CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
that treaty shopping arrangements are not inherently abusive for Canadian tax purposes. 9.10 Transfer Pricing and IP Taxation BEPS Actions 8 to 10 addressed several transfer pric - ing areas related to the arm’s length principle and introduced significantly revised guidance in the form of amendments to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Following consultations announced in Budget 2021, Budget 2025 proposed a comprehensive modernisa - tion of Canada’s transfer pricing framework to better align it with international consensus and the analyti - cal approach set out in the OECD Transfer Pricing Guidelines. The proposed changes establish a more structured framework for analysing cross-border transactions between non-arm’s length parties, focusing on the accurate delineation of transactions based on eco - nomically relevant characteristics, including their actual conduct. The rules clarify that the determina - tion of arm’s length conditions requires the use of the most appropriate transfer pricing method and allow adjustments – only in exceptional circumstances – to reflect what would have been determined if arm’s length conditions had applied (either under alterna - tive transactions or in the absence of a transaction). Budget 2025 also introduced targeted administrative measures to reduce compliance burdens and enhance audit efficiency, including higher penalty thresholds, simplified and aligned documentation requirements, and a shortened documentation submission deadline. The proposed measures are expected to apply to taxa - tion years and fiscal periods beginning after 4 Novem - ber 2025. These measures are currently being reviewed by the Senate as part of its legislative process. 9.11 Country-by-Country Reporting and Transparency Provisions Canadian country-by-country reporting legislation gen - erally conforms to the OECD model legislation, with the notable exceptions that it has not adopted the OECD’s master or local file requirements. Under domestic law, contemporaneous transfer pricing documentation is required in place of the local file requirements.
As recommended by BEPS Action 13, country-by- country reporting applies to MNEs with an annual consolidated group revenue equal to or exceeding EUR750 million in the previous year, and applies for fiscal years beginning on or after 1 January 2016. Filed reports are automatically exchanged with other jurisdictions in which the multinational business group operates, provided that: • the other jurisdiction has implemented country-by- country reporting legislation; • both Canada and the other jurisdiction have a legal framework in place for the automatic exchange of information; and • both Canada and the other jurisdiction have entered into a qualifying competent authority agreement. 9.12 Digital Economy Businesses Budget 2025 confirmed the government’s intention previously announced on 29 June 2025, and proposed legislation was introduced to formally repeal the DST Act retroactively as at its original enactment. Pending the rescission of the DST, the CRA has deferred the requirement to file a DST return since 30 June 2025 and has confirmed that businesses will not be required to file DST returns or remit any DST-relat - ed amounts. The CRA has also indicated that it will waive or cancel penalties for late-filed DST returns, as well as any interest on DST-related liabilities. If legisla - tion repealing the Act is introduced and receives Royal Assent, taxpayers who have already paid the DST will be entitled to a refund, with interest calculated at the rate generally applicable to corporate tax refunds from the date of payment. 9.13 Approach to Digital Services Taxation See 9.12 Digital Economy Businesses . 9.14 Offshore IP Provisions Offshore intellectual property deployed within Cana - da may result in taxation under generally applicable Canadian principles. Royalties paid to foreign recipi - ents are among the categories of income subject to withholding tax. The 25% withholding rate may be reduced by treaty.
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