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The basics of the law, the guidelines, the circulars, the TPMs, and how they relate to Canadian transfer pricing

On Behalf of | Jun 25, 2018 | Transfer Pricing |

An understanding of the nature and significance Provisions of Canadian law, the OECD guidelines (Guidelines), and the administrative circulars and memoranda of the Canada Revenue Agency (CRA) as set forth in Circulars and Transfer Pricing Memorandums (TPM) is critical to understanding transfer pricing. All are all in a process of continual evolution. This memorandum is an explanation of the basics of each, and how they interact with each other.

The laws, the guidelines, and the TPMs have been applied to a wide variety of diverse fact situations and transactions, and have been considered in Canada’s five transfer pricing cases. The following paragraphs explain the relationship between the law, the administrative guidelines of the CRA, and the relevance of the OECD guidelines that are now set forth in the reports of the Base Erosion and Profit Shifting Project (BEPS).


The law was section 69(2) of the Income Tax Act, (Act) from 1972 to 1998, and then section 247(2) in its original form from 1998 to 2012. There were revisions to section 247 in 2012 and 2013 that added subsections (12) to (15) which deal with deemed dividend and repatriation provisions, and clarify withholding tax issues and secondary adjustments. The basic scheme of the law is that the CRA is able to adjust the income by a reassessment under paragraph 247(2)(b) and (d) and paragraph 247(2)(a) and (c). The power under 247(2)(b) is known as a recharacterization power, and applies where the transaction would not have been entered into by persons dealing with arm’s length, and was entered into primarily to obtain a tax benefit. The power under 247(2)(a) is to set aside transactions where the terms differ from those terms that would have been made by persons dealing at arm’s length.


The guidelines were first established in 1979. The 1979 Guidelines were amended completely in 1995. There were significant amendments made in 2010 by revisions to Chapters 1-3 regarding comparability and profit methods, and Chapter 9 concerning restructuring. Chapter 4 was revised in 2013 and deals with safe harbours. From 2013 onward, the OECD released an action plan on base erosion and profit shifting (BEPS). This was a project mandated by the G20 nations, and four of the action items related to transferring pricing. Action 8 dealt with intangibles and amended Chapter 6 of the guidelines. Actions 9 and 10 related to risk and capital and high risk transaction. Action item 13 dealt with country by country reporting. These amended chapters 7 and 8 of the guidelines. BEPS and the guidelines are now related and intertwined. An example of a successful tax appeal is the

Circular and TPMs

The CRA’s first Information Circular on transfer pricing came out in 1987, and was revised as information circular IC87-2R in 1998 (the “Circular”). Related to the Circular, and forming an update on the CRA’s views as these change from time to time, are the 14 documents entitled Transfer Pricing Memorandum (TPM). The key point with respect to the Circular are that Canada endorses the OECD guidelines specifically, and makes many references to the adoption of specific paragraphs of the Guidelines. A good example of the importance of the TPMs is TPM-14 which clarifies that changes to the Guidelines in 2010 mean that the transfer pricing methods should be selected based on the most appropriate transfer pricing method to the circumstances of the case. Until that point, a hierarchy of methods had been followed.

Legal Cases

Tax appeals to the Tax Court of Canada have been undertaken where audit and internal appeals fail to resolve disputes. The advantage of litigation is that the dispute is managed by procedures, timelines and settlement processes offered by the court. It also engages the Department of Justice, which gives a new set of eyes to examine the nature of the dispute. The stages of a tax appeal are the pleadings, the discovery and the hearing. The pleadings is an exchange of documents. The discovery is where questioning under oath takes place before trial. The hearing is where a judge hears evidence and decides the case.

Summary of the Legal Cases

Canada has had five transfer pricing cases go to court since 2010. These cases have gone a long way to clarifying the application of the arm’s length principle, section 247(2) of the ITA, and the relevance of the OECD Guidelines and CRA’s circulars and guidelines. An example of one of the cases where our firm represented the tax payer is AP Circuits vs. HMTQ. Most cases have been decided based on the judge’s view of the facts. Does the transfer price reflect a reasonable price based on the amount paid. Does the evidence led by the taxpayer explain the controlled transactions and the way they were priced in a reasonable way? Does the expert testimony introduce proxies that lead us to be able to defend that a price is reasonable? Judges are human, and their view of the weight of the evidence given by the witnesses is very important to the decisions that they make. In another blog, I will explain more about the impact of each of these five cases on the above principles.

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