Tax Insights: Finance launches consultation on reforming and modernizing Canada's transfer pricing rules

June 09, 2023

Issue 2023-18

In brief

On June 6, 2023, the Department of Finance Canada (Finance) released a consultation paper, ”Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules,”1 to gather stakeholder input on various questions and proposals related to Canada’s transfer pricing legislation (the Consultation). The Consultation appears to be heavily influenced by perceived limitations in Canada’s transfer pricing rules as exposed by the Federal Court of Appeal’s decision in The Queen v. Cameco Corporation, 2020 FCA 112 (Cameco), and represents a potentially fundamental shift in the Canadian transfer pricing landscape.

The Consultation’s main focus is on potentially significant amendments to the transfer pricing adjustment rule in section 247 of Canada’s Income Tax Act (the Act) to provide greater clarity on the application of the arm's length principle in Canada and bring Canada’s transfer pricing legislation in line with international consensus on this topic. The Consultation also addresses certain administrative aspects of transfer pricing, including:

  • documentation requirements, such as the potential adoption of master file/local file
  • updated penalty provisions
  • simplification possibilities, such as standardized pricing for low value-adding service, routine distribution activities and intercompany financing arrangements

The Consultation process provides an opportunity for stakeholders to submit comments and feedback on the proposals, the deadline for which is July 28, 2023.

In detail

Canada’s existing transfer pricing legislation (introduced in 1997) is considered to be high-level and lacks explicit guidance on the application of the arm's length principle. The arm's length principle requires that the conditions of transactions between related parties are comparable to those that would have been applied by independent parties. This principle is intended to ensure that the appropriate amount of profit is reported and taxed in Canada. The legislation of countries with more modern transfer pricing rules tends to have more detailed provisions. The Consultation aims to address the current lack of explicit guidance on the application of the arm’s length principle and to consider more modern or simplified approaches to transfer pricing in specific situations. The Consultation is divided into five main sections:

  • Introduction
  • International consensus on the application of the arm’s length principle
  • The current state of Canada's transfer pricing tax law
  • Proposed solutions
  • Administrative measures


This section provides the background and context for the Consultation, explaining Finance’s objectives, scope and process. It also defines some key terms and abbreviations used throughout the paper, such as the arm's length principle, the Organisation for Economic Co-Operation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines), and the OECD’s project on Base Erosion and Profit Shifting (BEPS).

International consensus on the application of the arm's length principle

This section describes the evolution and development of the arm's length principle as the international standard for transfer pricing, as reflected in Article 9 of the OECD Model Tax Convention and the OECD Guidelines. It also summarizes the main changes introduced by the BEPS project, which were instrumental in revising and updating the OECD Guidelines in 2015.

The current state of Canada's transfer pricing tax law

This section analyzes the current transfer pricing legislation in Canada, which is contained in section 247 of the Act. It identifies two main areas where the legislation does not provide explicit guidance on the application of the arm's length principle:

  • how to determine the controlled transaction or series with reference to its economically relevant characteristics
  • how to compare the conditions of the controlled transaction or series with those of uncontrolled transactions or series in comparable circumstances

It also discusses some recent Canadian transfer pricing case law, particularly the Cameco decision, which highlighted some of the challenges and limitations of the current legislation.

Proposed solutions

This section presents the draft legislative proposals to amend section 247 of the Act, with the aim of providing more clarity and certainty on the application of the arm's length principle and aligning Canada's transfer pricing rules with the international consensus. The main proposals are new rules that:

  • require the controlled transaction or series to be determined with reference to its economically relevant characteristics (also to be defined in the legislation, and will broadly follow the wording in the 2022 OECD Guidelines). The focus of this rule is to delineate the controlled transaction in terms of the actual conduct of the parties, and not just based on contractual terms. This places a higher degree of importance on the functional analysis of the parties. This rule would also allow the Canada Revenue Agency (CRA) to disregard or replace the controlled transaction or series in exceptional circumstances.
  • require the conditions of the controlled transaction or series to be compared with those of uncontrolled transactions or series in comparable circumstances. “Conditions” will be interpreted broadly and will include any commercial or financial information relevant to the transaction or series of transactions. The proposed amendments would provide that the application of the arm's length principle requires a determination of which conditions of the delineated transaction or series would have been included had the parties been dealing with one another at arm's length in comparable circumstances. This rule would also allow the use of hypothetical comparators in the absence of reliable actual comparators, which could give the CRA broad leeway in assessing whether or not a controlled transaction was conducted in accordance with the arm’s length principle, and has the potential to create significant uncertainty for taxpayers.
  • specify that the transfer pricing rules are to be applied so as to achieve consistency with the OECD Guidelines, unless the context otherwise requires. This rule would also define the OECD Guidelines as those versions published in 1995, 2010, 2017 and 2022, and adopt a static approach to referencing the OECD Guidelines. This means that any future changes to the OECD Guidelines would not automatically affect the interpretation of the transfer pricing rules. This approach may have some advantages, such as providing more certainty and stability for taxpayers and the tax administration, but it may also have some disadvantages, such as creating potential gaps or inconsistencies with the evolving international consensus or best practices.

The section also provides some examples of how the proposed rules would apply in different scenarios, and invites comments and feedback from stakeholders on various questions related to the proposed rules.

Administrative measures

This section discusses some administrative aspects of transfer pricing, such as documentation, penalty provisions, and simplified or streamlined approaches. It reviews the current requirements and challenges in these areas and proposes some possible changes or options to improve them, such as:

  • aligning the local file requirements with the BEPS Action 13 Report, which introduced a standardized template for the local file
  • implementing a master file requirement, which was also introduced by the BEPS Action 13 Report, and which provides a high-level overview of the multinational enterprise's global operations and transfer pricing policies (taxpayers would only be required to prepare and submit a master file as part of a transfer pricing audit when the group meets the threshold for preparing country‑by‑country reporting)
  • introducing simplified documentation requirements for lower value transactions and smaller taxpayers, such as an annual reporting schedule or an exemption based on a de minimis threshold or a size criterion
  • reviewing the transfer pricing penalty provisions, which are intended to encourage taxpayers to have contemporaneous documentation and to deter non-compliance, and considering whether they need to be updated or modified (Finance is considering an increase of the threshold for penalty referrals on adjustments from those greater than $5 million or 10% of gross revenues, to those greater than $10 million or 10% of gross revenues)
  • exploring the possibility of using streamlined pricing approaches for certain transactions, including the introduction of:
    • a standard deemed arm’s length return or safe harbour return on low value‑adding intra‑group services
    • a safe harbour return for distributors that perform relatively routine activities
    • a limit on the acceptable range of certain loan conditions when identifying the arm’s length transaction to be used as a comparable, such as limiting the term of intra‑group loans, using the credit rating of the multinational group, and removing subordination features and embedded options

The takeaway

Finance is committed to modernizing Canada’s transfer pricing rules and the proposed revisions follow through on the federal government’s prior commitments to address concerns raised in respect of Cameco. The proposed changes to the legislation could represent a wide ranging and fundamental shift in the way that Canadian taxpayers will need to analyze and document their intra-group pricing arrangements. Our initial observations on the Consultation are that:

  • the use of hypothetical comparators could have broad reaching implications that require further analysis
  • the proposed simplifications may be welcome for some particularly small taxpayers or routine transactions where the compliance burden is currently high relative to the transaction values
  • the proposed master file/local file alignment with global practices may help some multinational groups to standardize their compliance efforts
  • the proposals around intra-group financing transactions highlight the government’s continuing focus on interest deductibility

We will continue to review the Consultation in the coming weeks. We encourage stakeholders to contribute their perspectives and insights as part of the Consultation, which could influence the potential reforms and administrative measures. The deadline for submitting comments and feedback is July 28, 2023.


1. Department of Finance “Consultation on Reforming and Modernizing Canada’s Transfer Pricing Rules

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Ivan Williams

Ivan Williams

National Transfer Pricing Leader, PwC Canada

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Marc Levstein

Marc Levstein

Tax Business Units Leader, Global Structuring, PwC Canada

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Simon Langlois

Simon Langlois

Partner, PwC Canada

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Lav Chadha

Lav Chadha

Tax Delivery Model Leader, PwC Canada

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Sabrina Fitzgerald

Sabrina Fitzgerald

National Tax Leader, PwC Canada

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