Pricing between related companies should feel almost as straightforward as a fair handshake, but the rules on transfer pricing in Canada do not make it easy.
In this article, we will talk about the rules governing transfer pricing in Canada, with a focus on the changes introduced in 2025. For more details about these rules, you can also contact a Lexpert-ranked corporate tax lawyer.
What is transfer pricing in Canada?
Transfer pricing in Canada is the way tax law expects related companies to price their crossborder dealings. Under Canada's laws, when a Canadian taxpayer transacts with a nonresident whom it does not deal with at arm's length, those transactions must be priced as if the parties were independent. This is called the arm's length principle under section 247 of the Income Tax Act (ITA).
Recent Articles
This rule applies to a wide range of dealings between a Canadian taxpayer and a nonresident, which is related to the Canadian taxpayer. These dealings include crossborder transactions like:
- sales of goods
- provision of services
- licensing or transfer of intellectual property
- other financial transactions (e.g., relatedparty loans or guarantees)
Learn more about transfer pricing across the globe with this video example:
Got questions about transfer pricing in Canada? Consult with the best Canadian corporate tax lawyers as ranked by Lexpert.
What are the laws that govern transfer pricing in Canada?
Several laws and guidelines govern transfer pricing in Canada, and corporate tax lawyers play a key role in helping clients comply and avoid violations. Here's a summary of these laws on transfer pricing:
The Income Tax Act
The main law for transfer pricing in Canada is section 247 of the ITA. It is the main legal basis which requires cross-border transactions between a Canadian taxpayer and a nonresident related party to follow the arm's length principle.
In simple terms, both pricing and conditions must match what independent parties would agree in similar circumstances. Otherwise, section 247 requires that amounts be adjusted, as if the transaction had been entered into, and priced, between persons dealing at arm's length.
Penalties under the law
The law also sets the timing and penalty framework:
- assessments: while the normal reassessment period is three (3) or four (4) years, transfer pricing and certain foreign affiliate issues receive an extra three years
- 10% penalty: if the Canada Revenue Agency (CRA) makes transfer pricing adjustments and the taxpayer did not make reasonable efforts, there's a nondeductible penalty of 10 percent once adjustments reach the threshold, which is now the lesser of $10 million or 10 percent of gross revenue
Together, these rules underscore that transfer pricing in Canada is not merely policy guidance but codified in the ITA and backed by extended audit rights and specific penalties.
The OECD Transfer Pricing Guidelines
In Canadian practice, transfer pricing generally follows the methods and concepts in the OECD Transfer Pricing Guidelines. Courts and the CRA have treated those Guidelines as the main reference when they apply the arm's length principle.
Budget 2025 and Bill C-15 go further by explicitly writing this link into the legislation, so interpretation must track the OECD framework as it is updated.
The Budget 2025 and Bill C-15
Apart from what has been discussed earlier, the Budget 2025 and Bill C15 updated ITA's section 247 in a major way:
The single adjustment rule
This rule replaced the old split between standard pricing adjustments and special "recharacterization" rules:
- under the new rule, transactions will be adjusted when they differ from arm's length conditions, as defined by the law
- it also includes the possibility that no transaction, or a different transaction, would have been made if the participants dealt with each other at arm's length under the same circumstances
The "delineation first" framework
The amendments also added a clear "delineation first" framework that looks at contractual terms, functions, assets, risks, market context, and business strategies. Canada now requires section 247 to be interpreted in a way that fits with the OECD Transfer Pricing Guidelines for tax years after November 4, 2025.
Here's another video that explains more about transfer pricing:
Bookmark our Legal FAQs page for more articles that answer common questions about Canadian laws.
What are the legal requirements for transfer pricing in Canada?
If you're a business or a corporation that engages in cross-border transactions, the following requirements for transfer pricing requirements in Canada are particularly relevant. We will discuss below some of these legal requirements, but for more clarification on these rules, it's better to consult with a Canadian law firm for corporate tax law.
The arm's length principle
One of the important legal principles to keep in mind when it comes to transfer pricing is the arm's length principle under ITA's section 247. Also called the golden rule of transfer pricing, this principle:
- states that prices and other conditions must match what independent parties would agree in similar economic circumstances
- applies where a Canadian taxpayer deals with a nonresident that is not at arm's length, across a wide range of goods, services, intellectual property, and financial transactions
Documentation requirements
Cross-border transactions, whether large or small, are now covered by the requirements for transfer pricing in Canada. ITA's Section 247 can apply to any Canadian taxpayer that has cross-border dealings, regardless of the amounts involved, and the CRA is known to review transfer pricing closely.
This is why many businesses should prepare detailed transfer pricing documentation, even before the CRA asks for it:
- contemporaneous documentation: ITA's Section 247 requires contemporaneous transfer pricing documentation, which describes the property or services, the terms of the transaction, the relationship between the parties, their functions, assets, and risks, and the data and methods used to set prices
- filing of the documentation: it must be in place by the tax return filing deadline and is not filed automatically; it must be provided to the CRA when requested; Budget 2025 and Bill C15 shorten the response time, from three months to 30 days for tax years after November 4, 2025
Requirements for information returns
Information returns are another legal requirement. Canadian taxpayers must now file the following:
- Form T106: for those that have nonarm's length transactions with nonresidents, and it must be filed with their corporate tax return
- Form T1134: for those that have foreign affiliates, for each affiliate of the taxpayer or partnership that is either a controlled or non-controlled foreign affiliate
- CbC reporting: large multinational groups with consolidated revenue of at least €750 million must also file a countrybycountry (CbC) report within 12 months of yearend
These forms do not replace transfer pricing documentation, but instead give the CRA a way to spot high-risk cases and start audits.
How can lawyers help clients with transfer pricing in Canada?
Having a corporate tax or a cross-border lawyer is important for business engaged in transactions that may fall under Canada's transfer pricing rules. Here are some of the ways that these lawyers can help you and your business:
- determine if you're covered by section 247: lawyers can first help clients understand whether section 247 even applies to their group, including mapping out which crossborder relatedparty transactions fall within the Canadian transfer pricing rules, and how those transactions line up with the arm's length principle in the Income Tax Act and the OECD Transfer Pricing Guidelines
- planning and documentation for cross-border deals: lawyers can work with tax and finance teams to design intercompany structures, prepare or review contemporaneous transfer pricing documentation under subsection 247(4), and make sure it covers facts, methods, and assumptions in a way that meets CRA expectations
- assess and manage high-risk businesses or transactions: lawyers can also review corporate restructurings, intragroup financial transactions and intellectual property arrangements, which are common targets for CRA scrutiny; they can also help decide when to use advance pricing arrangements or other dispute resolution services
- deal with the CRA when problems arise: lastly, lawyers can respond to information and documentation requests, attend meetings with CRA auditors, and prepare submissions and notices of objection if adjustments are proposed
Transfer pricing in Canada: Complying with new rules
With rules on transfer pricing in Canada now reaching deeper into how crossborder groups set terms, price risk, and share profits, legal advice and representation are more relevant than ever. Lawyers can translate complex transfer pricing reforms in Canada into practical steps for pricing, contracts, and records, so the next crossborder handshake also looks fair and defensible on paper.
Subscribe to the free Lexpert newsletter for more articles on Canadian financial and tax laws, including transfer pricing in Canada.