Canada’s transfer pricing regime faces a pivotal modernization moment after the new federal budget (Budget 2025) introduced major reforms.
These proposed measures are meant to better align Canada with the transfer pricing guidelines set by the Organisation for Economic Co-operation and Development (OECD) and the global consensus on the arm’s length principle. They were also proposed as a response to the perceived limitations of the rules in relation to the decision in Canada v. Cameco Corporation (2020 FCA 112).
Budget 2025 also proposed an interpretation rule confirming that Canada’s transfer pricing provisions must be applied consistently with the OECD’s analytical framework—emphasizing economic substance over legal form.
Taxpayers should act now—in collaboration with the appropriate advisors—to assess compliance processes, reinforce governance frameworks and prepare for increased scrutiny under the new rules.
With a limited window to get aligned, given that the measures would apply to taxation years beginning after Nov. 4, 2025, here is a look at the proposed legislative changes outlined in Budget 2025.
Transfer pricing adjustment rule
Under the proposed measures, a new transfer pricing adjustment rule would apply when 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. A new rule would also apply when the transaction or series includes actual conditions different from arm’s length conditions.
The determination of those conditions is based on contractual terms along with on other economically relevant characteristics. These comparability factors include:
- Contractual terms.
- Functions performed, assets used and risks assumed.
- Characteristics of the property or services.
- Economic circumstances and market conditions.
- Business strategies and commercial rationality.
The first two comparability factors emphasize the actual conduct of the parties—not merely their legal arrangements. The interpretation rule further confirms that economic substance prevails over legal form, allowing the Canada Revenue Agency (CRA) to look beyond contracts and evaluate how the parties behave in practice.
In exceptional cases where independent parties would not have entered into an arrangement, the CRA would have the authority to re-characterize the transaction or determine that no such transaction would have occurred.
This shift from legal form to economic substance appears in other areas of tax law, but this marks the first time this concept is applied in a transfer pricing context.
Transfer pricing audit reform
Budget 2025 proposed reducing the time to provide transfer pricing documentation, if requested by the CRA, from three months to 30 days.
This compressed timeline effectively requires that transfer pricing documentation is always audit-ready. In practice, taxpayers will need to maintain current analyses, benchmarking and supporting materials that can be provided on short notice.
Subsequently, the CRA is expected to intensify its audit activities by expanding the quantity, depth and technical scope of transfer pricing audits—with a particular focus on delineation, comparability and intangible transactions.
This convergence increases the likelihood of audit selection and the potential for transfer pricing adjustments and penalties.
Some adjustments may create the risk of double taxation if corresponding adjustments are not recognized in other jurisdictions; this would need to be addressed through the competent authority process—a process that can be lengthy and costly.
Increased documentation requirements
The new federal budget also included provisions that would expand documentation standards to align with the OECD’s delineation of the transaction approach.
Canadian taxpayers would be required to demonstrate that intercompany pricing reflects economic substance, supported by detailed analyses of all economically relevant characteristics.
This will require greater analytical depth in functional analyses, benchmarking and profit allocation support—including evidence of where the decision-making authority resides, how risk is managed and how business strategy influences profit allocation.
These changes will materially increase the volume and granularity of documentation expected by the CRA and the time required to prepare it. Taxpayers will need to review existing intercompany arrangements and models to ensure they align with the new delineation standards.
Simplified documentation
To reduce the compliance burden for low-risk taxpayers, Budget 2025 introduced a simplified documentation regime which will apply where prescribed conditions are met.
Further details are expected when the federal government presents updates to the regulations.
Increased penalty threshold
The new budget proposed increasing the de minimis threshold for the transfer pricing penalty under subsection 247(3) of the Income Tax Act from the lesser of $5 million or 10 per cent of gross revenues to the lesser of $10 million or 10 per cent of gross revenues.
While this provides modest relief for smaller taxpayers, the penalty will continue to apply where reasonable efforts to determine and document arm’s length pricing have not been made.
This may also affect multinational groups, where adjustments often exceed this threshold.
