent to the non-resident corporation;
  • where a Canadian parent company cannot otherwise effect repatriation within a reasonable time, the creation of a shareholders loan account – This would be effective at the date of the transfer pricing transaction and may result in the application of subsection 15(2) of the Act; or
  • netting upward and downward transfer pricing adjustments from different non-residents if both the taxpayer and all the non-residents involved agree in writing to have the amounts offset... .
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 98


Nathan Boidman, "Canadian Approach to Downward Pricing Adjustments: CCRA's 18 March 2003 Communiqué", International Transfer Pricing Journal, Vol. 10, No. 5 2003, p. 181.

Subsection 247(11)

Administrative Policy

14 September 2016 Internal T.I. 2016-0631631I7 - Transfer pricing capital adjustment

s. 152(4) limits apply to additional s. 247(3) assessments

In the situation where Canco acquired a non-depreciable capital property in Year X from an affiliate at a price that was substantially in excess of an arm’s length price, and then disposed of the property at a gain in Year X + 7 to a third party, the Directorate considered that a transfer pricing capital adjustment could be made to boost the adjusted cost base of the property in Year X even though that year was now statute-barred re Part I reassessments – and that, as “an initial assessment under subsection 247(3) can be made at any time,” a s. 247(3) penalty could be imposed respecting this Year X TPCA in the absence of reasonable efforts etc. The Directorate went on to state:

However, pursuant to subsection 247(11), any additional assessment under subsection 247(3) for the year of the TPCA (Year X) would be subject to restriction based on an application of subsection 152(4) with respect to Year X and Part XVI.1. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) s. 247(2) ACB adjustment can be made in statute-barred year 261
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(3) no statute-barring applies to initial assessments of transfer-pricing penalties 314

Subsection 247(12)

Administrative Policy

19 November 2014 Internal T.I. 2014-0530911I7 F - Transfer pricing secondary adjustments

no secondary adjustment where downward s. 247(2) adjustment to Canadian branch expense

An expense is incurred by a non-resident corporation, which carries on business in Canada through a permanent establishment, and paid to a non-resident with which it does not deal at arm's length, will be adjusted downwards under s. 247(2) as being in excess of an amount that would have been agreed by arm's length persons. Does s. 247(12) apply? The Directorate stated (TaxInterpretations translation):

[T]he requirement that the corporation in question reside in Canada for Part XIII to apply is not satisfied when subsection 212(13.2) is involved because this subsection deems residence in Canada only for purposes of an amount which is deductible in computing taxable income earned in Canada.

However, since Part XIV tax is payable in respect of taxable income earned in Canada, an adjustment to such income can increase the tax payable under such Part. This fact reinforces our conclusion that subsection 247(12) cannot apply to payments referred to in subsection 212(13.2) made by persons who are not resident in Canada. Simultaneous levies of tax under Parts XIII and XIV respecting the same sum would result in double taxation which, in our view, would not accord with the legislative intention… . In the event the taxpayer benefits…[from] subsection 219(2), the non-taxability of the sum reflects the legislative will… .

TPM-02 "Repatriation of funds by Non-residents – Part XIII assessments" 27 March 2003

Repatriation must be completed within 180 days from the time the repatriation agreement is signed.

Repatriation can be accomplished by:

  • Offsetting the Canadian company's inter-company accounts payable to the non-resident in the year of the transfer pricing adjustment. ...[I]nterest charges may have to be amended based on the revised inter-company balances.
  • Creating or adjusting a shareholder loan account. This may result in a Part XIII assessment because of thesubsection 15(2) or subsection 15(9) implications. Repaying the shareholder loan may result in a refund undersubsection 227(6.1) of all or a portion of the tax previously assessed under Part XIII because of subsection 15(2).
  • Offsetting against a separate downward transfer pricing adjustment that relates to the same non-resident taxpayer. ...

Repatriation must be achieved in the tax year of the transfer pricing adjustment. ...

Where offsets are not available until tax years after that of the transfer pricing adjustment, the only option available to the taxpayer will be to create or adjust a shareholder loan account. Offsets may then be used as repayments of the shareholder loan.

...Transferring funds would be used in combination with creating or adjusting a shareholder loan account. The transfer of funds would then be a repayment against the shareholder loan account.


Joel A. Nitikman, "Section 247 – Secondary Adjustments, Deemed Dividends, Repatriation and Interest", International Tax Planning (Federated Press), Vol. XVIII, No.1, 2012, p. 1224, at p.1225

Where Canco pays an excessive amount to a Forper [namely, a particular non-resident person] that is a non-resident sister corporation in the same corporate group, subsection 247(12) makes it clear that the deemed dividend is paid to Forper, even if it is not a shareholder of Canco. This raises the problem that the deemed dividend may be subject to a full 25% withholding tax with no treaty reduction, because Forper may not reside in a treaty country even if its parent corporation does, or Forper may not be eligible for a reduction under its treaty as it may not be actually a shareholder of Canco or may not have a high enough percentage of shares to qualify for treaty benefits. Furthermore, it may be difficult to assert that any non-resident, even if it otherwise had sufficient shareholdings to qualify for treaty benefits, is the "beneficial owner" of a deemed dividend or meets and LOB clause in the treaty.

Subsection 247(13)


Joel A. Nitikman, "Section 247 – Secondary Adjustments, Deemed Dividends, Repatriation and Interest", International Tax Planning, Vol. XVIII, No.1, 2012, p. 1224, at p. 1226:

It is not clear why the reduction is only for the amount that the Minister considers appropriate....The Joint Committee recommended that the reduction be on a dollar-for-dollar basis with the repatriated amount. That recommendation was not accepted. Accordingly, one can expect to see applications for judicial review in the Federal Court if the Minister attempts to tax a dividend that is not reduced by the full amount repatriated.