In the transportation and logistics industry, as with other industries, it is common for corporations in the same multinational group to provide goods and services to one another. If the parties to such a transaction include a Canadian taxpayer (for Canadian income tax purposes) and a non-resident person (such as a corporation), and the parties do not deal with each other at arm\u2019s length, the Canadian transfer pricing rules must be considered. Many jurisdictions, including Canada, have adopted robust transfer pricing rules in an effort to ensure that the appropriate amount of profits are reported in the applicable jurisdictions. If there is non-compliance with the Canadian transfer pricing rules, there can be significant penalties.<\/p>\n\n\n\n
Some examples of intercompany services in this industry include a foreign entity providing the following types of services to a Canadian subsidiary or affiliate, or vice-versa: \u201cback-office\u201d or administrative services, such as bookkeeping, payroll services, or IT services; dispatching services; invoicing and collection services; driver vetting, hiring, monitoring and\/or training; or acting as a subcontractor, among other services.<\/p>\n\n\n\n
Very generally, the transfer pricing rules are designed to ensure that cross-border transactions between non-arm\u2019s length parties occur under arm\u2019s length terms and conditions. The Canadian rules are contained in section 247 of the Income Tax Act <\/em>(Canada) (the \u201cITA<\/strong>\u201d). In addition, the Canada Revenue Agency (the \u201cCRA<\/strong>\u201d) publishes guidance and transfer pricing policies in a series of \u201cTransfer Pricing Memoranda\u201d or \u201cTPMs.\u201d While the CRA\u2019s guidance and policies are helpful, they do not supersede the law.<\/p>\n\n\n\n The Canadian transfer pricing rules apply when, among other things, there is a transaction between cross-border non-arm\u2019s length parties, such as between a foreign parent corporation and a wholly owned Canadian subsidiary, or between two wholly-owned subsidiaries of the same parent corporation, one of which is Canadian. The ITA contains several rules that deem two parties to not act at arm\u2019s length. Very generally, these deeming rules look at factors such as ownership and control. However, parties can also be acting not at arm\u2019s length in fact. This can make determining whether two parties are dealing with each other at arm\u2019s length a complicated and fact-specific process. The Canadian transfer pricing rules do not apply with respect to transactions involving arm\u2019s length parties.<\/p>\n\n\n\n If the transfer pricing rules apply and the terms and conditions of the transaction do not reflect arm\u2019s length terms and conditions, the CRA may adjust the prices or cost allocations so that they do reflect arm\u2019s length terms and conditions. Significant penalties may also apply in certain circumstances.<\/p>\n\n\n\n If the CRA makes adjustments in excess of a certain threshold, the CRA may assess penalties where it determines the Canadian taxpayer did not make \u201creasonable efforts\u201d to determine and use arm\u2019s length terms or conditions. Very generally, under subsection 247(4) of the ITA, a taxpayer is deemed not to have made \u201creasonable efforts\u201d unless they made or obtained records or documents that provide a complete and accurate description of the transaction at issue, including the methods considered and analysis performed to determine the transfer prices.<\/p>\n\n\n\n These records or documents must be \u201ccontemporaneous,\u201d meaning that they must be made or obtained on or before the taxpayer\u2019s \u201cdocumentation-due date.\u201d For a corporation, the \u201cdocumentation-due date\u201d is the income tax filing-due date for the year (i.e., six months after the end of the corporation\u2019s tax year).<\/p>\n\n\n\n If the CRA determines that the taxpayer did not make \u201creasonable efforts\u201d to determine and use arm\u2019s length terms and conditions, the CRA may assess a penalty equal to 10% of the net adjustments made by the CRA.<\/p>\n\n\n\n As a result, it is very important to ensure that there is an agreement between the entities outlining the services performed or goods purchased, the applicable fees or prices to be charged, and price adjustment language to deal with situations where the CRA or a foreign tax authority makes a transfer-pricing adjustment. Additionally, documentation demonstrating how the arm\u2019s length fees and pricing were determined should be maintained.<\/p>\n\n\n\n The Canadian transfer pricing rules are very complex and this article only briefly touches on a few key elements. If you have concerns about whether the transfer pricing rules apply to your business, or whether your business is compliant with these rules, it is important to seek specialized advice. The members of Miller Thomson\u2019s\u00a0Transportation & Logistics Team<\/a>\u00a0or\u00a0Corporate Tax Team<\/a>\u00a0would be happy to help you navigate these very complex rules.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" In the transportation and logistics industry, as with other industries, it is common for corporations in the same multinational group to provide goods and services to one another. If the parties to such a transaction include a Canadian taxpayer (for Canadian income tax purposes) and a non-resident person (such as a corporation), and the parties […]<\/p>\n","protected":false},"author":5,"featured_media":14397,"parent":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[544],"insight-format":[416],"class_list":["post-26193","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-transportation-and-logistics"],"acf":[],"yoast_head":"\nWhen do the transfer pricing rules apply?<\/h2>\n\n\n\n
Avoid penalties by taking \u201creasonable efforts\u201d and by making or obtaining contemporaneous documentation<\/h2>\n\n\n\n