Major Revamp of Canadian TP Regulations

The Canadian parliament passed Bill C-15, amending the Income Tax Act to implement a comprehensive modernization of Canada’s transferpricing regulations, on 18th Nov, 2025. This is the first substantial change to transfer pricing regulations laid out in sec. 247 of the Income Tax act introduced in 1998. The bill received royal assent on 26th Mar 2026, and applies to fiscal year beginning after 4th Nov, 2025.

The earlier regime relied on OECD Transfer pricing guidelines (TPG) as an reference material and did not have legal standing. The tax rulings were based on the erstwhile Income Tax Act, leading to overemphasis of legal form over economic substance.

Following are the significant changes post recent amendment:

1. Alignment with OECD: The amendments explicitly states that the transfer pricing regulations in the act are to be applied in such a manner that it is consistent with TPG.
   Substance over form & Recharacterization: The regulations now require taking into consideration the economically relevant characteristics and actual conditions of the transaction while determining the Arm’s length Price. i.e., terms consistent with actual conduct, functions performed, risk assumed, industry norms, characteristics of any property transferred or service provided.

Restriction on CRA to recharacterize related party transactions is now removed. Earlier CRA could recharacterize only if:

This includes power given to CRA to factor in terms and conditions that would have been entered between third parties.

Documentation: The timeline for submitting documents has been reduced from 3 months to 30 days, to align with mature TP jurisdictions. Documentation also requires disclosure of role of the entity in the value chain in the MNE group, the circumstances surrounding the transactions and industry practices.

The reform carried out by the government has broadly empowered CRA to pursue a broader range of transfer pricing matters and focusing on the actual economic substance of the transactions, rather than just contractual form.

MNE groups with operations in Canada should assess their current operations and transfer pricing plan. Importantly, the legal contract ought to align with terms & conditions entered between third parties, as per the economic substance of the transaction. Further, robust and defendable documentation ought to be prepared in a contemporaneous manner, as the timeline for submission has been shortened, and CRA has been vested with more powers to recharacterize the transaction.