Canada: New Measures In Canada's 2019 Budget Signal Broader Enforcement Of Transfer Pricing Rules

New Measures in Canada's 2019 Budget Signal Broader Enforcement of Transfer Pricing Rules

Canada's latest federal budget signaled an intention to enforce the transfer pricing rules in a greater number of cases, including potentially to arrangements involving arm's length intermediaries, and in a way that increases the likelihood of transfer pricing penalties being assessed. The 2019 budget measures are the latest in a series of recent developments that should ensure Canada's reputation for aggressive enforcement of transfer pricing rules remains well earned.

On March 19, 2019, the federal government tabled a budget that included two new measures specific to transfer pricing, reaffirmed Canada's commitment to the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative, and included a fourth consecutive wave of additional funding for tax enforcement. Taken together, the budget measures should allow the Canada Revenue Agency (CRA) to conduct a greater number of international tax audits, and in certain cases, to apply the transfer pricing adjustment and penalty rules to a greater number of historic taxation years.

Expanded Definition of "Transaction," for Purposes of Extended Reassessment Periods

The budget proposed changes to the Income Tax Act (ITA) to ensure that the term "transaction" has the same meaning in the rules governing which tax years remain open for reassessment, as it does in the transfer pricing rules. Canada's transfer pricing rules are contained in section 247 of the ITA; they provide an ability to adjust transfer prices used for transactions between non-resident parties who do not deal at arm's length (such as related parties), and for the assessment of corresponding transfer pricing penalties (where certain size thresholds are exceeded). For purposes of section 247 only, the word "transaction" has an expanded definition that "includes an arrangement or event".
A separate section of the ITA governs how many tax years remain open for reassessment, for example, as resulting from a CRA tax audit. For corporations, the normal reassessment period is typically three or four years from the date of the original notice of assessment. An extended reassessment period is allowed, going back an additional three years, for certain types of adjustments – including those "made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length." The 2019 budget proposed changes to this extended reassessment period section, that would define "transaction" the same broad way it has been defined in the transfer pricing rules.
The "transaction" definition change would affect taxation years for which the normal reassessment period ends on or after March 19, 2019.
Observations and Takeaways

For taxpayers involved in relatively complex arrangements, this measure could lead to a greater number of tax years becoming open for reassessment. Consider, for example, an arrangement involving a Canadian taxpayer and its related non-resident, but with an unrelated third party acting as intermediary between the two. Assume that the arm's length intermediary engages in "back-to-back" transactions with each of the related parties, but there are no direct transactions between the related parties. An expanded definition of the word "transaction" for purposes of the extended reassessment period, explicitly including an "arrangement" involving two related parties, may be more likely to allow an additional three years for the CRA to make transfer pricing reassessments related to such an arrangement – in a similar manner to a simpler example in which the same related parties had transacted directly with each other. 
There have been other recent changes to Canadian tax provisions that were originally limited to transactions directly between a Canadian taxpayer and a non-resident who are not dealing at arm's length, but were later expanded to cover scenarios involving third parties. For example, the 2014 budget introduced ITA changes that essentially ensured taxpayers could no longer avoid the thin capitalization rules for interest deductibility by imposing an arm's length intermediary between the Canadian payor of interest and a related non-resident lender. In 2013, a new provision was added to the transfer pricing rules, creating an exclusion from arm's length pricing requirements for certain guarantee fees that may be receivable by a Canadian resident from a controlled foreign affiliate, pertaining to loans provided to that controlled foreign affiliate by an unrelated third party; the previous form of this exclusion only applied in cases where the Canadian taxpayer made a loan directly to its controlled foreign affiliate. These two examples essentially took a Canadian tax provision that had previously applied only to direct transactions between two parties who do not act at arm's length and extended that same treatment to more complex arrangements that include unrelated parties as well.
Taxpayers engaging in "arrangements" that involve related non-residents, but without entering into direct transactions with the related non-resident, may want to consider the level of risk related to potential transfer pricing adjustments – especially for tax years beyond the normal reassessment period.  

Ordering Rule 

The 2019 budget also proposed a new measure intended to clarify that the transfer pricing rules within section 247 should be applied before the application of any other rules within the ITA.

Canada's transfer pricing rules reflect the arm's length principle and can be used to change certain amounts used in calculating the income of a Canadian taxpayer, such as the amounts paid or received in transactions with a related non-resident. With a few exceptions, the transfer prices charged in such transactions must be the same used if the parties had been dealing at arm's length. If adjustments are made under the transfer pricing rules, increasing the Canadian taxpayer's income beyond certain thresholds, then the assessment of transfer pricing penalties must also be considered. Exemption from such penalties is possible if the taxpayer can demonstrate it made "reasonable efforts" to determine and use arm's length prices, including by preparing contemporaneous documentation.
Other provisions of the ITA could apply to similar transactions, with similar effect. For example, other provisions of the ITA work to limit certain deductions to a "reasonable amount," or require the Canadian taxpayer to pay or receive "fair market value" when transacting with related parties. However, these other ITA provisions do not explicitly incorporate the arm's length principle, nor do they create exposure to the same potential transfer pricing penalties.
The new ordering rule would stipulate that in cases where both the transfer pricing rules and other provisions could apply, the transfer pricing rules of section 247 should be applied first.
The existing exceptions to the arm's length principle within the transfer pricing rules, pertaining to certain debts or guarantees involving controlled foreign affiliates, will continue to apply.
This provision would apply to tax years beginning on or after March 19, 2019.

Observations and Takeaways


This new measure has the potential to increase the number of tax audit cases in which transfer pricing penalties are assessed, and potentially to increase the amount of such penalties. In some past cases, tax audit adjustments that could have been made under the transfer pricing rules of section 247 were reassessed, in whole or in part, under other provisions of the ITA instead. In those cases, the transfer pricing penalties did not apply, or would apply only on a smaller subset of adjustments, perhaps even falling below the size thresholds for penalties to be considered at all.

Considering this new budget measure, taxpayers should expect that any audit adjustments that could be made under the transfer pricing rules will be made under those rules, increasing the likelihood that corresponding transfer pricing penalties could also apply (if the adjustments exceed certain size thresholds). This change potentially increases the value of maintaining contemporaneous documentation, since such documentation is a necessary condition to qualify for the "reasonable efforts" exemption to transfer pricing penalties.    

Commitment to the Base Erosion and Profit Shifting Initiative

No legislative changes were proposed relating to the OECD/G20's BEPS initiative. However, the 2019 budget reaffirmed Canada's commitment to "safeguarding Canada's tax system," and to remain an active participant in the BEPS initiative.   
Country-by-country report exchanges commenced in 2018 and Canada is participating in an OECD review of the quality of these initial reports, with the review expected to be completed in 2020.

Canada has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), along with 86 other jurisdictions to date.

Observations and Takeaways

Canada's response to the BEPS initiative has not yet involved significant changes to the local transfer pricing rules, other than the introduction of country-by-country reporting requirements in 2016. This could mean that the Canadian government is confident it can address the transfer pricing concerns raised by the BEPS initiative within the existing legal framework.
In our experience, Canadian tax auditors have been raising similar transfer pricing concerns as are described in the BEPS initiative since well before the first BEPS action plan was released. 

A Fourth Wave of Additional Resources for Tax Enforcement

The 2019 budget proposed to allocate an additional $150.8 million over five years to the CRA to fund new enforcement initiatives and existing programs such as:

  • Hiring additional auditors;
  • Targeting non-compliance associated with the digital economy; and
  • Extending programs aimed at combatting offshore non-compliance.

These latest investments are expected to generate $369 million of additional federal government revenues over five years, plus additional revenues for the provinces and territories.
The 2019 budget also proposes to invest $65.8 million over five years to improve the CRA's information technology systems, to help "fight tax evasion and aggressive tax avoidance."
The 2019 budget continues a trend observed each year since the OECD released its final reports from the BEPS action plan in October 2015. Since then, each of Canada's annual federal budgets have included substantial new investments in the government's international tax enforcement capabilities, each of which are expected to drive higher levels of local tax revenue collected from taxpayers.
For example:

  • The 2016 budget included over $444 of new funding for the CRA over five years, including for the hiring of new auditors and economists, focusing on audits of high-risk multinationals and expecting to generate $2.6 billion of new federal revenue in the same period.
  • The 2017 budget proposed more than $593 million of new funding for tax enforcement over five years, including for additional auditors and risk-assessment systems for international tax, driving expected additional federal revenue of $2.5 billion.
  • The 2018 budget increased funding for the federal court system by over $41 million, mostly directed toward the Tax Court of Canada.

Canadian members of multinational groups could reasonably expect that international tax audits will continue to increase in both number and frequency, with an emphasis on transfer pricing.
These continued investments in expanding the CRA's enforcement capability come with expectations of generating billions of dollars in new federal revenue, beyond the status quo, which suggests Canada's reputation for taking aggressive transfer pricing positions against taxpayers is likely to continue.



The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions