Transfer Pricing

Transfer pricing refers to the pricing of goods, services, and intangible assets that are being transferred between companies that are part of the same multinational group. In Canada, the Canada Revenue Agency (CRA) is responsible for ensuring that multinational corporations comply with the country’s transfer pricing rules. These rules serve to prevent companies from transferring profits to lower-tax jurisdictions.

To comply with the CRA’s transfer pricing rules, companies must demonstrate that the price and terms of goods, services or intangible assets exchanged between non-arm’s length entities are at the same price and terms that two similarly situated unrelated parties would undertake the same or similar transactions. Although the rules apply to all entities transacting across Canada’s borders, groups with transactions under CAD$1m in any tax year do not have to file a form T106, which lists the transactions between related parties outside of Canada and the Canadian taxpayer, as the transfer pricing method used to arrive at the proper price and terms.

Businesses are also required to keep appropriate documentation on file and be able to provide this documentation to the CRA within a reasonable time. If businesses do not comply, then they can face penalties on any adjustment of the transfer price, even if the adjustment would not otherwise give rise to tax (i.e., losses are adjusted). Dominion Tax Law works with a variety of economists in several jurisdictions to prepare transfer pricing studies and maintain appropriate documentation. The transfer pricing study itself is not a legal function, but the study forms the basis of taking tax and legal positions.