Recent Transfer Pricing Audit Trends – CRA Zeroes In On Intercompany Loans

The non-arm's length transactions which can be subject to Canadian transfer pricing legislation include tangible products, intangibles, intra-group services and cost-contribution agreements. Recently, however, the Canada Revenue Agency ("CRA") has been focusing on financial transactions — namely the interest rates on intercompany loans.

Let's begin by providing an example of such a transaction and assume that a Canadian company, Canco, receives an intercompany loan of 1B$ from its parent, Forco, at a fixed rate of 10% over a 10-year period. Canco would pay 100M$ annually in interest to Forco, documented on the T106 Information Return as a financial interest transaction.

Canco must demonstrate the arm's length nature of the interest rate in its transfer pricing contemporaneous documentation. If the CRA disagrees, and proposes, as an example, a 9% interest rate, Canco could be looking at a transfer pricing adjustment of 10M$ per year on the loan, as well as