A significant chapter in Canadian tax law is being rewritten. On Nov. 4, 2025, the federal government tabled Budget 2025, which introduced a comprehensive modernization of Canada's transfer pricing rules under section 247 of the Income Tax Act. These long‑awaited changes represent the culmination of a multi‑year narrative that began with the government's landmark court loss in the Cameco case, progressed through a detailed consultation process in 2023 and resulted in a fundamental shift in how transfer pricing will be analyzed and enforced in Canada.
For multinational enterprises (MNEs) operating in Canada, these proposals signal a new era of heightened scrutiny, increased compliance obligations and a decisive move towards aligning Canadian transfer pricing regulations with the latest Organisation for Economic Co‑operation and Development (OECD) standards. This alert provides a detailed analysis of this journey and the critical changes taxpayers must prepare for.
The Cameco decision
The story of this reform begins with the Tax Court of Canada and the Federal Court of Appeal's decisions in Cameco Corporation v. The Queen. The Canada Revenue Agency (CRA) challenged Cameco's transfer pricing structure, where a Swiss subsidiary purchased uranium from its Canadian parent and third parties and sold it for a significant profit when the prices of uranium spiked unexpectedly. The CRA argued that the entire arrangement was a sham or, alternatively, that the transactions should be "recharacterized" under subsection 247(2) because they would not have been entered into by arm's length parties.
The courts rejected the CRA's position, ruling in favour of Cameco. They found that the legal agreements were not a sham and set a very high threshold for the CRA to apply the recharacterization rule with the objective of piercing the corporate veil and taxing Cameco on its subsidiary's profits.
The Canadian courts emphasized that the focus should be on pricing the actual transaction that occurred, not substituting a different one that the CRA found more commercially reasonable. The Crown's loss in the Cameco case highlighted the limitations of the existing legislation and served as the primary catalyst for the government to seek reform.
The blueprint and the 2023 consultation paper
In response to the Cameco outcome and a signal in Budget 2021, the Department of Finance released a consultation paper in June 2023: "Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules." This paper laid the intellectual groundwork for the current proposals.
Its key objectives were:
- Strengthen the transfer pricing rules to protect the Canadian tax base.
- Align Canada's legislation more closely with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), particularly the post‑base erosion and profit shifting (post‑BEPS) updates.
- Shift the analytical focus from the strict legal form of a transaction to its economic substance and the actual conduct of the parties.
The paper introduced draft legislative concepts that are now central to the Budget 2025 proposals, including a focus on "economically relevant characteristics" and a unified approach to transfer pricing adjustments.
The Budget 2025 proposals
Budget 2025 translates the policy objectives of the consultation paper into concrete legislative and administrative changes, effective for taxation years beginning after Nov. 4, 2025. The proposals overhaul the analytical framework and significantly tighten compliance timelines.
1. A new, unified transfer pricing adjustment rule
This is one of the most significant changes proposed to the transfer pricing regulations. The proposed changes replace the existing transfer pricing adjustment rule, which currently has two branches: the pricing adjustment rule and the recharacterization rule, with a single streamlined rule. Under this rule, an adjustment would be made to the quantum and nature of the amounts reported if it is determined by the CRA that the "actual conditions" of the transactions or series differ from the "arm's length conditions".
This new framework is designed to give the CRA the authority to adjust not only the price, but also the fundamental nature of a transaction, including substituting it with an alternative transaction or disregarding it entirely (only in limited circumstances) without needing to meet the high recharacterization test from the old rules.
2. Key definitions and the new lexicon of transfer pricing
The new rule is built on several new and broadly defined terms:
- Actual conditions – This refers to the economic reality of the transaction, emphasizing the actual conduct of the parties over their contractual agreements. It includes all relevant commercial and financial information, such as price, margins and division of profit.
- Arm's length conditions – This is the new benchmark. It refers to the conditions that would have existed between the participants had they been dealing at arm's length. Crucially, this definition explicitly includes the possibility that arm's length parties might have entered into a different transaction or no transaction at all. This directly addresses the issue at the heart of the Cameco case.
- The term "conditions" used in both definitions above, is to be given a wider interpretation. In addition to prices and rates, it includes (without being limited to) various measures of profit and contribution, as well as "any commercial or financial information" relevant to determining the quantum and nature of amounts.
- Economically relevant characteristics – The delineation of the transaction must be based on these factors, which are closely aligned with the OECD Guidelines:
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- Contractual terms (but only if consistent with actual conduct).
- Functions performed, assets used, risks assumed (FAR) and how these relate to the value creation by the MNE Group.
- Characteristics of the property or services.
- Economic circumstances and market context.
- Business strategies of the parties.
3. Codification of the OECD Guidelines
The proposals introduce an explicit interpretive rule requiring that the analysis under section 247 be conducted in a manner that best achieves consistency with the 2022 OECD Guidelines. This elevates the Guidelines from a persuasive interpretive aid to a near‑legislative standard, subject only to specific carve‑outs in Canadian regulations.
4. Administrative and compliance
The practical implications for taxpayers are profound, with significant changes to documentation and penalty rules.
| Provision | Old rules (pre‑Budget2025) | New proposed rules (post‑Budget2025) |
|---|---|---|
| Documentation deadline | Three months from the date of a written CRArequest. | 30 days from the date of a written CRArequest. |
| Penalty threshold | Penalty applies if net adjustments exceed the lesser of 10% of revenue or $5million. | Penalty applies if net adjustments exceed the lesser of 10% of revenue or $10million. |
| Documentation scope | Focus on individual"transactions." | Broader focus on a "series of transactions" and the MNE group's valuechain. |
| Methodology | Reasonable efforts to determine and use arm's lengthprices. | Explicit requirement to select and apply the "most appropriate method" in accordance with the OECDGuidelines. |
| Simplified regime | No formal simplifiedregime. | A simplified documentation regime for lower‑risk taxpayers or transactions is enabled, but details are to beprescribed. |
Implications and takeaways for taxpayers
- Substance is supreme – MNEs can no longer rely solely on intercompany legal agreements. The CRA will be empowered to look through contracts to the underlying economic reality and conduct of the parties.
- Audit readiness is non‑negotiable – The reduction of the documentation deadline to 30 days is a game‑changer. It eliminates the ability to prepare documentation after receiving a formal notice from the CRA. Robust, comprehensive and contemporaneous documentation must be maintained on a "real‑time" basis.
- Pressure‑test your policies – Taxpayers must proactively review their transfer pricing policies, functional analyses and value chain narratives to ensure they align with the new emphasis on economic substance and the expanded documentation requirements.
- Increased uncertainty and dispute potential – The introduction of new concepts will likely lead to a period of uncertainty as taxpayers, advisors and the CRA develop their own interpretations of these nuanced concepts. This may result in more complex and prolonged audits.
Conclusion
The transfer pricing amendments in Budget 2025 are not minor. The changes include fundamental modernization designed to equip the CRA with more powerful tools (along with previously introduced changes to the CRA's enforcement powers) to enforce the arm's length principle in line with global standards.
The narrative that began with Cameco concluded with a clear message from the government: the analytical requirements have changed. For MNEs in Canada, the time to adapt is now. Proactive assessment and reinforcement of transfer pricing policies and documentation practices are essential to navigate these new, more demanding requirements.
Strengthen your transfer pricing strategy
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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