Transfer pricing

A transfer price is the amount charged between related parties involved in international transactions—for example, where a Canadian resident buys goods and services from or sells products to a related non-resident corporation. The government’s concern centres on ensuring that the price charged is equal to the amount that would be agreed upon by parties dealing at arm’s-length. If it’s not, taxable profits may be shifted from one jurisdiction to another.

The Canadian rules on transfer pricing are similar to those that have been put in place in other industrialized countries, such as the United States, the United Kingdom and Australia. The rules require Canadian taxpayers to adopt the arm’s- length principle in setting transfer prices for transactions with related non-resident persons and to document the basis for their transfer prices.

The arm’s-length principle has always been required in transactions with related persons, but there are now specific documentation requirements. These standards stipulate that the documentation for a particular tax year must be completed by the due date for filing that year’s tax return. Failure to complete the required documentation can result in a penalty of 10% of the transfer pricing adjustment, even where no additional tax arises as a result of that adjustment.

This area can be quite complex, as transfer prices must be developed that are acceptable to the tax authorities of both countries: the home country of the non-resident entity and Canada.

Tax tip: If you have transactions with related non-resident persons, have your tax adviser review your transfer pricing policies, as well as your related documentation, to determine whether they comply with the transfer pricing legislation.