Finance Canada proposes largest overhaul of Canadian transfer pricing legislative framework

7 minute read
26 June 2023

This article discusses the Department of Finance Canada's proposed legislative changes to section 247 of the Income Tax Act (Act), introduced to eliminate certain perceived issues with the current legislation and align Canada's transfer pricing rules with the current international consensus.

The recent decision in Her Majesty The Queen v Cameco Corporation (Cameco) likely expedited the need, in Finance Canada's view, for legislative changes. This decision was significant, as Cameco was the first Canadian case to consider the recharacterization rules in subsections 247(b) and (d) of the Act and set a precedent that impacted both legislative and administrative aspects of transfer pricing.

The draft legislative measures.

Following Cameco, it was evident that the lack of detail present in the current rules, specifically in the application of the arm's length principle, could lead to a wide range of interpretations by taxpayers and the courts alike. The end result in Cameco was a significant amount of profits taxed outside Canada, despite a perceived lack of functions performed in that other jurisdiction. Finance Canada has acknowledged these concerns, and in its consultation paper launched on June 6, 2023, proposed that changes be made to subsections 247(1) and (2) of the Act.

The proposed legislative amendments would integrate current international approaches as reflected in the Organisation for Economic Co-operation and Development's ("OECD") 2022 Transfer Pricing Guidelines, and additional guidance that Finance Canada felt was lacking in the application of the arm's length principle.

The resulting focus is to integrate a two-step comparability analysis, and a corresponding series of new rules:

Step 1 involves establishing a starting point of the comparison at the heart of the arm's length principle through three elements:

  • The addition of the proposed transaction determination rule in subsection 247(1.1), which delineates the controlled transaction through consideration of its economically relevant characteristics.
  • A definition of "economically relevant characteristics" under subsection 247(1), along the lines of the wording in the 2022 Transfer Pricing Guidelines.
  • An increased focus on the "conditions" of the transactions, supported by a "broad" interpretation rule in subsection (1.4), and a deeming rule in subsection (2.01) in the event that certain conditions are missing from the transaction that would have been included at arm's length.

Step 2 provides the parameters under which the comparison is to be applied, namely if the conditions are different than those that would have been included had the participants been dealing with one another at arm's length in comparable circumstances.

Finance Canada is also proposing to repeal the current recharacterization rules in paragraphs 2(b) and (d), and replace them with the non-recognition and replacement rules in subsections (1.2) and (1.3). If it is determined that the conditions are different from conditions at arm's length, the new adjustment rule at subsection (2.02) would disregard the transaction and replace it with a transaction that comports as closely as possible with the facts of the delineated transaction.  Furthermore, the definition for multinational enterprise group will be added and the definition for Transfer Price will be updated in subsection 247(1).

Finally, the proposed amendments aim to integrate consistency between the transfer pricing adjustment rule at subsection (2.02) and the 2022 Transfer Pricing Guidelines in subsection (2.03). While currently recognized as a source of guidance, the Transfer Pricing Guidelines are not binding on Canadian legislation or jurisprudence. Similar to other jurisdictions, a consistency rule would require that domestic transfer pricing legislation be applied in a way that best secures consistency with the Transfer Pricing Guidelines.

Impact to administrative measures.

Aside from these legislative changes, a number of administrative measures could be implemented to reduce compliance burden, improve tax certainty and internationally align Canadian transfer pricing requirements.

The first of these measures includes adopting a standardized approach to documentation centered on the Master file, the Local file, and the Country-by-Country Report, all derived from the OECD's BEPS Action 13 Final Report. The government hopes to balance the Canada Revenue Agency's (CRA) need for timely, accurate and relevant information to conduct risk assessments and efficient audits, with its efforts not to impose excessive or unnecessary compliance burdens on taxpayers.

In addition, the government is considering provisions for lower-risk transactions or smaller taxpayers that would simplify transfer pricing documentation requirements in these circumstances. One option considered, if a taxpayer qualifies, would allow the taxpayer to satisfy the transfer pricing documentation requirements by completing an annual reporting schedule.

Another proposed measure is to adjust the current transfer pricing penalty provisions under subsection 247(3) to correspond with modern inflation rates. As a result, the absolute threshold under the provision would be increased from $5 million to $10 million, and maintain the 10 per cent relative threshold to encourage compliance among smaller taxpayers.

Finally, Finance Canada recognizes there are a number of situations where streamlining transfer pricing approaches can reduce compliance burden for taxpayers and, ultimately, the number of transfer pricing disputes. As such, the consultation is considering standardized approaches for low value-adding intra-group services, returns for distribution activities, and new rules for intra-group loans, including a term limit of five years, use of the MNE group's credit rating and removing subordination features and embedded options.


Finance Canada's consultation proposes the most significant overhaul to Canada's transfer pricing framework since the introduction of section 247. The proposals seek to increase tax certainty, reduce compliance and administrative burdens, and integrate best practices from the OECD's Transfer Pricing Guidelines and the BEPS project to align with other jurisdictions.

The Cameco decision was viewed by many as being inconsistent with the OECD's recent BEPS guidance, so Finance Canada's commitment to align Canadian transfer pricing rules with international standards should eliminate some of the post-Cameco uncertainty. If the non-recognition and replacement provisions are adopted, it will be interesting to see whether the CRA relies on these provisions more frequently than it did the recharacterization provision. The Cameco decision had significantly narrowed the scope of when the CRA could recharacterize a transaction, and time will tell whether the courts give a broader application to the proposed non-recognition and replacement provisions. It is however not surprising for Finance Canada to seek to replenish the CRA auditor's toolkit with a second arrow, in addition to the standard transfer pricing adjustment provision.

Finance Canada invites comments on the proposed changes by July 28, 2023.

If you have any questions or comments with regards to the proposed changes, please contact Pierre Alary or André Bergeron.

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