Global transfer pricing guide

Canada Transfer Pricing Policy

Canada transfer pricing policy- Overview of Canadian Transfer Pricing Rules, Documentation Requirements, and CRA Compliance Measures

Learn More

Please click on each section to expand further:

Introduction

Canada’s transfer pricing regime is governed by Section 247 of the Income Tax Act (ITA), introduced in 1998. It applies to all Canadian taxpayers and partnerships that engage in cross-border transactions with related parties.
The aim is to ensure that intercompany pricing reflects arm’s length standards, i.e., pricing that would occur between independent enterprises in similar circumstances.
Canada relies heavily on guidance from the OECD Transfer Pricing Guidelines, but enforcement is managed domestically by the Canada Revenue Agency (CRA).

Fundamentals of Transfer Pricing- Canada Transfer Pricing Policy
  • Transfer pricing affects how multinational profits are distributed across jurisdictions.
  • The CRA requires that all controlled transactions between Canadian entities and their foreign affiliates be priced as if they were conducted between unrelated parties.
  • CRA audits focus on economic substance, not just legal form, and will recharacterize transactions where the form does not reflect actual conduct.
  • Canada has no de minimis thresholds: all international related-party transactions are subject to the rules, regardless of size.
Canada’s Transfer Pricing Policy
  • Canada’s policy prioritizes consistency, transparency, and risk-based assessment.
  • CRA promotes early engagement and voluntary disclosures to minimize transfer pricing disputes.
  • The emphasis is on selecting the most appropriate method, based on a functional analysis and available comparables.
  • The CRA applies a “reasonableness” standard, which means that a documented, good-faith attempt to comply with OECD principles will generally be treated favorably.
  • Adjustments are subject to penalties of 10% of the adjustment amount if proper documentation is not maintained.
International Transfer Pricing Alignment
  • Canada is an active participant in the OECD/G20 Inclusive Framework and has adopted many BEPS measures.
  • Canadian legislation reflects BEPS Action 13, and international cooperation mechanisms such as Mutual Agreement Procedures (MAP) are widely used.
  • Canada is also aligning with the UN’s transfer pricing manual, especially in the context of developing countries and source-based taxation.
BEPS Transfer Pricing Rules in Canada

  • Canada requires adherence to BEPS Action 13, which includes:
     • A Master File (global business overview)
     • A Local File (transaction-level details)
     • A Country-by-Country Report (if revenue thresholds apply)

  • These documents must demonstrate a clear link between value creation and profit allocation.

  • The CRA encourages contemporaneous documentation to reduce the likelihood of reassessment.

Country-by-Country Reporting (CbCR) in Canada
  • Applies to multinational groups with consolidated revenue ≥ CAD 1 billion in the preceding fiscal year.
  • Reporting must include revenue, profits, taxes paid, number of employees, and tangible assets in each jurisdiction.
  • CbCR must be submitted within 12 months of the fiscal year-end of the reporting entity.
  • CbCR data is shared with other jurisdictions under automatic exchange of information agreements.
Canada’s Transfer Pricing Compliance
  • Documentation must be submitted within 3 months of a CRA request.
  • Non-compliance may result in:
     • Penalties of up to CAD 12,000
     • Shift of burden of proof to the taxpayer
     • Discretionary adjustments by the CRA
  • The CRA uses risk-based criteria to select cases for audit, including:
     • Profitability anomalies
     • High-value intangibles
     • Recurring losses
     • Transactions with low-tax jurisdictions
Pillar 2 Impact in Canada
  • Canada Transfer Pricing Policy- Canada is adopting the OECD’s Pillar 2 Global Minimum Tax (15%) through draft legislation.
  • Affects multinational groups with global revenue above EUR 750 million.
  • Entities must consider Pillar 2 when planning transfer pricing for IP and holding structures.
  • The CRA may revise enforcement priorities once implementation begins in full.
CUP Method in Canada
  • Canada Transfer Pricing Policy- The Comparable Uncontrolled Price (CUP) method is preferred when identical or similar market data is available.
  • Commonly used for commodity transactions, licensing, and intercompany loans.
  • The CRA emphasizes strict comparability in terms of contractual terms, volume, geography, and timing.
Resale Minus Method
  • Suitable for distributors that purchase goods from affiliates and resell them without significant value addition.
  • CRA expects an appropriate gross margin deduction, supported by industry benchmarks.
  • Adjustments may be made for marketing, warehousing, or delivery functions.
Cost Plus Method

  • Common for manufacturing and service arrangements, especially for routine support services.

  • Requires identification of all direct and indirect costs, followed by application of a reasonable markup.

  • CRA may challenge markups that deviate significantly from market data.

TNMM in Canada
  • Canada Transfer Pricing Policy- The Transactional Net Margin Method is widely used when comparable gross margin data is unavailable.
  • Focuses on operating profit indicators (e.g., Return on Sales, Return on Assets) compared to third-party benchmarks.
  • CRA prefers the tested party to be the least complex entity in the transaction.
Profit Split Method
  • Appropriate for highly integrated operations or joint development of IP.
  • Canada Transfer Pricing Policy- CRA requires clear allocation keys based on contribution analysis or residual profits.
  • Often used in digital businesses, financial services, and cross-border R&D setups.
Comparability Analysis in Canada
  • Canada Transfer Pricing Policy- The CRA requires taxpayers to demonstrate that selected comparables reflect similar risks, functions, and market conditions.
  • Internal comparables (within the company) are often favored, but external databases (e.g., Compustat, Capital IQ) are acceptable with justification.
FAR Analysis in Canada

  • FAR stands for Functions performed, Assets used, and Risks assumed.

  • This is the foundation of any TP analysis and determines which entity should earn residual profits.

  • CRA places high importance on accurately documenting FAR in both Local File and audit responses.

Transfer Pricing Challenges in Canada

  • Canada Transfer Pricing Policy- Valuation of intangibles and intercompany services

  • Pricing of cost-sharing agreements

  • Transfer pricing of cloud computing and digital services

  • Lack of reliable local comparables in certain industries

Current Transfer Pricing Trends

  • Canada Transfer Pricing Policy- More CRA audits targeting digital economy and royalty flows

  • Growing use of bilateral and multilateral APAs

  • Stronger emphasis on substance over legal form

  • Integration of ESG factors in risk assessments (emerging)

Latest Transfer Pricing News – Canada

  • CRA expanding audit teams for cross-border transactions

  • OECD publishes updated guidance on intangibles (adopted by CRA)

  • Canada releases draft Pillar 2 legislation (2025 Budget)

Impact of Current Events on Canada’s Transfer Pricing

  • Canada Transfer Pricing Policy- AI adoption is reshaping supply chains and intangibles

  • Rising interest rates impact intercompany financing structures

  • Global conflicts and inflation drive adjustments in pricing benchmarks

Transfer Pricing for Startups in Canada
  • Canada Transfer Pricing Policy- Early-stage companies must consider IP valuation during funding rounds or acquisitions.
  • Startups often lack external comparables, requiring narrative-based documentation.
  • CRA may scrutinize stock-based compensation and cost-sharing arrangements.
Transfer Pricing for SMEs in Canada

  • SMEs benefit from simplified documentation but must still justify pricing for intercompany transactions.

  • CRA offers administrative relief for low-risk SMEs but requires minimum compliance.

  • Common risks: intra-group services, management fees, and royalty payments.

Advance Pricing Agreements (APAs) in Canada

  • Canada Transfer Pricing Policy- CRA offers Unilateral, Bilateral, and Multilateral APAs.

  • Suitable for high-value, recurring, or complex transactions.

  • APA process usually takes 18–36 months and includes pre-filing consultation.

Dispute Avoidance in Canada

  • Canada Transfer Pricing Policy- Early engagement with CRA via pre-audit discussions is recommended.

  • Proactive documentation, internal reviews, and voluntary corrections help avoid disputes.

  • Canada actively participates in OECD MAP programs for cross-border resolution.

OECD Transfer Pricing-Country-Profile Canada





This is general information only and not professional advice. Consult a professional before acting.

Learn More