Transfer Pricing Newsflash - Changes to the vdp for transfer pricing issues: the door is closing

May 09, 2017


The Canada Revenue Agency (“CRA”) is proposing changes to its Voluntary Disclosures Program (“VDP”) as it pertains to transfer pricing.  These changes would close the door on a remedy companies have been relying on to avoid the transfer pricing penalties that would apply when coming forward with an upward adjustment to income.  This places even greater emphasis on the need for proper transfer pricing planning up front, and for annual compliance with the requirement to produce contemporaneous documentation.


The CRA’s VDP is intended to promote voluntary tax compliance by giving taxpayers the opportunity to correct inaccurate or incomplete information in a tax return previously filed or to file a return that should have been filed. Under this program, taxpayers who make a valid1 disclosure under the Income Tax Act will have to pay the taxes owed plus interest but without penalty or prosecution. The Minister of National Revenue also has discretionary authority to grant interest relief2 to taxpayers in accordance with specific legislative provisions.

Proposed Changes to the VDP 

On December 8, 2016, the CRA released a Report on the VDP which lists the following major potential changes to the current program to combat offshore tax evasion and aggressive tax planning. This Report was prepared by the Offshore Compliance Advisory Committee (“OCAC”)3, which was created by the CRA in April 2016. Specific to transfer pricing there is a proposal that there be no relief granted for transfer pricing issues or penalties. 

The OCAC provided a rationale for the majority of the recommendations; however, for the proposed ending of the use of VDP in Transfer Pricing cases, the OCAC did not provide any rationale to support it. 

Further, on February 22, 2017, the CRA released its formal response to the recommendations proposed by the OCAC, in which it indicated that the review of these recommendations was expected to be completed by March 31, 2017.  The CRA has yet to release the results of its review. 

The Sifto Case 

During the 2002 to 2006 taxation years Sifto Canada Corp (“Sifto”) sold approximately 50 percent of its annual rock salt production to a related party in the United States, North American Salt Company (“NA Salt”). Sifto is a Canadian corporation and is an indirect subsidiary of Compass Minerals International, Inc. (“Compass”), a U.S. corporation and publicly traded company. NA Salt was also an indirect subsidiary of Compass. The price utilized in these intercompany transactions was based on a previous Transfer Pricing Study4

Based on a new Transfer Pricing Study that was completed by KPMG at some point after 2006 (the “2002-2006 Study”); Sifto came to the conclusion that the transfer prices utilized in the 2002-2006 taxation years were less than arm’s length prices and it wanted to correct the pricing.

Sifto filed an application to the VDP on April 11, 2007 to avoid the application of penalties under the ITA. On March 13, 2008, Sifto was accepted in to the VDP and reassessments for the upward adjustments proposed by the taxpayer to its taxable income in Canada were going to be issued. On April 21 and 22, 2008, the Minister issued notices of reassessments to Sifto for the years under review (“2008 Reassessments”). Subsequently, Sifto sought assistance from the Minister regarding potential double taxation. Sifto applied in writing to the Canadian Competent Authority on April 30, 2008, and Compass applied to the U.S. Competent Authority on May 13, 2008 for relief from double taxation under the Tax Treaty between Canada and the U.S.

The negotiations between the Canadian and U.S. Competent Authorities resulted in an agreement under the Canada - U.S. Tax Treaty regarding the acceptance of the transfer pricing adjustments proposed and the relief from double taxation. The settlement letter was dated November 10, 2010; and the taxpayer responded to this letter accepting the terms of the Competent Authority settlement on December 1, 2010.

Sifto was of the view that if both tax authorities accepted the proposed transfer pricing adjustment, it was because they concluded that the pricing used in these intercompany transactions was arm’s length; that this agreement was final and binding and; therefore, no penalties were going to be imposed.  However, based on the analysis performed by the CRA during the Voluntary Disclosure and the Competent Authority processes; the CRA decided to audit the taxpayer. On August 1, 2012, the CRA concluded that the prices for the intercompany sales transactions between Sifto and Compass should have been even higher and reassessed the taxpayer for the 2004-2006 years, adding approximately Cdn$135 million to Sifto’s taxable income. The CRA also imposed significant penalties under section 247(3) of the Canadian Income Tax Act.

After the review of the case submitted by the taxpayer on August 8, 2016 and September 9, 2016, the Tax Court of Canada concluded that the reassessments by the Minister were inconsistent with the VDP agreement between the Minister and Sifto, and the agreement between Canada and the U.S.; and that these agreements are to be viewed as final and binding as to the transfer prices utilized. The Tax Court decision was issued on March 10, 2017.

BDO’s Comments 

Based on the dates when the appeals were heard, July 11 to 14, 2016, the written submissions received by the Tax Court of Canada on August 8, 2016 and September 9, 2016, and the work performed by the OCAC with respect to developing the proposed recommendations to the VDP (from April 2016 when the OCAC was formed and December 8, 2016, when the report on the VDP was released), it appears that there could be a link between the Judge’s decision in the Sifto case and the CRA’s proposal to end the use of VDP in Transfer Pricing cases.

If the OCAC recommendations regarding the use of VDP for transfer pricing cases are accepted, in full, by the CRA, then the Sifto case could be last case heard by the Courts dealing with this type of situation.

Next Steps

Given that there may no longer be a potential remedy via the VDP for inappropriate transfer pricing, the need for proper transfer pricing planning up front, and for annual compliance with the requirement to produce contemporaneous documentation, is more vitally important than ever before.

The transfer pricing team at BDO can assist you with your transfer pricing planning, compliance, and controversy management needs. Contact our leader:

Dan McGeown
Associate, Transfer Pricing Practice Leader

1 A disclosure will be deemed to be valid if the CRA accepts a disclosure as having met the following conditions: (i) voluntary; (ii) complete; (iii) potential application of a penalty; and, (iv) one year past due.
2 The ability of the Minister to grant interest relief is limited to any taxation year (or fiscal period in the case of a partnership) that ended within the previous 10 years before the calendar year in which the submission is filed; regardless of the tax year in which the tax debt arose.
3 This committee was established by the Minister as an independent agent to advise the CRA when dealing with offshore companies.  The OCAC is composed of seven independent experts with significant legal, judicial and tax administration experience.
4 It is not known whether this Transfer Pricing Study was completed in-house or by a third-party advisor.
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