The Canada Revenue Agency (CRA) has cancelled IC 87-2R International Transfer Pricing.
IC 87-2R has been cancelled and archived because it is inconsistent with the interpretation and application of Canadian transfer pricing legislation and does not reflect updates to the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines”). It is the CRA’s practice to generally apply the Guidelines in administering Canada’s transfer pricing rules.
For example, IC 87-2R stated that as a general rule, the specific provisions of the Income Tax Act (the “Act”) relating to cross-border debt would be applied before considering the more general provisions of section 247 of the Act. This is inconsistent with CRA’s interpretation of the Act’s transfer pricing legislation. Except as otherwise specified in the tax rules, the CRA considers that section 247 applies to all cross-border transactions with non-arm’s length entities that are relevant under the tax rules. The CRA is generally of the view that subsection 247(2) can apply in conjunction with other provisions of the Act. (See, for example, Income Tax Rulings Document No. 2017-0691071C6 (E), released June 9, 2017, that addresses the interaction between s17 and s247).
IC 87-2R also stated that instances where it is necessary to recharacterize a transaction under paragraphs 247(2)(b) and (d) of the Act for tax purposes are limited. Specific reference was made to two examples in the 1995 Guidelines. Subsequent to the release of IC 87-2R, the Guidelines have been updated twice (in 2010 and 2017) and now, consistent with the wording of the transfer pricing provisions of the Act, provide support for a broader application of the recharacterization provision. The CRA will consult the Transfer Pricing Review Committee regarding the application of paragraphs 247(2)(b) and (d) in any material situation involving a transaction or series of transactions that would not have been entered into between persons dealing at arm’s length where it is reasonable to consider that the transaction or series was not undertaken primarily for bona fide purposes other than to obtain a tax benefit.
In addition to the OECD published Guidelines, the CRA has published a number of transfer pricing memoranda (TPMs) to provide further and more current guidance on specific aspects of the transfer pricing legislation. The CRA will continue to issue and update its TPMs and will look for an opportunity to consolidate its guidance into a new information circular or similar document in the future.
Taxpayers are invited to contact their CRA International and Large Business Case Manager, or the Director General of CRA’s International and Large Business Directorate at 613-952-7472, for more information.
For more information from Canada Revenue Agency, visit canada.ca/taxes.