The Arm’s Length Principle in Canada: Overview

Par Robert Robillard - 28 mai 2014

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Any transaction between associated enterprises must reflect an arm’s length price. This is the basic rule of transfer pricing across the world.

For the last ten years, tax agencies around the world have seriously revamped their audit activities related to transfer pricing.

Paragraph 1.6 of the OECD Transfer Pricing Guidelines states :

« […] [Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

By seeking to adjust profits by reference to the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances (i.e. in “comparable uncontrolled transactions”), the arm’s length principle follows the approach of treating the members of an MNE group as operating as separate entities rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent entities, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from the conditions that would be obtained in comparable uncontrolled transactions. Such an analysis of the controlled and uncontrolled transactions, which is referred to as a “comparability analysis”, is at the heart of the application of the arm’s length principle.[…]»

The Canada Revenue Agency fully recognizes this principle as it pertains to transfer pricing. Subsection 247(2) of the Income Tax Act states :

« Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm’s length (or a partnership of which the non-resident person is a member) are participants in a transaction or a series of transactions and

(a) the terms or conditions made or imposed, in respect of the transaction or series, between any of the participants in the transaction or series differ from those that would have been made between persons dealing at arm’s length, or

(b) the transaction or series

(i) would not have been entered into between persons dealing at arm’s length, and

(ii) can reasonably be considered not to have been entered into primarily for bona fidepurposes other than to obtain a tax benefit,

any amounts that, but for this section and section 245, would be determined for the purposes of this Act in respect of the taxpayer or the partnership for a taxation year or fiscal period shall be adjusted (in this section referred to as an “adjustment”) to the quantum or nature of the amounts that would have been determined if,

(c) where only paragraph 247(2)(a) applies, the terms and conditions made or imposed, in respect of the transaction or series, between the participants in the transaction or series had been those that would have been made between persons dealing at arm’s length, or

(d) where paragraph 247(2)(b) applies, the transaction or series entered into between the participants had been the transaction or series that would have been entered into between persons dealing at arm’s length, under terms and conditions that would have been made between persons dealing at arm’s length. »

Paragraph 47 of IC87-2R International Transfer Pricing indicates:

« Section 247 is intended to reflect the arm’s length principle expressed in the OECD Guidelines. »

In Canada, the IC87-2R International Transfer Pricing also states:

« 2. Transfer prices are the prices at which services, tangible property, and intangible property are traded across international borders between related parties.

3. This circular sets out the Department’s views on transfer pricing and also provides the Department’s position with respect to the application of the 1995 Organisation for Economic Co-operation and Development (OECD), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines).

4. The OECD Guidelines should be consulted for a more detailed discussion of the principles contained in Parts 2 to 6 of this circular. »

In effect, IC 87-2R directly refers to the OECD Transfer Pricing Guidelines over 25 times.

Like everywhere else around the world, transfer pricing in Canada must abide by the arm’s length principle.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost

RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.

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