CANADA U.S. TRANSFER PRICING AGREEMENTS
Updated: March 23, 2009

For more information contact Jonathan Levy at jlevy@uhyvictor.com. Jonathan is the Chairperson of the UHY Canada U.S. Tax Team.  UHY Victor (Montreal) prepares transfer pricing reports.

Click here to obtain the most recent copy of our UHY Global Transfer Pricing Guide. 

CANADA U.S. TRANSFER PRICING – A DEFINITION
Transfer prices are prices that companies charge for goods, services, tangible and intangible assets they trade with subsidiaries and other controlled entities.  Given that these transfer prices are set internally by management, they are frequently subject to scrutiny by both the IRS and the CRA.

Tax authorities concur that the proper transfer price is one which two parties dealing at arm's length would agree to. Consequently, the objective of transfer pricing experts is to determine what is the  "arm's length price" or “market price” is for any particular situation.

In recent years both the CRA and the IRS have increased their emphasis on transfer pricing audits. Both these tax authorities require companies to have documentary evidence supporting their transfer prices.

The Pacific Association of Tax Administrators (PATA), which include Australia, Canada, Japan and the United States, have created a “Transfer Pricing Documentation Package” so that one set of transfer pricing documentation can meet the respective transfer pricing documentation requirements in multiple jurisdictions, and these are integrated into the following text.

A proper analysis of many factors is required to determine a transfer price, including:

• Nature of the company's activities
• Risks
• Tangible and intangible assets employed
• Characterization of the entities and comparability of arm's length with non-arm's length transactions.

CANADA U.S. TRANSFER PRICING AGREEMENTS - REGULATIONS IN CANADA
In the absence of proper transfer pricing documentation, the tax auditor is required to assess a penalty of 10% of the net adjustment of the transfer price.

In addition, companies are required to have transfer pricing documentation that is current ,and it must be provided to the CRA within three months of a written request to do so.

CANADA U.S. TRANSFER PRICING AGREEMENTS – AN OVERVIEW
Companies start their transfer pricing analysis by identifying the transactions between related parties, which generally fall into the following areas:

1. Transfer of tangible products such as inventory.

2. Transfer of services such as management and administration services.

3. Transfer of intangible assets such as the use of a patent or copyright.

4. Transfer of tangible capital assets such as machinery and equipment.

5. Intra-group loans.

CANADA U.S. TRANSFER PRICING AGREEMENTS – INDUSTRY & MARKET ANALYSIS
The industry and market analysis provides a description of the general business environment, and includes:

     Industry profile.

     Market size and level of concentration.

     General profiles of competitors, their size, strategies and market shares.

     Current trends in the industry.

     Critical success factors.

CANADA U.S. TRANSFER PRICING AGREEMENTS – FUNCTIONAL ANALYSIS
Functional analysis is at the core of the transfer pricing study and includes analysis of:

1. Functions – which entity carries out the following which activities:
     Design
     Manufacturing
     Financing
     Inbound logistics
     R & D
     Inventory management
     Outbound logistics
     Marketing
     Sales activities
     After-sale services
     Supporting activities

2. Risks – which entity bears the risks associated with the transaction, and include:
     Financial risk  
     Credit and collection risk 
     Operational risk 
     Market risk 
     Product risk

3. Intangible assets  - which entity:
     Developed the intangibles
     Has the legal ownership of the intangibles
     Receives the benefit of the intangibles.

CANADA U.S. TRANSFER PRICING AGREEMENTS – SELECTION OF A TRANSFER PRICING METHOD
The CRA provides the following hierarchy of the following five methods:

1. Comparable Uncontrolled Price (CUP) method
2. Resale Price (R-) method
3. Cost Plus (C+) method.
4. Profit Split (PS) method
5. Transactional Net Margin method (TNMM).

The CRA requires that the CUP method be used if possible.  In cases where the CUP method is not feasible, one of the remaining four methods are to be used.  In the rare case that it is not possible to use any of the above methods, other unspecified methods may be used. However, in general, it is not advisable to use unspecified methods.

The selection of a method will depend on the functional analysis and availability of comparable transactions. If it is possible to use the internal CUP method, then the selection of a method can be relatively straight-forward.

CANADA U.S. TRANSFER PRICING AGREEMENTS – ECONOMIC ANALYSIS
The economic analysis provides the following:

     selection of comparable transactions or companies

     consideration of the quality of data

     assumptions and comparability factors

     selection of appropriate economic and statistical methods

     profit level indicators

     quantification of appropriate adjustments

CANADA U.S. TRANSFER PRICING AGREEMENTS – RECOMMENDATION
The recommendation is a clear statement of the recommended transfer pricing policy.

CANADA U.S. TRANSFER PRICING AGREEMENTS – IMPLEMENTATION & MONITORING
This section details the most efficient method of implementing the selected transfer pricing policy.

A transfer pricing study should be updated each year to reflect any material changes in the transactions under consideration. Provided that no material changes have occurred, an update is generally simple and straightforward.

Since every study must be prepared by the filing due date (generally 6 months after the corporate year end), it is advisable to monitor and document all the changes as they occur during the year. If circumstances change such that some or all transactions did not represent an arm's length price, it is possible to record a compensating year-end adjustment. This adjustment should be fully documented.

CANADA U.S. TRANSFER PRICING AGREEMENTS – DOCUMENTATION (APPENDICES)
The appendices should include documentation that supports conclusions reached regarding the transfer price. 
 

CANADA – U.S. TRANSFER PRICING AGREEMENTS - RESOURCES

CRA
 Income Tax Act Section 247
 IC 87-2R International Transfer Pricing
 IC 94-4R International Transfer Pricing: Advance Pricing Arrangements (APAs)
 IC 71-17R4 Requests for Competent Authority Considerations

CRA Forms:
 T106 - Information Return of Non-Arm's Length Transactions with Non-Residents
 T1134A - Information Return Relating to Foreign Affiliates That Are Not Controlled Affiliates
 T1134B - Information Return Relating to Controlled Foreign Affiliates
  T1141 - Information Return in Respect of Transfers or Loans to a Non-Resident Trust
  T1142 - Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust
 
Canadian Treaties - Ministry of Finance
  Canada - U.S. Tax Convention

IRS 

   Internal Revenue Code - section 482

OECD
    Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

Other
  PATA Transfer Pricing Documentation Package

-------------------------------------- 

DISCLAIMER:
While every effort has been made to ensure that this site contains accurate information, it is possible that errors do exist in the materials presented. All of the information provided here is provided “as is”, with no guarantees of completeness, accuracy or timelines, and without warranties of any kind, express or implied. The information presented on this site should not be considered to be, or construed as legal, economic, tax, or accounting advice.

UHY Victor - For Montreal Transfer Pricing

759 Square Victoria, Suite 400

Montreal, Quebec

H2Y 2J7