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Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
The Canada Revenue Agency (CRA) may assess whether a taxpayer made reasonable efforts to determine and use arm’s-length prices in its transaction under a transfer-pricing audit or for non-compliant taxpayers. When the CRA requests the documentation, the materials must be provided within three months. The taxpayer will be deemed not to have made reasonable efforts to determine the arm’s-length price if the documentation in support of the transfer prices is not:
- complete and accurate in all material aspects;
- prepared contemporaneously; or
- provided within three months of being requested by the CRA.
The CRA has no authority to extend the deadline regardless of the circumstances. If the taxpayer misses the deadline and the transfer pricing adjustments exceed the threshold (ie, the lessor of 10% of the taxpayer’s gross revenue for the year (before the application of the transfer pricing rules) or C$5 million), a penalty will be levied regardless of the quality of the documentation.
In the event of an audit, the burden of proof to satisfy the CRA auditor that the transfer pricing rules have been complied with lies with the taxpayer.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
What penalties may be imposed for non-compliance with transfer pricing rules?
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
All transfer pricing adjustments are subject to a mandatory review by the transfer pricing review committee to assess whether transfer pricing penalties should be applied. In addition, the committee must approve any transfer pricing adjustment that is based on the recharacterisation of the transactions.
The ordinary statute of limitations on reassessment of past taxation years that have been assessed is extended from four years (three years for certain taxpayers) to seven years from the date of the initial assessment where the transaction is with related non-resident persons.
How can parties challenge adjustment decisions by the tax authorities?
With respect to the assessment of transfer pricing penalties, the transfer pricing review committee provides the penalty referral report to the taxpayer, which can then submit a written response. The transfer pricing review committee’s decision is provided to the tax services office responsible for the file, which will then advise the taxpayer of the decision.
Once a transfer pricing adjustment and penalty decision have been formalised into a notice of reassessment issued by the CRA to the taxpayer, the taxpayer can contest the reassessment by following the normal objection procedures applicable to any reassessment of taxes under the Income Tax Act. Generally, the taxpayer has 90 days from the date of the notice of reassessment to file a notice of objection, the effect of which is to have the matter reconsidered by the CRA’s appeals division. Failing this, the taxpayer may seek redress in the courts.
Taxpayers may also seek redress through the competent authority process where the transfer pricing reassessment involves a related entity in a jurisdiction that has a treaty with Canada. Where the taxpayer wishes to pursue the competent authority process, the appeals process may be held in abeyance pending the outcome of the competent authority process.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Taxpayers can seek relief under the mutual agreement procedures (MAPs) of an applicable tax treaty to which Canada is a signatory in order to address transfer pricing adjustments that may result in double taxation. Under the MAP, the CRA will work with the competent authority in the other jurisdiction to eliminate double taxation. A taxpayer may seek assistance in the form of the Accelerated Competent Authority Procedure (ACAP) for subsequent filed taxation years in respect of the same issue.
To initiate the ACAP process, a taxpayer must make a formal application to the CRA, within the prescribed deadlines under the relevant tax treaty setting out what action will result in taxation. The application must include:
- the facts of the case;
- an analysis of the issues;
- the contemporaneous documentation; and
- the taxpayer’s view on any possible basis on which the request can be resolved.
While a taxpayer is not engaged in the discussions between two authorities, it may have an opportunity to provide its position.
The CRA usually acknowledges the receipt of an application within 30 days. Applications are generally accepted unless they concern notional expenses or thin capitalisation or the general anti-avoidance rule has been invoked. If the request is denied, the taxpayer may seek a judicial review of the decision by making an application to the Federal Court of Canada.
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