PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
In February, the Canadian government announced that taxpayers must prepare "contemporaneous documentation" to support their cross-border transactions with related non-residents or face penalties if incorrect pricing results in subsequent adjustments to income. These new rules are to apply for taxation years beginning after 1997. (See additional commentary in our earlier articles "Canadian Budget Includes Transfer Pricing Changes" (20 February 1997) and "New Transfer Pricing Penalties from Canada" (27 March 1997).)
Revenue Canada promised a news release before the end of June 1997, an opportunity for taxpayers to comment, and final legislation by the end of the year.
That timetable has proved to be optimistic. Through discussions with senior officials at Revenue Canada's International Tax Directorate in Ottawa, we understand that a press release is now expected before the end of August. This is to include draft legislation and an update to Revenue Canada's Information Circular 87-2 setting out their revised approach to international transfer pricing.
Countdown to Penalties
Despite the lack of any current firm guidance from Revenue Canada, taxpayers should start planning now to meet Revenue Canada's proposed timetable.
Let's look back from the deadline to determine what you should do today.
For calendar-year taxpayers, documentation must be in place for the year ended December 31, 1998, when tax returns are due on June 30, 1999. Therefore, the following dates are of critical importance:
June 30, 1999: This is the date on which documentation must be available to prove that inter-company transactions are reasonable;
December 31, 1998: The financial statements for the period ending on this date must reflect arm's-length transactions with related non-residents. Any adjustments necessary to reflect arm's-length terms should be recorded in the books by this date.
January 1, 1998: By the beginning of this taxation year, taxpayers should have a reasonable transfer pricing policy to apply during this fiscal period;
September 30, 1997: The average transfer pricing review takes at least three months to complete. To ensure that a reasonable policy is in place for the 1998 calendar year, taxpayers should start their transfer pricing analysis on or before this date.
The above timeline indicates that the time to begin a transfer pricing review is now.
Companies with year-ends other than December 31 will have a slightly longer timeline. However, should you change your year-end or undergo a change in control during 1998, you may cut this advantage short.
We will inform you of further developments as the news breaks. In the meantime, if you have any questions or would like more information please contact us. We have experienced transfer pricing professionals in Canada and around the world through Coopers & Lybrand International.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your Coopers & Lybrand advisor, or:
David W. Steele
145 King Street West
Toronto, Ontario M5H 1V8
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