Canada Passes New Transfer Pricing Law

At the end of March, the Canadian government received royal assent to enact Bill C-15, a law that reshapes the country’s transfer pricing rules and raises new compliance risks for global entities that transact in the Great White North.

The transfer pricing changes included in Bill C-15, which also implements the country’s annual budget and other sweeping reforms, take effect for tax years beginning after November 4, 2025. The law, as passed, formally establishes consistency between Canada’s intercompany transaction rules and guidelines from the Organisation for Economic Co-operation and Development (OECD). The framework shifts Canada’s transfer pricing rules to emphasize economic substance and comprehensive documentation. The law also expands the Canada Revenue Agency’s (CRA’s) enforcement authority, making now the right time for border-crossing corporations to review their transfer pricing arrangements and documentation practices.

Heightened Focus on Economic Substance 

Like the United States, Canadian law has long required that intercompany transfers be made at arm’s length — that is, as if the entities involved were unrelated. The prior law placed emphasis on contract terms in the analysis of the arm’s length nature of a related party transaction, while the new law leans more heavily on the transaction’s economic substance, which includes an analysis of actual conduct in practice. The change, which largely mirrors the approach adopted by dozens of countries, creates uncertainty as to how the CRA and Canadian courts will evaluate intercompany transactions going forward.

Expanded CRA Authority 

Entities with operations in Canada must also contend with the CRA’s enhanced authority to adjust transactions that it deems were not made at arm’s length. The new law gives the tax agency permission to recharacterize problematic transactions by altering their terms or disregarding them altogether. It also removes a prior recharacterization rule that historically hindered the CRA’s ability to prove breaches of the arm’s length principle in court.

Shortened Deadlines and Heightened Penalties 

Defending intercompany transactions before the CRA will also become more onerous. The law reduces the response deadline to CRA inquiries from 90 days to 30 days and requires more robust documentation. In addition, penalties are increased to the lesser of $10 million or 10% of gross revenues.

Smith + Howard: Global Transfer Pricing Advisors 

Law changes are known to raise compliance risks, and Canada’s most significant overhaul of transfer pricing rules this century is no exception. Your Smith + Howard Specialty Tax Services advisor can help you comply with the new law by:

• reviewing transfer pricing agreements to ensure they align with economic realities,
• designing practices to create audit-ready documentation, and
• assessing your risk on an ongoing basis.

If you have questions about your corporation’s structure or transfer pricing agreements with entities based in Canada, reach out to Brad Pittman, leader of the Specialty Tax Services team.