The Canadian government on 4 November announced measures that would modernise transfer pricing rules effective for tax years/fiscal periods commencing after 4 November 2025.
The existing tax legislation governing transfer pricing was first enacted in 1997 and has not been subject to any significant change until now. The proposed changes may be grouped under the following headings:
Under the proposed changes that will impact tax years commencing after November 4, 2025, Canadian taxpayers will have 30 days within which to deliver contemporaneous transfer pricing documentation to the CRA.
While three months provided taxpayers with time to request documentation from storage or prepared outside of Canada and to assemble full Canadian contemporaneous documentation, limiting this period to 30 days will place a burden on many taxpayers.
For tax years that commenced prior to November 4, 2025, the CRA could propose a transfer pricing adjustment in one of two ways:
For tax years commencing after November 4, 2025, transfer pricing adjustments will adjust the quantum or nature of the transaction to align with “arm’s length conditions.” This will allow the CRA to adjust the quantum and/or nature of the transaction or to take the position that there is no transaction.
The tax legislation governing transfer pricing will be amended to require that the analyses and resulting determinations made will be effected in a manner that results in greater consistency with the OECD transfer pricing guidelines and the definitions included therein, including the “most appropriate method” to determine whether the actual conditions relating to a transaction differ from arm’s length conditions.
There will be less emphasis on the contractual rights and obligations of the parties to a transaction and more emphasis on the conduct of the parties and the “actual conditions” and the “economically relevant characteristics” of the transactions.
Going forward, transfer pricing analyses and documentation will have to be far more robust and all-encompassing than under the previous legislation.
The wording of the transfer pricing legislation will be broadened to refer not only to a transaction but to a series of transactions, all of which must be analysed and documented with reference to the OECD transfer pricing guidelines and the new definitions being added to the legislation.
Going forward, it will be imperative to review, analyse and document the entire value chain/supply chain to encompass the full “series of transactions.”
For tax years that commenced prior to November 4, 2025, the penalty threshold was the lesser of CAD 5 million and 10% of the Canadian taxpayer’s gross revenues. For tax years commencing after November 4, 2025, the penalty will now be the lesser of CAD 10 million and 10% of the taxpayer’s gross revenues.
While there was mention of new simplified documentation under certain circumstances, no details were provided in the budget.
It is important that both taxpayers and tax advisors act now and adopt the following actions:
Dan McGeown
Hilary Coates
BDO in Canada
The existing tax legislation governing transfer pricing was first enacted in 1997 and has not been subject to any significant change until now. The proposed changes may be grouped under the following headings:
- Quicker response time for requests for contemporaneous documentation
- Changes to the nature of transfer pricing adjustments
- Enhancing consistency with the OECD Transfer Pricing Guidelines
- Augmenting contemporaneous documentation
- Changing the transfer pricing penalty threshold
Quicker Response Time to CRA Requests for Contemporaneous Documentation
For tax years that commenced prior to 4 November 2025, Canadian taxpayers were required to deliver contemporaneous transfer pricing documentation to the Canada Revenue Agency (CRA) within three months of the delivery of a letter from the CRA requesting documentation for a specific taxation year.Under the proposed changes that will impact tax years commencing after November 4, 2025, Canadian taxpayers will have 30 days within which to deliver contemporaneous transfer pricing documentation to the CRA.
While three months provided taxpayers with time to request documentation from storage or prepared outside of Canada and to assemble full Canadian contemporaneous documentation, limiting this period to 30 days will place a burden on many taxpayers.
Changes to the Nature of Transfer Pricing Adjustments
For tax years that commenced prior to November 4, 2025, the CRA could propose a transfer pricing adjustment in one of two ways:
- Adjustment to the actual pricing of a transaction; or
- Recharacterisation of the transaction.
For tax years commencing after November 4, 2025, transfer pricing adjustments will adjust the quantum or nature of the transaction to align with “arm’s length conditions.” This will allow the CRA to adjust the quantum and/or nature of the transaction or to take the position that there is no transaction.
Enhancing Consistency with the OECD Transfer Pricing Guidelines
The tax legislation governing transfer pricing will be amended to require that the analyses and resulting determinations made will be effected in a manner that results in greater consistency with the OECD transfer pricing guidelines and the definitions included therein, including the “most appropriate method” to determine whether the actual conditions relating to a transaction differ from arm’s length conditions.There will be less emphasis on the contractual rights and obligations of the parties to a transaction and more emphasis on the conduct of the parties and the “actual conditions” and the “economically relevant characteristics” of the transactions.
Going forward, transfer pricing analyses and documentation will have to be far more robust and all-encompassing than under the previous legislation.
Augmenting Contemporaneous Documentation
The wording of the transfer pricing legislation will be broadened to refer not only to a transaction but to a series of transactions, all of which must be analysed and documented with reference to the OECD transfer pricing guidelines and the new definitions being added to the legislation.Going forward, it will be imperative to review, analyse and document the entire value chain/supply chain to encompass the full “series of transactions.”
Changing the Transfer Pricing Penalty Threshold
For tax years that commenced prior to November 4, 2025, the penalty threshold was the lesser of CAD 5 million and 10% of the Canadian taxpayer’s gross revenues. For tax years commencing after November 4, 2025, the penalty will now be the lesser of CAD 10 million and 10% of the taxpayer’s gross revenues.While there was mention of new simplified documentation under certain circumstances, no details were provided in the budget.
Next Steps
It is important that both taxpayers and tax advisors act now and adopt the following actions:
- Review the group’s value/supply chain in conjunction with the existing transfer pricing model and related methods and policies to verify that they fulfil the requirement to determine and use arm’s length transfer prices. There has been a marked increase in the number of transfer pricing audits and this trend is expected to continue as the CRA starts to audit the years subject to the new legislation.
- Revisit existing transfer pricing documentation to determine what needs to be added to the analyses to meet the new requirements introduced in this Canadian Federal Budget. It is advisable to leverage existing documentation and augment it to meet the new requirements.
- Plan ahead to prepare the group’s contemporaneous transfer pricing documentation annually and by the documentation due date, knowing that the new 30-day period to provide documentation to the CRA will not be sufficient if documentation has not been kept up-to-date.
- Put Intercompany legal agreements in place for all intercompany transactions that would be covered by agreements if those transactions involved third parties acting at arm’s length. Invoice related parties in the same manner and with comparable terms and conditions as would be used for independent third parties, and comply with the terms of the agreements as if they involved third parties.
- Provide training to operating, finance, and tax personnel to confirm that everyone is aware of their role in ensuring that the group’s actual conduct is in line with its transfer pricing model and all relevant supporting analyses and documentation.
Dan McGeown
Hilary Coates
BDO in Canada