Is There a Sixth Comparability Factor in Canadian Transfer Pricing?

This article reviews the recent landmark transfer-pricing case law in Canada. It suggests that the Canadian courts may have given birth to a sixth comparability factor for the application of the arm's-length principle that contravenes the intent of section 247 of the Income Tax Act. This new comparability factor is referred to as the relevance of non-arm's-length factors surrounding the relationship between related parties. First, the article briefly summarizes the process known as the comparability analysis, as set out in the guidelines issued by the Organisation for Economic Co-operation and Development and in section 247 of the Act. Second, the meaning given by the Canadian courts to the comparability analysis is examined. The author highlights how the courts, through their decisions, have created a sixth comparability factor for transfer-pricing purposes. The article concludes with a brief discussion of the unintended consequences that this new comparability factor may have for what constitutes "reasonable efforts" to use arm's-length allocations or prices, and thus for the possible application of transfer-pricing penalties.