In March 2025, the Tax Court of Canada issued a key decision in the “Canada vs MEGlobal Canada ULC” case (No. 2025 TCC 50). This ruling significantly affects the Transfer Pricing and fair appraisal in related party transactions. Herein, we will address the key aspects, the effects of Canadian regulation, and the possible consequences for multinational companies.
Background
MEGlobal Canada ULC is a subsidiary of a multinational corporation involved in the manufacturing and distribution of petrochemical products. The CRA (Canada Revenue Agency) challenged the pricing of MEGlobal’s intercompany transactions after reassessing them in the fiscal years 2008, 2010, and 2011, arguing that the reported values did not reflect the Arm’s Length Principle, as established by the OECD and the Canadian Income Tax Law.
Transfer Pricing Litigations
According to the CRA, MEGlobal Canada ULC had undervalued transfer prices on certain related party transactions, resulting in a lower taxable base in Canada. The case focused on the following issues:
- Election of the Transfer Pricing Method: MEGlobal employed the Transactional Net Margin Method (TNMM), but the CRA argued that the Comparable Uncontrolled Price (CUP) was more appropriate.
- Benchmarking and Comparability: The comparables employed by MEGlobal were discussed in its benchmarking analysis, particularly regarding the Canadian market.
- Recharacterization Adjustments: The CRA proposed to adjust the recharacterization of specific income, which would significantly affect the MEGlobal’s tax burden.
Court Decision
The Tax Court of Canada analyzed the employed methodology and determined that the CRA did not sufficiently support the CUP method over the TNMM in this case. Conversely, the Court also pointed out deficiencies in MEGlobal’s comparability analysis, ordering certain adjustments in the Transfer Pricing determination. Finally, the CRA’s grounds were analyzed regarding its grounds to adjust under the Canadian Income Tax Law.
Effects and Consequences
This ruling reinforces the importance of a deep selection of the Transfer Pricing methods and demonstrates the evidentiary burden on taxpayers and the CRA. The principal lessons include:
- Need for detailed and well-supported Transfer Pricing documentation.
- Importance of solid benchmarking studies aligned with market conditions.
- A stricter approach of the Canadian tax authorities in reviewing intercompany transactions.
Concerning the above, companies must strengthen their documentation and compliance strategies to avoid similar disputes eventually.
Source: TPCases