PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
On September 11, 1997, the Canadian government issued the long-awaited draft legislation relating to the transfer pricing measures announced in their February 1997 budget. Also released was a revised circular outlining Revenue Canada's administrative practices in the transfer pricing area.
This legislation includes the new contemporaneous documentation requirements and imposes a significant penalty for those who do not determine and use arm's-length transfer prices. It is anticipated that the legislation, generally effective for tax years beginning after 1997, will be tabled in Parliament before year end. Therefore, only comments on the proposals received before November will be considered by the tax authorities.
It should be noted that the penalties can apply with respect to years when there is a loss for tax purposes. While the penalty provisions will not apply in respect of transactions completed before September 11, 1997 they will, together with the contemporaneous documentation requirements, be fully effective for taxation years that begin after 1998. This is later than originally indicated in February. The delay should allow Revenue Canada time to fully staff and plan for their enhanced transfer pricing audit efforts.
The new legislation is in conformity with the 1995 revised transfer pricing guidelines of the Organization for Economic Co-operation and Development (the "OECD"), and are generally in keeping with the transfer pricing rules of other OECD member countries. In summary, the legislation will:
require taxpayers who participate in cross-border transactions with non-arm's-length parties to conduct such transactions on terms and conditions that would have prevailed had the parties been dealing at arm's-length with each other;
introduce documentation requirements which effectively require taxpayers to contemporaneously document their transfer pricing transactions and the steps taken to ensure that the terms and conditions of such transactions satisfy the arm's-length principle; and
impose a penalty, in certain circumstances, where a taxpayer fails to make reasonable efforts to determine and use arm's-length transfer prices or arm's-length allocations in respect of transfer pricing transactions.
The Revenue Canada draft circular provides guidance for taxpayers with respect to a number of transfer pricing matters, including:
the methods endorsed by the OECD to determine arm's-length transfer prices or allocations for transfer pricing transactions and the considerations that enter into the selection of the most appropriate method in the circumstances of a particular transaction;
special considerations regarding cost contribution arrangements, transfers of intangibles, and intra-group services;
the nature and extent of the documentation required to ensure that the taxpayer will be considered, under the proposed legislation, to have made reasonable efforts to determine arm's-length transfer prices or allocations; and
the application of the proposed penalty.
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, Coopers & Lybrand, 145 King Street West, Toronto, Ontario M5H 1V8, Canada on Fax: 1-416-941-8415 or E-mail: email@example.com
David W. Steele
145 King Street West
Toronto, Ontario M5H 1V8
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