Update on Transfer Pricing
At the CTF annual conference in 2004, the CRA had indicated that there were 6 re-characterization referrals received by the Transfer Pricing Review Committee (“TPRC”) that had been referred back to the field for further review.
Question
Can the CRA provide an update on re-characterizations and, in particular, what kind of re-characterizations are being made?
Response
As of August 2005, a total of 12 re-characterization referrals have been received by the TPRC. Of these, 2 are at the stage where proposals will be issued; information is still being gathered on the other 10 cases.
In the event re-characterization is found to apply, and the reassessment is approved by the TPRC, we do not view the legislation as changing the transaction that was factually entered into; we view the legislation as providing for an alternative transaction that will form the basis for taxation under the Act.
From a practical standpoint, a reassessment under paragraph 247(2)(b) is likely to mean that the income and expenses, gains, asset and loss pools etc. that were reported based on the actual transaction, will be compared to what would have been reported had the transaction been the one that arm’s length parties would have entered into, and the resulting tax benefit will be quantified if the Act were to apply to the former, rather than the latter transaction. The Act will then be applied to the latter transaction to arrive at the reassessment.
In a case where persons would have transferred ownership in an asset (through a sale or as a capital injection) at arm’s length, but factually they have entered into a licence agreement, and it has resulted in a tax benefit, this might mean that, in addition to the impact on income assessed, other provisions in the ITA relating to gains/losses on disposition, capital cost allowance, etc. might now be expected to apply.