In the first scenario, a Canadian resident purchases a good (or service) from a non-resident at an amount in excess of an arm’s length price, and a transfer pricing adjustment is made to reduce the excess expenditure. In the second scenario, a Canadian resident sells a good (or provides a service) to a non-resident at an amount less than an arm’s length price and a transfer pricing adjustment is made to increase the amount considered to be received. Do such adjustments increase the Canadian resident’s gross revenue, as defined in s. 248(1)?
After noting the relevance of gross revenue to allocations under Reg. 402(3), CRA stated respecting Scenario 1:
Since the primary adjustment changes an amount paid, there is no amount that is received or receivable. Thus, an adjustment… would not be included in gross revenue for provincial income allocation purposes.
Respecting Scenario 2:
Upward adjustments made as per 247(2) essentially deem the sale price…to be what it would have otherwise been had the parties been dealing at arm’s length. Therefore, the amount of the increase should be included in gross revenue for the year… .
…[A]ny adjustment to gross revenue would be attributable…to whichever permanent establishment was reasonably attributed the gross revenue from the sale that was subject to the transfer pricing adjustment.