Certainly.
This measure relates to existing provisions in the Income Tax Act relating to transfer pricing. Transfer pricing describes the prices at which related parties transact over international borders. These would be corporations that are part of the same group. It can be used as part of international corporate tax planning to shift profits from a high-tax jurisdiction to a low-tax jurisdiction. In particular, what happens is that companies will try to move expenditures into high-tax jurisdictions or move revenues out of high-tax jurisdictions.
Under existing rules, CRA can make an assessment to adjust prices for these transactions to what arm's-length parties would have transacted at. That gives rise to a transfer pricing adjustment. You may increase or decrease the price of something for Canadian tax purposes. However, that's just what's known as a primary adjustment. Sometimes, even if you reduce an expenditure for the Canadian taxpayer, what's happened is that by overpaying, the Canadian taxpayer has conferred a benefit on a non-resident party. Normally, when a Canadian taxpayer confers a benefit to the non-resident parent, for example, that'll be a dividend that attracts part XIII withholding tax.
What this measure does is it allows the CRA to make what's called a secondary or consequential adjustment to capture, for part XIII purposes, the benefit conferred on a non-resident. The subcommittee on transfer pricing of the Advisory Panel on Canada's System of International Taxation recommended that there be a clarification of the treatment of secondary adjustments. Current CRA practice is to impose these kinds of adjustments under existing rules. This clarifies the operation.
