Proposed Transfer Pricing Reform: What Do Businesses Need to Know?

The 2025 federal budget includes draft legislation that would implement a significant rewrite of Canada’s transfer pricing provisions, largely aligned with proposals released in a 2023 Department of Finance Consultation Paper.

How will this development impact multinational enterprises operating in Canada? Here are five things to know about the proposed new rules:

1. New Adjustment Provision. The proposed new adjustment provision captures transactions where the “actual conditions” deviate from “arm’s length conditions” (that is, conditions that would have applied if the parties had been dealing at arm’s length in comparable circumstances, including the possibility that the parties would not have entered into the transaction at all or would have entered into a different one).
2. Emphasis on “Economically Relevant Characteristics.” In response to a perceived “overemphasis on intra-group contracts” in Cameco Corporation, the proposed legislation now explicitly requires consideration of a non-exhaustive list of “economically relevant characteristics” that includes the parties’ “actual conduct.” As a practical matter, courts have always considered such factors in transfer pricing cases.
3. Incorporation of OECD Guidelines by Reference. The proposed legislation would require that it be interpreted to “best achieve consistency” with the 2022 OECD Transfer Pricing Guidelines. Canadian courts already commonly cite the Guidelines, but they have not previously had the force of law. The new rule may generate uncertainty as the Guidelines contain principles-based language that is itself open to interpretation.
4. Tightened Timing for Compliance. If the new rules are enacted as proposed, taxpayers will have only 30 days (reduced from 90) to provide contemporaneous transfer pricing documentation when requested. This will heighten the need for better record retention and responsiveness.
5. Increased Penalty Threshold. The absolute dollar penalty threshold is proposed to be increased from C$5-million to C$10-million. Also included is a new rule that would allow for alternative, simplified documentation requirements to be prescribed by regulation. 

Ultimately, it remains to be seen how the new legislation will be interpreted and applied, but it is likely to increase compliance pressure in the immediate term.

For more information, please contact the authors or any member of our Tax Controversy & Litigation group.