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Transfer pricing in a Canadian multinational comes down to one test: would two unrelated companies have agreed to the same price and terms? The CRA’s transfer pricing page says the terms should be identical with a stranger or with a related party. If a price between group companies fails that test, the CRA can adjust your Canadian income, and that adjustment is taxed.
For tax purposes, the arm’s-length principle means that the terms and conditions should be identical whether you are dealing with parties at arm’s-length or not.
Transfer pricing, Canada Revenue Agency, canada.ca
What does the arm’s length test cover?
Anything that moves between a Canadian company and a related non-resident: goods, services, loans, royalties, management fees, use of software or brands. Each one needs a price you could defend with comparable deals between strangers.
A cost that looks fair in the group’s head office accounts may look high from Canada. A management fee with no clear service behind it is the usual example. So ask, for every charge, what was actually delivered and who in Canada benefited.
Think of a Canadian subsidiary of a European furniture group, selling in Montreal and Calgary. Head office bills it a flat monthly “support fee”. If nobody in Canada can say what the support was, or what it would have cost from an outside firm, that fee is the first thing a reviewer will poke at.
What records do you need, and by when?
The CRA says you aren’t treated as having made reasonable efforts to use arm’s length prices unless you’ve prepared contemporaneous documentation. That means ready by the filing due date of the return for the year, not assembled after a letter arrives. The CRA’s memorandum TPM-05R2 lists what it should describe.
| What to document |
|---|
| The property or services and the terms of the deal |
| Who the parties are and how they’re related |
| Functions performed, assets used and risks taken by each side |
| The data, method and analysis behind the price |
| Assumptions and policies that shaped the price |
| Each material change in later years |
When a CRA request arrives, the time to hand it over matters. The 2024 memorandum says three months from service of the written request. The CRA’s current transfer pricing page says that for taxation years beginning after November 4, 2025 it’s 30 days, following legislative changes it describes there. So a calendar 2026 year falls under the 30-day clock, and older years under the three-month one. Mark the date the letter is served, because the clock starts then.
What does a transfer pricing adjustment cost?
Take a Canadian subsidiary that pays its foreign parent for services, and suppose the CRA decides $100,000 of that charge wasn’t at arm’s length. The $100,000 is added back to Canadian income. A subsidiary of a foreign parent is normally not a Canadian-controlled private corporation, so the general rate is the one to test. In the corporate tax calculator, Ontario at the general rate is 26.5% combined, which is $26,500 of extra tax on $100,000.
That’s before interest and before any penalty. The CRA’s page describes a penalty of 10% of certain adjustments and says the threshold for considering it is now the lesser of $10 million or 10% of gross revenue, for years that begin after the same November 2025 date. Read the page for the exact test, because only the headline figures were confirmed here.
There’s a second problem. If the other country doesn’t give a matching reduction, the same profit is taxed twice. Treaty procedures exist to fix that, but they take time, and how long wasn’t tested for this page.
Do you have to report these deals each year?
Yes, generally. Form T106, the Information Return of Non-Arm’s Length Transactions with Non-Residents, is how the CRA collects them. The current form and its guide say when your total triggers it. Older figures turned up, and they’ve changed before, so no dollar threshold is quoted here. Read the T106 guide for your year.
A quick sanity check is possible before you file. Run the year’s margin on the intercompany line through the profit margin calculator. If your Canadian entity earns a margin far below similar independent companies, expect a question. The percentage calculator helps with the markup maths on a service charge.
What should you do when a CRA request arrives?
Don’t sit on it. Note the service date and the deadline, tell whoever signs off on the group’s pricing, and pull the file you prepared for that year. If the report exists and matches what was actually done, sending it is mostly an admin job. If it doesn’t exist, you’re building it against the clock, and that’s a bad place to be.
Mistakes that show up late
Writing the report after the year ends and calling it contemporaneous. Copying a group-wide policy without checking it against what the Canadian entity really does. Forgetting that loans between related companies carry a rate that has to be defensible too. And leaving the answer to the tax software. People set the price, and only they can explain it.
Dividends paid back to the parent are a different topic, but the dividend tax calculator shows how distribution to individual shareholders is taxed if the group owns through Canadians. Withholding on payments to non-residents isn’t covered on this page.
When is an adviser worth paying? When the related-party amounts are large enough that an adjustment would hurt, or when you’re setting a method from scratch. Pick someone who has written these reports for groups like yours, and ask to see the structure of one.
Where this information comes from
The arm’s length wording, the documentation due date, the 30-day period and the penalty headline come from the Canada Revenue Agency‘s transfer pricing page, read in 2026. The documentation list and the three-month period come from its 2024 memorandum TPM-05R2. The tax rate is from our corporate calculator for Ontario.
Frequently asked questions
What is the arm's length test?
The terms of a deal between related companies should be the same as if the parties were unrelated. That's the CRA's stated starting point.
When must transfer pricing documentation be ready?
By the filing due date of the tax return for the year, according to the CRA.
How long do I have to give documents to the CRA?
The 2024 memorandum says three months. The CRA's current page says 30 days for years beginning after November 4, 2025. Check your year.
What is the penalty?
The CRA describes 10% of certain adjustments, with a threshold of the lesser of $10 million or 10% of gross revenue for newer years. Read the page for the test.
Is there a T106 reporting threshold?
Older thresholds have changed, so we don't quote one. Check the current T106 guide.
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