Canada’s 2019 federal budget introduces transfer pricing measures

Canada’s 2019 federal budget, released March 19, proposes two new measures concerning the relationship between the transfer pricing (TP) rules in the Income Tax Act (ITA) and other provisions of the ITA. The budget also provides commentary on the ongoing BEPS project.

A summary of the TP-related measures contained in the budget is provided below.

Transfer pricing measures

The two budget measures related to TP include the order of application of the TP rules and the definition of transaction for an extended reassessment period.

Order of application of the transfer pricing rules

Canada’s government proposes amending the ITA to clarify that the TP rules in Part XVI.1 (s. 247) should have priority of application over other provisions in the ITA. The budget notes that this change may have various implications and provides an example on the calculation of TP penalties imposed under Part XVI.1 of the ITA. 

The budget notes that the current exceptions to the application of TP rules that pertain to Canadian resident corporations that have amounts owing from controlled foreign affiliates, or guarantees of amounts owed by controlled foreign affiliates, will continue to apply.

The order of application measure will apply to taxation periods that begin on or after March 19 2019.

Definition of transaction for extended reassessment period

Canada’s government has also proposed amending the ITA to ensure that the term “transaction” has the same meaning in both the TP rules and the applicable reassessment rules.

As background, an extended three-year reassessment period applies to reassessments made as a consequence of a transaction involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm’s-length.

The budget notes that this reassessment extension is intended to apply in the TP context, but that the expanded definition of “transaction” used in the TP rules does not apply for purposes of the extended reassessment period. As such, the change in definition of transaction for reassessment purposes is intended to better align the TP rules and the extended three-year reassessment period.

The change to the definition of “transaction” for purposes of the extended reassessment period will apply to taxation periods of taxpayers for which the normal reassessment period ends on or after March 19 2019.

Update on the BEPS project

The budget reiterates that the Canadian government continues to cooperate and actively participate in the OECD project known as the BEPS initiative.

Multilateral instrument

The budget notes that the Canadian government is taking the necessary steps to enact the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) into Canadian law, and to ratify the MLI as needed to bring the tool into force.

Country-by-country reporting

In addition, the budget notes that Canada is currently participating in an OECD review of the information being collected in the country-by-country reports to ensure that they provide tax administrations with information that facilitates accurate assessment for TP and other BEPS risks. This review is scheduled to be completed in 2020

Phil Fortier

Tony Anderson

This article was written by Phil Fortier and Tony Anderson of Deloitte LLP in Canada. 

Phil Fortier, Partner
Deloitte LLP
Email: philfortier@deloitte.ca

Tony Anderson, Partner
Deloitte LLP
Email: toanderson@deloitte.ca

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