Resolving Transfer Pricing Disputes In Canada

Introduction

The growth in international business has led to more Canadian companies transacting across borders with related parties, making transfer pricing an important focus of the Canada Revenue Agency ("CRA"). The CRA has invested significant resources in the area of transfer pricing which has established Canada as arguably the most sophisticated nation, and perhaps most aggressive, in international tax and transfer pricing. Furthermore, the Canadian tax system does not provide adequate measures to allow taxpayers to self-rectify filed taxation years where the transfer pricing analysis is subsequently determined to be inadequate. This increases the possibility of CRA audit action.

A taxpayer who receives a transfer pricing adjustment can contest the adjustment through the normal dispute resolution process available to all Canadian taxpayers subject to CRA reassessments, i.e., by filing a notice of objection with the CRA Appeals Directorate ("Appeals Process"). However, since a transfer pricing adjustment generally results in double taxation for the corporate group, as the adjustment generally taxes income that has already been reported in a foreign jurisdiction, an alternative dispute resolution mechanism is available through the Mutual Agreement Procedure article of Canada's bilateral tax treaties, to allow the competent authorities of the respective countries to resolve the double taxation ("Competent Authority Process" or "MAP"). The many considerations that must be contemplated by taxpayers and their advisors when deciding how to navigate the available dispute resolution avenues make transfer pricing disputes truly unique.

This article provides an overview of the various dispute resolution options that a taxpayer must consider once the CRA issues a notice of reassessment following a transfer pricing audit. While a taxpayer can decide whether to first have its file reviewed under the Appeals Process or the Competent Authority Process, this article will first examine the Appeals Process.

Appeals Process

The Appeals Process for a transfer pricing adjustment is the same as for any other tax adjustment. Briefly, it begins with the taxpayer filing a notice of objection in response to the CRA's notice of reassessment. Following a review of the notice of objection and additional exchanges with the taxpayer's representative, the CRA's Appeals Division will render a decision and either issue a new notice of reassessment allowing the objection in whole or in part, or a notice of confirmation stating that the taxpayer's objection has been denied. Where the taxpayer is unsatisfied, it may file a notice of appeal with the Tax Court of Canada ("TCC"). Before we delve into the transfer pricing litigation process, we will first provide an overview of the Competent Authority Process.

It should be noted that the Appeals Process does not resolve double taxation unless the CRA overturns the adjustment in full. For this reason, most transfer pricing cases are worked through the Competent Authority Process, as the correlative relief afforded by the other...

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