Transfer-Pricing Penalty Update

Taxpayers typically breathe a sigh of relief when a taxation year becomes statute-barred. In the context of transfer-pricing transactions, however, such relief may be premature. In a technical interpretation (2016-0631631I7, September 14, 2016), the CRA took the view that an adjustment under subsection 247(2) can be made at any time, irrespective of whether the underlying transaction occurred in a statute-barred year. Furthermore, in the CRA's view, a penalty under subsection 247(3) can also be imposed at any time, even in respect of a statute-barred year.

The CRA considered the following situation:
  • Year X: Canco buys a capital property (other than a depreciable property) from a related party, Forco, for $10 million (the transfer price).

  • Year X + 7: Canco sells the property for $15 million to an arm's-length buyer and reports a capital gain of $5 million ($15 million − $10 million).

  • Year X + 9: The CRA conducts an audit of Canco's X + 7 taxation year, and finds that the transfer price in year X should have been $1 million.

  • At the time of the audit, year X is statute-barred, but year X + 7 is still open.

The argument is that the CRA can make an adjustment to the ACB of the capital property even though the year in which the transaction occurred is statute-barred under part I because, under subparagraph 152(4)(b)(iii), the assessment period for transactions with non-arm's-length non-resident persons is extended by three years after the taxation year is initially assessed (for a total open period of six years for a CCPC, seven otherwise).

The adjustment can then be used to reassess Canco in year X + 7 and increase its capital gain from $5 million to $14 million ($15 million − $1 million). This is analogous to the CRA's practice of examining a return beyond the reassessment period to determine the cost of an asset for the purpose of later CCA claims or reducing a past addition to the capital dividend account.

Furthermore, the CRA's view is that a penalty assessment can be made at any time. Thus, if Canco did not make reasonable efforts to determine an arm's-length transfer price in year X, a referral to the CRA's national Transfer Pricing Review Committee could still be made (although the threshold calculation would be made in respect of Canco's gross revenue for year X).

Finally, the CRA noted that because the penalty will be assessed under part XVI.1 (that is, section 247), it is not constrained by the limitation periods set out in subsection 152(4). It is unclear whether this view is correct: subsection 247(11) applies the provisions of part I to part XVI.1 (Department of Finance, Explanatory Notes Relating to Income Tax (December 1997), at clause 238). The view that section 152, among others, applies to part XVI.1 has also been judicially endorsed (see Blackburn Radio Inc. v. The Queen, 2009 TCC 155, and Ho v. The Queen, 2010 TCC 325).

Rami Pandher
Shea Nerland LLP, Calgary

Canadian Tax Focus
Volume 7, Number 2, May 2017
©2017, Canadian Tax Foundation