World Transfer Pricing 2014: The Comprehensive Guide To The Worlds Leading Transfer Pricing Firms
Over the last several years, the Canadian federal tax authority, the Canada Revenue Agency (CRA), has become increasingly aggressive in auditing the affairs of multinational enterprises. In the face of growing fiscal deficits and increased demands for government spending, the CRA has devoted greater resources to reviewing international transactions that may be aimed at reducing Canadian taxes payable.
Recent Canadian legislative proposals have also imposed more extensive reporting obligations on Canadian taxpayers that enter into transactions with non-residents, and have extended the period in which such taxpayers may be reassessed if they fail to comply with such reporting requirements.
As a result of the increased scrutiny of international transactions by the Canadian government, it is critical that tax directors and their advisers properly manage Canadian transfer pricing audits.
Identification of audit targets
Any Canadian taxpayer that enters into a transaction involving a party with which it does not deal at arm's length may be at risk of being subject to a transfer pricing audit. While there is an element of chance inherent in whether a particular taxpayer will be selected for a Canadian transfer pricing audit, certain circumstances can increase the likelihood of a taxpayer being audited. Such circumstances include:
The persistent reporting of losses over an extended period of time; The payment or receipt of material intra-group charges in respect of intangibles, services or guarantees; The receipt or provision of bundled supplies; Contract manufacturing arrangements; Business reorganisations and/or intellectual property migrations; Transactions involving parties resident in low tax jurisdictions; Reporting deficiencies/anomalies on CRA Form T106, Information Return Of Non- Arm's Length Transactions With Non- Residents (including indications that the taxpayer has not prepared contemporaneous documentation in respect of a cross-border transaction); and Changes to historically applied transfer pricing methodologies. Contemporaneous documentation
The Income Tax Act (Canada) (the Tax Act) permits the CRA, in certain circumstances, to assess a special transfer pricing penalty, generally equal to 10% of the amount of any unfavourable annual net transfer pricing adjustment, if the unfavourable net adjustment exceeds a statutory safe harbour equal to the lesser of (i) C$5 million ($4.8 million), and (ii) 10% of the taxpayer's gross revenue...
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