On March 26, 2026, Canada's new transfer pricing rules received royal assent and will have a significant impact on multi-national enterprises (MNEs) in life sciences industries. The rules now focus on enumerated "economically relevant characteristics" which will affect how the Canada Revenue Agency scrutinizes cross-border transactions. For life sciences companies operating cross-border, proactive compliance and assessment of transfer pricing considerations is essential to ensure that the CRA does not inappropriately challenge the chosen transfer price of MNE intra-group transactions.
Key Takeaways
Life science companies that operate across borders should be aware of the following:
- The rules can affect how an MNE carries on business and, possibly, its ability to carry on business in certain jurisdictions. MNEs must give proper attention to the relationship between two (or more) members of the MNE to avoid the MNE being subjected to the taxation of the same income in more than one tax jurisdiction.
- The transfer pricing of royalties, shared services or other intra-group transactions between members of an MNE can give rise to tax disputes that may have a magnified adverse tax effect on MNE operations. Any position taken by one country's tax authority in relation to one tax year of a member of the MNE will affect the counterparty to the intra-group service that is subject to tax in another country. Positions taken by tax authorities in relation to one tax year also tend to have adverse tax consequences in future years, given the year-over-year nature of intra-group transactions.
- To ensure that proper consideration can be given to the intra-group transactions, MNEs should prepare and maintain robust, contemporaneous documentation, actively participate in the CRA audit process (i.e. functional interviews, keeping detailed records of all CRA interactions), and engage appropriate professional advisors early in the transfer pricing process to properly analyze and document the MNE intra-group services relationship. MNEs should also involve tax dispute professionals early in the transfer pricing audit/tax dispute process, to assist in outlining intra-group relationships, navigate transfer pricing audits nuances and mitigate the risk of reassessments and penalties under the rules' new framework.
The New Rules and Audit Considerations
The rules apply to taxation years and fiscal periods that begin after November 4, 2025.
The rules represent a full modernization of the transfer pricing regime contained in section 247 of Part XVI.1 of the Income Tax Act (Canada), R.S.C., 1985, c. 1 (5th Supp.) and a change to the legal framework within which cross-border transactions of MNEs (across all industries) will be evaluated and scrutinized by the CRA.
At the heart of transfer pricing considerations is an approach to intra-group transactions that assumes that each enterprise within the MNE group should be treated as a separate entity and that "[i]n order to apply the separate entity approach to intra-group transactions, individual group members must be taxed on the basis that they act at arm's length in their transactions with each other" (OECD Guidelines).
This exercise may seem straightforward in theory, but it has historically been, and continues to be, one of the most significant areas of tax disputes facing MNEs.
The main charging provisions in the rules allow the CRA to adjust the quantum or nature of amounts in a transaction or series where the transaction or series includes "actual conditions"—defined as the "conditions that actually apply between any of the participants in the transaction or series"—that differ from "arm's length conditions"—defined as the "conditions that would have applied had the participants to the transaction or series been dealing at arm's length in comparable circumstances, including the possibility that no transaction or series, or a different transaction or series, would have been concluded had the participants been dealing at arm's length in comparable circumstances."
While every transaction or series involving a taxpayer that is resident of Canada and a non-resident person with whom the taxpayer does not deal at arm's length is exposed to the rules, not every CRA transfer pricing audit will conclude in a reassessment that relies upon the transfer pricing adjustment provision. The CRA can only use the adjustment provision where the legal requirements under the rules are met.
When a taxpayer is selected for a transfer pricing audit, the CRA audit review will focus on whether the actual conditions of the transaction or series differ from arm's length conditions with reference to the following "economically relevant characteristics" of the transaction or series:
- Contractual terms of the transaction or series (provided those terms align with actual conduct);
- Actual conduct of the participants in the transaction or series including the assets held, risks assumed, functions performed, circumstances surrounding the transaction or series and industry practices;
- Characteristics of any property transferred or service provided;
- Economic circumstances of the participants and of the market in which the participants operate; and
- The business strategies pursued by the participants.
Before the rules came into force, taxpayers relied on the transfer pricing analysis framework set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The rules now set out the above "economically relevant characteristics" as a defined term and framework for transfer pricing comparability analyses, which must be conducted "so as to best achieve consistency" with the OECD Guidelines. This is a complex exercise, with CRA Audit often employing economists from the Economics Practice of the CRA's International Tax Division to prepare a transfer pricing analysis report on the transaction or series. The resulting economic report will then form the basis of a reassessment raised by the Minister/CRA pursuant to the transfer pricing adjustment provisions and will reflect the CRA's case to be rebutted.
The new adjustment provisions require analysis of the "economically relevant characteristics". The CRA has broad audit information gathering powers and Parliament is currently considering ways to further broaden these CRA powers. In light of the new adjustment provisions, CRA queries and functional interviews will likely become more prominent, with other new audit tools also being used by the CRA during transfer pricing audits. The following discussion provides some practical considerations.
Practical Considerations for Taxpayers
Maintain Books and Records
Taxpayers should maintain proper, complete and up-to-date contemporaneous documentation that meets the requirements of the rules. When a taxpayer is selected for a transfer pricing audit, the initial CRA letter will typically outline the year in issue and then request the taxpayer's "contemporaneous documentation" for the relevant year. Failure to provide the contemporaneous documentation within 30 days of the CRA request or failure to meet the requirements for contemporaneous documentation will deem the taxpayer "not to have made reasonable efforts to determine and use amounts that are based on arm's length conditions in respect of a transaction or series of transactions." This in turn exposes the taxpayer to a potential transfer pricing penalty under the rules. To mitigate risk, taxpayers should consider involving professional transfer pricing economists/advisors early in the process to ensure that the contemporaneous documentation is fulsome, that it meets the requirements under the Act, and to ensure that it can be provided to the CRA within the 30-day timeframe when requested.
Participate in Functional Interviews
As noted above, the CRA's broad audit information gathering powers include the power to require taxpayers to participate in oral interviews, along with other information gathering approaches. Currently, interviews are not uncommon in transfer pricing audits and are typically referred to as "functional interviews". Under the new rules, taxpayers can expect the CRA to conduct functional interviews more frequently to allow it to formulate positions in respect of the "economically relevant characteristics" of the relevant transaction or series. Taxpayers are encouraged to prepare for and participate in functional interviews as an opportunity (i) for CRA audit representatives to meet and speak with key individuals from the taxpayer organization, and (ii) to assist the CRA in gaining a better understanding of the taxpayer's business and interactions. In this regard, it is important to create internal awareness within an organization of the role that functional interviews play in transfer pricing audits. This allows organizations to identify interviewees who are best positioned to speak to key facts.
Develop a Written Audit Record
Taxpayers are also encouraged to develop a detailed memorialized written record of CRA audit interactions. As a CRA transfer pricing audit involves a fact-gathering exercise through a review of a taxpayer's contemporaneous documentation, functional interviews and written audit queries, taxpayers should adopt systems to log what information is shared with the CRA, when and in what form. Further, where meetings or interviews occur with the CRA, taxpayers should take diligent notes and, if appropriate, consider sharing their notes with the CRA to ensure a shared understanding of key facts. Alternatively, parties may transcribe the meeting. A written audit record will act as a reference for the taxpayer in dealing with a second review of the matter before CRA Appeals or in strategizing how to challenge incorrect assumptions of fact made by the CRA in raising a reassessment, for example as part a Tax Court of Canada litigation.
If you have further questions about this update or life sciences issues more generally, please contact the authors or a member of the Life Sciences Group.
