Federal Budget 2025: International Measures
Transfer Pricing
Transfer pricing rules are used to allocate profit among the various entities of a multinational enterprise (MNE) group. The accepted international standard is the arm’s length principle set out in Article 9 (Associated Enterprises) of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital and included in Canada’s bilateral tax treaties. In addition, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Transfer Pricing Guidelines”) present internationally agreed principles and provide guidelines for the application of the arm’s length principle.
Budget 2025 proposed to modernise Canada’s transfer pricing rules to better align with the international consensus on the application of the arm’s length principle. In addition, an interpretation rule would be added to ensure that Canada’s transfer pricing rules are applied in a manner consistent with the analytic framework set out by the OECD Transfer Pricing Guidelines.
The new rules would provide more detail on how cross-border transactions between non-arm’s length persons must be analysed. A new transfer pricing adjustment application rule would apply if two conditions are met: (i) there is a transaction or series of transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length; and (ii) the transaction or series (once it has been analysed and determined) includes actual conditions different from arm’s length conditions. The actual conditions are determined not only by the contractual terms of the transaction or series, but also by other “economically relevant characteristics,” including the conduct of the participants.
The intention of transfer pricing analysis is to determine the price that would have been charged between arm’s length parties in comparable circumstances, taking into account the options realistically available to them at the time of entering into the transaction or series. The arm’s length price is the fair market value that should be charged, and the tax authorities can reassess taxpayers transacting at other values.
In addition to modifying the manner in which acceptable transfer prices must be determined, the new rules would modify certain administrative measures. These include the following items:
- increasing the threshold for the transfer pricing penalty to apply from a $5 million transfer pricing adjustment to a $10 million adjustment;
- clarifying the transfer pricing documentation requirements and also more closely aligning them with the new definitions and the requirements to select and apply the most appropriate method;
- providing for simplified documentation requirements when prescribed conditions are met; and
- reducing the time to provide transfer pricing documentation from 3 months to 30 days (the requirement for taxpayers and partnerships to make or obtain the appropriate records or documentation by their documentation-due date, generally the due date for their tax return for the year in which the transactions occurred, would remain unchanged).
This measure would apply to taxation years that begin after November 4, 2025.
