Daniel Marion
Partner | CPA, CA | Tax

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.

Canada Revenue Agency auditors currently consider this to be an important issue. They have realized in recent years that many taxpayers have been significantly underestimating reported income from cross-border intercompany transactions. It is, therefore, increasingly important to be aware of transfer pricing rules and correctly apply them.

Transfer pricing rules in Canada

Generally, in Canada, transfer pricing is governed by Section 247 of the Income Tax Act and Information Circular 87-2R published by the Canada Revenue Agency (CRA). 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. Essentially, under this principle, Canadian residents involved in such transactions should report the same income as they would have with non-resident parties that are at arm’s length.

If the arm’s length principles is not applied, the CRA 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. However, the transfer pricing penalty does not apply if the taxpayer demonstrates that it has made reasonable efforts to determine and use arm’s length prices.

Reasonable efforts by the taxpayer can be demonstrated if the taxpayer has prepared or obtained records or documents which provide a description that is complete and accurate of intercompany transactions and provide this documentation within three months of receipt of a CRA request. This documentation must be prepared within six months of each fiscal year end.

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.

Audit

As part of the tax audit process, the first thing the CRA auditor will request is transfer pricing documentation. If the documentation has not been prepared in the six months following year-end, the taxpayer has no protection against transfer pricing penalties. Additionally, the auditor can determine what the transfer prices should have been and reassess the taxpayer’s income accordingly. However, if the documentation has been prepared within the required deadlines, while it may not be a guarantee, the taxpayer should be protected against transfer pricing penalties. Additionally, before reassessing income, the auditor must prove that the method applied in the documentation is not appropriate.

A taxpayer who receives a notice of reassessment has 90 days to file a notice of objection to protect its right of appeal with the CRA’s Appeals Branch and the Canadian Courts. Should a portion of the reassessment remain after the appeal, the taxpayer will be in double tax situation since tax will have been paid in the foreign country. The taxpayer must therefore contact both the Canadian and foreign authorities to ensure that, regardless of the result of the reassessment, there is no double taxation. 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.

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.

International tax planning

Transfer pricing can also be a means for a multinational to manage its international tax burden. For example, it is to a multinational’s benefit to have added-value functions, high-value assets and high-risk activities located in jurisdictions with a lower tax rate since, under the transfer pricing principle applicable to these activities, the higher income levels are taxed.

 

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Conclusion

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.

Your Raymond Chabot Grant Thornton advisor can help answer your transfer pricing questions.

10 Aug 2017  |  Written by :

Mr. Marion is a partner at Raymond Chabot Grant Thornton. He is your expert in taxation for the...

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Proposed Measures to End Certain Tax Planning Strategies Using Private Corporations

In its 2017 budget, the federal government signaled its intention to address tax planning strategies involving private corporations that can result in high-income individuals obtaining tax benefits not available to other individuals. Accordingly, on July 18 the Minister of Finance of Canada tabled certain legislative proposals and a Consultation Document: Tax Planning Using Private Corporations.

The legislative proposals tabled by the Minister basically address income splitting and tax planning designed to convert income from a corporation (dividends, salary) into capital gains. The government also announced plans to change the rules with respect to corporations that hold passive investments. Consultations are then also being held on this subject. Here is a brief overview of the various proposed measures.

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Welcome to IFRS Newsletter – a newsletter that offers a summary of certain developments in International Financial Reporting Standards (IFRS) along with insights into topical issues.

We begin this second edition of the year by considering how tax issues resulting from the UK’s decision to leave the European Union may affect entities’ financial reporting. We then move on to look at a number of proposals that have been published by the IASB, including the latest instalment in the IASB’s Disclosure Initiative project – a Discussion Paper which suggests principles to make disclosures in financial statements more effective.

Further on in the newsletter, you will find IFRS-related news at Grant Thornton and a general round-up of financial reporting developments. We finish with a summary of the implementation dates of newer standards that are not yet mandatory, and a list of IASB publications that are out for comment.

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Pascal Grob
Senior manager | Ph., D. | Tax

The media more often report the challenges represented by climate change, population density, farming practices and the sustainable management of natural resources through a pessimistic—even a catastrophic—lens.

Yet, Philippe Rigault, the President and founder of Gydle, maintains that human development indicators such as life expectancy, education, improvements in the status of women, the reduction of poverty and hunger, the number of war casualties, etc. are constantly improving, so that objectively speaking, “things were no better before”.

In fact, certain global problems such as acid rain, the hole in the ozone layer and population growth in developing countries were resolved in very large part when a consensus was reached as to the proper course of action to take.

Managing the planet using genomics

Philippe is one of those fundamentally optimistic scientists who are convinced that scientific and technological advancements, which require new knowledge, have allowed for human progress and that it is by continuing along the same path that the new challenges before us will be resolved. We must therefore develop a real management plan for the planet by changing our way of life, our way of farming and producing goods and our way of managing ecosystems so as to address all of the challenges before us simultaneously. This means optimizing production yields and the efficiency of sustainable farming practices, ensuring public health and protecting biodiversity while taking into consideration the new climate realities in an open world. To achieve this, we must first and foremost know about the living world around us so that we may take action to meet these challenges. This is the ambitious gamble of genomics.

Genomics is a field that combines biology, genetics and informatics to study genomes, i.e. the genetic material in the form of DNA that makes up every living being. Having knowledge of the genome makes it possible to interpret this information, viewing it as a biological recipe for life, and to understand all of the molecular data of an organism as well as their function. Such knowledge also provides insight into genetic differences between individual members of the same species which underlie genetic diseases, personalized medicine, and different forms of cancer, but also all farming practices and improvements to certain organisms using technology. Finally, since all living organisms have common ancestors, comparing genomes makes it possible to study the evolution of species as well as the mechanisms and factors that have allowed them to adapt, and to understand ecosystems and biodiversity.

Philippe Rigault founded Gydle, a Québec-based bioinformatics firm, in 2008 after acquiring 17 years of international experience mapping the human genome (Généthon) and working in biotechnology (Incyte and Illumina), as well as being involved in university and pharmaceutical research. Gydle’s mission is to develop tools to assemble, analyze and compare genomes.

The genome is a puzzle for living things that is pieced together using algorithms

Philippe explains that “assembling a genome is like putting together a puzzle with no picture to guide you. You have the pieces and can see which ones would generally go together. We use this information to put the whole puzzle together using algorithms.” Where the genome is concerned, the pieces of the puzzle are sequenced DNA fragments (a hundred or so A, C, G or T base pairs) that are compared by aligning the sequences. The solution represents the DNA of the complete genome. The smallest genomes are composed of a million base pairs (e.g. for viruses and bacteria) while those for plants and animals are gigantic (from hundreds of millions to tens of billions of base pairs), requiring combinatory analyses of billions of fragments. DNA sequencing technology has made huge strides (25 years ago, it cost a dollar to sequence one base pair whereas today it costs the same amount to sequence 10 million base pairs). In fact, since sequencing technology has evolved even more quickly than information technology, the assembly and analysis of finished genomes are now the limiting factors.

That is why Gydle has been developing high-performance technology over a number of years to assemble, compare and analyze genomes in detail. Compared to other solutions, the Gydle nuclear DNA aligner is much more efficient due to the optimized multicore processors and memory. Data stored in the Gydle (GYM) format is 50 times more compact and is fully processed in an integrated visual environment (Vision). Gydle is teaming up with leaders in the field of genomics to provide solutions for all types of genomes and applications for farming, human health, forestry, bioenergy and biodiversity. For example, Gydle technology made it possible to assemble the finished genome for the chloroplasts of forty or so species of eucalyptus, thereby mapping all of the genetic changes for this family of plant over the last 80 million years. This provides an exceptional body of knowledge making it possible to better classify these plant species, to understand how they have adapted over time and to determine changes relating to more effective photosynthesis.

After seeing bioinformatics evolve over 25 years, from the mapping of the first human genome to quick and inexpensive genome sequencing, Philippe believes that within the next 25 years we will know the genome for most living organisms as well as how they function, how they have evolved over time and how they interact with one another. This is a new era of informational biology, which will allow us to understand all living organisms.

The key issue: is society ready?

The paradox, as seen by Philippe Rigault, is that as knowledge is being built and solutions are developed, there is resistance in Western societies as some people seek to halt development or even take a step backwards. Some people view any human intervention in a natural process as heresy. This applies to all new endeavours, specifically and preferably relating to others, since the proponents of these schools of thought will rarely shun vaccines, antibiotics, infertility treatments, fruits and vegetables developed through select genetic modifications since the Neolithic period (like the sweet potato), hydroelectricity or other technology contributing to their modern-day comforts.

In dealing with the major issues of tomorrow confronting the human race today, innovators like Philippe Rigault are boldly seeking solutions while trying to understand how to improve living organisms through technology. These researchers do not fear the world that awaits us and believe that it must be adapted quickly so that we may continue to live better, and in a sustainable manner.  The conclusion of their analysis is that the solution involves using technology to address the functions of living organisms in order to improve natural and artificial ecosystems and to tailor these ecosystems to new realities and have a new management plan for the planet following a social debate informed by this new knowledge.

The challenges before us are urgent and must be addressed simultaneously and on a global scale. However, they cannot be resolved by taking a step backwards. What solution will society choose? This question is compelling, to say the least, and warrants consideration and debate.

29 Jun 2017  |  Written by :

Mr. Pascal Grob is the director of information technology SR&ED projects. He specializes in...

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