Prepare for Significant Changes to Canadian Transfer Pricing Landscape

December 15, 2025

Overview

On November 4, the long-awaited 2025 Federal Budget was released, proposing significant changes to Canada’s existing Transfer Pricing (TP) rules. Shortly following the Federal Budget’s release, the federal government issued Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025. Bill C-15 includes the legislative amendments to the existing transfer pricing rules, with key changes summarized as follows:

A shift in the transfer pricing analytical framework toward a more substance-over-form approach.
Modifications to adjustment and recharacterization rules.
Explicit alignment with the Organization for Economic Co-operation and Development (OECD) TP Guidelines (the OECD Guidelines or the Guidelines).
Expanded documentation requirements in terms of both depth and breadth.
A shortened response timeline for providing documentation in a TP audit; and
An increased threshold applicable to the amount of any transfer pricing adjustments raised and sustained by the Canada Revenue Agency (CRA), on which transfer pricing penalties would be applicable.

Historical context of the transfer pricing amendments

Canada’s overhaul of its TP regime in Bill C-15 did not arise in isolation. Rather, it is the result of years of litigation, policy reviews and stakeholder consultations. The following subsections outline the key milestones that have shaped the trajectory towards Bill C-15.

Decision on The Queen v. Cameco Corporation

When Canada introduced its TP legislation in 1997 through the enactment of, section 247 of the Income Tax Act (ITA), it took a high-level approach. The legislation did not make explicit how the arm’s length principle should apply.

The Queen v. Cameco Corporation involved a landmark transfer pricing dispute. In 2018, the uranium giant Cameco Corporation (Cameco) appealed to the Tax Court of Canada (TCC) in respect of the reassessment issued by the Canada Revenue Agency (CRA) in which the CRA (represented by the Minister) challenged Cameco’s transfer pricing, claiming huge tax underpayments by attributing profits from its Swiss subsidiary back to Canada. The TCC rejected the audit positions relied on by the Minister, concluding that there had been no deception or sham.

In 2020, in its appeal tothe Federal Court of Appeal (FCA), the Minister relied on the TP recharacterization rules, arguing the taxpayer would not have entered into the same transaction with the actual counterparty had they been dealing at arm’s length. This interpretation was unanimously rejected by the FCA. The dispute arose from the different interpretation of the recharacterization rule (i.e. paragraphs 247(2)(b) and (d) of the ITA). The FCA held that the requirement in recharacterization was an objective test with a hypothetical person, such as whether persons dealing at arm’s length would have entered into the transaction or series of transactions, whereas the CRA submitted that the subjective test was the proper interpretation, such as whether the particular taxpayer (i.e. Cameco) would have entered the transaction or series of transactions at issue with an arm’s length party. The FCA dismissed the argument and concluded that the Minister’s interpretation of the recharacterization rule was overbroad.

FCA’s decision became an explicit catalyst for revisiting the recharacterization rule and analytical framework embedded in section 247 of the ITA. The Federal government first signaled legislative action in Budget 2021, announcing its intention to consult on reforming Canada’s TP rules in response to both domestic case law (including Cameco) and evolving practices under the OECD’s Base Erosion and Profit Shifting (BEPS) framework.

June 2023 Consultation Paper

In The Queen v. Cameco Corporation’s decision, certain challenges and limitations of Canada’s current TP legislation were highlighted. According to the Department of Finance, the most prominent was that there was an overemphasis on the role of intra-group contracts in assessing the arm’s length nature of an arrangement/transaction in Canada rather than on the factual substance.^[1]

As a result of its concerns, Finance released a consultation paper in June 2023, entitled “Consulting on Reforming and Modernizing Canada’s Transfer Pricing Rules” (the Consultation Paper). This Consultation Paper was intended to gather stakeholder input on various questions and proposals related to the (i) proposed changes to amend Section 247 of the Act (i.e., Canadian TP legislation); and (ii) proposed new/revised TP administrative measures.

Revised draft legislation released with 2025 Federal Budget (Bill C-15)

Bill C-15 largely resembles the proposed rules released in the Consultation Paper as it pertains to the main changes to the transfer pricing analytical framework, the recharacterization rule, the explicit statutory alignment with the OECD Guidelines, and the increase in the threshold for applying transfer pricing penalties.

In terms of administrative measures, the introduction of simplified documentation requirements under prescribed circumstances is maintained, but the details of the simplified requirements and what constitutes “prescribed conditions “are still to be released.

Shift of transfer pricing analytical framework to a more substance-over-form approach

The new legislation provides a clearer interpretation of the arm’s length principle and its application. First, subsection 247(1) introduces several new definitions such as “actual conditions”, “arm’s length conditions”, and “economically relevant characteristics”, “multinational enterprise group” (MNE group), “delineation of transaction or series” and “interpretation of conditions”.

Secondly, the new subsection (1.1) requires that transactions be “analyzed and determined with reference to the economically relevant characteristics”. These characteristics, as defined in section 247(1), explicitly include:

Contractual terms to the extent not inconsistent with the actual conduct of the participants, including the contractual terms of each other transaction that involves at least one of the participants or any other member of the MNE group;
The actual conduct of the participants, and particularly the functions performed by those participants, taking into account the assets used and risks assumed, the functions in relation to the wider value generation by the MNE group, circumstances surrounding the transaction and industry practices;
The characteristics of any property or service involved;
The economic circumstances of the participants and of the market; and
The business strategies of the participants.

Notably, the first characteristic expressly makes contractual terms overridden by actual conduct. Overall, these characteristics represent an emphasis on factual substance in comparability analysis, which highlights a shift to a substance-over-form approach.

The new subsection (1.2) also introduces a broad interpretation of “actual condition” and “arm’s length condition”, which requires taxpayers to consider factors that may not be directly related to the controlled transaction under analysis, such as divisions of profit and cost contribution, and “any commercial or financial information relevant” when determining the amounts. This broad definition could create challenges and uncertainty for taxpayers as there may be different interpretations with respect to which identified factors are truly relevant to a controlled transaction versus those that would not be.

Modification of adjustment and recharacterization rules

Once the transaction is delineated and analyzed pursuant to subsection 247 (1.1), a new transfer pricing adjustment rule can now be found under the new subsection 247(2.02), which would apply and pivot the application of the arm’s length principle to whether the transaction includes “actual conditions” that differ from “arm’s length conditions”. An adjustment is then made to reflect amounts that would have been determined if arm’s length conditions had applied.

It is important to note that the “arm’s length conditions” are defined as the conditions that would have applied had the actual participants been dealing at arm’s length in comparable circumstances, as opposed to conditions applied between hypothetical third parties, which overturns the position of the FCA in The Queen v. Cameco decision as mentioned earlier. The “arm’s length conditions” also include the possibility that no transaction would have occurred, such that a transaction would be completely ignored, resulting in TP adjustments.

This new adjustment rule is to replace the current recharacterization rule, which allowed for non-recognition of a transaction only when the transaction (1) would not have been entered into between arm’s length parties, and (2) could reasonably be considered primarily for obtaining tax benefits.

Consistency with the OECD Guidelines

Another key change to the legislation is to formally align with the OECD Guidelines. The new subsection 247 (2.03) introduces an interpretation rule explicitly establishing that:

The Transfer Pricing OECD Guidelines represents a source of reference, and
The applications of (1.1) and (2.02) are to be made so as to “best achieve consistency with such Transfer Pricing Guidelines.”

Further, the new subsection (2.04) imposes “an analysis where the most appropriate method is selected and applied in accordance with the Transfer Pricing Guidelines.”

The alignment with the OECD Guidelines is not a total divergence from the CRA’s current practice, as the CRA has previously endorsed older versions of such Guidelines. Also, many taxpayers are currently already preparing their TP documentation in a format which is in compliance with the OECD Guidelines. The formal recognition of the Guidelines as part of Canada’s legislation provides taxpayers with greater certainty in dealing with transfer pricing matters.

The draft legislation refers to the 2022 version of the Guidelines or as otherwise prescribed by legislation. This leaves room for adaptation of newer versions or potentially exceptions or carve-outs.

Expanded documentation scope required in terms of both depth and breadth

As described above, there are new definitions in the proposed legislation, in particular, terms such as “economically relevant characteristics”, “actual conditions” and “arm’s length conditions”. The new documentation requirements are meant to more closely align with these new definitions.

While the OECD’s Master file / Local file documentation approach that was originally included in the Consultation Paper was not retained by the legislator, the scope of analysis required under the new documentation rule is broadened to include:

Contractual terms of a much broader set of transactions between members of the MNE group and with third parties, emphasizing the need to consider the interrelation between transactions across the MNE group.
Functional analysis with respect to the tested transaction and how it is linked to the wider value generation by the MNE group.
Other comparability factors those included in the definition of “economically relevant characteristics”, given the emphasis on the actual conduct of the parties and its broad interpretation, and
The requirement to describe how “the most appropriate method” is selected and applied.

The new documentation requirement is more granular than the Local file and includes certain elements of the Master file, such as a description of the MNE group’s value chain analysis. While the Local file requires copies of material intercompany agreements, it does not require mapping the interrelations of contractual terms across the group. Therefore, the new requirement goes beyond the OECD standard by mandating a more comprehensive analysis of how the terms of the tested transaction may be related to other transactions within the group.

Overall, the new requirements increase the effort required to prepare documentation and meet the “reasonable effort” standard.

Administrative measures

Certain administrative measures considered as part of the Consultation Paper are included in the proposed legislation, as described below.

Shortened response timeline

The draft legislation shortens the time to provide transfer pricing documentation to the CRA in response to a written request, from 3 months down to 30 days. The premise of this change is that transfer pricing documentation should be available, at the latest, when a taxpayer is required to file its tax return and therefore should be readily available within 30 days. This reduced timeline, along with the broadening documentation scope, is probably the most immediate and practical implication for taxpayers.

Increased penalty threshold

Where an adjustment is raised by the CRA and sustained, failures in the sufficiency of documentation may give rise to penalties. Currently, these penalties apply where the adjustment is greater than CA$ 5 million or 10% of revenue, whichever is the lesser of the two amounts.

In the draft legislation, the adjustment’s threshold for a transfer pricing penalty to apply is to increase from CA$ 5 million to CA$ 10 million. However, the threshold relative to the revenue remains to be 10%.

For example, if a MNE group has a Canadian subsidiary (Canco) that performs research and development (R&D) services for the benefit of a non-resident related party. The intercompany service fee represents 100% of Canco’s revenue and is in the amount of CA$ 3 million. Canco might still be subject to penalty if the CRA made an adjustment to the transaction that is greater than CA$ 300,000 (i.e. 10% of Canco’s revenue), although the transaction itself has an amount lower than the fixed threshold (i.e. CA$ 5 million under the current rule or CA$ 10 million under the new rule).

Therefore, it will continue to be important for taxpayers to undertake risk assessment based on the nature and magnitude of related-party transactions to determine an appropriate documentation strategy.

Simplified documentation

While the proposed legislation does reference the introduction of simplified documentation requirements when prescribed conditions are met, details of the requirements and the prescribed conditions have not yet been released.

What should taxpayers do to prepare for the changes

In light of the new transfer pricing rules, Canadian taxpayers should consider taking the following preventive steps:

Undertake a gap analysis: Taxpayers should review their current transfer pricing documentation to determine what additional information is needed to ensure that their TP documentation meets the new requirements.
Assess historical positions: Although the application of the new rules is prospective, it has been observed that the CRA already requests information required under the new rules during audits. In addition, financial statement auditors and M&A advisors performing due diligence may raise questions accordingly.
Conduct comprehensive value chain analysis: To prepare for potentially more stringent CRA audits, MNE groups should perform a comprehensive review of their value chain and evaluate the alignment of substance with their transfer pricing policies, as well as gather facts and evidence to support their position.

[1] This aligns with Organisation for Economic Co-operation and Development’s (“OECD”) concerns that led to the work on Actions 8-10 of the Base erosion and profit shifting (“BEPS”) project.

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