Arm’s-length standard in transfer pricing – 2025 proposed budget

The “arm’s-length” standard is reinforced:

In the 2025 federal budget, the government has proposed a major overhaul of Canada’s transfer-pricing regime, improving the alignment with the Organisation for Economic Co‑operation and Development (OECD) guidelines and reinforcing the “arm’s-length” standard. The reforms introduce a new adjustment rule that applies when related-party cross-border transactions involve actual conditions that differ from what independent parties would have agreed, and they formalise five key “economically relevant characteristics” (including functions performed, assets used, risks assumed, market context, and business strategy) to guide comparability analysis. On the administrative side, the proposals raise the penalty threshold for transfer-pricing adjustments from CAD $5 million to CAD $10 million, clarify documentation requirements (with optional simplified procedures under prescribed conditions), and shorten the deadline for responding to Canada Revenue Agency audits — from three months to just 30 days. These changes are set to apply for taxation years beginning on or after November 4 2025. Businesses with multinational or affiliate-related transactions should review their intercompany pricing policies, documentation systems and audit readiness to ensure compliance under this modernised framework.