Transfer pricing — arm's-length pricing for related-party transactions
Transfer pricing
Section 247 requires that transactions between related parties (including a Canadian company and its foreign parent or subsidiary) be priced at arm's length — the price that two unrelated parties would agree to.
Plain-language explanation
Section 247 is Canada's primary transfer pricing rule. When a Canadian person deals with a non-arm's-length non-resident (such as a Canadian subsidiary and its foreign parent), they must use arm's-length prices — the same prices they would charge an unrelated third party.
Why it matters: Without transfer pricing rules, multinationals could shift profits to low-tax jurisdictions. For example, a Canadian subsidiary could pay excessive "management fees" to its Bermuda parent, reducing Canadian taxable income.
The arm's-length principle: CRA requires the same price, terms, and conditions that would have been agreed between independent parties under comparable circumstances. Transfer pricing methods recognized by the OECD: - Comparable Uncontrolled Price (CUP) - Cost Plus - Resale Price - Transactional Net Margin Method (TNMM) - Profit Split
Documentation requirements: Canadian taxpayers with more than $1 million in transactions with non-arm's-length non-residents must maintain contemporaneous documentation justifying their transfer prices. Failure to maintain documentation makes the adjustment penalty apply automatically.
Adjustment penalty: CRA can adjust non-arm's-length prices to arm's-length, adding income to the Canadian entity. A 10% penalty applies on transfer pricing adjustments unless contemporaneous documentation exists and the taxpayer made reasonable efforts to comply.
Example
Maple Tech Inc. (Canada) pays $5M annually to its Irish parent for a licence to use technology. CRA challenges the royalty as excessive — similar licences in the market cost $1M. CRA adjusts Maple Tech's income up by $4M and assesses a 10% penalty ($400,000) for lack of documentation.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
OECD BEPS Action 13 implemented: Country-by-Country Reporting (CbCR) introduced for large multinationals (annual revenues ≥ €750M). Canadian MNE groups must file Form RC4649 with CRA annually.
Before
No CbCR requirement; transfer pricing documentation was bilateral only
After
CbCR required for large MNE groups; Form RC4649 filed with CRA; automatic exchange between tax authorities
Mandatory Disclosure Rules (MDR) enacted: Canadian taxpayers must now report "notifiable transactions" (listed transactions) and "uncertain tax treatments" to CRA, including transfer pricing arrangements that meet the disclosure thresholds.
Before
Voluntary disclosure of aggressive tax planning; no mandatory reporting of transfer pricing structures
After
Mandatory reporting of notifiable transactions and uncertain tax treatments exceeding materiality thresholds; penalties for failure to disclose
Common questions
What is arm's-length pricing? +
The price two unrelated, independent parties would agree to in the same transaction under comparable circumstances. Transfer pricing rules require related-party transactions to use arm's-length prices — the same rate a third party would pay or receive.
Do transfer pricing rules apply to small Canadian companies? +
Formally yes, but CRA's audit focus is on transactions exceeding $1 million. Below that, documentation requirements are less strict. However, any Canadian entity with related non-resident parties should be aware of the rules.
What is the transfer pricing penalty? +
10% of the amount by which CRA adjusts your income upward due to transfer pricing. The penalty does not apply if you had contemporaneous documentation and made reasonable efforts to determine arm's-length prices.
Key terms
Related sections
CPA recommendation
Transfer pricing is a complex specialty. Any Canadian company with material transactions with non-resident related parties should work with a CPA or tax lawyer who specializes in international tax.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 247. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.