Transfer Pricing Documentation and Penalty Calculator
The penalty is 10% of the adjustment, not 10% of the tax, and documentation is the only thing that removes it. Work out your threshold, your exposure per open year, and what documentation would have cost by comparison.
total across open years
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Does the Penalty Apply
| Test | Basis | Result |
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Exposure Per Open Year
| Item | Basis | Per Year | All Years |
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What Documentation Must Contain
| Element | Why It Matters |
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Points That Decide This
What to Do Next
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Disclaimer: Subsection 247(2) allows the CRA to adjust terms between non-arm’s length parties to arm’s length terms. The penalty under subsection 247(3) is 10% of the net adjustment, and applies only where that net adjustment exceeds the lesser of $5,000,000 and 10% of the taxpayer’s gross revenue for the year. Subsection 247(4) deems a taxpayer not to have made reasonable efforts unless contemporaneous documentation was made or obtained by the documentation-due date, which is the T2 filing due date, six months after the fiscal year end. Transactions supported by adequate documentation are excluded from the penalty base. Part I tax on the adjustment is calculated at 26.5%, being the Ontario general rate, since a subsidiary of a foreign parent is generally not a Canadian-controlled private corporation. A secondary adjustment may be treated as a deemed dividend to the non-resident under subsection 247(12), attracting Part XIII withholding. Form T106 is required where reportable transactions exceed $1,000,000, with a late filing penalty of $25 a day, minimum $100 and maximum $2,500 per year. This page is general information, not tax advice.
The Penalty Is on the Adjustment, Not the Tax
This is what makes section 247 different from every other penalty in the Act. Ten percent of the adjustment, regardless of how much tax the adjustment actually produces. An adjustment against a loss year still carries the full penalty.
On a $3,000,000 adjustment the penalty is $300,000 a year, whether or not any tax is payable. Across three open years that is $900,000 of penalty alone, and documentation prepared in advance would have removed all of it.
Smaller Companies Have a Lower Threshold
The penalty applies only where the net adjustment exceeds the lesser of $5,000,000 and 10% of gross revenue. Because it is the lesser, a smaller company is exposed sooner.
| Gross Revenue | 10% of Revenue | Threshold |
|---|---|---|
| $8,000,000 | $800,000 | $800,000 |
| $20,000,000 | $2,000,000 | $2,000,000 |
| $100,000,000 | $10,000,000 | $5,000,000, the cap |
A company with $8,000,000 of revenue faces the penalty on an adjustment above $800,000. A company with $100,000,000 of revenue does not face it until $5,000,000. The rule that looks like it protects small business does the opposite.
Documentation Is the Only Defence
Subsection 247(4) deems a taxpayer not to have made reasonable efforts unless contemporaneous documentation exists, made or obtained by the T2 filing due date, six months after year end.
It is a deeming rule, not a factual test. You cannot argue you made reasonable efforts if the documentation is not there. It does not matter how commercially sensible your pricing was, how carefully you thought about it, or that an adviser told you it was fine. No document by the deadline means no reasonable efforts, and the penalty follows automatically once the threshold is crossed.
What It Has to Contain
- The property or services involved in the transactions.
- The terms and conditions and how they relate to those of other transactions.
- The participants and their relationship to each other.
- The functions performed, property used and risks assumed by each participant. This is the analytical core.
- The data and methods considered and the analysis performed to determine the transfer prices.
- The assumptions, strategies and policies that influenced the pricing.
It also has to be updated each year for material changes. A study prepared three years ago and never revisited is not contemporaneous documentation for the current year.
The Secondary Adjustment Is the Part People Forget
Where the adjustment means value left Canada without proper consideration, subsection 247(12) can treat the amount as a dividend paid to the non-resident, attracting Part XIII withholding.
| Recipient | Withholding on a $3,000,000 Adjustment |
|---|---|
| A treaty parent holding 10% or more | $150,000 at 5% |
| A treaty shareholder otherwise | $450,000 at 15% |
| No treaty | $750,000 at 25% |
A repatriation agreement can sometimes avoid the secondary adjustment where the amount is actually returned to Canada, but that is negotiated and it is not automatic.
T106 Is Separate and Often Missed
Form T106 is required where reportable transactions with non-arm’s length non-residents exceed $1,000,000 in the year. It is due with the T2 and carries $25 a day to a maximum of $2,500 per year.
The penalty is small. What matters is that the form tells the CRA exactly where to look, and a corporation with substantial intercompany transactions that has never filed one is doing nothing to reduce its audit profile.
Where Adjustments Usually Come From
- Management fees charged by a foreign parent with no evidence of services actually delivered.
- Cost-plus arrangements where the markup was set once and never benchmarked.
- Interest-free or low-interest intercompany loans, which attract both a transfer pricing adjustment and Part XIII exposure.
- Royalties for intellectual property with no valuation supporting the rate.
- A Canadian distributor that consistently loses money while the group is profitable.
- Guarantee fees charged or not charged between group members.
Documentation Costs a Fraction of the Penalty
A transfer pricing study for a mid-size Canadian entity is a small fraction of a single year’s penalty on a meaningful adjustment. On the figures above, the documentation would have removed $900,000 of penalty across three years.
It is one of the few areas of tax where the cost-benefit is not close, and where the work has to be done before the deadline rather than after the letter arrives.
What This Calculator Does Not Cover
- Determining the correct arm’s length price, which is the substance of a study
- Country-by-country reporting for large multinational groups
- Competent authority relief and mutual agreement procedures
- Repatriation agreements to avoid the secondary adjustment
- The extended reassessment period for transactions with non-arm’s length non-residents
- Corresponding adjustments in the other jurisdiction
The deadline is six months after year end and it does not move. Our international tax service covers the documentation, the T106 and the intercompany agreements.
Frequently Asked Questions
Common questions on Canadian transfer pricing.
Related Calculators and Guides
More tools for cross-border groups.
Six Months After Year End, and the Deadline Does Not Move
Send us your intercompany agreements and the group structure. We prepare the contemporaneous documentation, file the T106, and set the intercompany pricing so it holds up before an auditor asks.