{"id":42443,"date":"2025-12-11T14:51:19","date_gmt":"2025-12-11T19:51:19","guid":{"rendered":"https:\/\/www.millerthomson.com\/?p=42443"},"modified":"2025-12-11T14:51:22","modified_gmt":"2025-12-11T19:51:22","slug":"budget-2025-and-the-end-of-form-over-substance-canadas-new-transfer-pricing-era","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/budget-2025-and-the-end-of-form-over-substance-canadas-new-transfer-pricing-era\/","title":{"rendered":"Budget 2025 and the end of form-over-substance:\u00a0Canada\u2019s new transfer pricing era"},"content":{"rendered":"\n

Budget 2025, introduced on November 4, 2025, proposes the most significant changes to Canada\u2019s transfer pricing rules since they were first introduced in 1997. Those changes were set out in the Notice of Ways and Means motion that accompanied Budget 2025 and are now in Bill C-15<\/a>, which is currently in first reading.  The transfer pricing amendments overhaul how cross-border arrangements are evaluated and bring Canada\u2019s transfer pricing rules into alignment with the OECD Transfer Pricing Guidelines<\/a>. Although not retroactive, the new rules will apply to all existing cross-border structures beginning with taxation years of taxpayers that start after November 4, 2025, meaning long-standing arrangements will soon face a fundamentally different statutory framework.<\/p>\n\n\n\n

The federal government expects these measures to generate $510 million in additional revenue over five years, signaling increased audit activity and a far broader range of potential adjustments.<\/p>\n\n\n\n

Why was reform necessary?<\/h2>\n\n\n\n

The Department of Finance\u2019s 2023 Consultation on Reforming and Modernizing Canada\u2019s Transfer Pricing Rules<\/a> (the \u201cConsultation Report<\/strong>\u201d) identified several structural weaknesses in Canada\u2019s transfer pricing rules. Most importantly, the rules did not provide a coherent statutory method to operationalize the arm\u2019s-length principle in Article 9 of the OECD Model Convention.<\/p>\n\n\n\n

Courts were left to fill the gap. In cases such as Cameco Corporation v The Queen<\/em><\/a> (2018 TCC 195, affirmed, 2020 FCA 112), the Tax Court and the Federal Court of Appeal focused heavily on the legal form of intra-group arrangements and on whether hypothetical arm\u2019s-length parties could have entered into the transactions. Because the statute did not require an analysis of economically relevant characteristics, define \u201cconditions,\u201d or prescribe a delineation step, courts regularly accepted structures that did not reflect economic substance or the real-world conduct of the parties.<\/p>\n\n\n\n

The Department of Finance concluded that Canada\u2019s rules needed modernization to align with the OECD Transfer Pricing Guidelines, constrain reliance on legal form, and ensure pricing reflects functions, assets, and the economically relevant circumstances of the parties to the transaction.<\/p>\n\n\n\n

What is new? A new two-step framework<\/h2>\n\n\n\n

Budget 2025 replaces the prior text of subsection 247(2) of the Income Tax Act<\/em><\/a> with a mandatory two-step process closely modeled on the OECD Guidelines.<\/p>\n\n\n\n

Step 1: identify and accurately delineate the transaction<\/h3>\n\n\n\n

The two-step process in the new paragraph 247(2)(b) requires taxpayers to identify the \u201cactual conditions\u201d (a new defined term) of the controlled transaction. The identification of the \u201cactual conditions\u201d requires an examination of the transactions or series of transactions between the taxpayer and the non-arm\u2019s length person to identify the conditions that actually<\/em> govern the transaction. The conditions of the transaction (and series) would be identified by examining their \u201ceconomically relevant characteristics\u201d (also a new defined term) which includes a consideration of the:<\/p>\n\n\n\n