Global Daily Tax News, Canada Proposes Updates To Transfer Pricing Rules, (Nov 7, 2025)

Canada's new 2025 Budget included proposals to enhance the nation's transfer pricing regime.

The Government said the proposals follow up on a commitment in Budget 2021 to update the rules and are based on extensive feedback received from stakeholders during earlier consultations.

The Government said it intends to modernize Canada's transfer pricing rules to better align with the international consensus on the application of the arm's length principle. In addition, an interpretation rule would be added to ensure that Canada's transfer pricing rules are applied in a manner consistent with the analytic framework set out by the OECD Transfer Pricing Guidelines.

The Government said the new rules would provide more detail on how cross-border transactions between non-arm's length persons must be analyzed. To assist this analysis, a new transfer pricing adjustment application rule would apply if two conditions are met:

• there is a transaction or series of transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length; and

• the transaction or series (once it has been analyzed and determined) includes actual conditions different from arm's length conditions.

Under the proposal, the "actual conditions" would be determined not only by the contractual terms of the transaction or series, but also by other "economically relevant characteristics", including the conduct of the participants.

Further, the new rules would also provide that a transaction or series will be considered to include conditions that differ from arm's length conditions where:

• a condition does not exist as an actual condition, but would have existed had the participants to the in-scope transaction or series been dealing at arm's length in comparable circumstances; or

• the participants would not have entered into the transaction or series, or would have entered into a different transaction or series, had they been dealing at arm's length in comparable circumstances.

The main factors required for a transfer pricing analysis would be set out in the new definition of "economically relevant characteristics".

The new rules would require any in-scope transaction or series to be analyzed and determined with reference to the economically relevant characteristics of the transaction or series.

In addition, a new definition of "arm's length conditions" would require the comparison to posit what the actual participants to the in-scope transaction or series would have done if they had been dealing at arm's length, and not what other theoretical parties dealing at arm's length might have done.

A new transfer pricing adjustment rule would provide that where the conditions of the transfer pricing application rule are met, any amounts that would be determined for the purpose of applying the provisions of the Income Tax Act in respect of the taxpayer's taxation year are to be adjusted to the quantum or nature of the amounts that would have been determined if the arm's length conditions in respect of the transaction or series would have applied.

In addition, the new rules would modify certain administrative measures. They include:

• providing relief for taxpayers through an increase in the threshold for the transfer pricing penalty to apply from an assessment (from a CAD5m transfer pricing adjustment to a CAD10m adjustment);

• clarifying the transfer pricing documentation requirements and also more closely aligning them with the new definitions and the requirements to select and apply the most appropriate method;

• providing for simplified documentation requirements when prescribed conditions are met; and

• reducing the time to provide transfer pricing documentation from three months to 30 days (whereas the requirement for taxpayers and partnerships to make or obtain the appropriate records or documentation by their documentation-due date for any given year or period would remain unchanged).

The changes are proposed to apply to taxation years that begin after Budget Day.