Revenue Canada releases details of advance pricing arrangements program.

I. Overview

On December 10, 1994, the Canadian government announced that it was formally adopting an Advance Pricing Arrangement (APA) program, styled along that adopted a few years earlier by the United States.[1] APAs are agreements between taxpayers and Revenue Canada (or both Revenue Canada and the governments of other treaty countries) about the method by which prices for intercompany transactions will be established. Normally the agreement does not establish a specific price or prices but rather the pricing methodology (transfer price methodology -- TPM).

That development was ironic because Revenue Canada[2] had steadfastly refused to consider such a procedure in the late 1980s on the grounds that such an approach would somehow hamper the competent authority procedure in respect of issues arising after the fact. Now, nearly 15 years after initially rejecting the notion and some 7 years after deciding to adopt it, Revenue Canada in March 2001 released "Comprehensive Guidance on Advance Pricing Arrangements (APAs)."[3]

II. Reasons for Seeking an APA

A. Reason #1: Transfer Price Related Penalties

1. Scope of Penalties. An interest in the APA program often will turn on whether the Canadian party to an intercompany transaction can be potentially subject to specific penalties arising out of the use of transfer prices that are ultimately found by a court to be so inaccurate that they have understated Canadian income by an amount that reaches the threshold of penalties. The interest increases where the other country involved, for example, the United States, also imposes such penalties. Under both Canadian and U.S. law, transfer price related penalties can apply where the income has been understated by an amount exceeding the lesser of $5 million or 10 percent of the gross sales (of goods or services) of the relevant Canadian or U.S. party.[4]

Where the threshold for Canadian penalties is crossed, the penalty under subsection 247(3) is a tax of 10 percent of the understated income. In the United States, there is a dual-level penalty system. The first (entailing a penalty equal to 20 percent of the additional tax payable by reason of understated outbound or overstated inbound transfer prices) involves the threshold of either (1) the lesser of $5 million of understated income or 10 percent of gross sales or (2) a situation where the U.S. taxpayer used prices that are 200 percent or more or 50 percent or less than arm's-length prices. The second (entailing a penalty of 40 percent of understated tax) involves an understatement exceeding either (1) the lesser of $20 million of understated income or 20 percent of gross receipts or (2) a situation where the taxpayer used prices that are 400 percent or more or 25 percent or less than arm's-length prices.

Given the U.S. approach, the effective tax associated with a penalty assertion at a U.S. federal corporate tax rate of 35 percent is, in the first case, some 7 percent (20 percent x 35 percent) and in the second case, 14 percent (40 percent x 35 percent). Therefore, the Canadian "tax" of 10 percent is more or less half way between the two extremes of the U.S. effective tax cost for inaccurate transfer prices. Moreover, in this respect, the U.S. approach is such that if there are losses in the year, the penalty rule for understated income from transfer price arrangements may not result in an actual, immediate tax liability, whereas the Canadian penalties impose an immediate tax without regard to whether the assessment of income related to transfer pricing results in net taxable income for the year.

2. Basic Response to Scope of Penalties. The spectre of penalties may be dealt with in one of two ways. First, there are safe harbors potentially available by complying with the associated rules respecting the preparation of contemporaneous documentation, with the objective of showing that inaccurate prices arose from "reasonable efforts." Second, there is the preemptive approach of advance pricing arrangements (APAs).

The penalty rules, which apply to tax years commencing after 1998, require in order that there be a penalty that (1) the taxpayer's transfer prices are inaccurate and (2) the taxpayer did not make "reasonable efforts" in arriving at those "wrong" transfer prices.[5] The taxpayer will be deemed not to have made such reasonable effort if the taxpayer has not prepared, by the time it has to file its tax return for the tax year in question (which is six months after the tax yearend), "contemporaneous documentation" as set out in subsection 247(4) of the Income Tax Act. Preparing such documentation, however, does not automatically mean the taxpayer will be considered to have made "reasonable efforts."

Most taxpayers (where business dealings rise to the level of the penalty thresholds) will consider that there is a serious threat that Revenue Canada could convince a court that the prices are not "right" (and thus be exposed to penalties) and will enter into the "documentation" process.

3. The Risk of Penalties and the Inherent Nature of Transfer Pricing. The risk of exposure to penalties stems from the inherent nature of tax law in countries (such as Canada or the United States) that adopt as a legal principle the "arm's-length principle" as a means of governing the tax effects of intercompany transactions (as opposed to mechanical formulary income allocation where there has been intercompany transactions). The inherent nature is the uncertainty and subjectivity of a legal principle that is bound up in facts and circumstances. The issue is exacerbated when tax administrators (including Revenue Canada) act as though (1) there is a cohesive set of "rules" governing intercompany transactions, (2) a taxpayer has the capacity to voluntarily comply with these rules, and (3) the taxpayer can choose either to comply or, instead, deliberately manipulate these "rules" to distort appropriate income reporting.[6]

An associated theme in considering an APA in the Canada-U.S. context is that, aside from differences in procedural factors, transfer pricing, per se, is essentially identical in both countries (and most other countries as well), being unified by the use of "arm's-length prices." The thesis here, however, that regardless of what is written in regulations under section 482 of the Internal Revenue Code or Revenue Canada's views of the manner of applying subsection 247(2) of the Act,[7] a judge in either Canada or the United States could well come to the exact same conclusion about any particular transfer price issue.[8]

Subsection 247(2) of the Act sets out the requirement that intercompany pricing conform with the arm's-length principle. The statute contains no transfer-pricing "methods" to apply the arm's-length principle and does not provide the Department of Finance with the authority to write regulations for such purpose. Revenue Canada seeks to apply the arm's-length principle in accordance with the transfer-pricing "methods" developed and published by the Organisation for Economic Co-operation and Development.[9] A Canadian court is not, however, in any way bound by anything written by Revenue Canada views or the OECD.

Canada has only had one "real" transfer-pricing issue[10] dealt with by a court. In Hofert,[11] the Tax Review Board decided, well before the establishment of formal transfer-pricing methodologies, that the transfer-pricing issue was essentially a question of "facts and circumstances" and the obvious place to start the inquiry is "comparables." Thus, in the case, the court rejected Revenue Canada's position that a Canadian subsidiary (of a U.S. parent), which harvested Christmas trees in British Columbia and sold those trees at $3 a tree in small quantities to independent local retailers but sold the same trees at $2 a tree in massive quantities to its U.S. parent (which acted as a distributor to retailers), should have used, for its transfer price, the same $3 it charged to the local Canadian retailers. The Tax Review Board found that there was simply no comparability between the circumstances of the unrelated party sales and the related party sales (other than there being the same product).[12]

Revenue Canada generally proceeds as though it could be proven to a court that there is a predictable, objective way of determining transfer pricing between members of a multinational group and in particular by application of the OECD methods. There appears, however, to be no reason why a court today would take any different approach than what was taken in 1962, namely, a transfer-pricing issue comes down to the particular facts and circumstances.

B. Reason #2: The Risk of Revenue Canada-IRS Disagreement

An associated factor in considering an APA in the Canada-U.S. context is the potential for disagreement between the two countries. The IRS favors (when good comparables are not available) jumping to bottom-line profit comparisons, that is to say, the comparable profit method (CPM). In contrast, Revenue Canada insists that, in concept at least, one should try wherever possible to first use traditional "transactional" methods, that is to say, where there are not comparables, the secondary transactional methods, resale price and cost plus. If it is necessary to go to other methods that relate to profit, Revenue Canada advocates the "transactional net margin method" (TNMM) approach over CPM, though Revenue Canada stated in its 1999 information circular that it will accept CPM in limited circumstances.[13] But, even in preference to TNMM, Revenue Canada would prefer profit-split approaches and, in particular, residual profit split rather than straight profit split.

Taxpayers can try to rely on either documentation, or competent authority, to resolve issues that might arise. Alternatively, taxpayers, in the Canada-U.S. context, may wish to avoid all of the uncertainty and negotiate APAs between the two countries.

C. Reason #3: The Risk of Penalties Even When There Is Successful Competent Authority Resolution

In principle, one key reason for an APA is to preclude transfer price related penalties. But even if there is ultimate agreement between Revenue Canada and the tax authority of another country, such as the United States, over a transfer price dispute (thereby eliminating the spectre of double tax arising from such disputes), the competent authority agreement does not, by itself provide protection against penalties that otherwise could be found to be applicable by a court.

D. Other Reasons

APAs may also be considered attractive (1) as a means simply of avoiding costly hassles with Revenue Canada or the tax authorities; (2) where there is absolutely no data respecting comparable third-party arrangements, thus raising the highest risk of dispute over subjective estimating; (3) where a Canadian subsidiary is established to perform low risk subcontracting tasks for a multinational (e.g., manufacturing services for a group that has developed a valuable product outside of Canada and intends to market the finished product outside of Canada) and there is concern that Revenue Canada might see more value in the Canadian activity than is the case; (4) where a Canadian product or service developer requires, to lure customers, a marketing subsidiary in another country but with most day-to-day management of the subsidiary's role and function managed from Canada or by visiting Canadian based personnel, with the potential concern that Revenue Canada can take the point of view that all or substantially all of the profit belongs to the Canadian parent whereas the foreign tax authority wishes to recognize the benefit arising from the very existence of the corporation (to the extent used to achieve market share in the local market; or (5) perhaps where a Canadian based multinational wishes to "push the envelope" with respect to activities in offshore tax haven locales but wishes to avoid audit issues with Revenue Canada.

In other words, an APA could be used as a shield or a sword depending upon the overall context (i.e., the nature of the relationship between the members of the group, their respective places of residence, their respective tax positions as well as the particular transactions being undertaken).

E. Summary

In summary, the subjectivity of establishing transfer prices, the spectre of penalties in one country or another, coupled with perceived differences in philosophy or approach with respect to applying the arm's-length principle and the somewhat hostile (anti-taxpayer) attitudes of tax authorities in North America make it particularly relevant to consider APAs and particularly in the Canada-U.S. context.

III. Reasons to Avoid an APA

Presumably, APAs would not be particularly appealing to taxpayers that push the envelope in transfer-pricing matters, have done so in the past, and wish to continue to do so in the future. This stems from Revenue Canada's policy of retaining the right, under an APA negotiation, to review open years in light of information developed during the APA process.[14] Revenue Canada, however, considers that rollbacks are "not a big issue" given that (1) Revenue Canada's approach is "future orientated" and (2) Revenue Canada is generally "current on its audits of large taxpayers who may have transfer-pricing issues."[15] This, of course, will depend upon the level of concern that there are (transfer prices) skeletons in the closet.

APAs may often have "opportunity costs" in the sense of preempting transfer-pricing strategies that seek to capitalize on the inherent subjectivity and uncertainty in establishing intercompany prices. This is of course the other side of the sword, because the APA can also take away the spectre of that uncertainty being used by Revenue Canada to raise assessments that are not really justified.

Another reason to avoid an APA may be concerns about confidentiality of information having regard to the detailed disclosure required of business plans, economic analysis, etc. Obviously, the protection afforded by section 241 of the Act should be available and recent legislation in the United States precludes slippage in the context of bilateral APAs with the United States.[16]

In addition, the costs and potential hassle involved with APAs may be considerable. In this respect, it should be noted that there have been prolonged delays in processing APAs and recently Revenue Canada adopted measures to expedite matters with the objective of, in the case of bilateral APAs, presenting the competent authority portion of the arrangement to the other country tax authorities "within 12 months of the taxpayer's submission of a request."[17]

IV. The Situation in Other Countries

The concept of APAs first arose in 1989 at a meeting of the Pacific Association of Tax Administrators, held in Australia, with the United States taking the lead, followed closely by Australia and then Canada. The first APA in fact dealt with the Australian-U.S. arms of Apple Computer. The concept now has spread to most if not all other developed countries. For example, in 1999, the United Kingdom adopted an APA program and by the end of that year 24 APA requests were pending and 20 had been completed.[18]

V. What is An APA?

An APA confirms an appropriate transfer-pricing methodology (but not prices per se) which will, in subsequent audit of compliance with the APA, be assessed in relation to the agreement.[19] In a way, an APA is essentially an agreement to split the projected profit from projected multinational operations, which include intercompany transactions. The APA may not be so stated, but the fact is tax authorities agreeing to APAs are looking for a certain cut of the pie regardless of the methodology used, whereas taxpayers are seeking to have that pie split in a manner that minimized the overall group's tax liability. It is truly a negotiation in which neither party is compelled to conclude an agreement but where both parties have certain interests in arriving at an agreement.

Paragraph 7 of the new circular defines an APA as:

   An advance pricing arrangement between the Minister of National Revenue and
   a taxpayer. It covers certain transactions and arrangements between the
   taxpayer and non-resident entities. APAs confirm appropriate transfer
   pricing methodologies between the taxpayer and non-resident entities. APAs
   confirm appropriate transfer pricing methodologies, in advance, and their
   application to specific cross-border non-arm's length transactions or
   arrangements for specified periods of time, under specified terms and
   conditions, for purposes of the Act. When appropriate, the Canadian
   competent authority may enter into a BAPA or MAPA with its foreign
   counterparts under the mutual agreement procedure article of the relevant
   income tax treaty, as described below.

Paragraph 9 elaborates, as follows:

The APA process is designed to produce an APA specifying the:

* taxpayer and the non-resident entities;

* nature and scope of transactions to be covered;

* appropriate TPMs to be employed;

* period for which an APA is to be effective; and

* other terms and conditions.

VI. Negotiating APAs -- NEW IC 94-4R

A. Overview

When the APA program was initiated in 1994, Information Circular 94-4 was issued to provide some guidance respecting the manner in which APAs could be negotiated. The March 2001 circular reflects Revenue Canada's experience with the process during the past seven years. It deals with the manner in which APAs can be negotiated and agreements arrived at, the substantive and procedural content (such as the circumstances in which they may be modified, cancelled, revoked or renewed), the nature of the information (which is extremely comprehensive) that must be provided and the type of negotiations and discussions that are required to arrive at an agreed TPM under the terms of the arrangement. Essential to arriving at an APA is the development of "critical assumptions," upon which the agreement rests, as well as the relationship between the APA process and information provided to Revenue Canada and. audit of the taxpayer (in respect of both years prior to the applicability of the APA and those to which the APA will apply).

The process will be substantially affected by whether the APA is unilateral (i.e., just between the taxpayer and Revenue Canada) or bilateral or multilateral (i.e., involving one or more governments of other countries). An APA also deals with the manner in which the agreed TPM is complied with and its application by a taxpayer and arrangements that can be required if there is divergence between the terms of the APA and the subsequent evolving affairs of the taxpayer. In general terms, APAs will be subject to the confidentiality requirements of section 241 of the Act.

IC 94-4R is both comprehensive and straightforward. The purpose of this article is not to restate what can be read in the source document but rather to comment on those aspects of the circular that are of particular interest.

B. Flexibility of the Program

The program is quite flexible. Agreements can be reached on a unilateral basis (APA) (i.e., with the Canadian government only), on a bilateral basis (BAPA) (i.e., involving tax authorities of another country with which Canada has a treaty), or on a multilateral basis (MAPA) (i.e., involving two or more other countries with which Canada has treaties). Revenue Canada will consider any case, regardless of size or type of intercompany transaction involved or type of TPM involved (including application of the principles to intra-branch transactions of one legal entity) as long as the agreement is to apply to either "current transactions" or "specified future transactions" and not "hypotheticals" (paragraph 11).

In general the procedures and considerations discussed in IC-94-4R are similar to, and in many cases essentially identical to, those prevailing under the U.S. APA program or those advocated by the OECD.[20]

Paragraph 6 of the circular notes that the APA is voluntary and it is provided as an "administrative service," with the view that APAs "... benefit both taxpayers and the CCRA ... [in terms of] ... long-term time savings, efficient resolution of recurring complex matters, greater certainty about transfer pricing issues, potential application of findings to past years, and the minimization of global risk."

C. Relationship of APAs to Audits of Open Years

An early question was the extent to which the APA process would or could affect the audit of intercompany transfer pricing for years not covered by the APA agreement. The answer is provided in paragraphs 13 to 16 of the new circular. In principle, Revenue Canada asserts the right to apply the terms and conditions of an APA retroactively to open years and will consider requests from taxpayers to have such treatment. In either case, the matter of retroactive application will be assessed in light of the views of the District Office of Revenue Canada which has responsibility for the taxpayer's returns and, in the case of bilateral or multilateral APAs, with the tax authorities of the other countries involved. The matter will only be entertained where, in the words of paragraph 13, "... the facts and circumstances of the open prior years were similar to those on which the APA was concluded."[21]

Conversely, the APA process itself might be initiated as a result of or during an ongoing Revenue Canada audit of prior transfer price matters. Paragraph 15 notes that a request may be made to the District Office involved in the audit to consider commencement of an application of an APA for future years, with a view to application retroactively to the years under audit. But paragraph 15 cautions that "merely filing an APA request or submission will not prevent or defer an audit of the years prior to the proposed APA years." In principle, early consideration of APA or "on-time referral" allows both Head Office and the District Office of Revenue Canada to inform taxpayers of various channels for resolving issues under audit and to decide any appropriate approach for the case.

The overall philosophy of Revenue Canada with respect to the relationship between APAs and audit is succinctly summarized in paragraph 16 of the circular which reads, as follows:

   The APA program and the audit programs of the CCRA are separate and
   distinct. Filing an APA request or submission neither automatically nor
   independently initiates an audit. CCRA staff responsible for each of these
   programs will endeavour to co-ordinate their program efforts and
   responsibilities to achieve maximum efficiency and benefits for both
   taxpayers and the CCRA -- for example, they will work together when a
   taxpayer seeking an APA has an audit protocol in place or under
   consideration. An audit protocol between the CCRA and a taxpayer
   establishes a clear framework for the audit and covers domestic and
   international tax issues. It is not a substitute for the APA program, which
   is the only program that ensures a taxpayer's TPM and its application are
   acceptable under the Act for a specified number of future years. When you
   comply with the terms and conditions of an APA, we will consider that the
   results of applying the agreed TPMs have satisfied section 247 of the Act
   for the transactions and periods specified in the APA.

D. Revenue Canada's Preferences Respecting Unilateral Versus Bilateral/Multilateral APAs

It is not surprising that paragraph 22 expresses Revenue Canada's preference for bilateral or multilateral APAs. Indeed, with respect to an agreement concerning an affiliate in another treaty country, any request for a unilateral APA must explain the reasons for not requesting a bilateral APA. Furthermore, Revenue Canada reserves the right, in the case of a requested unilateral APA respecting another treaty country, to notify the competent authority of the other country of such request. Finally, unilateral APAs will be utilized, if necessary, in competent authority proceedings to resolve transfer-pricing issues.

E. Government Charges

Paragraph 27 provides that no fee will be imposed for processing APA requests but states that a a non-refundable user fee will be charged for each accepted APA request or renewal to cover anticipated out-of-pocket costs, such as travel and accommodation expenses.

F. Independent Experts

Paragraphs 48-52 review the possibility that either party may stipulate a need for an independent expert, a term defined in paragraph 48 as "any person with specialized skills, knowledge, education, or experience in a field of study, industry, or geographic area relevant to an APA". The costs are be borne by the taxpayer and the opinions expressed by the expert will not necessarily "be binding on any of the relevant participants in the APA process."

G. Term of an APA

Paragraph 55 notes that, although the initial APA term will depend upon the facts and circumstances, it will usually be three to five years and the first year will normally not have a termination date that is more than 180 days before the first meeting between taxpayer and Revenue Canada to discuss the suitability of an APA.

H. Quasi-Legal/Contractual Nature of an APA

The quasi-legal/contractual nature of an APA is established by the following paragraphs from the circular (as annotated by the added footnotes):

   6. There is no legal requirement to enter into APAs. The CCRA provides them
   as an administrative service. The CCRA considers all requests for APAs that
   are in accordance with paragraph 11. APAs benefit both taxpayers and the
   CCRA. These benefits include long-term time savings, efficient resolution
   of recurring complex matters, greater certainty about transfer-pricing
   issues, potential application of findings to past years, and the
   minimization of global risk.

   56. Your initial APA submission must include a statement in the following
   form: "I deeclare that I have examined this initial APA submission,
   including accompanying documents, and, to the best of my knowledge, all
   information presented in this APA submission is complete and accurate in
   all material respects."

   64. ... When possible, we will exchange position papers with the relevant
   participating foreign tax administrations before beginning negotiations.

   65. Neither you nor the non-resident entities will be directly involved in
   competent authority negotiations. However, we may ask you or the
   non-resident entities to be available to respond to any questions the
   competent authorities may have during negotiation sessions.

NATHAN BOIDMAN is a partner in the Montreal office of Davies Ward Philllips & Vineberg LLP. He holds degrees in civil law and common law from McGill University and is also a chartered accountant. Mr. Boidman practiced accounting from 1964 to 1973, and since 1974 has practiced tax law, restricted to international matters since 1979. He has written many books and articles on international tax matters and lectures frequently on tax topics.

   73. An APA is regarded as binding on the CCRA and on you, subject to any
   qualifications stated in the APA and the comments in paragraphs 93 to
   108.[22]

   74. The mere act of requesting an APA or filing an APA submission will not,
   by itself, constitute <<reasonable efforts>> for the taxation years
   proposed to be covered under the APA for the purposes of section 247 of the
   Act.[23] When you comply with the terms and conditions of an APA, we will
   consider that the results of applying the agreed TPMs have satisfied
   section 247 of the Act for the transactions and periods specified in the
   APA. With respect to transactions covered by an APA, no penalty will be
   levied under subsection 247(3) of the Act for taxation years during which
   the APA remains in force.

   75. All information obtained or generated during the APA process is for the
   purpose of administering the Act. Consequently, the confidentiality
   provisions of the Act limit our rights and powers to use and disclose
   information submitted in connection with an APA request or submission. The
   confidentiality provision in the relevant income tax treaty will also
   apply. APAs, and the information we obtain or generate during the APA
   process, including commercially sensitive and proprietary data, relate
   directly to your potential tax liability under the Act.[24]

   76. Except as otherwise provided by written agreement, your APA may not be
   introduced by you or the CCRA as evidence in any administrative or judicial
   proceeding in relation to any taxation year, transaction, or person.[25]

   77. At our discretion, we may make publicly available certain statistics
   about the APA program. To this end, we may disclose general information
   about APAs, such as the number of APAs pending and in process, as well as
   the number and types of APAs concluded, and the TPMs employed. We will make
   all such disclosures according to the confidentiality provisions of the Act
   and the relevant treaty, as applicable.[26]

Paragraphs 78-82, captioned "Administering an APA"; paragraphs 833-88, captioned "Compensating Adjustments"; paragraphs 91-92, captioned "Resolving Disputes"; and paragraphs 93-1098, which deal with revising, cancelling, revoking, or renewing APA are all also part of this contractual framework.

I. Process Respecting Bilateral or Multilateral APAs

Part VI of the circular (captioned "Competent Authority Considerations") address bilateral and multilateral APAs. The key purpose of such agreements is avoidance of double tax. The process is facilitated by the provisions for mutual exchange of information under the relevant treaties. Paragraph 71 addresses the right of the taxpayer to reject any agreement reached between two countries that does not comport with the taxpayer's submission (respecting a transfer-pricing method), and paragraph 72 notes that, in the case of a failed bilateral or multilateral negotiation or a unilateral APA, the taxpayer maintains "rights to pursue the mutual agreement procedure available under the relevant tax treaty" with respect to double tax issues that may arise at a future time. In connection with unilateral APAs, however, competent authority reserves the right in a mutual agreement procedure to deviate from the APA -- the latter always subject to the right of a taxpayer to reject the effects of a competent authority agreement.[27]

J. Confidentiality of Information

Confidentiality of information during the APA process is provided for within the framework established by section 241 of the Act.[28]

K. Procedures for "Compensating Adjustments"

1. Overview. Paragraphs 83-88 deal with the notion that an APA "... may include a provision to permit you and the non-resident entities to make a compensating adjustment ... [as would] bring recorded amounts or results of the covered transactions into agreement with the amounts or results of the covered transactions as determined by the application of the TPM set out in the APA."

2. Government-Initiated Adjustments and Related Matters. Revenue Canada can reassess the income of a taxpayer's year (whether up or down) under subsection 247(2) in an initial "notice of assessment" or at any time (in a "notice of reassessment") within seven years from the date the initial notice (of assessment) has been issued for the taxation year in question.[29] (The reassessing period is four years for most matters other than transfer pricing and three or six years where the taxpayer is a "Canadian controlled private corporation.") There is no limit on reassessment where the adjustment derives from deliberate misrepresentation or gross negligence.[30]

Where the adjustment increases taxable income that arises from an overcharge by the foreign parent or an affiliate related to such parent, a secondary adjustment in tax respecting "disguised distributions" may also arise under the withholding rules of Part XIII of the Act. Paragraph 211 of the Information Circular 87-2R puts the matter this way:

   Where adjustments are made under subsection 247(2) of the Act, withholding
   tax under Part XIII of the Act may also be payable on the amount of the
   adjustment, as a deemed dividend, by virtue of the deeming provisions of
   paragraph 214(3)(a) of the Act.

The Department will, however, waive the Part XIII tax where the following conditions specified in paragraph 212 of Information Circular 87-2R are satisfied:

* The Canadian taxpayer agrees in writing to the proposed transfer-pricing adjustments (such an agreement does not restrict the Canadian taxpayer or the non-arm's length party from seeking relief under the Mutual Agreement Procedure article of Canada's tax treaties);

* The adjustments did not arise from a transaction that may be considered abusive; and

* The foreign corporation repatriates the funds equivalent to the gross amount arising from the transfer-pricing adjustment immediately or agrees in writing to repatriate such amount within a reasonable time.

3. Taxpayer-Initiated Adjustments and Related Matters. Where a Canadian taxpayer has initially overstated income by reason of an intercompany transaction, the matter has not been the object of a downward assessment by Revenue Canada and the taxpayer wishes to take alleviating action, what rights arise under the Act and what administrative relief does Revenue Canada provide?[31]

A Canadian taxpayer is required to file a tax return within six months after the end of the relevant taxation year. If before both the end of the taxation year and the filing of the return, an overstatement of income by reason of an intercompany transaction is detected, steps obviously can be taken to correct the transaction and to report reduced income. If the matter is discovered after the end of the year but both before finalizing financial statements for the year and filing a return, it is probable that, through the use of accrual concepts of accounting, an adjustment can be worked into the financial statements and the tax return for the year. It is less clear in the case where financials have been completed but the tax return has yet to be filed. In this respect, however, paragraph 191 of the Information Circular 87-2R is helpful:

   Taxpayers may, after a transaction has occurred but before the filing due
   date, recognize that the transfer price recorded for that particular
   transaction does not represent an arm's length price.

   For example, this could occur if a taxpayer overlooked information that was
   available at the time the transfer price was set, or detects a
   computational error in the calculation of the price. In these instances,
   taxpayers should make a compensating adjustment to the transfer price
   before filing their tax return. For tax purposes, the adjustment should
   accrue in the year in which the transaction occurred and taxpayers should
   ensure that the adjustment is fully documented.

A taxpayer can effectively adjust its own return up to 90 days after receiving an initial notice of assessment for the year in question (which would normally be issued by the Department within three to six months after receipt of the return for the year) through the process of objecting to any assessment received from the government. Under this rule, a taxpayer can object to the amount assessed by the government even if that assessment is in accord with the taxpayer's own original tax return. Although paragraph 191 of Information Circular 87-2R does not take into account this time period, the remedy proposed there for action before filing due date could seemingly also apply to action before the expiry of the period of objecting to an initial assessment.

Paragraph 192 of Information Circular 87-2R expresses the view that "where a taxpayer recognizes that a transfer price is not arm's length only after the filing due date, taxable income as reported on their tax return should be adjusted."[32] This option, however, is limited by paragraphs 25 to 27 of the Information Circular 87-2R, which deal with two different notions: (1) the unusual rule of subsection 247(10) providing the government can deny a downward adjustment and, separately, (2) the Department's "general policy regarding taxpayer initiated adjustments that reduce tax payable" as outlined in Information Circular 75-7R3 and Information Circular 84-1.[33]

Paragraph 4 of Information Circular 75-7R3 ("Reassessment of a return of income") states:

   A reassessment to create a refund ordinarily will be made upon receipt of a
   written request by the taxpayer, even if a notice of objection has not been
   filed within the prescribed time, provided that

   (a) the taxpayer has, within the four-year filing period required by
   subsection 164(1), filed the return of income;

   (b) the Department is satisfied that the previous assessment or
   reassessment was wrong;

   (c) The reassessment can be made within the four-year period or the
   seven-year period, as the case may be, referred to in paragraph I above or,
   if that is not possible, the taxpayer has filed a waiver in prescribed
   form;

   (d) the requested decrease in taxable income assessed is not based solely
   on an increased claim for capital cost allowances or other permissive
   (permissible) deductions, where the taxpayer originally claimed less than
   the maximum allowable; and

   (e) the application for refund is not based solely upon a successful appeal
   to the Courts by a taxpayer."

The foregoing factors and comments focus on taxpayer-initiated changes to change income through adjustments to the year in which the transaction arose. There is, however, a totally separate mechanism, recognized some 25 years ago by the Canadian Federal Court, which would entail correcting an over-statement of income of one year by a compensating payment made and recorded (thus reducing income) of a subsequent year. In Aluminum Co. of Canada Ltd.,[34] the Canadian parent had overpaid its Jamaican subsidiary for the supply of raw material. Following an assessment by the Jamaican tax authorities, the parent in a subsequent year made a payment to compensate for the prior underpayment and deducted that payment in the year in which it was made. Revenue Canada challenged the deduction, but the taxpayer's treatment was upheld by the Federal Court Trial Division.[35] There appears to be no relationship between constraints imposed by subsection 247(10) with respect to a same-year downward adjustment and an adjustment of an overstatement of income by way of a compensation payment in a subsequent year with a claim for relief thereof in that subsequent year as dealt with in the Aluminum Co. case.

What is the analysis if a foreign parent undercharges a Canadian subsidiary? Subject to subsection 247(10), an adjustment downward of the taxable profits of a Canadian subsidiary should be accompanied by a notional increase in the books of the Canadian subsidiary for its expense or purchase account and recording of an account payable (liability) to the foreign parent, which can then receive that additional amount as a tax-free payment from the Canadian subsidiary in respect of the additional obligation or as a result of an adjustment. Alternatively, there could be an analysis respecting a contribution to capital and a subsection 53(1) cost base addition that, with respect to a subsequent repayment, would bring into play section 84 of the Act, entailing rules respecting the circumstances where a distribution to a shareholder by a Canadian company may be treated as a taxable dividend. In this situation section 84 should not deem a dividend.

In the absence of specific statutory or even Revenue Canada guidelines, one would look to "logic" in determining the effects of various situations in terms of tax adjustments or compensating payments. The discussion herein of different situations following review of different scenarios is, in many respects untested and speculative at best.

If the overcharging foreign party is a foreign subsidiary of the relevant Canadian corporation (not a common situation), the overcharge will be adjusted (and increase Canadian income) and presumably (unless repaid) will be treated as a receivable from the foreign subsidiary or as a contribution to the foreign subsidiary, which under subsection 53(1) adds to cost base. In the latter case, the Canadian tax treatment of a subsequent payment of that amount to the Canadian parent will depend upon the nature thereof (whether in form a dividend or instead a reduction of corporate capital and, in the former case, whether the subsidiary is operating in a country with which Canada has a treaty). Where Canada has a treaty with the country of residence of the foreign subsidiary, dividends received generally are exempt from Canadian tax under the "exempt surplus" rules of the Canadian foreign affiliate system or, absent "exempt surplus," act as a grind on cost base.[36] Only where the subsidiary is operating in a non-treaty country (which of course would include tax havens) might the return (by dividend) trigger tax. This can arise with respect to receiving dividends out of "taxable surplus" and where there is not sufficient underlying tax related to such dividends. If "receivable" analysis applies, reference will be required to section 17 of the Act respecting imputed interest on loans by Canadian corporations to non-residents.

In an outbound context, if a Canadian parent corporation undercharges a foreign affiliated party, the results will be the same. First, there will be an adjustment to the taxable income of the Canadian corporation and then the undercharge will be treated as a contribution to the capital of that corporation or a receivable from it. Where the foreign party is a parent shareholder, the undercharge will be treated as a deemed dividend subject to Part XIII tax.

If a Canadian corporation overcharges a foreign affiliated party, subject to section 247(10) of the Act, there should be a downward adjustment of income and a payable recorded to the foreign party, the payment of which is not subject to Canadian tax, although if the foreign party is a subsidiary, it may be viewed as an immediate dividend that, depending upon a treaty country analysis, may or may not be taxable.

4. Compensating Adjustments under APAs. Under paragraph 83 of the circular, an APA can include a provision to make compensating adjustments to deal with differences between "recorded amounts or results of the covered transactions [as reported by the taxpayer] and the amounts or results of the covered transactions as determined by the application of the TPM set out in the APA." In principle, compensating adjustments (which, in the words of paragraph 87, constitute "any payment method, as mutually agreed to") could be made either once a year or perhaps throughout the year.

In the former case, where they are agreed to or arise after filing a tax return for the year and audit by Revenue Canada or where they stem from proposed adjustments by "participating foreign tax administrations," they obviously will be made subsequent to the year in question. In such case, under paragraph 84, notice must be provided to Revenue Canada within 90 days of the date of the notice of the foreign country's proposed adjustment.

Paragraph 85 provides that, for purposes of determining ancillary calculations under the Act (such as tax installments), a compensating adjustment will be treated as arising on the last day of the relevant taxation year. Payment may be made in any form agreed to between the taxpayer and Revenue Canada and generally will be agreed to be made within 180 days of the end of the relevant tax year or, in the case of reassessment, within 90 days of reassessment. (Paragraphs 86 and 87, the latter which also stipulates that the currency of the payment is to be that which governed the relevant intercompany transactions.)

Finally, paragraph 88 states that in a case where the APA provides for compensating adjustments but the taxpayer fails to pay tax liability arising from same, the APA may be cancelled.

L. APA Negotiation and Information To Be Provided

The actual dynamic of negotiating and arriving at an APA is described in detail in the circular.

M. Audit and Compliance with an APA

Paragraphs 89 and 90 deal with audit cycle of APAs. The requirements and procedures are reasonably logical and appropriate. All parties to the APA are required to maintain books and records that permit Revenue Canada to determine compliance with the APA. This will be carried out through the District Office of Revenue Canada during the course of the regular audit cycle. Revenue Canada makes clear that such audit is not intended to and will not "re-evaluate the TPMs or other terms and conditions agreed to in an APA," but rather will assess compliance with terms and conditions by reference to four factors:

* material representations in your APA request, the related submissions, and the periodic APA reports remain valid and accurately describe your operations and those of non-resident entities;

* you applied the agreed-upon TPMs consistently in accordance with the terms and conditions of your APA;

* supporting data and calculations used in applying the agreed-upon TPMs were correct in all material respects; and

* critical assumptions underlying your APA remain valid and relevant.

The audit compliance process may entail discussions between the District Office and representatives of the Canadian competent authority services division, in relation to the scope and results of the audit. This seems to be (although not stated specifically as such) a prerequisite to an adjustment to the accounts of the taxpayer which have been developed in accordance with the taxpayer's view of the manner in which the APA is to be applied.

Proposed or actual adjustments do not, per se, affect the continuing validity or applicability of an APA. If the taxpayer agrees with the proposed adjustment, there will be triggered the compensating adjustment procedures. If the taxpayer does not agree, a procedure for resolving disputes is provided for in paragraphs 91-92. In essence, the office of the Director General of the International Tax Directorate of Revenue Canada will do one of four things:

* make an interpretation of the terms of the APA which is binding on the District office;

* revise the APA, with the concurrence of the taxpayer;

* cancel the APA; or

* revoke the APA.

With respect to the first option (Revenue Canada unilaterally interpreting the APA in order to deal with the dispute), no channel is provided for an appeal, although paragraph 92 notes that in such case a taxpayer is free to report income for the year in a different manner, with the risk of the APAs being cancelled or revoked, and with the dispute being subject to the normal rules of the Act with respect to disputes between Revenue Canada and a taxpayers.

N. Revisions, Revocations, and Renewals of APAs

Paragraphs 93-108 of the circular deal with revisions, cancellations, revocations or renewals of APAs. Revisions arise where (1) critical assumptions have not been met, (2) there has been a change of law or treaty provision, (3) there has been a material change in circumstances, or (4) certain type of issues arise with the government of the other country involved in a bilateral or multilateral APA.

APAs may be cancelled where (1) the taxpayer has made material misrepresentations, mistakes, or omissions in any phase of the APA cycle; (2) there has been failure to comply with a material part of the APA; or (3) for any of the reasons pursuant to which there might be a revision of the APA. Cancellations operate prospectively or in respect of a tax year to which any of the causes for cancellation apply.

Pursuant to paragraph 101, Revenue Canada may also seek to revoke an APA (for material misrepresentations attributable to neglect, carelessness or wilful default or perhaps inconsistency by the foreign country tax administration involved), in which case revocation operates retroactively "effective from the first day of the first APA year and the APA will be no force and effect with respect to the taxpayer and the Minister of National Revenue as though it had never been signed."

Renewals of APAs will entail, as required, "the same form and procedures in effect at the time the request for renewal is made that apply to initial APA requests." Except as otherwise agreed, renewal requests must be made within nine months of the expiry of the APA in force. The terms of a renewed APA will essentially comprise those of the preexisting arrangement modified as required by changed circumstances and the degree of information that must be submitted will depend upon the extent to which either there has been a change of facts or circumstances or a desire by the taxpayer to change the terms of the APA. Finally, the process, in the case of bilateral or mutlilateral APAs, will involve negotiation with the tax authorities of the other countries involved.

O. Comments on the Appendices

In general the appendices to the circular are intended to and do provide a good idea of the nuts and bolts involved in APAs.

Appendix I, "Prefilng Meeting(s)," sets out the parameters of matters which if adequately discussed will provide a good basis for the parties to determine whether or not an APA will be suitable for the taxpayer's needs and whether or not it will be feasible to negotiate one.

Appendix II, "Example of a BAPA Request Letter," sets out an illustrative letter of request for a bilateral APA and sets out the contractual framework respecting the APA scope as well as the modalities and mechanics for proceeding further, including relevant parties for purposes of dealing with information and communication and hold harmless against Revenue Canada for risk with respect to confidentiality of information.[37]

Appendix III sets out a specimen of an acceptance letter from Revenue Canada in response to an APA request letter from a taxpayer. It sets out the boundaries of the APA to be sought. It also addresses the nature of what the APA will actually lead to (agreed TPMs), the nature of the relationships with other foreign tax administrations, agreement concerning payment of user fees, confirmation of the CCRA's right to disclose information to the other treaty countries involved, and explains that a successful agreement may not in fact ensue. Finally, the letter confirms the applicability of the usual rules of the Act concerning confidentiality of information.

Appendix IV sets forth an "APA Submission Checklist," which is presented as "only a guideline ... provided ... to help you organize and prepare your APA submission." The checklist entails virtually every type of information which can be relevant in dealing with intercompany pricing determinations (and, in this case, in dealing with agreements in advance of how intercompany transactions will be priced) -- from factual to legal to quasi-legal (i.e., the basic factors relevant to transfer-pricing situations such as the OECD Guidelines, Information Circular 87-1R, etc.).

Appendix V contains an example of a "case plan" -- and a proposed timetable containing nine sections: (1) prefiling meeting, (2) APA request filing, (3) acceptance letter, (4) APA submission filing, (5)preliminary review of the APA submission by the team, (6) review, analysis and evaluation of the APA submission, (7) negotiation of foreign competent authority terms and conditions, etc., (8) agreement, and (9) post-settlement meeting.

Finally, Appendix VI reprints an example of an APA, containing 22 sections: (1) Background, (2) Definitions, (3) Covered Transactions and Terms, (4) The Methodology and Its Application, (5) Effect of the APA, (6) Critical Assumptions, (7) APA Reporting, (8) APA Audit, (9) Record Retention, (10) Compensating Adjustments, (11) Dispute Resolution, (12)Use, Disclosure, and Protection of Information, (13) Revision of this APA, (14) Cancellation of this APA, (15) Revocation of this APA, (16) Change in the Foreign Tax Administration's APA, (17) Renewal, (18) Change in Law or to the Convention, (19) Notice, (20) Penalties, (21) Counterparts, and (22) Miscellaneous.

[1] Information Circular 94-4, "International Transfer Pricing: Advance Pricing Agreements (APA)." See Nathan Boidman, <<Can an Efficient Transfer Pricing Strategy Be Developed Under Canadian Law>>, 47 Tax Executive 290, 294 (July-August 1995). In 1994, Revenue Canada abandoned the word "agreement" and APA now stands for Advance Pricing Arrangement -- consistent with the OECD terminology. The U.S. continues to use the word "agreement."

[2] Effective November 1, 1999, a new agency, the Canada Customs and Revenue Agency (CCRA), assumed the responsibility from the Department of National Revenue (Revenue Canada) for the administration of Canada's income tax, customs, and trade laws. Although the CCRA is an independent agency, the Minister of National Revenue will be responsible for, and accountable to Parliament for, all of its activities. References in this artcile to "Revenue Canada" can more accurately be read as references to "CCRA."

[3] See Information Circular 94-4R (which cancels and replaces IC 94-4), "International Transfer Pricing: Advance Pricing Arrangements (APAs)" (March 16, 2001). As of March 31, 2000, 43 agreements had been completed, 37 were in process, and 13 were pending but not yet formally accepted into the program. Nine applications had been withdrawn, mainly over confidentiality concerns or unexpected complexity.

[4] For the Canadian thresholds, see subsection 247(3) of the Income Tax Act (Canada) (hereinafter referred to as "the Act" or "ITA"); and for the U.S. penalties, see section 6662(e) of the Internal Revenue Code of 1986, as amended (the "Code").

[5] There has yet to be an instance of Revenue Canada successfully litigating a straight transfer-pricing case.

[6] There probably is one safe harbour, generally ignored or not identified. In a limited percentage of cases (roughly 15 percent), units of a multinational do in fact establish prices in accordance with the norm of actual third party transactions, that is by negotiation for the separate interests of each unit of the multinational. In cases where this can be proven to a court, there should be no need to consider the plethora of "transfer pricing" procedures and process advocated by various observers, including government, in dealing with the establishment of prices between members of a multinational, nor the safe harbour of an APA.

[7] Revenue Canada's interpretation is set forth in Information Circular 87-2R, "International Transfer Pricing" (September 27, 1999). In addition, the Organisation for Economic Co-operation and Development issued guidelines in 1979. "Transfer Pricing and Multinational Enterprises," Report of the OECD Committee on Fiscal Affairs (1979).

[8] Certain U.S. case law suggests that the section 482 regulations are properly viewed as nothing more than aids to a court in arriving at a "facts and circumstances" determination and are not in any meaningful sense "law." For a detailed discussion of the final (1994) U.S. regulations, see Nathan Boidman, <<Canadian Perspective on the Final Section 482 Regulations," 23 Tax Management International Journal 553 (November 1994).

[9] IC-87-2R, "International Transfer Pricing" (September 27, 1999). The 1999 Circular revised and replaced the original Circular issued in 1987 (IC-87-2).

[10] "Real transactions" is a reference to trade or transactions between units of a multinational both operating in high tax jurisdictions, such as Canada and the United States, and entered into in the ordinary course of their businesses and without any apparent tax-avoidance motivation. These transactions may be distinguished from intercompany transactions involving, say, a Canadian company and a tax haven affiliate that purport to rely upon transfer-pricing rules but are really tax avoidance arrangements. Although there have been a number of cases involving such arrangements -- Dominion Bridge Co. Ltd. v. The Queen, 75 DTC 5150 (F.C.T.D.) and 77 DTC 5367 (F.C.A.); Spur Oil Ltd. v. The Queen, 80 DTC 6105 (F.C.T.D.) and 81 DTC 5168 (F.C.A.); Indalex Limited v. The Queen, 86 DTC 6039 (F.C.T.D.) and 88 DTC 6053 (F.C.A.); and Irving Oil Limited v. The Queen, 88 DTC 6138 (F.C.T.D.) and 91 DTC 5106 (F.C.A.) (leave to appeal to the Supreme Court of Canada denied in September 1991) -- they do not add to an understanding of how a court will deal with the arm's length principle with respect to "real transactions."

[11] Hofert v. M.N.R., 62 DTC 50 (T.R.B.). See also Safety Boss Limited v. The Queen, 2000 DTC 1767 (T.C.C.) (ruling against Revenue Canada and holding that bonuses and other amounts paid to a non-resident shareholder, based in a tax-haven, for valuable services provided were reasonable within the arm's length rule of the predecessor to section 247, subsection 69(2) of the Act).

[12] Given the obvious difference in the levels of trade and quantities involved, this decision made eminent sense and it was simply a question of looking at the "facts and circumstances" to determine that there were no comparables. Once that line of attack was dismissed, the court reviewed other facts surrounding the operations of the two companies including a review of some of their financial statement ratios and concluded that there was no basis to sustain the government's reassessment of the taxpayer.

[13] See Nathan Boidman, "Canada Releases Final Administrative Views (IC-87-2R) on Transfer Pricing (Part I)," 28 Tax Management International Journal 725 (November 1999).

[14] This position has been criticized. See "Canada -- Taxpayers Say CCRA Officials Must Change Attitude That APAs Are Audits, Officials Say," 9 Tax Management Transfer Pricing Report 148 (June 28, 2000) (Canadian taxpayers have complained that "Canadian tax officials are treating advance pricing agreement requests too much like transfer-pricing audits and the government needs to change their mind set of APA staff officials....").

[15] See "Advance Pricing Agreements -- Canada, U.K. Authorities Downplay Rolling Back APA Terms to Open Years," 7 Tax Management -- Transfer Pricing Report 971 (April 21, 1999). That same report notes the position in the U.S. where the Service's policy "is to roll back the terms of a taxpayer's APAs to open years whenever it makes sense to do so in light of the taxpayer's facts and circumstances."

[16] Section 6103 of the Internal Revenue Code was amended in 1999 to shield APAs and APA background information from disclosure on the basis that they constitute confidential tax return information.

[17] See "Canada -- Zed Says Revised Circular Will Add Case Planning, Milestones to APA Process," 9 Tax Management Transfer Pricing Report 272 (August 23, 2000). Revenue Canada staff involved in the APA program has increased to 78 from 24 at the end of 1998.

[18] The U.K. program was formally established by legislation in October 1999. See "In Brief -- U.K. Has 24 APAs Pending, 20 Completed," 8 Tax Management Transfer Pricing Report 710 (December 22, 1999).

[19] An APA differs substantially from a ruling that generally confirms an extant interpretation of law and provides taxpayers with certainty about the subject matter of the ruling. This is simply not the nature of an APA and taxpayers and practitioners, conditioned to the certainties resulting from the ruling process, must be alert to this fundamental difference.

[20] See Organization for Economic Co-Operation and Development, Revised Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Chapter 4) (including October 1999 Supplementary Guidelines for APAs, entitled "Guidelines for Conducting Advance Pricing Arrangements Under Mutual Agreement Procedure").

[21] Paragraph 14 provides: "You should ensure that the taxation years relating to the request for retroactive application do not become statute-barred in Canada and in the relevant foreign jurisdiction. You should protect your status in Canada by filing waivers, throughout the process as necessary, in the form outlined in subparagraph 152(4)(a)(ii) of the Act, and by having the non-resident entities take any similar action necessary with their tax administrations."

[22] Paragraphs 93-108 deal with revising, cancelling, revoking, or renewing APAs.

[23] Penalties otherwise arising under section 247(3) are inapplicable where a taxpayer can show that "reasonable efforts" were made in arriving at the prices in respect of which adjustments exceeding the penalty thresholds are made.

[24] Section 241 of the, Act provides the basis for such confidentiality.

[25] This requirement (and the legal theory upon which it is based) is somewhat obscure.

[26] The situation in the United States is discussed in note 16.

[27] Paragraph 72 provides: "If for any reason a BAPA or MAPA has not been concluded, and you and the CCRA have concluded a unilateral APA, you retain your rights to pursue the mutual agreement procedure available under the relevant tax treaty. However, if double taxation occurs on the transactions covered by your unilateral APA, the Canadian competent authority may, under the mutual agreement procedure article of the relevant tax treaty, deviate from the terms and conditions in your unilateral APA to resolve the matter with the relevant treaty partner. If you and the non-resident entities accept the settlement negotiated by the Canadian competent authority and the relevant foreign competent authority regarding the parties and transactions specifically covered by your unilateral APA, it will prevail over the terms and conditions of your unilateral APA."

[28] A background factor respecting confidentiality arises out of concerns of foreign observers about Revenue Canada's use of "secret comparables" -- that is to say, data that Revenue Canada has determined on another taxpayer file and is using, without disclosure to the taxpayer, in developing a transfer-pricing assessment. Revenue Canada is precluded under section 241 of the Act from disclosing information about one taxpayer to another taxpayer unless and until the matter goes to court, in which case (subject to the right of appeal by the third party), the third party information can be disclosed. See paragraphs 208-210 of Information Circular 87-2R. See also "Canada -- Government Reviewing Policy of Using Secret Comparables in Audits, Official Says," 7 Tax Management -- Transfer Pricing Report 967 (April 21, 1999); Richard Barrett & Francois Vincent, "Secret Comparables: A North American Policy Analysis," 8 Tax Management Transfer Pricing Report 99 (March 8, 2000).

[29] Subsection 152(4) of the Act. The initial notice is generally issued within six months of filing a tax return for the taxation year. Such returns, in the case of a corporation, are to be filed within six months of year-end.

[30] Subsection 152(4) of the Act.

[31] For discussion of one of the elements in the discussion which follows -- subsection 247(10) -- see Nathan Boidman, "Canada Releases Final Administrative Views (IC-87-2R) on Transfer Pricing, 28 Tax Management International Journal 725 (November 1999) (Part I); 29 Tax Management International Journal 54 (January 2000) (Part II), and 29 Tax Management International Journal 175 (March 2000) (Part III).

[32] The taxpayer's inability to effectuate changes to its tax return position after the expiry of the 90-day period renders curious the view (noted in paragraph 192 of Information Circular 87-2) that a taxpayer can adjust his tax return to deal with initially inappropriately reported income arising from intercompany transactions. Clearly, where such adjustment is desired to reduce income after the 90-day notice of objection period, the taxpayer has no "right" to such downward adjustment but must instead rely upon Information Circular 75-7R3, "Reassessment of a return of income" (July 9, 1985). Conversely, where the adjustment would increase income, not only does the taxpayer not have an obligation to amend its return to file the increased income, but it does not have a right to do so even if it wished to.

[33] Information Circular 84-1, "Revision of Capital Cost Allowance Claims and Other Permissible Deductions" (July 9, 1984), deals with the revisions of capital cost allowance claims and other permissive deductions and is not relevant to this discussion.

[34] 74 DTC 6408 (F.C.T.D.)

[35] The dispute did not involve a straight under-payment but rather a complex series of transactions that the court construed to be an underpayment for purposes of dealing with the parent's compensating payment.

[36] See sections 90-95 of the Act, and the underlying regulations in Part 5900 of the Regulations.

[37] For example, the model letter contains the following statement: "We agree not to hold the CCRA or its employees liable for any damage or loss, however caused, arising out of the electronic transmission of correspondence and other information related to our BAPA."