The client  

The client (CanCo) is a Torontobased, Canadianowned manufacturer of parts for certain industrial systems. With $25 million in revenue, the company planned its first international push by establishing a US distributor, followed by distribution into Europe via thirdparty partners. CanCo leadership wanted a compliant, scalable transfer pricing (TP) framework that wouldn’t overengineer the business at its current size—yet would stand up to CRA, IRS, and European scrutiny as volumes grew. 

The challenge 

CanCo’s expansion raised typical crossborder tax and TP questions for a growing business: 

  • How to price intercompany product sales to the new US distributor so it can earn an appropriate expected return, without inappropriately shifting profits. 
  • Whether to charge for management support, logistics coordination, and brand/IP use and how to do so—without creating unnecessary complexity and administrative burden. 
  • How to document contemporaneously to satisfy CRA and IRS expectations, while keeping the records proportionate to materiality. 
  • How to implement the policy operationally and legally (including ERP pricing, invoicing, monthend trueups, and agreements) with a small accounting team and outside Counsel. 

Our approach: Quick, practical, and scalable 

We started with a quick assessment reviewing corporate functions, assets, and risks. For Canada, this included understanding manufacturing, product sourcing, inventory risk, customer contracts, and IP value. For the US, it involved understanding the envisaged local selling function, marketing, logistics, and the brand’s value in the u market. We mapped envisaged intercompany flows (finished goods, lowvalue services, and brand use) and screened for potential tax risks or exposures, including permanent establishment/state nexus and indirect tax flags.

After our 1-week assessment, we 

Designed a simple, scalable transfer pricing policy aligned with OECD principles and North American CRA and IRS practice. The components included a US distributor TP model set up, system implementation for management and support services, embedded brand/IP use rights, and built-in flexibility for change in volume.  

 

  • US limitedrisk distributor (LRD): CanCo sold the goods to its US distributor at a transfer price based on market comparisons that provides a reasonable expected profit to the distributor (benchmarked with the transactional net margin method (TNMM)). CanCo retained residual entrepreneurial returns on manufacturing, inventory, and IP. 
  • Management and support services: CanCo provided management,  finance, HR, IT, and sales enablement services to the U distributor at a cost-based charge with a modest markup.  We kept allocations simple (time sheets and headcount drivers) to minimize admin burden. 
  • Brand/IP use: Implemented a limited royalty-free license for the US distributor to authorize access to brand IP and certain know-how.. 
  • Smart scaling: Established materiality thresholds and quarterly checks for the policy can adjust as volumes changed.  

We also collaborated with the accounting team and external Counsel on documentation and implementation of processes. This included assisting Counsel with drafting legal agreements, enabling tools to track product pricing and profits for the accounting team, and computing service costs.  

Legal agreements: Assisted with implementing an intercompany distribution agreement, services agreement, and brand license with concise scope, clear risk allocation, and pricing annexes. 
Enterprise resource planning (ERP) enablement: Configured dashboards to monitor transfer prices and margins, managed and tracked service costs, and structured a quarterly trueup mechanism. 
Tax process: Mapped invoice flows and documentary evidence, aligned necessary information for tax reporting requirements in Canada (Form T106) and in the US (Form 5472), and addressed tax withholding. 
Controls: Implemented a lightweight governance routine—quarterly variance review, annual benchmark refresh, and triggers for new channels, rebates, or significant discount campaigns. 

Prepared documentation to stay audit-ready and help avoid penalties. This included preparing a concise TP narrative, detailed reports, supporting intercompany agreements, and an implementation memo that shows how the pricing policy is connected to the systems.  

Produced proportionate, contemporaneous files that provide penalty protection and practical audit readiness, including: 

  • A concise TP narrative (business overview, industry, supply chain, DEMPE/FAR analysis, TP model overview). 
  • Local files for Canada and the US with tested party selection, method rationale (e.g., TNMM for the distributor, costplus for services), screening and selection of comparables, and pricing conclusions tied to operational data. 
  • Supporting intercompany agreements. 
  • An implementation memo connecting policy to the ERP and working papers. 

Results 

Within the first year, the US distributor earned a predictable margin, with minimal quarter or year-end adjustment effort. CanCo is now CRA and IRS audit-ready, knowing the mindful approach to planning, implementing, and documenting transfer prices provides protection from potential penalties. As European sales began via thirdparty partners, CanCo extended the policy framework to Europe—adding a limitedrisk distributor policy for an EU subsidiary in charge of local channel partner relationships. CanCo reports that quarterend close is unchanged in duration, and leadership has predictable, defendable crossborder results that scale with growth—without burdening a small team. 

 

*Case study generalized to protect confidentiality of our client.