Transfer Pricing Rules
Transfer pricing rules generally apply when transactions occur between non-arm’s length parties.
If transfer pricing rules apply, the terms and conditions of the transaction must be consistent with those that would apply in an arm's length transaction. If they are not, the commissioner may adjust the terms and conditions of the transaction to those that would have applied if the transaction had been at arm’s length.
These rules are modelled after the Income Tax Act (Canada) transfer pricing rules, but with two key differences:
- They apply, with some exceptions, to all non-arm’s length transactions and are not limited to transactions with international parties
- Self-dealings are specifically addressed
You must keep detailed and current records for all transfer prices and be able to provide this documentation upon request.
Your documentation must include descriptions of the following:
- The property or services relating to the transaction
- The terms and conditions of the transaction
- The identity of the participants in the transaction and the participants’ relationship to each other at the time the transaction was entered into
- The functions performed, the property used or contributed and the risks assumed, relating to the transaction by the participants in the transaction
- How you arrived at the transfer prices and the policies, strategies or assumptions, if any, that influenced you
You must make reasonable efforts to determine and use transfer prices consistent with those that would apply in an arm’s length transaction. Reasonable efforts include maintaining and providing documentation as required.
A penalty applies when the sum of all your transfer pricing adjustments where you haven’t made reasonable efforts to comply with the rules exceeds either $5,000,000 or 10% of your gross revenue for the taxation year.
The penalty is:
- 3.5% of the value of those adjustments for taxation years beginning on or after January 1, 2017
- 5% of the value of those adjustments for taxation years beginning on or after January 1, 2037