Canada’s new transfer pricing rules coming into play next year. Explore what implications this will have for companies in the region and how they can prepare
by Rachel Mathre, Director of Corporate and International Tax Advisory at Vistra
On March 26, 2026, the Budget Implementation Act, 2025, No. 1 (“Bill C-15” or “the Act”) was granted Royal Assent and will be enacted into law. A number of tax measures have been implemented in this act, including changes to Transfer Pricing regulations, which will have significant impact on businesses operating in the region.
Changes to Transfer Pricing rules are applicable to fiscal periods beginning after November 4, 2025. Thus, for companies with a calendar year end, these changes apply to the 2026 filings due June 30, 2027.
The implications
For tax purposes, the arm’s-length principle means that the terms and conditions of a transaction should be the same whether you are dealing with related parties or not. Taxpayers in Canada are required to keep records on non-arm’s-length transactions with non-residents.
If a taxpayer’s intercompany prices or cost allocations do not reflect arm’s-length standards, the Canadian Revenue Agency (CRA) can make transfer pricing adjustments under audit. In addition to the adjustments, in certain circumstances taxpayers may be subject to penalties equal to 10% of the adjustment if the CRA determines that the taxpayer did not make reasonable efforts to determine the arm’s-length prices.
As a defense to the penalties, a taxpayer may be considered to have made reasonable efforts to determine the arm’s length conditions of a transaction if contemporaneous documentation is prepared by the due date of the taxpayer’s annual filing.
Taxpayers with adequate contemporaneous documentation are generally protected from the transfer-pricing penalty, even if the CRA determines an adjustment is necessary, Under the prior Transfer Pricing guidelines, taxpayers had 90 days to respond to a written request from the CRA for transfer pricing documentation. The CRA realized that even if taxpayers did not have the transfer pricing documentation completed by the filing deadline, 90 days was sufficient for a taxpayer to hastily prepare documentation after receiving the written request. To close this loophole, Bill C-15 reduced this time period to 30 days.
With these changes, the CRA has signaled a crackdown on taxpayers who may indicate their possession of contemporaneous documentation without having properly prepared them.
Facts and Circumstances
Previously, the CRA had a limited ability to disregard the terms of an intercompany transaction. This bill has included a significant change to the previous recharacterization rules. Aligning closer to Organization for Economic Co-operation and Development (“OECD”) guidelines, the CRA’s new analytical framework places less emphasis on the legal terms of the intercompany transaction, and more on the facts and substance.
In practice, this update deals a significant blow to the documentary-based defense of taxpayers whose intercompany transactions may have veered out of the originally defined scope of their intercompany service agreements.
To see how this would play out in practice, consider a hypothetical Canadian subsidiary engaged to provide Sales and Marketing services for its foreign parent. The facts and circumstances of the services may change over the years as follows.
As the company grows, the Canadian marketing team grows from 3 members to 30, with supervisory/leadership roles based in Canada. A few employees’ responsibilities shift more into product development efforts. Additionally, a Human Resources employee is hired to facilitate this increased workforce. To facilitate cash flow needs, an informal intercompany loan is initiated between the parent and subsidiary. This loan is only documented via email and is not repaid on a standard schedule.
Customers begin to reach out to the sales employees for post-sale product service/maintenance services. While the original scope of Sales and Marketing services still applies, as time goes on and activity grows, it is very easy for new transactions to arise that would need their own Transfer Pricing analysis performed.
The CRA reserves the right to reassess an arm’s length transaction’s characteristics and may even determine that arm’s length parties would not have entered into the transaction in the first place.
Transfer pricing documentation should be reviewed and updated annually for any material changes. It is not uncommon for related parties to agree (in writing) to the provision of one intercompany service, but in practice allow additional services to creep in over time.
Taxpayers should pay close attention to the true nature of their intercompany transactions and consider whether additional agreements (and thus additional contemporaneous documentation) would be required.
As such, it is crucial to that companies ensure their contemporaneous documentation is in place by their next annual corporate income tax filing date, and that existing intercompany agreements are reviewed to confirm the scope of services documented still aligns with your ongoing intercompany activities.
This will help to ensure a smooth transition to the new pricing transfer agreement.
Rachel Mathre is a seasoned tax professional with over 25 years of experience in corporate, international, and state & local tax advisory. She currently serves as Director of Corporate and International Tax Advisory at Vistra, where she has been leading tax strategy and advisory services since September 2021. Prior to joining Vistra, Rachel spent over 13 years at Ernst & Young (EY), where she rose to the role of Senior Manager, advising multinational clients on complex tax matters. Rachel’s in-house corporate experience includes serving as International Tax Counsel at 3M (2007–2010), where she provided strategic guidance on global tax planning, and as State and Local Tax Manager at Wells Fargo (2005–2007), managing tax compliance and planning across jurisdictions. Rachel combines deep technical expertise with a strategic, business-oriented approach to tax advisory, making her a trusted partner for organizations navigating complex domestic and international tax landscapes.
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