Proposed legislative amendments to modernise Canada’s transfer pricing regime

April 2026 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

April 2026 Issue

Although Canada already incorporates the arm’s length principle into its existing transfer pricing (TP) rules, it does not explicitly define how the principle should be applied.

While Canadian courts have historically recognised the Organisation for Economic Co-operation and Development’s (OECD’s) ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ as a reference, these guidelines were not binding on Canadian legislation or judicial interpretation of the arm’s length principle.

Canadian jurisprudence over the years, particularly the Cameco Corporation decision, had brought to light that Canada’s current TP legislation lacks sufficient detail to ensure adequate alignment with the TP guidelines. Consequently, in 2021 the Canadian government announced a need for TP reform and to better align its legislation with international norms.

After consultation papers were made public in 2023, the Canadian government finally released legislative proposals in November 2025 which are now in the final stages of parliamentary approval.

The proposals ensure better alignment with TP guidelines and address other gaps identified by the Canadian government in the application of the arm’s length principle and documentation issues.

Summary of the proposals

The proposed reforms would introduce significant changes to Canada’s TP framework. Central to the package is the replacement of the current bifurcated system – where TP adjustments and recharacterisation rules operate separately – with a single, unified adjustment rule.

Under this consolidated approach, the Canada Revenue Agency (CRA) would assess transactions by comparing the actual conditions of related‑party arrangements against the arm’s length conditions that would have applied between independent entities. This shift aims to streamline the legislation and better reflect the modern principles of TP analysis.

A further element of the proposals is a requirement that TP evaluations place greater emphasis on economically relevant characteristics. This includes ensuring that contractual terms are consistent with the parties’ real‑world conduct, taking into account the functions they perform, the assets they employ and the risks they assume.

The analysis must also consider broader economic circumstances, business strategies and any other facts that meaningfully influence the nature of the transaction. In effect, the proposals reinforce the primacy of economic substance over form.

To improve alignment with international standards, the government intends to introduce a new consistency rule that would explicitly link Canada’s TP legislation with the 2022 OECD TP guidelines. This measure would effectively codify the OECD guidelines into domestic law, requiring taxpayers, the CRA and Canadian courts to interpret and apply TP rules in a manner that is consistent with global norms. Such codification mirrors developments in other jurisdictions and is intended to promote uniformity and reduce interpretive uncertainty.

The proposals also contemplate strengthened compliance and documentation obligations. In particular, the timeframe for taxpayers to respond to CRA requests for TP documentation at the outset of an audit would be significantly shortened – from the current three months to just 30 days. This accelerated timeline reflects a broader effort to encourage timely and robust taxpayer recordkeeping.

Finally, the reform package includes updates to Canada’s TP penalty thresholds. The absolute threshold for penalty exposure would be increased from $5m to $10m, reflecting inflationary trends, while the relative threshold would remain unchanged at 10 percent of the relevant transaction amounts. By adjusting the threshold values, the government aims to maintain an appropriate balance between incentivising compliance and avoiding undue burden on smaller taxpayers.

The proposals also allow tax regulations to be prescribed at a later date to allow for simplified TP documentation. The Canadian government is still exploring standardised approaches to reduce compliance burdens and minimise disputes.

Certain potential measures are not being put forward for enactment at this time; however, they may be introduced later through regulations. These prospective measures relate to several streamlined TP approaches that the government continues to evaluate. One such approach concerns low value‑adding intragroup services, where simplified methods could eventually be adopted to reduce administrative burden and provide greater certainty for taxpayers. Another area under consideration is the treatment of routine returns for distribution activities, for which a standardised, more predictable methodology may be developed.

The government is also exploring possible streamlined rules for intragroup loans. If implemented, these rules would establish a maximum loan term of five years, mandate the use of the multinational enterprise group’s credit rating when determining arm’s length interest rates, and eliminate the use of subordination features or embedded options. Collectively, these potential measures signal an interest in reducing complexity and aligning certain aspects of Canada’s regime with internationally recognised simplification practices, even though they are not being formally adopted at this stage.

Impact of proposals

Most taxpayers striving to comply with the arm’s length principle have generally adopted practices aligned with the new TP guidelines. Taxpayers are aware that the CRA adheres to these guidelines, regardless of any gaps identified by the Canadian government, and generally have aimed to avoid the risk of costly, lengthy TP audits.

Since most intercompany transactions involve high-tax jurisdictions such as the US, UK, Europe and Japan, aggressive tax strategies are generally limited or absent altogether. As such, the proposals related to the arm’s length principle are expected to have a limited impact on compliant taxpayers and their advisers, leaving established practices largely unchanged.

From the CRA’s perspective, the proposals further reinforce its TP audits and economic analysis efforts. Given the CRA’s focus on TP compliance, we expect the agency to maintain its current rigorous monitoring of TP cases until audit results indicate a significant reduction in non-compliance. However, we do not anticipate that the proposals will intensify the CRA’s historical audit activity levels.

André Bergeron is a partner at Gowling WLG. He can be contacted on +1 (613) 786 0043 or by email: andre.bergeron@gowlingwlg.com.

André Bergeron

Gowling WLG