If you and another entity within your multinational group agree to buy or sell goods or services with each other, these transactions must be priced properly to ensure the appropriate amount of profit is reported in Canada. There are a lot of things to be concerned about with Transfer pricing. If your purpose is a tax strategy, you may end up regretting that decision.
Whenever you undertake a strategy to avoid taxes for the purpose of saving taxes as a business strategy, you are inviting an attack from CRA.
A common sense and safe policy; is for each party to charge a fair price based on normal accounting. If your pricing cannot be attacked as robbing Peter to save taxes by Paul, then you are fine.
In other words, Transfer pricing legislation requires that these transactions occur under arm’s length terms and conditions.
The arm’s length principle
For tax purposes, the arm’s length principle means that the terms and conditions should be identical whether you are dealing with parties at arm’s length or not. For example, transactions between a parent company and its related parties are subject to transfer pricing rules. Applying the arm’s length principle is generally based on a comparison of the prices, or profit margins, that non-arm’s length parties use or obtain, with those of arm’s length parties engaged in similar transactions.
Canada’s transfer pricing rules apply if:
- two or more parties are involved;
- one or more of the parties is a taxpayer for Canadian tax purposes. An entity can be non-resident but still be a taxpayer for Canadian income tax purposes;
- it is a cross-border transaction involving Canada;
- the Canadian taxpayer and at least one of the offshore parties are not dealing at arm’s length and;
- the parties enter into a series of transaction.