Best Practices In Determining A Transfer Price: 2026 Transfer Pricing Guide – Part 1

A Practical Guide to Canadian Transfer Pricing examines the full transfer pricing lifecycle, from pricing and documentation through to audits, disputes, and cross‑border relief.

Explore other chapters in the guide:

• Chapter 2: The Transfer Pricing Audit
• Chapter 3: Domestic Avenues of Relief
• Chapter 4: The Competent Authority Process

Knowing the Canadian Transfer Pricing Rules

The Importance of Transfer Pricing

Transfer pricing is a fundamental aspect of tax compliance for any company or multinational enterprise (“MNE”) engaged in cross-border transactions involving goods, services, or intangible property within their corporate structure. Adherence to transfer pricing rules is essential, as non-compliance can result in significant tax consequences, including the adjustment or recharacterization of transactions and the reallocation of income in a manner that may not accurately reflect the underlying economic activity.

The OECD Guidelines

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations were adopted by the Committee on Fiscal Affairs on January 7, 2022 (the “OECD Guidelines”). The OECD Guidelines represent the international consensus agreed by member countries on transfer pricing. Specifically, the OECD Guidelines rely on the arm’s length principle and provide a two-step comparability analysis between a controlled transaction (i.e., a non-arm’s length transaction) and an uncontrolled transaction (i.e., an arm’s length transaction).

Step 1 delineates the controlled transaction through identifying (i) the commercial and financial relations of the parties, and (ii) the economically relevant circumstances and characteristics of those relations (i.e., the characteristics which parties to the controlled transaction would have accounted for).

Step 2 compares the economically relevant circumstances and characteristics identified in step 1 between the controlled transaction and a comparable uncontrolled transaction. Where applicable, adjustments will be made to the controlled transaction.

Aside from adjustments to the controlled transaction, the OECD Guidelines also provide for a non-recognition and replacement rule, allowing tax authorities to substitute a controlled transaction with a more commercially rational alternative if the original transaction is found to be commercially irrational.

Prior to March 26, 2026, while the Canada Revenue Agency (the “CRA”) endorsed the OECD Guidelines, they did not form part of Canadian transfer pricing legislation. After March 26, 2026, the OECD Guidelines explicitly form part of the Canadian transfer pricing legislation.

The New Canadian Transfer Pricing Rules

In Canada, transfer pricing is governed by section 247 of the Income Tax Act (the “Act”). The transfer pricing rules apply where two or more entities are:¹

1. participants in a transaction or series of transactions;
2. at least one of the entities is a Canadian taxpayer;
3. at least one of the entities is a non-resident of Canada; and
4. the entities do not with each other deal at arm’s length.

Entities do not deal at arm’s length if they are “related persons”² under the Act. For example, two corporations do not deal at arm’s length if they are controlled by the same person or group of persons.³ Therefore, entities within the same corporate group are considered non-arm’s length parties, and these intra-group cross-border transactions will be subject to the transfer pricing rules.

New Transfer Pricing Framework

On March 26, 2026, new Canadian transfer pricing rules were enacted into law, applicable to taxation years and fiscal periods that begin after November 4, 2025.

The new transfer pricing adjustment rule in subsection 247(2) has two requirements. If both requirements are met, then the CRA may affect a transfer pricing adjustment. The first requirement is met if a taxpayer and a non-resident non-arm’s length person are participants in a transaction or series of transactions. The second requirement is met if the transaction includes actual conditions which are different from the conditions that would exist in a transaction between arm’s length parties. This rule consolidates the prior “repricing” rule in old paragraphs 247(2)(a) and (c) and the prior “recharacterization” rule in old paragraphs 247(2)(b) and (d), into a single transfer pricing test.

There is a new substance-based test under subsection 247(1.1). Subsection 247(1.1) specifies that a transaction or series of transactions is to be analyzed and determined with reference to the “economically relevant characteristics” of the transactions or series of transactions. “Economically relevant characteristics” is now a defined term under subsection 247(1), and includes:

• The contractual terms of the transaction or series;
• The actual conduct of the participants in the transaction or series, and in particular the functions performed by the participants, taking into account:
  • the assets and risks assumed,
  • the relationship of those functions to the value generated by the multinational enterprise group as a whole;
  • the circumstances surrounding the transaction or series; and,
  • industry practices.
• The characteristics of any property transferred or service provided;
• The economic circumstances of the participants and of the market in which the participants operate; and,
• The business strategies pursued by the participants.

In effect, the addition of the “economically relevant characteristics” definition creates an economic substance test in the transfer pricing rules under the Act, in line with the OECD Guidelines.

There is also a new subjective comparison test due to the newly enacted definition of “arm’s length conditions” in subsection 247(1). “Arm’s length conditions” are the terms and conditions that would have been entered into between the participants themselves had they been dealing at arm’s length in comparable circumstances. In effect, taxpayers must now demonstrate that they would have entered into the transaction(s) with a non-resident non-arm’s length party, as opposed to drawing a comparison between other similar entities or hypothetical persons.

The addition of the subjective comparison test is in response to the Federal Court of Appeal (“FCA”) decision in Canada v Cameco Corporation,⁴ wherein the Court determined that the arm’s length principle required consideration of hypothetical arm’s length parties in a transfer pricing comparison, without considering the economic and commercial context of the particular non-arm’s length taxpayers to those hypothetical arm’s length parties.

Notably, there is also no longer a “tax benefit” purpose test that must be met in order to recharacterize a transaction or series, but the Explanatory Notes indicate that a transaction or series should be recharacterized “only in exceptional circumstances.”

Other Key Changes

New subsection 247(2.01) expands the scope of what is subject to a transfer pricing adjustment by deeming that a transaction or series is deemed to include actual conditions different than arm’s length condition if a condition does not exist in respect of the transaction or series but would have existed had the participants been dealing at arm’s length in comparable circumstances. Finally, new subsection 247(2.03) specifies that any adjustments to amounts for the purposes of the Act would be required to be determined by reference to the “Transfer Pricing Guidelines”, a newly defined term in subsection 247(1). The definition of “Transfer Pricing Guidelines” refers to OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as adopted by the Committee on Fiscal Affairs on January 7, 2022, but contemplates that Canada could prescribe by regulation either its own guidelines or updated OECD Transfer Pricing Guidelines after January 7, 2022.

Primary Adjustment

If the transfer pricing rules are applicable, then the CRA may adjust the terms and conditions or recharacterize the transaction to reflect an arm’s length transaction or series in the circumstances. This could result in an increase in the price of goods or services purchased or sold, thereby leading to an increase in taxable income.

Secondary Adjustment

Another adjustment the CRA may make under the transfer pricing rules is to deem the taxpayer resident in Canada to have paid a dividend to each non-resident party to the non-arm’s length transaction.⁵ The deemed dividend would be subject to withholding tax under Part XIII of the Act.

Transfer Pricing Penalties

Significant penalties may apply if a transfer pricing adjustment reduces a taxpayer’s income or capital by an amount exceeding the lesser of 10% of the taxpayer’s gross revenue or $10 million.⁶ A transfer pricing penalty may be imposed unless the taxpayer can demonstrate that reasonable efforts were made to determine and use arm’s length transfer prices and allocations in respect of the transaction.

The determination of reasonable efforts rests on the proper documentation of contemporaneous documents of the transaction.⁷ A taxpayer who fails to satisfy the contemporaneous documentation requirements is deemed not to have made reasonable efforts and will be subject to the transfer pricing penalty.

Contemporaneous Documentation

Subsection 247(4) of the Act requires a taxpayer to make or obtain contemporaneous documentation, including the details that must be included in that documentation and the time within which such documentation must be provided to the Minister. The content required to be included in contemporaneous documentation generally reflect the economically relevant characteristics to be considered in applying the arm’s length principle. The time within which contemporaneous documentation must be provided to the Minister upon written request is now 30 days (a reduction from the previously three months). New subsection 247(4.1) would simplify the documentation requirements where a taxpayer meets certain prescribed conditions.

Best Practices in Developing a Transfer Price

Intercompany Agreements

Whether a transfer pricing adjustment is made depends on whether the parties to a non-arm’s length transaction can demonstrate that the terms, conditions, and the nature of their deal are consistent with what arm’s length parties would have agreed to in similar circumstances. The best way to support this is often through a well-drafted intercompany agreement, as this is where taxpayers have the most control over the transfer pricing process.

Given the complexity and risks involved, especially with the focus on “economically relevant characteristics,” it is wise to seek legal advice early. Properly drafted agreements should clearly reflect the characteristics considered by the parties to the transaction and to demonstrate reasonable efforts in determining arm’s length transfer prices and allocations.

A few best practices in structuring these intercompany services agreements include:

• Less is not more: Agreements should detail the property or services and assets involved, the scope and purpose of the transactions, relations with members of the corporate group, any risks or liabilities assumed, and economic circumstances and contributions of the parties. These details establish the “economically relevant characteristics” of the delineated transactions, which sets the ground for transfer pricing comparison.
• Schedule in flexibility: Itemize each property or service in a schedule to the agreement to include more details and allow for easier amendments. It may be preferable to allow more flexibility to make changes to a schedule rather than to amend and possibly restate an agreement. Schedules should also outline pricing methods, service rates, and the considerations used to determine arm’s length prices.
• Stay up to date: Regularly update and keep the agreement and its schedules current to ensure they reflect the actual transactions and demonstrate any transfer pricing considerations and methods used. Up-to-date documentation demonstrates that transactions are conducted as described.
• Standardize Processes: For groups with frequent intragroup transactions, use template agreements and standardized accounting processes. Consider having each party to the transactions create a resolution to identify the property or services received and the provider of such property or services. Consistent practices across the group support compliance and make it easier to demonstrate alignment with agreements and schedules.

A key takeaway from these best practices is that agreements, documentation, and internal practices should provide the CRA with a clear, complete picture of the transactions and how they were conducted.

Corporate Restructuring

Canada’s domestic transfer pricing rules may apply to the restructuring of a MNE with a Canadian nexus, particularly where such restructuring appears to have a significant tax motivation (e.g., a restructuring which shifts the profits of an MNE to a low-tax jurisdiction).

Section 247 of the Act sets out a general framework to determine pricing for transfers between related parties within an MNE group. To the extent that a corporate restructuring has been undertaken involving a Canadian taxpayer and a non-resident non-arm’s length party, it must accord with the arm’s length principle.

Chapter IX of the OECD Guidelines states that a transfer pricing analysis of a corporate restructuring generally requires an accurate delineation of the relevant transactions referencing the functions, assets and risks of the MNE both prior and subsequent to the consummation of such restructuring.⁸ As a result, any such restructuring will require an analysis into whether: (i) there has been a transfer of functions, assets and risks within the MNE group, and (ii) whether arm’s length consideration has been paid in respect of such transfers.

The following are some considerations concerning best practices related to transfers in the context of a corporate reorganization or restructuring:

• Pricing: Ensure that any corporate reorganization or restructuring is priced in a manner that will compensate the parties to the transaction on arm’s length terms in order to comply with the arm’s length principle.
• Commercial Justification: Articulate a commercial purpose for the restructuring to establish that the transaction was not purely motivated by a tax-driven rationale and would have been entered into by arm’s length parties. Any commercial rationale that supports that arm’s length parties with the particular business strategies would have entered into the transaction is helpful for transfer pricing purposes.
• Documentation is Critical: Obtain independent valuations to support the value of Canadian subsidiaries, transferred assets, and assets whose value may be difficult to ascertain (e.g., intangibles) where the restructuring of the MNE group has a Canadian component. For instance, where a Canadian subsidiary of the MNE group is closed as a result of the restructuring of the MNE group, ensure that any payment for such closure accurately reflects the value of the Canadian subsidiary (taking into account any synergies and benefits conferred on the Canadian subsidiary by related parties within the MNE group).

Intangibles

Transfer pricing issues may also arise on cross-border transfers of certain intangibles (e.g., patents, know-how and trade secrets, trademarks, etc.) between related parties. The Act does not contain specific rules dealing with intangibles; however, taxing authorities are generally concerned that the arm’s length principle’s “perceived emphasis on contractual allocations of functions, assets and risks” is susceptible to manipulation with respect to the transfer of intangibles by MNEs.⁹

Although a tax-motivated transfer of assets to allocate profits derived thereon to lower-tax jurisdictions is not inherently offensive under the Act,¹⁰ taxpayers should adopt the following best practices in respect of the transfer of intangibles:

• Functional analysis for intangibles: Undertake a functional analysis involving the use or transfer of intangibles, which is grounded in an understanding of the business of the MNE and how the relevant intangibles add value across the MNE’s supply chain. In particular, such functional analysis should identify: (i) the relevant intangibles, (ii) how those intangibles contribute to the value of the subject transaction under review, and (iii) the functions performed and risks assumed in respect of the development, maintenance, protection, and exploitation (“DEMPE”) of the relevant intangibles. This functional analysis should support that the transfer of intangibles accords with the arm’s length principle.
• Exploitation of Intangibles: The legal ownership of intangibles will not in and of itself suffice to establish the entitlement of any profit derived from the exploitation of intangibles. Accordingly, it is important to interrogate the functions performed by related parties within the MNE group to determine whether such relationships conform with the arm’s length principle.
• Commercial Justification : Articulate a commercial purpose for the transfer of the intangibles to establish that the transaction was not motivated solely for tax purposes.
• Entitlement to Reimbursements: Related parties in an MNE group that add value in connection with the DEMPE of an intangible may be entitled to remuneration for such services. Further, related parties in an MNE group that provide funding and assume financial risk (but do not perform any function in connection with the intangibles) may only be entitled to a risk-adjusted return.

When transferring intangibles, MNE groups should be cognizant of intra-group relationships when considering entitlement for the exploitation of such intangibles. It is not sufficient to ground entitlement for the exploitation of intangibles solely on legal ownership thereof in the transfer pricing context.

Transfer Pricing Methodology

Although the taxpayers are required to comply with the arm’s length principle under section 247, the Act does not specify how to adhere with that standard. Subsection 247(2.04) of the Act provides that whether a transaction or series of transactions includes actual conditions that differ from arm's length conditions is to be determined through an analysis where the most appropriate method is selected and applied in accordance with the OECD Guidelines. However, the legislation does not state what those methods are or their hierarchy.

The CRA’s administrative guidance identifies five transfer pricing methodologies (endorsed by the OECD) which are intended to give effect to the arm’s length principle:

• the comparable uncontrollable price (“CUP”) method that compares the pricing of transactions between related parties and the pricing of similar transactions between third parties;
• the cost-plus method that adds a profit mark-up on the cost incurred by a supplier for goods or services provided to a related party;
• the resale price method that reduces the gross margin on the resale price of goods or services that are purchased from a related party and subsequently sold to a third party;
• the transactional net margin (“TNM”) method, which compares the net operating profits which are realized among transactions between related parties and the net operating profits that are realized among comparable transactions against an appropriate base; and,
• the transactional profit split (“TPS”) method, which allocates the combined profit or loss of a particular transaction among related parties based on the value contributed by the parties to the subject transaction. The TPS method is generally applied where related parties dealing at non-arm’s length have interconnected operations, such that it is not feasible to determine an arm’s length comparable in an open market.¹¹

Although, the CRA has not adopted a strict hierarchy among the transfer pricing methodologies, it has accepted that a “natural hierarchy” exists among the methods.¹² For instance, the CRA has opined that traditional transaction methods, such as the CUP method, are preferable to the TPS method due to the availability and reliability of data gathered from the traditional methods.

Transfer pricing disputes often arise due to disagreement as to which transfer pricing methodology is most appropriate to a taxpayer’s particular circumstances. As a result, it is critical that taxpayers select an appropriate transfer pricing methodology to their circumstances and document the reasons for that selection should a transfer pricing audit ever arise.

Contemporaneous Documentation

Taxpayers are required to keep specific, contemporaneous documentation which demonstrates that they have made reasonable efforts to determine and use arm’s length transfer prices or allocations.¹³ Although the Act does not define what constitutes “contemporaneous documentation”, taxpayers are generally required to prepare or obtain records or documents that provide a description that is complete and accurate in respect of the following:

• the property or services to which the transaction relates;
• the terms and conditions of the transaction and their relationship, if any, to the terms and conditions of each other transaction entered into between the participants in the transaction;
• the identity of the participants in the transaction and their relationship to each other at the time the transaction was entered into;
• the functions performed, the property used or contributed and the risks assumed, in respect of the transaction, by the participants in the transaction;
• the data and methods considered and the analysis performed to determine the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction; and,
• the assumptions, strategies, and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, in respect of the transaction.¹⁴

The CRA’s suggested best practices are that contemporaneous documentation should generally include the following:

• a description of the taxpayer’s relevant business and its general organization;
• the selection of a particular transfer pricing methodology, including an explanation as to why the particular transfer pricing methodology is more appropriate than other methods;
• where the subject transaction involves the transfer of intangible assets, taxpayers should prepare a projection of the expected benefits conferred in respect of acquiring such assets;
• the scope of search and criteria used to identify comparable transactions;
• an analysis of the factors considered when assessing the comparability of benchmark transactions; and
  the assumptions, strategies, and policies of the parties as they relate to tangible assets, intangible assets and the services being transferred.¹⁵

As noted above, transactions between Canadian taxpayers and non-resident non-arm’s length parties should be formally documented in an intercompany agreement to facilitate the creation of the above-noted supporting documentation.

Taxpayers must prepare this documentation on or before the relevant taxpayer’s documentation “due-date”¹⁶ (which is generally the date on which the taxpayer’s tax return is due for the relevant year) or the fiscal period in which the transaction was entered into.¹⁷ In addition, the taxpayers must provide such documentation within 30 days of receiving a written request from the CRA.

In practice, the CRA will generally commence a transfer pricing audit with a request for contemporaneous documentation and will generally not entertain any request for an extension by the taxpayer. Accordingly, it is imperative that contemporaneous documentation is readily available in advance of a contemplated audit.

Preparing for audit scrutiny or reviewing documentation defensibility?

Learn how transfer pricing audits unfold, what the CRA expects, and how to manage risk throughout the process — see Chapter 2: The Transfer Pricing Audit.

Footnotes

1. Subsection 247(2).

2. Subsection 251(2).

3. Paragraph 251(2)(c).

4. 2020 FCA 112 [Cameco].

5. Subsection 247(12).

6. Subsection 247(3).

7. Subsection 247(4).

8. OECD Guidelines at p. 362.

9. BEPS 8-10 Final Report - OECD/G20 Base Erosion and Profit Shifting Project, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10: 2015 Final Reports (Paris: OECD Publishing, 2015) at p. 9.

10. See e.g., Cameco Corporation v. The Queen, 2018 TCC 195, aff’d in 2020 FCA 112.

11. Subparagraphs 247(4)(a)(i) through (vi).

12. TPM-14 2010 Update of the OECD Transfer Pricing Guidelines (31 October 2012) (“TPM-14”).

13. Subsection 247(4).

14. Subparagraphs 247(4)(a)(i) through (vi).

15. IC 87-2R, “International Transfer Pricing” (September 27, 1999).

16. Defined in subsection 247(1).

17. Paragraph 247(4)(a).

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