The 2019 Budget contains two transfer-pricing proposals. The first proposal is an ordering rule, and the second proposal is to expand the meaning of the term “transaction.”
Ordering Rule: Effective for taxation years commencing after March 19, 2019, transfer-pricing adjustments shall apply in priority to any other adjustments required under the Income Tax Act. As a result, any transfer-pricing penalties will be the same or larger than they would have been before this proposed change. This proposal also has an increasing impact on the resulting withholding tax “secondary adjustment” rules that can apply to deem a dividend to have been paid when transfer pricing income adjustments are made.
“Transaction” Definition: This proposal is for taxation years when the normal reassessment period ends on or after March 19, 2019. This normal reassessment period is generally four years after the initial examination. For transfer pricing, an extended three-year reassessment period exists for reassessments. However, the definition of “transaction” used when determining if the normal reassessment period can be extended by three years to, generally seven years, has been different from the definition used for “transaction” for other transfer pricing rules. The budget proposes to be consistent and use the broader definition for all transfer pricing rules. The broader definition of “transaction” includes arrangements or events. As a result of this proposal, the CRA auditors would use an expanded definition of “transaction” when determining whether or not to reassess a transaction for an additional three years.
“In the tax context, ‘transfer pricing’ refers to the prices, and other terms and conditions used in transactions occurring across international borders by persons who are not dealing at arm’s length. These transactions may involve the intra-group purchase or sale of goods, services or intangibles. They may also involve the provision of intra-group financing or loan guarantees.” – Budget 2019