9.3.2 [a] Arm’s Length Standard
Article 9 incorporates into the Treaty the arm’s length principles reflected and noted above in U.S. domestic law. In its most basic dimensions, it provides, simply that when related persons or enterprises engage in a transaction on terms that are not arm’s length, the Contracting States may make appropriate adjustments to the taxable income and liability of those related enterprises to reflect what the income and tax of these related persons/enterprises would have been concerning the transaction had there been an arm’s length relationship between them.
9.3.2 [b] Associated Enterprises
An enterprise in one country is not independent with respect to an enterprise in another country if one of the enterprises participates directly or indirectly in the management or control of the other enterprise. The enterprises are also not independent if the same persons participate directly or indirectly in the management or control of both enterprises.
Hence, the Article applies if an enterprise of one State participates directly or indirectly in the management, control, or capital of the enterprise of the other State. Also, the Article applies if any third person or persons participate directly or indirectly in the management, control, or capital of enterprises of different States. For this purpose, control, whether or not legally enforceable and however exercised or exercisable is to be considered.
9.3.2[c] Secondary Adjustments under Article 9 (Paragraph 3,4,5)
Under paragraph 3, when a Contracting State has made an adjustment that is consistent with the provisions of paragraph 1, paragraph 3 obligates the other Contracting State to make a corresponding adjustment if two conditions are satisfied: (1) the other Contracting State agrees with the adjustment to be made or to be made by first Contracting State; and (2) the competent authority of the other Contracting State has received notice of the first adjustment within six years of the end of the taxable year in which that adjustment relates.
Paragraph 4 provides the competent authority of the State making the initial adjustment may grant unilateral relief from double taxation where the competent authority in the other State has not received a notification during the prescribed period.
Paragraph 5 notes that the relief provided under paragraph 3 and 4 may not be available in the case of fraud, willful default or neglect, or gross negligence on the part of the taxpayer or any related person.
References:
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell