TPM-02R

Secondary Transfer Pricing Adjustments, Repatriation and Part XIII Tax Assessments

June 10, 2021

Application

Transfer pricing memoranda (TPMs) are issued periodically to communicate the Canada Revenue Agency's (CRA) transfer pricing policy and provide guidance on specific aspects of the transfer pricing legislation. While the content of this memorandum relates to provisions of the law in force at the time it was written, the information provided is not a substitute for the law. Since this memorandum may not address your particular situation, you should refer to the Income Tax Act (ITA), any applicable regulation, and relevant case law. For more information, you can contact a CRA tax services office.

Introduction

1.  This memorandum cancels and replaces Transfer Pricing Memorandum TPM-02, Repatriation of funds by Non-Residents – Part XIII Assessments, dated March 27, 2003. The policies included in this memorandum are effective as of the date of this publication. 

2.  The purpose of this memorandum is to provide direction on the application of Part XIII tax, interest on Part XIII tax, penalties on the failure to withhold or deduct Part XIII tax, and the repatriation policy as they relate to international transfer pricing adjustments under subsection 247(2) of the ITA. The principles outlined in this memorandum may also be considered in other circumstances involving repatriation of funds.

3.  The content of this memorandum is arranged as follows:

• Background
• Deemed dividends
• Part XIII tax
• Repatriation
• Penalty on Part XIII tax
• Joint and several liability
• Non-duplication provision
• General comments

Background

4.  Section 247 of the ITA applies to situations where a taxpayer (or a partnership)^{Footnote 1} and a non-resident person with whom the taxpayer does not deal at arm's length are participants in a transaction or a series of transactions. Where a taxpayer participates in a transaction (or series) with a non-arm's length non-resident, and the terms or conditions of the transaction are not in accordance with the arm's length principle, subsection 247(2) may adjust, for tax purposes, any amounts related to the transaction (or series) to reflect arm's length terms or conditions. This transfer pricing adjustment is commonly referred to as the “primary adjustment”.

5.  Once an upward primary adjustment has been made, a secondary adjustment is generally required to account for the benefit conferred on the non-arm's length non-resident. The secondary adjustment results from the excess amount that the taxpayer has paid to, or the insufficient amount received from, the non-arm's length non-resident. The benefit conferred on the non-arm's length non-resident is usually deemed to be a dividend, and is subject to Part XIII tax. Relief from Part XIII tax may be granted through a repatriation agreement.

6.  It is important to note that the secondary adjustments described in this memorandum will not apply where the benefit is conferred on a non-resident that is a controlled foreign affiliate as defined in subsection 17(15) of the ITA. In this instance, the benefit conferred on the non-resident is more akin to a capital contribution than a dividend.

Deemed dividends

7.   For transactions that occurred prior to and including March 28, 2012, secondary adjustments were raised using various provisions of the ITA pertinent to the conferral of benefits. Effective after March 28, 2012, Canadian resident corporations became subject to subsection 247(12). Subsection 247(12) does not apply to other taxpayers (individuals and trusts). As outlined in more detail below, the benefit and the corresponding deemed dividend for secondary adjustments will generally be established through one of the following sets of provisions of the ITA:

• subsection 247(12),
• section 15 and subsection 214(3),
• subsections 56(2) and 214(3), or
• paragraph 246(1)(b)

8.   For the purposes of Part XIII tax, when a Canadian corporation (or a partnership of which the corporation is a member) is subject to a transfer pricing adjustment for transactions occurring after March 28, 2012, a secondary adjustment may apply under subsection 247(12) of the ITA. Subsection 247(12) deems the Canadian corporation to have paid a dividend to the non-arm's length non-resident, regardless of whether the non-resident is a shareholder of the Canadian corporation. Paragraph 247(12)(a) deems the dividend to have been paid immediately before the end of the tax year. Paragraph 247(12)(b) determines the amount of the deemed dividend, which is generally the amount by which the transfer pricing capital^{Footnote 2} and income adjustments exceed the transfer pricing capital and income setoff adjustments. The term “reasonably be considered” included in subsection 247(12) accommodates series of transactions involving more than one non-resident person.

9.  For all other taxpayers (including Canadian corporations for transactions up to and including March 28, 2012), where a transfer pricing adjustment has been made, a secondary adjustment is usually applicable under section 15 or subsection 56(2) in conjunction with paragraph 214(3)(a) or paragraph 246(1)(b) of the ITA.

10.  Where the non-resident that is considered to have obtained the benefit in question is a shareholder of the taxpayer, the amount of the benefit may be subject to the provisions of section 15 of Part I of the ITA, as if the non-resident were a resident of Canada. Where a benefit is conferred as a result of a transfer pricing transaction with a non-resident that is not a shareholder of the taxpayer, the benefit is subject to the provisions of subsection 56(2) and added to income of the other non-resident person (usually the non-resident shareholder) who directed or concurred with the transaction, as if the other non-resident were a resident of Canada.

11.  Consequently, where either section 15 or subsection 56(2) of the ITA would apply to a non-arm's length non-resident, as if the non-resident were a resident of Canada, the benefit is deemed to be a dividend to the non-resident under paragraph 214(3)(a) of the ITA, which is subject to Part XIII tax under subsection 212(2).

12.  Alternatively, subsection 246(1) of the ITA may apply where a person confers a benefit on a non-resident taxpayer, either directly or indirectly (such as in the case of a secondary transfer pricing adjustment). The amount of the benefit would then be subject to tax under Part XIII, to the extent that

• it is not otherwise included in the non-resident's income or taxable income earned in Canada under Part I of the ITA; and
• the amount of the benefit would have been included in income of the non-resident if
  • the non-resident taxpayer were resident in Canada, and
  • the payment were made directly by the person to the non-resident taxpayer.

Paragraph 246(1)(b) provides a deeming rule that applies for the purposes of Part XIII tax. If the taxpayer is a non-resident, it deems the benefit to be a payment in respect of property (e.g. a dividend), services or otherwise, depending on the nature of the benefit. Thus, Part XIII tax may apply on that deemed payment.

13.  The following chart provides an overview of the secondary adjustment provisions contained in the ITA.

14. Under subsection 214(3.1) of the ITA, the dividend is deemed to be paid at the time of the event or transaction when subsection 214(3) applies. However, to be consistent with the principles of subsections 247(12) to (15), the administrative policy regarding the timing of the deemed dividend for all taxpayers is as follows: the dividend will be deemed to have been paid immediately before the end of the tax year in which the transaction(s) occurred. This resolves the issue of calculating interest when multiple transactions occur throughout the year.

15. When a transfer pricing adjustment arises on a transaction or a series of transactions between a Canadian branch of a non-resident corporation (the branch corporation) and another non-arm's length non-resident person, the transfer pricing adjustment will generally result in an increase to the base amount which is subject to Part XIV tax for the branch corporation. Since the amount is subject to branch tax under Part XIV, the CRA will generally not impose Part XIII tax on any resulting benefit conferred on the other non-arm's length non-resident.

Part XIII tax

16. A dividend deemed to have been paid to a non-resident is subject to Part XIII tax under subsection 212(2) of the ITA. The rate of Part XIII tax is 25%; however, it may be reduced or eliminated when a tax treaty applies^{Footnote 4}. It is important to note that in certain treaties there may be shareholding thresholds that must be met in order to qualify for the reduced rate. Thus, a non-resident that is not a direct shareholder of the taxpayer may not qualify for the reduced rate^{Footnote 5}. The person who paid, or is deemed to have paid, an amount which is taxable under Part XIII is required by subsection 215(1) to deduct or withhold the amount of tax and remit that amount to the Receiver General of Canada on behalf of the non-resident person. See Example 1 of Appendix A for an example of when a taxpayer pays the Part XIII tax on a secondary adjustment.

17. There may be cases where a transfer pricing adjustment occurs on a transaction which was previously subject to Part XIII withholding tax. In these cases, the Part XIII tax previously remitted may be taken into account when considering the subsequent secondary adjustment, as a form of administrative relief. For any instances in which a higher amount of Part XIII tax would be due, when compared to the amount previously remitted, Part XIII tax owing on the secondary adjustment may be reduced by the amount already remitted. In cases where a lower amount of Part XIII tax would be due when compared to the amount previously remitted, a refund may be considered if requested within two (2) years from the end of the calendar year in which the withholding tax was initially remitted^{Footnote 6}. In both situations, consultation with the Non-Resident Audit Program will be necessary in order to properly process these adjustments. 

18. Relief from Part XIII tax may be granted through a repatriation agreement when it relates to transfer pricing adjustments. Repatriation is discussed later in this memorandum.

Interest on Part XIII tax

19. Subsection 227(8.3) of the ITA requires interest to be charged on the amount of Part XIII tax that was not deducted or withheld on the deemed dividend, from the time the amount was required to be deducted or withheld to the day that the payment of the Part XIII tax was made to the Receiver General of Canada. However, as noted in paragraph 14 above, the CRA's policy is that the dividend will be deemed to have been paid immediately before the end of the tax year. Therefore, the calculation of interest will also start at that time. Information about interest on Part XIII tax where repatriation has occurred is provided below in paragraphs 34 and 35 of this memorandum.

Repatriation

20. Repatriation refers to the repayment of the amount, or a portion of the amount, of the benefit conferred on the non-arm's length non-resident as a consequence of a primary transfer pricing adjustment. In this case, the repayment of the benefit (i.e. the repatriation) results in an increase to retained earnings of the Canadian taxpayer at the time of the repatriation. See example 2 in Appendix A.

Repatriation under section 247

21. Subsection 247(13) of the ITA provides relief from Part XIII tax under certain circumstances. For transactions that occur after March 28, 2012, subsection 247(13) applies where a dividend is deemed to have been paid to a non-arm's length non-resident under subsection 247(12), and, with the concurrence of the Minister^{Footnote 7}, the non-resident repatriates an amount to the Canadian corporation.

22. If the Minister concurs with the repatriation, paragraph 247(13)(a) of the ITA specifies that the amount of the deemed dividend may be reduced by the amount the Minister considers appropriate, taking into consideration all the circumstances surrounding the secondary adjustment and the associated repatriation.

23. Upon finalizing the audit, the CRA will apply the following administrative repatriation policy to maintain consistency with the provisions of section 247 of the ITA. This repatriation policy is applicable in all cases, for all taxpayers, regardless of how the secondary adjustment is determined, and is effective as of the date of this memorandum.

Situations where relief from Part XIII tax may be granted through repatriation

24.  The CRA may provide relief from Part XIII tax when the non-arm's length non-resident repatriates the amount, or a portion of the amount, of the primary transfer pricing adjustment(s) to the taxpayer, if the taxpayer has made a bona fide attempt at determining an arm's length price for the transaction(s) or series of transactions.

25.  The CRA will not provide relief from Part XIII tax in the following cases:

• the Transfer Pricing Review Committee has approved the application of paragraphs 247(2)(b) and (d) of the ITA;
• the General Anti-Avoidance Rule Committee has approved the application of the general anti-avoidance rule under subsection 245(2) as an assessing position;
• other anti-avoidance provisions of the ITA are applicable to the transaction(s) or series of transactions (for example, subsections 17(2), 247(9), etc.);
• the taxpayer or a non-arm's length non-resident has failed to honour a requirement or compliance order issued under the ITA relating to the transaction(s) or series of transactions; or
• any other circumstance in which the Minister does not concur with the repatriation.

26.  Where the CRA determines that the option to repatriate is available to the taxpayer, the auditor must advise the taxpayer in writing of the option to repatriate and of the conditions that must be met. It is up to the taxpayer whether to accept the offer to repatriate. The conditions that must be met include all of the following:

• The taxpayer agrees in writing to the proposed transfer pricing adjustment(s)^{Footnote 8}.
• The taxpayer and the non-arm's length non-resident agree to the terms and conditions of the repatriation agreement.
• The non-arm's length non-resident either
  • immediately repatriates the funds equivalent to the gross amount, or a portion of it, arising from the transfer pricing adjustment(s), or
  • agrees in writing with the taxpayer to the repatriation and to the completion of all appropriate transfers and entries in the financial records of the taxpayer within 90 days from the signing of the repatriation agreement.
• An unconditional waiver of the right to object to and appeal the transfer pricing adjustment(s) is obtained prior to granting relief for the repatriation. If the taxpayer decides not to waive its right of objection or appeal at the audit stage, the CRA's Appeals Branch may still consider a request for repatriation during the objection process. Signing the waiver does not prevent the taxpayer from seeking assistance from the Competent Authority Services Division (CASD)^{Footnote 9}.

The repatriation payment

27.  Repatriation can be accomplished by one or more of the following actions:

• Making a cash payment.
• Offsetting the taxpayer's inter-company liability account with the non-arm's length non-resident at the time of repatriation (i.e. the date the repatriation agreement is signed). Where repatriation can be fully achieved through offsetting against an inter-company liability, there is no need to raise a Part XIII tax assessment. For an example of where the taxpayer has offset the repatriated amount against an amount owing to the non-arm's length non-resident, see Example 2 of Appendix A.
• Creating or adjusting an inter-company receivable account at the time of repatriation. When an inter-company receivable is created, the CRA must ensure that the receivable is recorded in the taxpayer's books and records, starting at the time of repatriation. From that time forward, interest under section 80.4 may apply on the amount of the receivable outstanding and may be subject to Part XIII tax as a deemed dividend under subsections 15(9), 15(1), 214(3) and 212(2). If the receivable is not repaid within one year from the end of the taxation year in which the repatriation took place (i.e. subsection 15(2.6) does not apply), subsection 15(2) in conjunction with paragraph 214(3)(a) deems a dividend to have been paid to the non-arm's length non-resident to which Part XIII tax will apply. Interest under subsection 227(8.3) may also apply on the amount of Part XIII tax from the time the amount was required to be deducted or withheld (i.e. the date of repatriation). Example 3 of Appendix A provides an example of where the taxpayer has offset the amount that is repatriated against the amount owing to the non-arm's length non-resident. However, in this example, the amount owing does not cover the full amount of the transfer pricing adjustment, so an inter-company receivable was created.
• Offsetting against a separate downward transfer pricing adjustment that relates to the same non-arm's length non-resident, for the same tax year, in the context of an audit. Pursuant to subsection 247(10), a downward transfer pricing adjustment may only be made if the Minister is satisfied that the adjustment is appropriate in the circumstances. See Transfer Pricing Memorandum TPM-03^{Footnote 10}, Downward Transfer Pricing Adjustments under Subsection 247(2), for further detail on this subject.

The repatriation agreement

28. As noted in paragraph 26 above, a precondition for granting relief for the repatriation is that the taxpayer agrees in writing (the repatriation agreement) to the transfer pricing adjustment(s). Both the taxpayer and the non-arm's length non-resident who participated in the transaction(s) must sign the agreement.

29.  The agreement must contain all of the following information:

• any terms and conditions agreed to;
• the amounts involved;
• the steps that both the taxpayer and the non-arm's length non-resident will take to effect the repatriation (including the payment details);
• the timeframe in which those steps will be carried out; and
• the signatures mentioned in paragraphs 28 and 30.

See Appendix B for a sample repatriation agreement.

30.  Once the taxpayer and the non-arm's length non-resident finalize the agreement, it must be approved and signed by the Minister's delegated authority. This authority has been delegated to the Director or Assistant Director within the respective tax services office.

31.  The settlement of the repatriation must be completed within 90 days from the time the repatriation agreement is signed. No extensions will be granted to this 90 day timeframe.

32.  As mentioned above, the repayment is considered to take place on the date the repatriation agreement is signed. Whether the repayment is an offset to an existing liability, the creation of a receivable, or a cash payment, it is considered a reduction or elimination of the deemed dividend associated with the primary adjustment and results in a corresponding increase to retained earnings.

33.  The CRA will rely on this agreement when verifying if the repatriation has been carried out. Where the repayment has not been made or recorded in the books and records of the taxpayer within 90 days of the date of the repatriation agreement, a dividend will be deemed to have been paid immediately before the end of the tax year in which the adjusted transaction(s) occurred. The corresponding assessment of Part XIII tax plus interest will be assessed at that time. Penalties, other than subsection 227(8), may also apply.

Interest on notional Part XIII tax when there is repatriation

34.  Under paragraph 247(13)(b) of the ITA, interest under subsection 227(8.3) would accrue on an amount equivalent to the Part XIII tax amount, until such time as the amount, or a portion of the amount, of the primary adjustment is repaid under an acceptable repatriation agreement. However, paragraph 247(13)(b) is subject to subsection 247(14) of the ITA, which may provide for a reduction or waiver of this interest.

35.  Subsection 247(14) of the ITA provides that if the non-arm's length non-resident has repatriated an amount, interest under subsection 227(8.3) on the Part XIII tax liability may be reduced to the amount that the Minister considers appropriate, having regard to all the circumstances, including whether the country of the non-resident provides reciprocal treatment. Barring extraordinary or abusive situations, the CRA will generally not assess interest under paragraph 247(13)(b) (i.e. interest on the Part XIII tax amount or the applicable part of it) when a repatriation agreement has been accepted.

Penalty on Part XIII tax

36. Where a dividend is deemed to have been paid under subsection 247(12), paragraph 227(8.5)(b) provides that no penalty for failure to deduct or withhold under subsection 227(8) will be assessed, whether or not the taxpayer chooses to repatriate. Paragraph 227(8.5)(b) is effective for tax years that end after March 28, 2012.

37. It is the CRA's policy that no penalty under subsection 227(8) for failure to deduct or withhold will be assessed on any secondary adjustment resulting in either a Part XIII tax assessment or in a repatriation settlement if the primary adjustment is a transfer pricing adjustment.

Joint and several liability

38. Where a taxpayer has failed to deduct or withhold the Part XIII tax on behalf of a non-resident, subsection 227(8.1) of the ITA provides that the non-resident and the taxpayer are jointly and severally, or solidary, liable to pay any interest payable under subsection 227(8.3) on that amount of tax.

39. When subsection 247(12) applies, joint and several, or solidary, liability under subsection 227(8.1) will apply in respect of interest payable as a result of the application of paragraph 247(13)(b).

Non-application of provisions

40. Subsection 247(15) of the ITA provides that where a dividend is deemed to have been paid to a non-arm's length non-resident under subsection 247(12), then the rules pertinent to conferral of benefits under section 15, subsections 56(2) and 212.3(2), and section 246 do not apply.

General comments

41. The existence of a tax treaty does not affect the decision to accept a repatriation agreement.

42. If the CRA determines that repatriation is appropriate, the auditor must notify the taxpayer in writing that repatriation is an option. This notification can be done in the proposal letter.

Conclusion

43. Both the non-arm's length non-resident and the taxpayer must agree in writing to the repatriation and the completion of all appropriate transfers and entries in the financial records of the taxpayer within 90 days of the signing of a repatriation agreement. Without this signed agreement, repatriation relief will not be granted. A copy of the signed written agreement must be submitted to the auditor, who will seek the final approval of the Minister's delegated authority as noted in paragraph 30.

Appendix A - Examples

A1.  In the following examples, assume that the audit was completed in March 2021, and the transfer pricing adjustments and corresponding deemed dividends were as follows:

• 2016    $3,000,000
• 2017    $4,000,000
• 2018    $5,000,000

Example 1

A2.  The taxpayer accepts the transfer pricing adjustment and pays the Part XIII tax on the deemed dividend (the taxpayer can still file an objection with Appeals or seek assistance with the Competent Authorities).

A3.  Interest under 227(8.3)(b) is charged on the Part XIII tax amount from the date of the deemed dividend. According to the CRA policy (as stated in paragraph 14), the dividend will be deemed to have been paid immediately before the end of the tax year. Therefore, the interest calculation would start at that time, and end on the date of payment of the Part XIII tax to the Receiver General for Canada.

A4. According to the CRA policy (as stated in paragraph 37) penalties under subsection 227(8) for failure to deduct or withhold are not assessed on the Part XIII tax amount.

Example 2

A5.  The non-arm's length non-resident repatriates the amount of the primary adjustment to the taxpayer. The method of payment agreed upon in the repatriation agreement was to offset the amount required to be repatriated against the amount owing to the non-arm's length non-resident with the corresponding increase to retained earnings.

A6.  The repatriation settlement is considered to be made on the date the repatriation agreement is signed. In this example, the balance of the intercompany account is sufficient to support the entire offset (i.e. repatriated) amount at the date of settlement.

A7.  According to the CRA policy (as stated in paragraph 35), interest under subsection 227(8.3) will not be assessed unless the facts and circumstances warrant.

Example 3

A8.  As in example 2, the non-arm's length non-resident chose to repatriate the funds to the taxpayer by offsetting the amount required to be repatriated against the amount owing to the non-arm's length non-resident. However, the accounts payable balance to the non-arm's length non-resident is not sufficient to cover the full amount of the repatriation payment (i.e. the primary transfer pricing adjustment). The result is the creation of a shareholder's loan account.

A9.  The accounts payable balance of $4 million is reduced to nil, the shareholder's loan account has a balance of $8 million ($12 – 4 = $8), and the retained earnings is increased by $12,000,000. The shareholder's loan account must be set up in the taxpayer's books and records at the date of repatriation, and subsection 15(2) or 15(9) provisions will come into effect at that time.

A10.  If the non-arm's length non-resident is not a shareholder of the taxpayer, then an inter-company receivable would be created. 

Appendix B - Sample repatriation agreement

Repatriation agreement between (Enter taxpayer's name here) and (Enter non arm's length non-resident's name here), for tax year(s)/fiscal period(s) (Enter FPS here) to (Enter FPE here)

This repatriation agreement is in relation to the repayment of a dividend that is deemed to have been paid to the non-arm's length non-resident pursuant to (Auditor to select only the section(s) that apply, i.e. subsection 247(12), section 15 and paragraph 214(3)(a), subsection 56(2) and paragraph 214(3)(a), or paragraph 246(1)(b)) of the Income Tax Act, as a result of a transfer pricing adjustment under subsection 247(2).

The taxpayer acknowledges that the repatriated amount of $(XXXX) will result in a reduction of the deemed dividend by that amount, thus an increase to the retained earnings of the taxpayer. The applicable Part XIII tax on that deemed dividend and any interest on the Part XIII tax amount will also be reduced accordingly.

Conditions of the repatriation:

• (Taxpayer's name) and (non-arm's length non-resident's name) agree to the terms and conditions of this agreement represented by the authorized signatures provided below;
• (Taxpayer's name) agrees to the transfer pricing adjustment(s) noted above;
• (Non-arm's length non-resident's name) repatriates the agreed amount within 90 days from the signing of this agreement (no extensions will be granted);
• The taxpayer records all entries of the repatriation in its financial records including the corresponding increase to retained earnings;
• (Taxpayer's name) has provided an unconditional waiver of the right to object to and appeal the transfer pricing adjustment(s); and
• This agreement has the concurrence of the Canada Revenue Agency represented by the signature of a delegated authority provided below.

If the repatriation is not effected within the 90 day period, then either (Auditor to select only the section(s) that apply, i.e. subsection 247(12), section 15 and subsection 214(3), subsections 56(2) and 214(3), or paragraph 246(1)(b)) will apply. The corresponding Part XIII tax plus interest will be assessed, and penalties (other than subsection 227(8)) may also apply.

 

Amount of the repatriation:  

$___________________________

 

Method of repayment:

(One or more methods can be used. Specify the amount per method and delete those that do not apply.)

1. Offset to the intercompany liability account with the non-arm's length non-resident
2. Creation of an intercompany receivable account with the non-arm's length non-resident
   • Must be recorded in the taxpayer's books and records as of the date the repatriation agreement is signed;
   • If not repaid within one year from the date of record, section 15 in conjunction with paragraph 214(3)(a) may apply to deem a dividend to have been paid of which Part XIII tax will apply;
   • Interest under section 80.4 or section 17 may apply; and
   • Interest under 227(8.3) may apply on the amount of the Part XIII tax from the time the amount was required to be deducted or withheld.
3. Cash payment

Other steps taken to effect the repatriation (i.e. payment details):

________________________________________________________________________________________________________

________________________________________________________________________________________________________

(Enter taxpayer's name)

 

_________      _____________________________________       __________

Date           Authorized officer's name (print)       Position

 

__________________________________

Authorized officer's signature

 

(Enter non-arm's length non-resident's name)

 

_________      _____________________________________     __________

Date           Authorized officer's name (print)     Position

 

__________________________________

Authorized officer's signature

 

Canada Revenue Agency

 

_________      _______________________________________       __________

Date           Delegated authority's name (print)       Position

 

_____________________________________

Delegated authority's signature