Cross-border transactions between Canadian subsidiaries and U.S. parent companies have always drawn close attention from the Canada Revenue Agency (CRA). As of 2025, CRA transfer pricing rules remain one of the most scrutinized areas of corporate taxation, with increasing focus on how multinational corporations determine prices for goods, services, loans, and intellectual property exchanged across borders.
For U.S.-based corporations operating in Canada, these rules define how profits are allocated between entities and directly affect both Canadian and U.S. tax liabilities. Recent CRA guidance emphasizes the importance of maintaining proper documentation, using arm’s-length pricing, and ensuring inter-company transactions reflect fair market value.
This blog breaks down how transfer pricing works under Canadian tax law, what the CRA looks for in audits, and the key updates U.S. corporations should know to remain compliant and reduce the risk of costly adjustments or penalties.
TL;DR (What U.S. HQs Need to Know)
- Canada applies the arm’s-length principle under ITA section 247. The CRA can adjust intercompany prices that don’t reflect market value, and penalties apply if reasonable efforts are not made.
- U.S. transfer pricing follows Treasury Regulation §1.482-1, while penalties fall under §1.6662-6. Together, both jurisdictions require consistent, defensible pricing for related-party transactions across borders.
- Maintain contemporaneous transfer pricing documentation by your T2 filing-due date. It must be available within 90 days of a CRA written request. For broader filing context, review the Canadian corporate tax filing guide.
- U.S. authorities evaluate transfer pricing documentation under the IRS Transfer Pricing Examination Process (TPEP) and documentation FAQs. For dual-filing entities, this aligns closely with CRA expectations.
- Form T106 reporting generally does not require detailed per-counterparty disclosure if the total with that non-resident is under CAD $100,000 (for 2022 and later). However, a T106 return may still be due. Learn more in our Form T106 filing requirements overview.
- Multinationals meeting Country-by-Country (CbC) thresholds (Canada: €750m; U.S.: $850m) must file Form 8975 (U.S.) or its Canadian equivalent within 12 months of year-end. Review Country-by-Country (CbC) reporting for multinational groups for details.
- If the CRA makes an upward adjustment, relief may be available through repatriation or the Mutual Agreement Procedure (MAP). For advance certainty, an APA can be arranged through the IRS APMA Program. See transfer pricing adjustments and relief options for how this process works.
- U.S.-based corporations with Canadian operations can benefit from proactive planning and documentation support. Explore TMP’s corporate tax advisory services in Canada for professional guidance.
Advance Pricing Arrangement (APA) may be pursued through the IRS Advance Pricing and Mutual Agreement (APMA) Program, which coordinates with CRA’s Competent Authority team.
What “Arm’s-Length” Means in Canada
Canada’s transfer pricing framework is based on the arm’s-length principle, which requires related-party transactions between Canadian subsidiaries and foreign affiliates to reflect the same terms that would apply between independent entities in a comparable situation.
Key points:
- Canada follows the OECD Transfer Pricing Guidelines and adjusts non-arm’s-length cross-border prices under section 247(2) of the Income Tax Act.
- The United States applies the same principle under Treasury Regulation §1.482-1, aiming for consistent treatment of intercompany transactions between both tax authorities.
- U.S. parent companies should align inter-company pricing with the functions performed, assets used, and risks assumed by each entity—particularly in areas such as management fees, inter-company services, financing, and intellectual property.
Documentation: What to Prepare and When
The CRA requires detailed transfer pricing documentation that clearly supports how intercompany prices were determined under the arm’s-length principle. This documentation must demonstrate that the pricing between related entities aligns with what independent parties would have agreed to in similar circumstances.
What the CRA expects:
- Transaction descriptions, terms, and relationships between the parties involved
- Functional analysis covering functions performed, assets employed, and risks assumed
- Methods and comparables used to determine transfer prices, along with key assumptions and policies applied
- Year-over-year updates for any material changes in business operations or intercompany arrangements
Timing requirements:
- Documentation must be prepared by the Canadian entity’s T2 filing-due date, generally six months after the fiscal year-end
- It must be provided to the CRA within 90 days (three months) of receiving a written request
U.S. alignment:
The IRS applies similar standards under its Transfer Pricing Examination Process (TPEP) and Transfer Pricing Documentation FAQs, which outline what U.S. agents consider high-quality supporting files. For multinational groups, mirroring this structure across jurisdictions helps maintain consistency and reduce audit risk on both sides of the border.
Penalties and How to Avoid Them
The CRA can impose penalties when corporations fail to make reasonable efforts to determine and document arm’s-length transfer prices. Under the CRA transfer pricing rules, a 10 percent penalty may apply to certain net upward adjustments if documentation is missing, incomplete, or insufficient to support intercompany pricing.
In the United States, Treasury Regulation §1.6662-6 establishes a comparable penalty regime. Substantial valuation misstatements related to section 482 adjustments can lead to a 20 percent accuracy-related penalty, or 40 percent in more severe or repeated cases. For multinationals operating across both countries, maintaining consistent, well-supported files helps mitigate exposure on either side of the border.
Quick checklist:
- Contemporaneous transfer pricing documentation complete and approved before filing
- Transfer pricing method selection justified (CUP, Resale Price, Cost-Plus, TNMM, or PSM)
- Comparable data set and adjustments clearly documented
- Annual review and update of any material operational or economic changes
T106 Information Return (Related-Party Cross-Border Transactions)
Canadian corporations and branches that engage in non-arm’s-length cross-border transactions must file Form T106, the Information Return of Non-Arm’s-Length Transactions with Non-Residents. This form provides the CRA with details about payments, loans, or other financial dealings with foreign affiliates.
Who files:
- Canadian entities or permanent establishments with reportable related-party transactions involving non-residents
De minimis threshold:
- If the total value of transactions with a single counterparty is below CAD $100,000 for the year (for 2022 and later), the detailed Part III reporting is not required.
- However, a T106 return may still be mandatory if the entity has any related-party cross-border transactions during the year.
Filing accurately is critical, as the CRA uses T106 data to identify potential inconsistencies or risks under the transfer pricing framework. Ensuring that these disclosures align with inter-company documentation helps reduce audit exposure and supports a consistent compliance profile across jurisdictions.
Country-by-Country Reporting (RC4649 / Form 8975)
Large multinational groups are required to file country-by-country reports disclosing global income, taxes paid, and key economic indicators for each jurisdiction in which they operate. The goal is to provide both the CRA and the IRS with transparency over profit allocation across entities.
In Canada, the requirement applies when the consolidated group revenue meets or exceeds €750 million. The filing is made on Form RC4649, Country-by-Country Report, and must generally be submitted within 12 months of the fiscal year-end.
In the United States, the equivalent filing is Form 8975 with accompanying Schedules A. It applies to U.S. parented groups with at least $850 million in consolidated annual revenue. The form is due 12 months after year-end and follows the standards outlined in the IRS Country-by-Country Reporting FAQs and instructions.
Maintaining consistent data between jurisdictions helps prevent discrepancies that could trigger additional scrutiny during transfer pricing reviews or cross-border audits.
If CRA Adjusts You: Deemed Dividends, Branch Tax and Relief Paths
When the CRA makes an upward transfer pricing adjustment, the reassessed amount may be treated as a deemed dividend subject to Part XIII withholding tax, or it may increase a corporation’s branch tax liability in Canada. These adjustments can also affect corresponding income recognition in the United States, potentially creating double taxation if not addressed through available relief mechanisms.
Relief options are available through the Mutual Agreement Procedure (MAP) or an Advance Pricing Arrangement (APA). The MAP process helps resolve double taxation by coordinating outcomes between the CRA and the IRS, while an APA provides forward-looking certainty on how specific transactions will be priced.
In the United States, both programs are administered by the IRS Advance Pricing and Mutual Agreement (APMA) Program. Guidance on procedures is available through the IRS APMA hub, along with Revenue Procedure 2015-40 (for MAP cases) and Revenue Procedure 2015-41 (for APA applications).
Action Plan (for U.S.-Based Corporations)
A practical approach helps U.S.-based corporations manage ongoing transfer pricing compliance under the CRA transfer pricing rules. The following timeline outlines how to stay audit-ready throughout the fiscal year.
Quarterly
- Monitor profit tests and scope changes.
- Track per-counterparty T106 transaction totals against the CAD $100,000 threshold.
Year-End to Filing Due Date (approximately six months)
- Finalize the contemporaneous transfer pricing file and ensure alignment with U.S. documentation standards under the IRS Transfer Pricing Examination Process (TPEP) and Transfer Pricing Documentation FAQs.
On CRA Request
- Activate a 90-day production workflow to prepare and deliver transfer pricing documentation on time—extensions are not granted once the CRA issues a written request.
After Adjustments
- Consider repatriation to mitigate withholding exposure, initiate the Mutual Agreement Procedure (MAP) for double tax relief, and explore an Advance Pricing Arrangement (APA) for future certainty. Guidance and contact details are available through the IRS Advance Pricing and Mutual Agreement (APMA) Program resources online.
FAQs
Q1. What’s the penalty if my pricing is off?
If reasonable efforts weren’t made, the CRA may assess a 10 percent penalty on certain net upward adjustments. In the United States, Treasury Regulation §1.6662-6 imposes a 20 percent (or 40 percent in more severe cases) accuracy-related penalty on substantial section 482 misstatements. Robust documentation is essential in both jurisdictions to avoid these penalties.
Q2. When exactly is documentation due?
Transfer pricing documentation must be completed by the Canadian entity’s filing-due date, which is generally six months after year-end. In the United States, IRS agents evaluate documentation quality under the Transfer Pricing Examination Process (TPEP) and the Transfer Pricing Documentation FAQs.
Q3. Can we avoid double tax after an adjustment?
Often yes. Relief may be available under the Mutual Agreement Procedure (MAP) within the tax treaty framework. For forward-looking certainty, companies may apply for an Advance Pricing Arrangement (APA). Both are administered by the IRS Advance Pricing and Mutual Agreement (APMA) Program, with details available in Revenue Procedures 2015-40 and 2015-41.
Q4. Do we have to file U.S. CbC even if Canada handles it?
If the U.S. ultimate parent entity meets the USD 850 million threshold, Form 8975 is required unless an exemption applies. The IRS Country-by-Country Reporting FAQs and Instructions outline criteria for surrogate filings and exemptions.
Next Steps
Cross-border transfer pricing remains one of the most closely examined areas by both the CRA and the IRS. For U.S.-based corporations with Canadian operations, maintaining consistent and well-supported documentation is essential to withstand review on either side of the border.
Need a CRA-defensible transfer pricing file that also satisfies IRS reviewers? TMP builds contemporaneous documentation, benchmark studies, and end-to-end T106 and CbC reporting workflows tailored for U.S. groups operating in Canada.
Talk to a CBV or transfer pricing specialist today at TMP Contact Page