21 September 2005
On 16 May 2005, the Canada Revenue Agency released the latest in its series of memorandums on transfer pricing. The purpose of the document is to provide information concerning the bundling of transactions in relation to transfer pricing and the taxation of non-residents.
A bundled transaction is one in which a single price is established for a number of different properties and/or services that have been packaged together to form a single transaction.
The need to provide a clarification stems from two concerns. One of the issues for Canadian tax purposes is whether this bundling results in a price that differs from that which would otherwise have been established if the property or services were sold on an individual basis. Often, to evaluate overall price, it is necessary that transactions be unbundled in order to determine separate values for which comparable information exists.
The second concern is that bundling may disguise transactions so that tax on a non-resident's income under Part I or Part XIII of the Canadian Income Tax Act (the Act) is lowered or avoided altogether. When tax is only applicable to an element of a transaction, unbundling is necessary in order to determine the value of the element subject to tax.
The memorandum clarifies that even though there is no explicit reference to a bundled transaction or a requirement to separately price property or services in the Act (other than Sec. 68, which provides for the specific allocation of consideration between the disposition of property and the provision of services), bundling can result in a transfer pricing adjustment if the terms and conditions of the bundled transaction fail to meet the arm's length standard. The onus is on the taxpayer to have accurately described and to have considered, in advance, whether the arm's length principle is being followed for all related party transactions, bundled or not.
Withholding taxes may also be applicable to an element of the bundled transaction. Sec. 105 of the Canadian Income Tax Regulations (Regulation 105) provides for the withholding on payments to non-residents in respect of services rendered in Canada, while Part XIII of the Act imposes a withholding tax on certain amounts paid or credited to non-resident persons.
The memorandum sets out various policies in respect of these issues and addresses practical questions in respect of the application of the Canada Revenue Agency's policies.
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