Canexi Accounting & Tax Solutions Blog

What is transfer pricing?

Transfer pricing is simply the price your Canadian company charges - or pays - when it buys from, sells to, or provides services to related companies in other countries.  The core rule is the arm's length principle: related parties must price their dealings as if they were independent businesses negotiating in the open market.

In Canada, the arm's length requirement is written into Section 247 of the Income Tax Act, and CRA's official transfer pricing guidance explains how it expects taxpayers to apply it in practice.  This applies to goods, services, management fees, interest on intercompany loans, royalties, and even cost-sharing arrangements.

Why it matters: tax, penalties, and double taxation

If CRA thinks a cross-border related-party price is too high or too low, it can adjust the Canadian company's income to what it believes an arm's length price should be.  That can mean more tax, plus interest.  On top of that, section 247 allows CRA to impose a 10% transfer pricing penalty on the adjustment if the company did not make "reasonable efforts" to set and support its prices properly.

There is another sting in the tail: if a foreign tax authority does NOT make a corresponding adjustment on the other side of the transaction, you can end up with double taxation — the same profit taxed in two countries.  CRA points out in its guidance that proper documentation is the main way to reduce this risk and to qualify for penalty relief.

What CRA expects: "reasonable efforts" in plain language

CRA's own publications say that "reasonable efforts" means preparing and keeping contemporaneous transfer pricing documentation — in other words, a file put together around the time you enter into the transactions, not years later when an audit starts.  In practical terms, that file should cover:

• A description of the related parties and the nature of the intercompany transactions.
• A functional analysis: who does what, who uses which assets, and who takes which risks.
• A discussion of the transfer pricing method chosen (for example, comparable uncontrolled price, cost plus, or transactional net margin) and why it is the most appropriate.
• Data and calculations showing how the arm's length range or margin was determined.

CRA states that this documentation should be available within three months of a request in an audit.  If you cannot produce it, the agency can assume you did not make reasonable efforts and may apply penalties on top of any tax increase.

Practical tips for Canadian companies

For a Canadian company, a sensible compliance approach includes:

• Identify all related-party cross-border transactions each year: not just the obvious ones like management fees.
• Document your story: why the structure exists, who really does the work, and how the pricing was set.  CRA guidance stresses that facts and functions drive the right price, not tax targets.
• Use market data where possible: for example, independent service fee benchmarks or margins from comparable distributors.
• Keep documentation up to date: especially when business models or functions change (such as adding a new service line or shifting risks).

CRA's public guidance makes one thing very clear: transfer pricing is no longer a niche concern; it is a mainstream compliance expectation for Canadian companies with foreign-related transactions.  Investing early in clear, layman-friendly documentation can save significant time, stress, and money when CRA comes calling.

*General Information Disclaimer (as of 2025-12-15)* 

This blog provides educational insights on Canadian accounting, tax, and international SME topics based on current public CRA guidelines and standards. Laws change frequently, so content may become outdated—verify with official sources. Canexi Accounting & Tax Solutions provides general insights; this is not professional advice. As a non-public practice, we focus on advisory services—contact us for tailored guidance. We offer no guarantees or liability for decisions based on this material. Consult a qualified CPA for personalized needs.

Further reading: Canada Revenue Agency: Transfer Pricing