Transfer Pricing Penalties

Many firms and practitioners creating transfer-pricing documentation often attempt, as their primary goal, to avoid costly transfer pricing penalties. Subsection 247(3) of the Canadian Income Tax Act (the "Act") discusses the application of such a penalty. The penalty is 10% of the net adjustment of the transfer price for which the taxpayer did not make a reasonable effort to determine and use arm's length prices [e.g. Insufficient, or lack of, contemporaneous documentation was prepared].

The problem with determining a strategy to avoid penalties is to determine what "reasonable efforts" means. The difficulty with determining reasonable efforts is the fact that it is very subjective and is not defined anywhere in Section 247 of the Act.