Modernizing Canada’s transfer pricing rules

In Cameco Corporation v. The Queen (2018 TCC 195; affirmed 2020 FCA 112), the Tax Court of Canada and the Federal Court of Appeal took a close look at how Canada’s transfer pricing recharacterization rule in subsection 247(2) should work. The CRA argued that profits earned by Cameco’s Swiss subsidiary should be shifted back to Canada because in its view, the related party arrangements didn’t reflect arm’s length behaviour. The courts rejected the CRA’s position. They found that the legislation required the transaction to be priced as it was actually structured, and that changing or “recharacterizing” a transaction should only happen in very limited circumstances. When the Supreme Court declined to hear the case, those rulings became final.

Following that outcome, the Department of Finance raised concerns that Canada’s transfer pricing rules—written back in 1997— didn’t provide sufficient statutory direction to properly apply the arm’s length principle. In particular, Finance noted that the rules didn’t align with how the principle is applied internationally under the OECD Transfer Pricing Guidelines.  

In 2023, Finance released a public consultation paper proposing a comprehensive modernization of section 247. The consultation explicitly cited the Cameco decisions as highlighting structural weaknesses in the legislation, including an overreliance on legal form and the absence of a clear framework for identifying the economically relevant characteristics of a controlled transaction. Finance proposed a two-step OECD aligned approach that would give the CRA explicit authority to disregard or replace a transaction where arm’s length parties would not have entered into it in comparable circumstances.

2025 Federal Budget proposal on transfer pricing rules

Proposed changes released in Budget 2025, largely implements the approach outlined in the 2023 consultation, with several important refinements. Most notably, the draft rules remove the long standing distinction between a “pricing adjustment” and a “recharacterization.” Under the proposed draft legislation included in Bill C-15, a transfer pricing adjustment may be made whenever the actual conditions of a cross-border transaction between related parties differ from the arm’s length conditions that would have applied between independent parties.

The draft legislation formally embeds a “delineation-first” approach, requiring taxpayers to evaluate a defined set of economically relevant characteristics, including the parties’ conduct, to determine the true nature of the transaction. Where appropriate, the CRA may conclude that arm’s length parties wouldn’t have entered into the transaction at all, or would have entered into a different one. A statutory interpretation rule further requires that section 247 be applied in a manner that best achieves consistency with the 2022 OECD Transfer Pricing Guidelines.

The Budget also proposes changes to the transfer pricing penalty and documentation regime. The absolute dollar threshold for the transfer pricing penalty would increase to $10 million (from $5 million), but the relative threshold of 10% of revenues would continue to apply in parallel, with the penalty triggered at the lesser of the two amounts. Documentation requirements would be expanded to be more closely aligned with OECD concepts, and the deadline to provide documentation upon request would be reduced to 30 days (from three months). Missing this deadline would eliminate penalty protection—even if the documentation was prepared on time. The government is also proposing simplified documentation requirements for qualifying taxpayers, with eligibility criteria to follow in future administrative guidance.

These measures are proposed to apply to taxation years beginning after November 4, 2025. However, it’s important to note that the draft legislation included in Bill-15, isn’t yet enacted.

Takeaways

The shortened 30-day response window significantly increases the importance of maintaining audit-ready transfer pricing documentation and governance processes. Taxpayers should revisit their existing transfer pricing policies to ensure they fully address economically relevant characteristics and accurately delineate intercompany transactions under the new framework.

The elimination of the recharacterization threshold and the change to the primacy of legal form significantly expands the CRA’s adjustment discretion. This change is likely to intensify audit scrutiny, particularly for structures that rely heavily on contractual allocations that may differ from arm’s length precedent or aren’t fully supported by conduct.

At the same time, the increased penalty threshold and the introduction of simplified documentation represent welcome developments for smaller Canadian multinationals and may reduce compliance burdens for qualifying taxpayers.  

For help navigating these rules or how the proposed changes may impact your business, please contact your local advisor or reach out to us here.

^Disclaimer

^{The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.}