Transfer Pricing Benchmarking Studies for Canadian Related-Party Transactions
Intercompany prices have to match what independent parties would agree. A benchmarking study is the evidence: comparable companies or transactions, selected and screened, showing an arm’s length range your results can be tested against. Bestax prepares studies the CRA can follow from search to conclusion.
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Who Needs a Benchmarking Study
Any Canadian taxpayer that transacts with related non-residents has to price those transactions at arm’s length. A benchmark is how most of them show that the price, margin or rate they used was reasonable.
- Canadian subsidiaries that distribute goods bought from a foreign parent or affiliate.
- Canadian entities that provide services, management or support to related companies abroad.
- Groups with intercompany loans, guarantees or cash pooling that need an arm’s length rate.
- Businesses paying or receiving royalties or licence fees within the group.
- Groups whose existing benchmark is several years old or no longer reflects the business.
- Taxpayers that have received a CRA request for their transfer pricing documentation.
A benchmark supports the documentation; it does not replace it. The study sits inside a contemporaneous file that also describes the transactions, the parties and the method chosen.
Also see our full Transfer Pricing Services, and T106 Reporting for the annual information return.
What Our Benchmarking Studies Cover
Each study follows the same path from the facts of the transaction to a documented range, so every step can be traced and repeated.
- A functional analysis of each party: the functions performed, assets used and risks assumed.
- Selection of the tested party and the most appropriate method for each transaction.
- A search of commercial databases for comparable independent companies or transactions.
- Quantitative and qualitative screening, with the reasons each comparable was accepted or rejected.
- An arm’s length range, commonly the interquartile range, and where your results fall in it.
- A written report that fits into your contemporaneous documentation, with annual updates.
The Arm’s Length Rules Behind a Benchmark
Section 247 of the Income Tax Act lets the CRA adjust the terms of transactions between a Canadian taxpayer and related non-residents to what arm’s length parties would have agreed. The CRA follows the OECD Transfer Pricing Guidelines in applying it.
Those guidelines recognize five methods: comparable uncontrolled price, resale price, cost plus, the transactional net margin method and profit split. The method chosen should be the most appropriate for the transaction, and the comparables have to be comparable in the ways that affect price.
Documentation must be contemporaneous: prepared by the documentation due date, which for a corporation is its T2 filing deadline.
The study should explain the tested party, the method and the search, so the CRA can reproduce the result.
The CRA can request the documentation in writing, and it must be provided within the time limit the rules set.
A penalty of 10% can apply to transfer pricing adjustments above a threshold where reasonable efforts to price at arm’s length are not shown.
Federal budgets have proposed changes to Canada’s transfer pricing rules. We confirm the rules in force for each year a study covers.
The Stages of a Benchmarking Study
A benchmark is built once and maintained after. Each stage has its own timing and leaves its own record in the file.
| Stage | What happens | When | What you receive |
|---|---|---|---|
| Functional analysis | Interviews and a review of functions, assets and risks | At the start of the study | A characterization of each party and the tested party |
| Comparable search | Database search, screening and review of each candidate | Once the method is chosen | A documented set of comparables and the arm’s length range |
| Financial update | Refreshed comparable financials tested against your results | Each year | Confirmation of where your results fall in the range |
| Full refresh | A new search and screening from the start | Commonly every few years, or when the business changes | An updated comparable set and range |
| Documentation | The benchmark placed in your contemporaneous file | By the documentation due date each year | A file ready to give the CRA on request |
Benchmarks are only as current as the business they describe. A restructuring, a new product line or a change in risk can call for a new search before the usual cycle.
What We Need to Prepare Your Study
A benchmark starts from how the business actually works, so we begin with the group’s structure and the agreements between its entities.
Where agreements are informal or missing, we document the transactions as they happen in practice and note any gaps for you to close.
- A group organization chart showing ownership and where each entity operates.
- Intercompany agreements, or a description of how each transaction works.
- Financial statements for the Canadian entity, and segmented results where available.
- Volumes and amounts of each related-party transaction for the year.
- Any existing transfer pricing policy, study or prior documentation.
- Recent T2 returns, T106 filings and any CRA correspondence on transfer pricing.
Our Benchmarking Process
Understand the transactions
We map the related-party transactions and the role each entity plays in them.
Choose the method
We select the tested party and the most appropriate method, and record why.
Search and screen
We search commercial databases for comparables and screen them against documented criteria.
Set the range
We calculate the arm’s length range and test your results against it.
Report and document
We write up the study and place it in your contemporaneous documentation.
Keep it current
We update the financials each year and refresh the search when the cycle or the business requires it.
Why Groups Choose Bestax for Benchmarking
Searches you can follow
Every accept and reject decision is recorded, so the CRA can retrace the study step by step.
Method chosen on the facts
We match the method to how the transaction works, not to the result we want to reach.
Linked to your filings
Your study, documentation and T106 tell the same story about the same transactions.
Maintained, not forgotten
Annual updates keep the benchmark current between full searches.
Ready for a request
Your file is finished before the CRA asks for it, not assembled after.
Related Bestax Services
Transfer Pricing Services for policies, documentation and CRA reviews built around your benchmark.
Cross-Border & International Tax for groups with operations or owners outside Canada.
T2 Corporate Tax Returns so the corporate return reflects your transfer pricing positions.
CRA Audit & Review Support when the CRA reviews your related-party transactions.
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Frequently Asked Questions
It is an analysis that compares the prices, margins or rates in your related-party transactions with those of independent companies or transactions. The result is an arm’s length range that shows whether your pricing is consistent with section 247.
It depends on the transaction and the information available. The OECD methods the CRA follows are comparable uncontrolled price, resale price, cost plus, the transactional net margin method and profit split. We choose the most appropriate one and explain why in the study.
A common practice is a full new search every few years, with the comparables’ financial results updated each year in between. A significant change in the business can call for a new search sooner.
The CRA may adjust your income to bring the transaction to an arm’s length amount, and a penalty can apply to large adjustments where reasonable efforts were not made. Finding the issue first lets you review the pricing policy before year end.
The T106 information return reports your transactions with related non-residents each year and asks about the methods used and whether documentation was prepared. Your benchmark and documentation should support what the T106 reports.
Federal budgets have proposed changes to Canada’s transfer pricing rules. We track their status and confirm which rules apply to each year your study and documentation cover.