9.2.2 [a] Article IX(1) – Transfer Pricing Adjustments
Article IX(1) is a general rule that effectively authorizes Canadian tax authorities to make, in certain circumstances, income and tax adjustments under applicable provisions of the Act dealing with the transactions between non-arm’s length parties. Article IX(1) is a jurisdictional provision that integrates the powers granted by the Act in respect of transfer pricing and other rules dealing with non-arm’s length transactions into the Treaty. Article IX(1) does not provide any relief to U.S or Canadian taxpayers, although some limited relief may be obtained by the affected taxpayers under Article IX(3) and Article XXVI (Mutual agreement procedures).
9.2.2 [b] Article IX[2} – Definition of Related Persons
Article IX(2) provides the definition of the term “related persons” for the purposes of Article IX. Where the term “related persons” is used in other provisions of the Treaty, in the absence of direct reference to Article IX, the term “related persons” should take the meaning it has for the purposes of the Act. For example, two individuals related by blood may not be related persons for the purposes of Article IX, but may be considered related, pursuant to the definition of “related persons” in the Act, for the purposes of other Articles of the Treaty.
Pursuant to Article IX(2), one person is deemed to be related to another person for the purposes of Article IX where:
- Either person participates directly or indirectly in the management or control of the other, or
- Any third person or persons participate directly or indirectly in the management or control of both.
9.2.2[c] Article IX(3) – Corresponding Adjustments
The function of Article IX(3) is to provide relief and avoid economic double taxation that may result from a transfer pricing adjustment made by the tax authorities of one State where the tax authorities of the other State may not otherwise be obligated to make a corresponding adjustment in respect of the same income.
9.2.2[d] Article IX(4) – Relief from Double Taxation
Article IX94) provides that 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.
There are no provisions in the Act that would oblige the Canadian tax authorities to relieve double taxation in the circumstances where it made an initial income adjustment and the foreign tax authorities (such as the IRS) either have not been notified within the period prescribed in Article IX(3) or declined to amend the initial transfer pricing adjustment.
Where a transfer pricing adjustment made by one State results in double taxation, a taxpayer may request competent authority consideration as provided under Article XXVI (Mutual agreement procedure). The purpose of the negotiations between the U.S. and Canadian Competent Authorities is to determine the transfer pricing or allocations that result in double taxation.
9.2.2[e] Article IX(5) – Fraud or Negligence
The relief provided under Articles IX(3) and (4) to the taxpayers affected by a transfer pricing adjustment 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. In such cases, the taxpayer will not be able to obtain corresponding adjustments under Article IX(3) or double taxation relief under Article IX(4).
References:
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell