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Transfer Pricing – Concept and procedures
At ITA, our professional has knowledge of the Global Transfer Pricing Rules. OECD
Guidelines and BEPS. Country-by-Country Reporting (CbCR) is part of the OECD's Base
Erosion and Profit.
Transfer Pricing – Concept and procedures
How would you determine that the price at which you are selling goods or services to
your US subsidiary or branch is acceptable to both Canadian and US tax authorities?
Essentially, any transaction between a related Canadian and overseas enterprise must
successfully pass the test of arm’s length pricing under Transfer Pricing (‘TP’)
regulations of Canada.
Compliance with TP regulations has been an important task for the CFOs of multi-
national enterprises. The CFOs are having greater responsibility to ensure that their
inter-company pricing policies commensurate with the local regulations of each
jurisdiction they operate in. Globally, there has been a greater emphasis on disclosure
of transactions between the related enterprises. The Organization for Economic
Cooperation and Development’s (‘OECD’s) along with G7 countries have come out with
newer reporting standards contained in Base Erosion and Profit Shifting (‘BEPS’) action
plans. These standards require greater transparency in the reporting of inter-co
transactions.
We provide below a brief summary of TP framework as generally described in the

Canadian tax regulations
Introduction to transfer pricing
Transfer pricing refers to the setting-of prices between related cross-border enterprises
involving the transfer of property or services. These transactions are also referred to as
“controlled” transactions, as distinct from “uncontrolled” transactions, which are between
enterprises that are not related and operate independently (“on an arm’s length basis”).
Here are some examples of controlled transactions:
Example 1: The parent company in Canada (CanCo) provides administrative services

and technical services to its subsidiary company in the US (USCo). The USCo pays
$100,000 for the services provided by its parent company CanCo.
Example 2: The parent company in US (USCo) has a subsidiary company in Canada

(CanCo). CanCo acts as a sales office for its parent company USCo. CanCo sells the
goods transferred from USCo and charges a commission for the sales services
provided in Canada.
Example 3: The parent company in Canada (CanCo) has a subsidiary company in the
US (USCo). Both companies (CanCo and USCo) are operating separately and except
one transaction, do not have any other intercompany transaction. USCo sometimes
collects funds from CanCo’s customers in the US on behalf of CanCo as a collecting
agent. CanCo pays 5% of the total amount as collection fees to USCo as its fee for the
services.
In all the above examples, the transaction between CanCO and USCo has to meet the
arm’s length standard of both the countries, i.e. Canada and the U.S. respectively.
Principle of arm’s length
Arm’s length principle defines the price at which uncontrolled enterprises deal with each
other, and market forces ordinarily determine the conditions of their commercial and
financial relations.
The arm’s length principle provides that the terms and conditions between the parties
should be identical, whether the enterprise is dealing within the MNE Group or outside
of the MNE Group.
Canadian transfer pricing regulations require that related party transactions occur
under the arm’s length conditions.
Canada’s transfer pricing rules apply if:
• there are two or more entities;
• either or both the entities are taxpayers for Canadian tax purposes (an entity can be
non-resident but still be a taxpayer for Canadian income tax purposes);
• it is a cross-border transaction involving Canadian entities;

• the Canadian taxpayer and at least one of the non-resident entities are not dealing at
arm’s length; and
• the parties enter into a transaction or series of transactions.
Application of the arm’s length principle is generally based on a comparison of prices or

profit margins of the related parties with those of the unrelated parties engaged in
similar transactions.
Determination of arm’s length price
The focus of transfer pricing provisions is the determination of the arm’s length price.
CRA relies on the transfer pricing methods set out in the Information Circular 87-2R (“IC
87-2R”) and the OECD Guidelines.
The methods prescribed generally involve finding comparable arm’s length transactions
and using those transactions to determine the correct transfer price. The OECD
Guidelines prescribe the following methods, which have also been endorsed by the
CRA:
• Comparable uncontrolled price method;
• Resale price method;
• Cost plus method;
• Profit split method; and
• Transactional net margin method.
The selection of one of the above methods for determination of the arm’s length price
could be challenging. The OECD guidelines provide that, based on the analysis, the
most appropriate method should be selected.
In IC87-2R, the CRA states that the methods form a hierarchy with the Comparable
uncontrolled price method being more reliable than the Resale price method and Cost-
plus method, and those three methods being more reliable than the bottom two.
Nonetheless, the CRA concedes in IC87-2R that “the most appropriate method in a
given set of circumstances will be the one that provides the highest degree of
comparability between transactions”.
Guidelines and legislation
• Section 247 of the Income Tax Act
• IC87-2R International Transfer Pricing – This document outlines the CRA’s
administrative policies and guidance on the application of section 247 of the Income Tax
Act. Note that transfer pricing memoranda (TPMs) are issued periodically to supplement
and update CRA’s transfer pricing policy, and provide further, and more current
guidance on specific aspects of the transfer pricing legislation.
• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations – Canadian transfer pricing legislation and administrative guidelines are
generally consistent with the Organization for Economic Co-operation and Development
(OECD).
• Tax treaties – Canada has income tax conventions or agreements—commonly known as
tax treaties—with many countries. These treaties are in place to avoid double taxation
and to prevent tax evasion.
• Permanent Establishments – Refer to TPM-08 The Dudley Decision.
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Transfer Pricing – Concept and procedures

Transfer Pricing – Concept and procedures

We provide below a brief summary of TP framework as generally described in the

Here are some examples of controlled transactions:

Example 1: The parent company in Canada (CanCo) provides administrative services

Example 2: The parent company in US (USCo) has a subsidiary company in Canada

Principle of arm’s length

Canada’s transfer pricing rules apply if:

• there are two or more entities;

non-resident but still be a taxpayer for Canadian income tax purposes);

• it is a cross-border transaction involving Canadian entities;

arm’s length; and

• the parties enter into a transaction or series of transactions.

Application of the arm’s length principle is generally based on a comparison of prices or

Determination of arm’s length price

• Comparable uncontrolled price method;

• Resale price method;

• Cost plus method;

• Profit split method; and

• Transactional net margin method.

Guidelines and legislation

• Section 247 of the Income Tax Act

• IC87-2R International Transfer Pricing – This document outlines the CRA’s

guidance on specific aspects of the transfer pricing legislation.

• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax

Administrations – Canadian transfer pricing legislation and administrative guidelines are

• Tax treaties – Canada has income tax conventions or agreements—commonly known as

and to prevent tax evasion.

• Permanent Establishments – Refer to TPM-08 The Dudley Decision.

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