Principal Issues: What will be the cost to a taxpayer of property acquired from a non-resident person with whom the taxpayer does not deal at arm's length?
Position: Usually the arm's length price.
Reasons: Subsection 247(8) expressly gives precedence to the arm's length standard of subsection 247(2) over the fair market value standard of subsection 69(1).
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 26
Deemed cost of property acquired from a non-resident who is not at arm's length
Paragraph 69(1)(c) provides that a taxpayer acquiring property by gift, bequest or inheritance is deemed to acquire the property at its FMV. In the case of two taxpayers resident in Canada who do not deal with each other at arm's length, the taxpayer is generally deemed to have acquired the property for an amount equal to the price paid for the property.
In the case of a transfer of capital property at a preferential price by a non-resident person to a taxpayer resident in Canada that does not deal at arm's length with the transferor, it appears that the provisions of paragraph 247(2)(a) ensure that the property is both deemed to have been disposed of at its FMV by the transferor and acquired by the Canadian taxpayer at the same amount.
For the transferor, there are no penalties under subsection 247(3) if it is not otherwise subject to Canadian tax. The same holds true for the Canadian taxpayer, since it is a transfer pricing capital setoff adjustment.
In the case of a non-resident vendor or donor, subsection 247(8) is generally interpreted in such a way that the transfer pricing rules (relief under subsection 247(2)) take precedence over sections 67 to 69.
Question to the CRA
Can the CRA confirm that, with respect to any non-arm's length transfer of capital property by a non-resident to a resident Canadian, the deemed cost of the property received by the Canadian resident is always adjusted based on the FMV of the property received on the date of the transfer, regardless of whether it is a gift or a disposition at less than the FMV of the property?
CRA response
The question seeks confirmation of the value to be used for any non-arm's length transfer, whether by gift or disposition, of capital property by a non-resident to a Canadian resident.
The nature of the transaction and of the property disposed of has a direct impact on the value to be used for the transfer. For example, if a non-resident disposes of or makes a gift of taxable Canadian property to a person with whom it does not deal at arm's length, the disposition is deemed to be made at FMV in accordance with section 116. On the other hand, in the transfer pricing context, where the conditions for the application of subsection 247(2) are satisfied, the arm's length transfer price is used to determine the value of the transaction in question. The arm's length price is the price that two unrelated parties would have used in light of all the circumstances surrounding the situation. As for the FMV, it generally represents the highest price obtainable for a property on a sale in a free and open market between two willing, informed and prudent persons acting independently. In a transfer pricing context where these values are different, subsection 247(8) confirms, as you indicated, that if the transfer price is adjusted pursuant to the application of subsection 247(2), subsections 69(1) and (1.2) are not applicable. Thus, the arm's length transfer price generally would be used to determine the value of the transaction in question.
For the purposes of the transfer pricing penalty pursuant to subsection 247(3) and the calculation of the threshold for the application of the penalty, any transfer pricing capital setoff adjustment will reduce the total of transfer pricing capital or income adjustments only if it is determined that the taxpayer or partnership of which the taxpayer is a member has made serious efforts to determine arm's length transfer prices for this setoff adjustment. In the situation where the taxpayer has no other transfer pricing adjustment, a transfer pricing capital setoff adjustment would not be subject to the transfer pricing penalty under subsection 247(3).
Response prepared by:
International Advisory Services Section (East)
International Taxation Division
Canada Revenue Agency
Sylvain Grégoire
(450) 926-747
2014-053820