Corporations that carry out significant transactions with foreign corporations under common control cannot avoid the question of transfer pricing because it encompasses tax compliance, risk management and international tax planning.

The issue of transfer pricing is constantly evolving in Canada and internationally, particularly as a result of the Organisation for Economic Co-operation and Development’s (“OECD”) base erosion and profit shifting (“BEPS”) project. Being aware of transfer pricing rules and applying them correctly is therefore crucial.

Transfer pricing rules in Canada

Generally, in Canada, transfer pricing is governed by Section 247 of the Income Tax Act (“ITA”). The Canada Revenue Agency (“CRA”) generally refers to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in applying transfer pricing rules.

The underlying rule in Canada is the arm’s length principle, which Canadian residents must apply for transactions with non-arm’s length non-resident parties. This principle requires that arrangements between the non-arm’s length parties be the same as those with arm’s length parties in similar circumstances. under this principle, Canadian residents involved in cross-border transactions with non-arm’s length parties should report essentially the same income as they would have with arm’s length parties.

If the CRA considers that the arm’s length principles is not applied, it can adjust the transfer prices and impose a penalty. The penalty could apply if total CRA upward adjustments (capital and income) are greater than $5,000,000 or 10% of the entity’s gross income and will be 10% of the adjusted amount. This penalty can, however, be avoided if the taxpayer is able to demonstrate that it has made reasonable efforts to determine and use arm’s length transfer prices.

Reasonable efforts by the taxpayer can be demonstrated if the taxpayer has maintained transfer pricing documentations that complies with ITA 247(4). It must provide this documentation within three months of receipt of a CRA request. In addition, such documentation must be timely, i.e., prepared or obtained on or before the filing deadline for the taxpayer’s tax returns for the tax year in which the transaction was entered into.

Audit

As part of a tax audit, the CRA will request transfer pricing documentation at an early stage of the process. This request will be made in writing and the taxpayer will have 90 days to provide the documentation. If documentation is not provided, the taxpayer has no protection against the transfer pricing penalty. The absence of documentation also shifts the burden of proof to the taxpayer.

It should be noted that the limitation period for a transfer pricing audit in Canada is three years longer than the usual period, and can therefore extend up to seven years.
In the event that a taxpayer is issued a transfer pricing adjustment, the taxpayer has 90 days following receipt of a reassessment to file a notice of objection. This notice of objection is necessary to protect the taxpayer’s right of appeal to the CRA’s Appeals Branch and to the Canadian courts.

In the event that the transfer pricing adjustment is upheld, the taxpayer will be in a situation of double taxation, as taxes will have already been paid on the income in the foreign country. The taxpayer will be able to seek assistance from the appropriate Canadian and foreign authorities to avoid double taxation if the tax treaty between the two jurisdictions provides for such a mechanism.

It’s important to note that the CRA is one of the most aggressive tax authorities in the world when it comes to auditing transfer pricing. Unlike its U.S. counterpart, the CRA audits medium and large corporations and is prepared to issue a notice of reassessment for amounts as little a few hundred thousand dollars.

These audits have resulted in taxpayers spending considerable time and money objecting to the notices of reassessment, requesting the assistance of the appropriate Canadian and foreign authorities to avoid double taxation and appealing decisions in Canadian courts. In many cases, this could have been avoided had the transfer prices been properly determined and documented. Having well-prepared documentation with all the necessary supporting documents often determines the parameters considered during an audit.

Corporations subject to applying transfer pricing rules are legally obligated to document their intercompany transactions. Missing documentation translates into a significantly higher risk of a reassessment, non-deductible penalties and interest payable in unpaid taxes. However, transfer pricing rules also provide all of the requisite tools to efficiently manage a multinational’s international tax burden. Transfer pricing rules should be known and applied.

Don’t hesitate to call on your Raymond Chabot Grant Thornton advisor who can help answer your transfer pricing questions.

Your SME has experienced considerable growth in recent years. It’s ready to expand by making an acquisition beyond Quebec’s borders.

Your analyses indicate that this is the most beneficial and least risky option. Provided, of course, that the price is right. However, this is not the only consideration. During the analysis, ask yourself whether the target business:

Updated on July 11, 2023

For several years now, the Internal Revenue Service (IRS) has been engaged in a vigorous campaign against international tax fraud and failure to declare bank accounts outside the U.S., including Canada.

IRS streamlined filing compliance allows US citizens living in Canada to update their tax obligations without incurring penalties.

As a U.S. citizen or tax resident (including green card holders) residing in Canada, what are your U.S. tax obligations and what solutions are available to you? To answer your questions, we have called upon the contribution of tax experts from the Raymond Chabot Grant Thornton network.

Q: What are the income tax compliance requirements for U.S. citizens living in Canada?

A: U.S. citizens and resident aliens residing outside the United States are required to annually file a U.S. income tax return and declare worldwide income to the IRS, insofar as this income is equal to or greater than the personal exclusion amount and the applicable basic deduction.

Q: In addition to filing a tax return, are there any other requirements to meet?

A: In addition to filing an income tax return annually, U.S. citizens and resident aliens are required to file form FinCEN 114 (Report of Foreign Bank Accounts) to disclose their interest in certain financial accounts held outside the U.S., if such interest exceeds US $10,000 at any given time during the year.

Furthermore, U.S. citizens and tax residents must also report certain information to the URS on their registered education savings plan, tax-free savings account, foreign trusts, and may need to file form if they hold an interest in a foreign corporation.

Q: What are the applicable penalties if these requirements are not met?

A: U.S. citizens and tax residents who have not or have only partially met their tax obligations become exposed to significant penalties and the risk of legal proceedings. For example, if you omit to file a U.S. income tax return, the IRS can tax you up to 25% of the amount due.

Additionally, if you omit to file the FinCEN 114 report without a valid reason, you may be subject to a civil penalty up to $10,000 per unintentional violation. For intentional violations, penalties may amount to the higher of $100,000 and 50% of the value of the foreign account.

Q: What can I do to adjust my situation?

A: To encourage taxpayers to take action and adjust their tax file, the IRS introduced a voluntary disclosure program in September 2012. This program, named Streamlined Foreign Offshore Procedures for Taxpayers Outside the U.S., applies to U.S. taxpayers residing outside the U.S. who have omitted to file income tax returns or information forms, as well to those who omitted to declare certain income.

The disclosure consists in performing all of the following:

• Filing income tax returns (including all information forms) for the last three years;
• Filing the FinCEN 114 bank account reports for the last six years;
• Paying taxes due plus interest (all penalties are withdrawn under this program).

We can help lighten your burden!

The rules surrounding tax obligations for U.S. citizens and resident aliens are numerous and complex. If you are a U.S. citizen or resident alien and have not met your tax reporting or other obligations with the U.S. tax authorities, consult a Raymond Chabot Grant Thornton specialist who will help you find the best solution for your situation.

Do you have questions relating to U.S. tax issues? The tax experts of Raymond Chabot Grant Thornton can help you!