Canada Revises Transfer Pricing Rules to Align with International Norms

Canada is updating its transfer pricing regulations in accordance with international standards. The proposed changes aim to enhance clarity and attract new investments.

The analysis of comparability, which involves defining transaction terms and comparing them with uncontrolled transactions, will form the basis for applying the “arm’s length principle.” Commercial and financial relationships between related entities will be considered when determining the appropriateness of the controlled transaction price.

In turn, Canadian tax legislation concerning transfer pricing has undergone minimal changes since 1997. The amendments will allow Canada to improve tax fairness and attract fresh investments.

The new transfer pricing rules begin with establishing a benchmark for comparison. The proposed changes include defining a transaction or series of transactions based on their economically significant characteristics.

The definition also encompasses the following factors:

Contractual conditions,
Functional analysis,
Economic circumstances.

The legislative goal is to align with international standards and conduct a more precise comparability analysis. The proposed changes involve expanding the analysis to cover all transaction conditions, including profit level indicators.

Emphasis is placed on the commercial interests of the parties and accurately defining transaction terms. The proposed non-recognition and substitution rule ensures the alignment of profit allocation with the relative contributions of group entities.

It is applied after defining the transaction and passing two tests for the adequacy of conditions.