The Canadian government, through the 2025 Federal Budget, has announced a series of proposals aimed at modernizing its transfer pricing regime. This reform represents a significant step in strengthening the Canadian tax framework and aligning it with international standards set by the Organization for Economic Cooperation and Development (OECD).
The main objective is to ensure that transactions between related parties more accurately reflect the conditions that would have been agreed upon by independent entities in comparable circumstances, thereby guaranteeing the integrity of the tax system and reducing opportunities for tax base erosion.
Context and rationale for the reform
The Canadian transfer pricing system is based on the arm’s length principle, applied through section 247 of the Income Tax Act.
However, in recent years, both international practice and the evolution of OECD guidelines have led several countries to update their regulatory frameworks to more accurately reflect the economic reality of intercompany transactions.
The 2025 Budget responds to this need for updating, proposing a comprehensive modernization of the Canadian approach, which seeks to improve the clarity of the rules, reduce legal uncertainty, and provide the Canada Revenue Agency (CRA) with more effective tools for transfer pricing enforcement.
Main proposals
Among the most relevant changes are the following:
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Reinforcement of the arm’s length principle
A new analytical rule is introduced that requires consideration of both the contractual terms and the actual conduct and economic circumstances of the related parties.
This means that the authorities will be able to adjust transfer prices not only on the basis of contracts, but also taking into account the economic substance and true commercial nature of the transactions.
This approach seeks to avoid situations in which contractual structures do not reflect the functions, assets, or risks actually assumed by the entities of the group.
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Identification of economically relevant characteristics
The draft establishes a list of factors that must be analyzed to determine whether a transaction complies with the arm’s length principle, including:
- Contractual obligations between the parties.
- Functions performed and risks assumed.
- Assets used (tangible and intangible).
- Market conditions and commercial strategies.
- Economic circumstances surrounding the transaction.
This systematic approach aligns with the OECD Transfer Pricing Guidelines (2022 version), promoting greater consistency between international practices and Canada’s domestic rules.
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Changes to documentation deadlines and obligations
One of the most significant adjustments proposed is the reduction of the deadline for filing transfer pricing documentation with the CRA from the current three months to just 30 days.
This change seeks to promote greater discipline in the preparation and maintenance of transfer pricing studies, ensuring that information is immediately available upon request by the authority.
The budget also proposes increasing the threshold for imposing penalties from CAD 5 million to CAD 10 million and creating a simplified documentation regime for lower-risk taxpayers, although the details on eligibility criteria have not yet been defined.
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Scope and temporary application
If the legislative measures are approved, the new rules would apply to fiscal years beginning on or after November 4, 2025, giving companies a limited period to adapt their compliance policies and systems.
Implications for multinational enterprises
The proposed amendments have a direct impact on multinational enterprises (MNEs) that operate in Canada or have transactions with related entities resident in the country.
In practical terms, companies will need to:
- Review and update their transfer pricing policies to ensure that they reflect the economic substance of the transactions.
- Reassess the functional studies and methodologies used in determining comparable margins or ranges.
- Implement internal controls to enable the preparation and retention of supporting documentation on an ongoing basis, given the new 30-day response period.
- Monitor regulatory developments and guidelines issued by the CRA regarding the simplified regime or risk criteria.
Beyond formal compliance, the reform emphasizes the need for intercompany structures to be consistent with the operational reality of the business group.
Alignment with international trends
The Canadian project is part of a global trend toward modernizing transfer pricing regimes, driven by the OECD and G20 BEPS program. Countries such as Australia, the United Kingdom, and Germany have already adopted similar reforms that prioritize economic substance analysis and tax transparency.
In this context, Canada seeks to strengthen its position within the international framework, ensuring that its legislation maintains comparable standards and contributes to preventing double taxation and tax evasion through cross-border transactions.
Conclusion
The modernization of the transfer pricing regime proposed in the 2025 Budget represents a significant transformation for the Canadian tax environment.
The reinforcement of the arm’s length principle, the incorporation of economic substance criteria, and the reduction of documentation deadlines reflect a trend toward more rigorous and efficient control of intercompany transactions.
For multinational companies, the challenge will be to anticipate the changes, review their internal structures and policies, and maintain solid, up-to-date documentation to support compliance with the new provisions.
Ultimately, this reform seeks to balance the government’s goal of protecting the tax base with the need to provide greater clarity and consistency in the application of transfer pricing rules in Canada.
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At TPC Group, we have a team of experts in transfer pricing and international taxation, with a presence in the United States, Spain, and Latin America.
We provide comprehensive advice and customized solutions to ensure regulatory compliance and the correct application of the arm’s length principle in every jurisdiction where your company operates.
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Source: McMillan