26 February 2019 Toronto CRA & Tax Professionals Seminar

CRA comments relating to the mooted BEPS impact on CRA transfer-pricing practices included:

• BEPS Actions 8 to 10 did not effect substantial changes, i.e., the underlying principles are the same.
• CRA hopes to have final guidance out (re BEPS changes) by November 2019 including clarifying the concepts of risk-free return and risk-adjusted return.
• Canada has not adopted the simplification measure concerning low-value-added intragroup services – so that, rather than accepting a flat markup on intragroup service-charges because of the OECD guidance, CRA will continue to rely on IC87-2R to govern intragroup pricing until adoption of a new measure.
• Once the financial transactions project is completed, CRA will provide guidance on how the BEPS changes apply in Canada.
• The Canadian penalty regime is not more rigorous than Action 13 – instead it is that CRA's audit process is more rigorous than in most jurisdictions.

CRA stated:

• Penalties are usually imposed for failure to have accurate and complete contemporaneous documentation respecting the ss. 247(4)(a)(iv) to (vi) matters (regarding the underlying analysis).
• CRA will audit the “story” in the underlying documentation, e.g., if the taxpayer represent that one of the parties is a low-risk distributor and CRA’s review demonstrates that it is a full-fledged distributor, penalties will probably be imposed (provided the $5 million threshold is exceeded).
• The Canadian penalty regime is not more rigorous than Action 13 – instead it is that CRA's audit process is more rigorous than in most jurisdictions.