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Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
The government’s approach to transfer pricing largely adopts and is consistent with the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
The last major overhaul of Canada’s transfer pricing framework occurred in 1998 and aimed to harmonise it further with the arm’s-length principle contained in Article 9 of the OECD Model Convention. Canada introduced Part XVI.1 of the Income Tax Act, Section 247 of which includes the adjustment and recharacterisation provisions. Before this, transfer pricing in Canada was governed by the avoidance rules concerning non-arm’s-length pricing (Sub-sections 69(2) and (3) of the act). These provisions set a reasonable amount rather than an arm’s-length standard.
Although the Supreme Court of Canada decision in GlaxoSmithKline Inc v R (2012 SCC 52) was decided under Canada’s old transfer pricing regime – which pre-dated the enactment of the existing transfer pricing regime under Section 247 of the act – the decision contains a number of important principles regarding transfer pricing in Canada that should apply to the interpretation of Section 247. One of the notable principles flowing therefrom is that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have no force of statute in Canada. Instead, prices must ultimately be tested under Sub-section 69(2) of the Income Tax Act, rather than any particular transfer pricing methodology set out in the guidelines or the commentary thereto.
There is relatively little jurisprudence concerning transfer pricing in Canada (other notable decisions include McKesson Canada Corp v R (2013 TCC 404), General Electric Capital Canada Inc v R (2010 FCA 344) and Marzen Artistic Aluminum Ltd v R (2014 TCC 194)). That said, there is a growing recent trend of the Canada Revenue Agency (CRA) focusing on and using transfer pricing as the principle method to reassess transactions and, as such, a growing body of jurisprudence in this area is expected. Two recent decisions of note relating to procedural matters are summarised below:
- In Cameco Corporation v R (2017 FC 763), an ongoing transfer pricing case concerning approximately C$2.2 billion of tax, the CRA sought to interview 25 employees in order to verify information included in Cemeco’s transfer pricing reports using its general audit powers under Paragraph 231.1(1)(d) of the Income Tax Act. When Cameco refused, the minister made a summary application for a compliance order under Section 231.7 of the act. The Federal Court of Canada dismissed the application, finding that the Tax Court of Canada had rules of procedure that provided for oral discovery and that it would be disproportionate to allow CRA to compel oral interviews from as many persons as they saw fit with little to no procedural limits.
- In Sifto Canada Corp v R (2017 TCC 37), the Tax Court of Canada overturned a transfer pricing adjustment as a result of a mutual agreement procedure (MAP) settlement that Sifto had previously entered into, which established the arm’s-length values of the intercompany transactions in question. The MAP settlement had been reached after a voluntary disclosure by Sifto that it had underreported its taxable income for its 2002 to 2006 tax years. Notices of reassessment were issued in 2008 and the US and Canadian competent authorities reached a settlement through an exchange of letters pursuant to the MAP. Nonetheless, the CRA audit division conducted a further audit of Sifto’s 2004 to 2006 taxation years and issued a reassessment with another upward transfer pricing adjustment. Sifto argued that the Income Tax Act prevented the CRA from reassessing on a basis that is inconsistent with a MAP settlement. The heart of the dispute was whether the MAP settlement was an agreement to provide relief from double taxation or an agreement that fixed the arm’s-length transfer price. While the Tax Court of Canada found that the Income Tax Act did not restrict the CRA from issuing a subsequent reassessment, it held that the accepted MAP settlement bound the CRA from reassessing the taxpayer, even if the agreed-on transfer price was not principled under the act.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
Section 247 of the Income Tax Act sets out Canada’s transfer pricing regime. This section does not provide for the levy of taxes; rather, it allows for the adjustment of the quantum or nature of any amounts which, but for Section 247 and the general anti-avoidance rule set out in Section 245 of the act, would be determined for purposes of computing tax owing thereunder.
The Canada Revenue Agency (CRA), the federal taxing authority, has published extensive guidance on transfer pricing matters, which can principally be found in Information Circular 87-2R and its transfer pricing memoranda series (Transfer Pricing Memoranda 02-14 and Information Circulars 71-17R5, 94-4R and 94-4R-SR).
The Income Tax Act also contains specific rules relating to inter-company debt financing arrangements that apply in conjunction with the transfer pricing rules (Sub-section 15(2) – loans to non-resident shareholders; Section 17 – deemed interest income on loans to non-residents, Sub-section 80.4(2) – deemed benefits on low interest or interest free loans; Sub-section 18(4) – thin capitalisation rules; and Sub-sections 18(6), 18(6.1) and 212(3.1) to (3.3) – back-to-back loan rules).
Are there any industry-specific transfer pricing regulations?
Canada imposes no industry-specific transfer pricing guidelines or regulations and the transfer pricing method to be employed by a taxpayer is not dictated by legislation. Instead, taxpayers must transact in accordance with the arm's-length principle. Nonetheless, the CRA, in its administrative role, suggests possible transfer pricing methods and recognises a natural hierarchy between transfer pricing methodologies.
What transactions are subject to transfer pricing rules?
Generally, any transaction between a person subject to tax in Canada and a non-resident of Canada with whom such person does not deal at arm's length must comply with the formal and substantive requirement of the Canadian transfer pricing regime.
Where a taxpayer and non-resident person with whom the taxpayer does not deal at arm's length participate in a transaction or a series of transactions and the terms or conditions of the transaction or series of transactions differ from the arm's-length terms and conditions, the CRA may adjust the terms and conditions of the transaction or series of transactions to reflect those that would have been made if the parties had been dealing at arm's length (Paragraphs 247(2)(a) and (c) of the act).
More controversially, where a non-arm's-length transaction or series of transactions can be reasonably considered to have been primarily entered into in order to obtain a tax benefit, the CRA can adjust or recharacterise the transaction or series of transactions to reflect those that would have been entered into by arm's-length parties (Paragraphs 247(2)(b) and (d) of the act).
Although the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide that the recharacterisation of transactions should be an exceptional step, Section 247 contains no such restrictions. Information Circular 87-2R states that the CRA will administratively restrict its use of Sub-section 247(2) and recharacterise only in limited circumstances. The CRA procedure for approving recharacterisations is set out in TPM-13 (October 30 2012). A Transfer Pricing Review Committee has been established to review and approve all possible recharacterisations and ensure the fair and consistent application of Section 247(2).
In some circumstances, the Income Tax Act’s transfer pricing regime and rules addressing thin capitalisation or inter-affiliate interest rates may be applicable to certain financial transactions between related persons.
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
In Canada, the relevant concept for the applicability of the transfer pricing rules is a transaction that occurs between parties that do not deal with each other at ‘arm’s length’, as this term is defined and understood for purposes of the Income Tax Act. Under the act, related persons are deemed not to deal with each other at arm’s length (Paragraph 251(1)(c)). ‘Related persons’ are defined in Sub-sections 251(2) to (6) of the act as:
- individuals connected by blood or marriage;
- a corporation and the individual or group of individuals that control it; and
- any two corporations where one corporation controls the other, both corporations are under common control or each corporation is related to the same third corporation.
Whether unrelated persons are dealing with each other on a non-arm’s-length basis at a particular time is a question of fact. The common factors that courts have examined in making such determinations are:
- the existence of a common mind that drives the bargaining of both parties;
- whether parties to a transaction are acting in concert without separate interests; and
- whether one party has de facto control over the other.
Are any safe harbours available?
Except for certain downstream loan guarantees provided by a Canadian parent to its controlled foreign affiliate and certain loans described in Section 17, Sub-sections 247(7) and (7.1) of the Income Tax Act, all transactions between a taxpayer and non-resident person with whom the taxpayer does not deal at arm’s length are subject to the Canadian transfer pricing rules. There is no legislated guidance or safe harbours to measure arm’s length.
As Canada generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, the safe harbours set out in those guidelines are generally instructive in assessing the manner in which the CRA will apply the Canadian transfer pricing rules.
Which government bodies regulate transfer pricing and what is the extent of their powers?
In Canada, the CRA administers the Income Tax Act, which includes all transfer pricing matters (eg, audits and the determination of guidelines). Revenu Quebec may also conduct transfer pricing compliance audits of taxpayers subject to tax in Quebec, which is unique to the province. The audit and investigation powers of the CRA and Revenu Quebec are extensive.
Which international transfer pricing agreements has your jurisdiction signed?
Canada is a signatory to the OECD's transfer pricing agreements and more than 90 income tax conventions and treaties, which generally include a competent authority procedure (also known as the mutual agreement procedures (MAP)). Canada is also a signatory to the OECD’s project on Base Erosion and Profit Shifting (BEPS).
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
The CRA endorses the OECD transfer pricing guidelines, which rely on the arm's-length principle. Further, Canada’s transfer pricing legislation and administrative guidelines are generally consistent with the OECD guidelines.
While the OECD guidelines are not legally binding on the CRA, taxpayers can generally look to the OECD’s comments and guidelines to determine the arm’s-length price of transactions effected between parties, as the Canadian courts also accept the OECD guidelines as a relevant interpretive aid (see the CRA positions set out in Information Circular 87-2R and the Supreme Court of Canada decision in GlaxoSmithKline Inc v R, 2012 DTC 5147 (SCC)).
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
The following transfer pricing methods are used in Canada:
- the traditional transaction-based method, which includes:
- other comparable uncontrolled price method, which requires a price comparison for similar goods or services between independent parties;
- other cost plus method, which requires a comparison with profit mark-ups applied by independent parties on the cost of production of similar goods or services in order to obtain the arm’s-length sale price that should be charged by the taxpayer for the goods or services; and
- other resale price method, which requires a comparison with profit mark-ups applied by independent parties on the sale of similar goods in order to obtain the arm’s-length purchasing price that should be paid by the taxpayer to a related party in respect of the goods subsequently being resold to third parties; and
- profit-based methods:
- othe transactional profit split method, which requires a determination of the division of profits that independent parties would have expected to realise, based on functions performed, assets used and risks assumed, from engaging in transactions similar to those entered into between related parties; and
- othe transactional net margin method, which requires the comparison of the net profit margin realised by a taxpayer from one or more transactions with related parties and compares it with the net profit margin realised by independent parties in similar circumstances.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
The CRA officially endorsed the 2010 revisions to the Organisation for Economic Cooperation and Development, whereby the previous hierarchy of transfer pricing methodologies was replaced with an approach that seeks to apply the most appropriate method. However, it qualified the revisions’ endorsement by noting that they do not firmly de-emphasise the natural hierarchy, but refocus the topic on what is truly relevant – namely, the degree of comparability available under each of the methods and the availability and reliability of the data.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Other than Form T106 (discussed below), Canada does not require taxpayers to prepare, maintain or file transfer pricing documentation. However, in order to avoid the 10% transfer pricing penalty (discussed below) which can apply where taxpayers have not made reasonable efforts to determine the arm’s-length price that should be used to transact, taxpayers must contemporaneously prepare and maintain documentation in support of their transfer prices. Under Sub-section 247(4) of the Income Tax Act, taxpayers will be deemed not to have made reasonable efforts for the purposes of the 10% transfer pricing penalty where the documentation is not:
- complete and accurate in all material respects;
- prepared contemporaneously; or
- provided within three months of being requested.
For the year in which a transaction is entered into, a taxpayer must make or obtain records or documents that provide a complete and accurate description of the transaction within six months from the end of the taxation year. Further, the taxpayer must provide the Canada Revenue Agency (CRA) with such documentation within three months of a written request.
In addition, a taxpayer that is resident in Canada or not resident in Canada but carries out business in Canada must file a T106 Form where the aggregate amount of reportable transactions with non-resident persons exceeds C$1 million. There are three specific penalties that may apply where a taxpayer fails to comply with the T106 reporting and filing requirements which can range from C$2,500 per failure to comply with requirements to C$24,000 for filing incorrect or incomplete forms (Section 233.1 of the Income Tax Act).
The Income Tax Act contains other foreign reporting obligations relating to the holding of foreign properties and certain transactions with foreign trusts and non-resident corporations. Significant penalties may apply for non-compliance with these rules (Sections 233.2 to 233.4 and Section 233.6 of the act).
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
For transfer pricing purposes, taxpayers must draft or obtain documents or records that provide complete and accurate descriptions of:
- the property or services to which the transaction relates;
- the terms and conditions of the transaction and their relationship, if any, to the terms and conditions of other transactions entered into between the participants;
- the identity of the participants in the transaction and their relationship to each other at the time that the transaction was entered into;
- the functions performed, the property used or contributed to and the risks assumed (this is also known as the ‘functional analysis’) in respect of the transaction by the participants in the transaction;
- the data and methods considered and the analysis performed to determine the transfer prices or the allocation of profits or losses or contributions to costs, as the case may be, in respect of the transaction; and
- the assumptions, strategies and policies, if any, that influenced the determination of the transfer prices or the allocation of profits or losses or contributions to costs, as the case may be, in respect of the transaction (Sub-section 247(4) of the act).
If the transaction continues into subsequent taxation years or fiscal periods, the taxpayer must describe only the material changes in a complete and accurate manner. If there are no material changes in a year, no new documentation is required. Nonetheless, taxpayers will generally prepare reports annually in order to minimise or reduce the risk of a penalty and a transfer audit.
Canada has enacted legislation to implement the country-by-country reporting obligations set out in Action 13 of the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) final report (Section 233.8 of the Income Tax Act).
The rules apply to fiscal years of certain multinational enterprises (MNEs) that begin on or after January 1 2016. In general, Canadian-resident parents of MNEs and Canadian-resident subsidiaries of MNEs (where certain secondary reporting requirements are met) must comply with annual country-by-country reporting requirements by filing a Form RC4649.
In accordance with the OECD BEPS final report, country-by-country reporting is required only for MNEs with an aggregate annual consolidated group revenue of €750 million or more.
What are the penalties for non-compliance with documentation and reporting requirements?
In addition to any interest and penalties resulting from the transfer pricing adjustment itself, taxpayers may be subject to an additional 10% penalty for failure to have made “reasonable efforts” to determine arm’s-length transfer prices (Sub-section 247(3) of the Income Tax Act). Such penalty can be avoided or reduced where the taxpayer “made reasonable efforts to determine arm's length prices” and used such prices (Sub-section 247(4) of the act). As noted above, a taxpayer will be deemed not to have made reasonable efforts where it does not meet the contemporaneous documentation criteria set out in Sub-section 247(4) of the act.
This 10% penalty is imposed on a taxpayer where its transfer pricing capital and income adjustments exceed a de minimis amount, which is the lessor of the ‘threshold’ (ie, 10% of the taxpayer’s gross revenue for the year before the application of the transfer pricing rules or C$5 million). The penalty may apply in situations where there are no increases in taxes payable pursuant to the transfer pricing adjustment, as the penalty is based on the quantum of the transfer pricing adjustment and not the increase in tax payable.
An anti-avoidance provision prevents taxpayers from avoiding the penalty by increasing gross revenues to meet the threshold.
In addition, as noted above, resident taxpayers and non-resident taxpayers carrying on business in Canada may be subject to a separate penalty for failure to file a Form T106.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
The main goals of preparing transfer pricing documentation are to:
- mitigate the risk of penalties arising from a failure to make “reasonable efforts” to determine the arm’s length transfer price; and
- reduce transfer pricing audit risk.
Taxpayers should follow the following best practices in managing their transfer pricing compliance and audit risks:
- Profits attributable to the less complex party to the transaction should not be below industry norms, unless this can be underpinned by specific facts and circumstances.
- Transactions with related entities located offshore or in low-tax jurisdictions should be thoroughly documented, as they are subject to additional scrutiny by the Canadian tax authorities.
- Royalty payments should not be used to strip profits from related parties (aggressive royalty payments are a common transfer pricing audit trigger).
- The determination of the arm’s-length value of management fees should be properly documented and the economic reality underpinning the price of such services should be analysed extensively.
- Intangible asset transfers should not be used as a way to reduce the global taxes paid by a multinational enterprise (ie, by transferring such assets to entities subject to tax in low-tax jurisdiction).
- Taxpayers should determine the correct transfer pricing method on a case-by-case basis and adapt such methods to the specific facts and circumstances of each relevant transaction.
- Taxpayers should document their dealings with related non-residents and prices should always be determined pursuant to a transfer pricing method recognised by the CRA (such prices should also be used consistently by all taxpayer members of the same multinational enterprise).
- Any restructuring transaction (defined by the OECD as the cross-border redeployment by a multinational enterprise of functions, assets and risks) should be subject to a substantive transfer pricing analysis and documentation, as the CRA focuses on such transactions for transfer pricing audit purposes.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
An ‘advance pricing arrangement’ (ie, a formal arrangement between a taxpayer and the minister of national revenue in respect of cross-border transactions between non-arm’s-length persons) is possible in Canada. Under an advance pricing arrangement, taxpayers may confirm with the minister the appropriate transfer pricing method and its application to the specific transaction.
The Canada Revenue Agency (CRA) may enter into unilateral, bilateral and multilateral advance pricing arrangements, although the latter are more common. The benefit of proceeding with a bilateral and multilateral advance pricing arrangement is that it minimises the changes of double taxation if a foreign administrator disagrees with the Canadian approach.
In its 2016 advance pricing arrangement programme report, the CRA noted that the transactional net margin method was the predominate methodology used in advance pricing arrangements.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
To initiate the process for an advance pricing arrangement, an information package must be submitted to the CRA. These typically consist of information about the multinational enterprise including its:
- transfer pricing history;
- proposed transfer pricing methods;
- financial statements; and
- reason for the advance pricing arrangement request.
How long does it typically take to conclude an advance pricing agreement?
The typical timeframe to conclude an advance pricing arrangement is three to four years. Based on the 24 bilateral advance pricing arrangements closed in the 2016 calendar year, the CRA reported that an average of 47.3 months was required to complete an advance pricing arrangement from acceptance to completion.
The process involves three stages. During stage one, the taxpayer meets with the CRA within 180 days from the end of the first tax year covered by the advance pricing arrangement. After this meeting, the taxpayer can make a formal request to enter into the advance pricing arrangement programme. Once the taxpayer is accepted into the programme, the CRA reviews its submitted information package and may request additional information. The CRA then prepares a paper setting out its views on the covered transactions and the appropriate transfer pricing methodology. During stage two, the CRA negotiates with the foreign government, if there is a bilateral or multilateral arrangement. The taxpayer is generally not engaged in this process. The final stage involves:
- the execution of the advance pricing arrangement between the CRA and the taxpayer; and
- the documentation and execution of a bilateral or multilateral understanding between the CRA and the foreign tax administration body.
What is the typical duration of an advance pricing agreement?
The taxpayer should set out its preferred duration for the advanced pricing agreement in its application. Advance pricing arrangements are generally made for five years.
What fees apply to requests for advance pricing agreements?
The CRA levies a non-refundable user charge for each accepted advance pricing arrangement request or renewal to cover anticipated out-of-pocket costs, such as travel and accommodation expenses. User charges for advance pricing arrangements are outlined in an advance pricing arrangement acceptance letter between the taxpayer and the CRA and are payable on receipt of the acceptance letter (Information Circular 94-4R).
For advance pricing arrangements governed by the CRA’s Small Business Advance Pricing Agreement Programme, the administrative fee is fixed at C$5,000. This programme is generally available:
- to taxpayers with gross revenues of less than C$50 million in the most recent tax year; or
- where the transaction covered is anticipated to be less than C$10 million.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
The benefits of an advance pricing arrangement in Canada are not unique. Such arrangements provide certainty to the taxpayer with respect to the tax outcome of its cross-border transactions and minimise audit activity and threats relating to the transactions covered by the advance pricing arrangement, which may result in cost savings over the term of the agreement. The principal disadvantage is that undertaking such an arrangement is a lengthy process that requires upfront investment of the taxpayer’s resources.
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.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
The following is a summary of recent actions, initiatives and pronouncements by the Canadian government concerning efforts to combat tax avoidance:
- In the 2017 federal budget, without setting out any specific new measures, the government highlighted existing measures that have been implemented or are in the process of being implemented, but expressed that it “will continue to work with its international partners to ensure a coherent and consistent response to fight tax avoidance”.
- The 2017 federal budget also notes that the Canada Revenue Agency (CRA) is applying revised international guidance on transfer pricing by multinational enterprises in response to OECD Base Erosion and Profit Shifting (BEPS) recommendations.
- In the 2016 federal budget, the government undertook extensive expansions to the back-to-back loan rules and the Income Tax Act’s cross-border surplus stripping provisions.
- Administratively, the CRA has increased its international audit activities, especially concerning transfer pricing audits.
In the 2017 federal budget, the government announced C$524 million of new funding to boost the CRA’s audit activity in order to probe tax evasion and tax avoidance.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
Although the 2017 federal budget contains no new legislative proposals to implement the OECD BEPS project, it did highlight Canada’s ongoing work to implement the project’s minimum standards – for example:
- in April 2016 the CRA published Information Circular 70-6R7 to outline the types of tax ruling that Canada intends to share spontaneously with other jurisdictions (Action 5);
- Canada was involved in developing the OECD BEPS Multilateral Instrument that would modify existing income tax treaties to implement various BEPS project measures, including BEPS Action 6 on treaty abuse (Action 6);
- Canada introduced country-by-country reporting requirements effective for taxation years commencing on or after January 1 2016 (Action 13); and
- Canada is committed to improving the efficiency and effectiveness of the mutual agreement procedures in its income tax treaties (Action 14).
On June 7 2017 Canada signed the BEPS Multilateral Instrument. The following points are notable:
- The government has indicated that certain measures could come into force as early as January 2019.
- The BEPS Multilateral Instrument could impact as many as 75 of Canada’s 93 bilateral tax treaties.
- Canada has opted for the principal purpose test as the substantive technical rule. This test is a general anti-abuse rule based on the principal purpose of transactions or arrangements. It will have the effect of denying a benefit under a tax treaty where one of the principal purposes of a transaction is to obtain a benefit under the treaty.
- Although the BEPS Multilateral Instrument contains certain other optional provisions, Canada has adopted only the minimum standard provisions and the binding mandatory arbitration provision and has registered reservations on all other optional provisions.
Is there a legal distinction between aggressive tax planning and tax avoidance?
What penalties are imposed for non-compliance with anti-avoidance provisions?