Transfer pricing governs how transactions between related, non-arm's-length parties across borders are priced for Canadian tax. Section 247 of the Income Tax Act requires those transactions to reflect arm's-length terms, and taxpayers must keep contemporaneous documentation (demonstrating "reasonable efforts") by the tax return filing date. The penalty under subsection 247(3) is 10% of the transfer-pricing adjustment — a rate that is unchanged — and it applies only where a net adjustment exceeds a threshold that depends on when the tax year begins. The CRA's administrative guidance is Information Circular IC87-2R. This is a high-level primer for Alberta and BC businesses with cross-border related-party dealings. Source: Transfer pricing — Canada.ca.
The arm's-length principle (section 247)
The core rule is the arm's-length principle: a transaction between related parties must be priced as if it had occurred between unrelated parties dealing at arm's length. Section 247 lets the CRA adjust the terms of a non-arm's-length transaction — and reallocate income to Canada — where the actual terms differ from arm's-length terms. This matters for any Canadian business that buys from, sells to, lends to or licenses intellectual property to a related foreign company: the price must stand up as one independent parties would have agreed.
Contemporaneous documentation
Canada requires contemporaneous documentation that demonstrates the taxpayer made reasonable efforts to determine and use arm's-length prices. The documentation must generally be in place by the tax return filing date for the year. The CRA's expectations for that documentation are described in Information Circular IC87-2R. Source: IC87-2R, International Transfer Pricing — Canada.ca.
The practical point: good documentation is the defence. A taxpayer that has made reasonable efforts and kept proper contemporaneous documentation is generally protected from the transfer-pricing penalty even if the CRA later makes an adjustment. Without it, the same adjustment can attract the penalty.
The penalty: 10% of the adjustment
Under subsection 247(3), the transfer-pricing penalty is 10% of the transfer-pricing adjustment. The 10% rate has not changed and applies throughout. The penalty is not automatic on every adjustment — it applies only where a net adjustment exceeds a threshold, and where reasonable efforts and contemporaneous documentation are absent.
The threshold and documentation window depend on the tax year
This is the part that must be applied carefully, because it changed for tax years beginning after November 4, 2025. The threshold is not a flat $5 million — it depends on when the tax year begins.
| Tax year begins | Penalty threshold (net adjustment exceeds) | Documentation due after a written request |
|---|---|---|
| On or before November 4, 2025 | The lesser of $5,000,000 and 10% of gross revenue | Within 3 months |
| After November 4, 2025 | The lesser of $10,000,000 and 10% of gross revenue | Within 30 days |
For tax years beginning on or before November 4, 2025, the penalty applies when the net adjustment exceeds the lesser of $5,000,000 and 10% of gross revenue, and documentation must be provided within 3 months of a written request. For tax years beginning after November 4, 2025, Bill C-15 (Budget 2025, Royal Assent March 26, 2026) raises the threshold to the lesser of $10,000,000 and 10% of gross revenue and shortens the documentation window to 30 days. The 10% penalty rate is unchanged under both regimes. Source: Transfer pricing — Canada.ca.
In both regimes, the documentation should already be contemporaneous — the request window is the time to provide it, not to create it after the fact.
Who this affects
Transfer pricing reaches more Alberta and BC businesses than owners expect — any company that transacts with a related party outside Canada: a foreign parent or subsidiary, a related supplier, an affiliated financing entity, or a related IP holder. The exposure grows with the size of the cross-border dealings, and the shorter 30-day window for newer tax years raises the cost of being unprepared.
How RN Canada helps
RN Canada helps Alberta and BC businesses with cross-border related-party dealings understand where the section 247 arm's-length rule applies, identify the documentation expected under IC87-2R, and recognize which penalty threshold and documentation window apply based on when the tax year begins. For the structural picture behind cross-border groups, see our corporate finance and capital restructuring service and holding company in Alberta guide; transfer-pricing work itself often warrants specialist tax-law support alongside our advisory.
This page is general information, not personalized tax, accounting, or legal advice. Speak with RN Canada about your specific situation.
Frequently asked questions
Transfer pricing is how cross-border transactions between related (non-arm's-length) parties are priced for tax. Section 247 of the Income Tax Act requires those transactions to reflect arm's-length terms — the terms unrelated parties would have agreed to. If they do not, the CRA can adjust the prices and reallocate income to Canada. The CRA's administrative guidance is set out in Information Circular IC87-2R.
Canada requires contemporaneous documentation that demonstrates reasonable efforts to determine and use arm's-length prices. The documentation must generally be in place by the tax return filing date for the year. Maintaining proper contemporaneous documentation is what protects a taxpayer from the transfer-pricing penalty if the CRA later makes an adjustment, because it evidences the reasonable efforts the rules require.
Under subsection 247(3) of the Income Tax Act, the transfer-pricing penalty is 10% of the transfer-pricing adjustment. The 10% rate has not changed. The penalty applies only where a net adjustment exceeds a threshold, and a taxpayer that has made reasonable efforts with proper contemporaneous documentation is generally protected from it even if an adjustment is made.
It depends on when the tax year begins. For tax years beginning on or before November 4, 2025, the penalty applies when the net adjustment exceeds the lesser of $5,000,000 and 10% of gross revenue, with documentation due within 3 months of a written request. For tax years beginning after November 4, 2025, the threshold rises to the lesser of $10,000,000 and 10% of gross revenue, and the documentation window shortens to 30 days.
It depends on the tax year. For tax years beginning on or before November 4, 2025, documentation must be provided within 3 months of a written request from the CRA. For tax years beginning after November 4, 2025, that window shortens to 30 days. In both cases the documentation should already be contemporaneous, so the request period is for providing it, not for creating it.