The Canadian Income Tax Act’s transfer pricing regime is a dualistic one. Paragraphs 247(2)(a) and (c) of the Act house a fairly standard, gardenvariety transfer pricing rule. That rule’s basic function is to reprice transactions as structured by taxpayers. Conversely, paragraphs 247(2)(b) and (d) of the Act contain an ‘‘exceptional’’ transfer pricing rule. In certain exceptional circumstances, described in detail below, the rule first restructures or recharacterizes transactions and then prices the recharacterized transactions.

Despite the manifest duality of this regime and the exceptional nature of the recharacterization rule, it appears that the CRA routinely relies on the authority of the rule in paragraphs 247(2)(a) and (c) to recharacterize transactions, thereby circumventing the strict conditions under which paragraphs 247(2)(b) and (d) can apply and, somewhat perversely, transforming the exception into the rule.

Like the rule, this article is divided into two parts. The first part considers the merits of the CRA’s position by undertaking a detailed examination of the tax policy underlying the Act’s transfer pricing rules. The second analyzes the CRA’s position in relation to an actual case, modified as necessary to protect taxpayer confidentiality.