Tax Insights: Canada introduces a simplified transfer pricing documentation regime

Issue 2026-31

In brief

What happened? 

On July 23, 2026, the Department of Finance released draft legislation to implement numerous tax and other measures and technical amendments. The release includes new Part XCVIII of the Income Tax Regulations (ITR), prescribing conditions for electing into a simplified transfer pricing documentation regime under subsection 247(4.1) of the Income Tax Act (ITA). The rules apply to taxation years beginning after December 31, 2025.

A taxpayer that elects into the simplified regime is not absolved of its obligation to prepare contemporaneous documentation. The regime reduces the scope and depth of the required documentation for qualifying transactions — but an arm’s length analysis, a description of terms and conditions, and annual updates for material changes must still be prepared by the documentation‑due date and provided to the Canada Revenue Agency (CRA) within 30 days of a request.

The four qualifying categories are:

• small taxpayers and partnerships – multinational enterprise (MNE) groups with Canadian affiliated entities with aggregated gross revenue of $25 million or less and their intercompany transactions do not include intangible transfers or royalty payments
• tangible property – sales or purchases of tangible goods with a related non-resident where the gross amount is $5 million or less per year
• intra‑group services – services provided to, or received from, a related non-resident where the gross amount is $2 million or less per year
• loans – intercompany lending or borrowing with a related non-resident where the gross interest is $1 million or less per year

Why is it relevant?

The regime is intended to reduce the compliance burden for small Canadian taxpayers and qualifying low-value transactions; however, it does not offer extensive practical relief. Thresholds are modest, the anti‑avoidance rule is broad, and the documentation requirements still require an analysis of the arm’s length conditions. Transfer pricing penalty risk for taxpayers that qualify may already be low.

Actions to consider

Canadian entities within an MNE group should assess eligibility across the four qualifying categories, evaluate the cost‑benefit of electing in, and ensure internal processes can deliver timely elections by the documentation-due date. They should not assume that the simplified regime eliminates documentation obligations — as meaningful contemporaneous documentation content and analyses must still be prepared.

In detail

Qualifying categories and thresholds

Bill C‑15,¹ which received royal assent on March 26, 2026, overhauled Canada’s transfer pricing regime under section 247 of the ITA. The overhauled regime includes a delineation-first framework, broader documentation requirements, a 30‑day response deadline and a $10 million penalty threshold. It had contemplated simplified documentation “when prescribed conditions are met” — which is now available under draft ITR Part XCVIII.

ITR Part XCVIII establishes four qualifying categories, each requiring an election by the documentation‑due date.

ITR section 9801 – Small taxpayers and partnerships

This is the broadest category — it covers all intercompany transactions (where the taxpayer does not have intangible property (IP) related transactions) with non-arm’s length non‑residents for qualifying taxpayers and partnerships. A taxpayer or partnership is deemed to satisfy the prescribed conditions in paragraph 247(4.1)(a) of the ITA if all of the following are met:

• the total gross revenue of the taxpayer or partnership, plus the gross revenue of any other member of the MNE group that is resident in Canada (excluding partnership members already counted), does not exceed $25 million during the immediately preceding taxation year or fiscal period
• the taxpayer or partnership:
  • did not dispose of intangible property (or incorporeal property) to a non‑arm’s length non‑resident during the taxation year or fiscal period
  • did not pay, credit or receive royalty payments to or from a non-arm’s length non‑resident during the taxation year or fiscal period, and
  • elects in prescribed form and manner, on or before the documentation‑due date, to have subsection 247(4.1) of the ITA apply

Simplified documentation requires that the records and documents provide an accurate description of: (i) the calculation of gross revenue of the taxpayer or partnership and any other Canadian‑resident MNE group member during the preceding year; (ii) the terms and conditions of the transaction or series, including the identity of participants, the property or services and the amounts paid or payable (or received or receivable); and (iii) the analysis performed to determine that amounts are based on arm’s length conditions.

Observation: The $25 million revenue threshold is calculated on a consolidated Canadian basis — it aggregates the taxpayer’s revenue with all other Canadian‑resident members of the MNE group. This means a small Canadian subsidiary of a large multinational will not qualify if other Canadian group members cause total Canadian revenue to exceed $25 million. Additionally, the proposed regulation disqualifies Canadian taxpayers that sold IP or paid/received royalty payments, reflecting the government’s view that transactions involving IP warrant full documentation regardless of the taxpayer’s size.

ITR section 9802 – Tangible property (sales or purchases)

This category applies to a transaction or series that is a sale or purchase of tangible property (or corporeal property) between the taxpayer or partnership and a non‑arm’s length non‑resident. A taxpayer or partnership is deemed to satisfy the prescribed conditions if:

• the gross amount paid or payable (or received or receivable) for the tangible property by the taxpayer or partnership during the taxation year or fiscal period does not exceed $5 million, and
• the taxpayer or partnership elects in prescribed form and manner on or before the documentation‑due date

Simplified documentation requires that the records and documents provide an accurate description of: (i) the terms and conditions of the transaction or series, including the identity of participants, the property to which the transaction relates and the amounts paid or payable (or received or receivable); and (ii) the analysis performed to determine that amounts are based on arm’s length conditions.

Observation: Unlike the small taxpayer category, there is no aggregation across all tangible property transactions — each transaction or series is assessed independently against the threshold. This category will be relevant for MNEs where inventory purchases or commodity transactions are ancillary in nature, or where there are small volumes sold to many non‑resident related parties.

ITR section 9803 – Intra-group services

This category applies to a transaction or series that is a provision or receipt of services between the taxpayer or partnership and a non‑arm’s length non‑resident. The prescribed conditions are:

• the gross amount paid or payable (or received or receivable) by the taxpayer or partnership for the services during the taxation year or fiscal period does not exceed $2 million
• the taxpayer or partnership elects in prescribed form and manner on or before the documentation‑due date

Simplified documentation requires that the records and documents provide an accurate description of: (i) the terms and conditions of the transaction or series, including the identity of participants, the services to which the transaction relates and the amounts paid or payable (or received or receivable); and (ii) the analysis performed to determine that amounts are based on arm’s length conditions.

Observation: The $2 million threshold may be relevant for management fees, back‑office support and shared services arrangements that are common in MNE groups. However, taxpayers should note that the threshold applies to the gross amount for a specific service transaction or series — where multiple distinct services are provided under a single intercompany agreement, whether these constitute one “transaction or series” or not may affect whether it qualifies for the simplified transfer pricing documentation regime.

ITR section 9804 – Loans

This category applies to a transaction or series that is a lending or borrowing of money between the taxpayer or partnership and a non‑arm’s length non‑resident. The prescribed conditions are:

• the gross amount of interest paid or payable (or received or receivable) on the loan during the taxation year or fiscal period does not exceed $1 million
• the taxpayer or partnership elects in prescribed form and manner on or before the documentation‑due date

Simplified documentation requires that the records and documents provide an accurate description of: (i) the terms and conditions in respect of the loan, including the identity of the participants, the principal amount, term, issuance date, maturity, credit rating of the borrower, interest rate, currency, payment terms and the amounts paid or payable (or received or receivable); (ii) the purpose of the loan; and (iii) the analysis performed to determine that amounts are based on arm’s length conditions.

Observation: The loans category imposes the most granular documentation requirements of the four categories — requiring not only terms and conditions and an arm’s length analysis, but also the purpose of the loan, the credit rating of the borrower and detailed financial terms (principal, maturity, currency, payment terms). Taxpayers should note that this category covers both directions (lending to and borrowing from non‑arm’s length non‑residents) and that the threshold applies to each loan transaction or series independently.

Common elements across all categories

Several features apply uniformly across all four categories:

• Election – Each category requires the taxpayer or partnership to elect, in prescribed form and manner, on or before the documentation-due date (i.e. the filing-due date for the tax return). If an election is not filed, full documentation requirements under subsection 247(4) of the ITA apply.
• 30‑day delivery – The simplified documentation must be provided to the Minister within 30 days after receiving a written request. This mirrors the 30‑day deadline introduced by Bill C‑15 for full documentation submissions.
• Annual updates – For each subsequent year in which a transaction or series continues, the taxpayer must prepare records describing any material changes to the documented matters. This ensures documentation remains current.
• Arm’s length analysis required – Every category of transaction requires an analysis demonstrating that amounts are based on arm’s length conditions. The simplified regime does not eliminate the analytical requirement — it streamlines the surrounding documentation content requirements (e.g. functional analysis description, industry overview).

Anti-avoidance (ITR section 9805)

A taxpayer or partnership is deemed not to meet the prescribed conditions — for the current year and any subsequent year in which the transaction continues — if “it is reasonable to conclude that one of the purposes of the transaction or series is to benefit from subsection 247(4.1).” The explanatory notes illustrate with two examples:

• creating a new entity to avoid the royalty disqualification under ITR section 9801
• splitting transactions to stay within the monetary thresholds

The “one of the purposes” standard is a low bar, and the forward-looking aspect persists for the life of the transaction.

Interaction with Bill C-15 and Bill C-31

While Bill C‑15 has enacted the statutory provision in subsection 247(4.1) of the ITA, Bill C‑31² (first reading: May 6, 2026) enhances CRA audit powers — Notice of Non-Compliance, daily penalties, suspension of reassessment periods, expanded foreign-based information powers and a 10% compliance order penalty.³ The simplified regime offers a streamlined path to penalty protection, but Bill C‑31’s enhanced enforcement powers increase the consequences of failing to meet documentation standards.

Customs valuation – parallel considerations

Transfer pricing and customs value operate under distinct legal frameworks with different timing. Transfer pricing under the ITA is often finalized around (or after) year‑end by making adjustments, while customs valuation under the Customs Act is generally fixed at importation. Post-importation transfer pricing adjustments can create misalignment with declared customs values — and the simplified transfer pricing documentation regime does not resolve this issue. The reduced documentation burden may paradoxically increase customs risk where transaction‑level pricing changes are not documented, and there is no corresponding “simplified” customs valuation regime even below the $5 million threshold under the proposed draft ITR Part XCVIII.

When the simplified transfer pricing documentation regime applies, the functional analysis underpinning the arm’s length analysis may still be needed to support customs declarations. Therefore, taxpayers considering electing into the simplified documentation for tangible property must carefully consider whether the standard documentation (i.e. under paragraph 247(4)(a) of the ITA) content is critical for customs purposes.

Best practices are to maintain coordinated documentation and cross-functional governance between tax and trade/customs functions. Intercompany agreements should address both transfer pricing and customs valuation requirements — including price adjustment mechanisms. The Canada Border Services Agency (CBSA) may request transaction‑level evidence linking declared customs values to specific shipments, and businesses should ensure that pertinent transfer pricing documentation is available to support customs considerations.

The takeaway

Draft ITR Part XCVIII delivers the simplified documentation regime contemplated by Bill C‑15 — but it is not a safe harbour, not a compliance holiday and not a substitute for rigorous transfer pricing analysis. The benefits of the simplified regime are limited by modest thresholds, a broad anti‑avoidance rule and requirements that are not materially less extensive than current best practice. The regime mostly benefits smaller Canadian MNE members and larger MNEs with lower‑value routine transactions.

All taxpayers should assess eligibility and ensure compliance processes accommodate the election mechanics. The ITR Part XCVIII draft legislative proposals should be considered alongside the broader reform package: Bill C‑15’s revised transfer pricing rules under section 247 of the ITA, Bill C‑31’s enhanced CRA enforcement and the CBSA’s reliance on transfer pricing materials in various circumstances. Together, these represent a significant modernization of Canada’s transfer pricing and trade compliance landscape.

Taxpayers are invited to submit comments by September 4, 2026. Industry feedback may prompt changes before these regulations are finalized.