Would the Canada Revenue Agency (CRA) accept a 5% markup on the $2 million your Canadian team spends serving its US affiliate, or would it expect 9%? On that cost base, the gap moves $80,000 of taxable profit across the border every year, and transfer pricing methods are how the right figure gets decided.
The percentage on its own proves very little. What the CRA looks at is the method behind it: what you compared, which company you tested, and whether the data fits the way your business actually operates.
Founder Jonathan Soosaipillai, CPA, CGA, leads our cross-border financial strategy and corporate tax structuring work for owners operating in both Canada and the US. Intercompany pricing is one of the first places we look, because a price set once and never revisited tends to drift away from what an auditor will accept.
Here are the five accepted methods with worked examples, how the CRA expects you to choose between them, and the Canadian rules that changed for tax years beginning after November 4, 2025.
TL;DR — Transfer Pricing Methods
Here are seven points to know before you set or defend an intercompany price.
- A transfer pricing method is the tool that measures whether a related-party price matches what independent businesses would agree to.
- Five methods are accepted internationally: comparable uncontrolled price, resale price, cost plus, transactional net margin, and transactional profit split.
- The first three test the price or gross margin of a transaction; the last two test net profit or the split of combined profit.
- Canada has no strict ranking of methods, though the CRA prefers a traditional method when its data is as reliable as the alternatives.
- The right choice follows a functional analysis of who performs the work, owns the assets, and carries the risk.
- The CRA tests your results one year at a time and keeps government assistance in the cost base for cost-based methods.
- Since tax years beginning after November 4, 2025, Canadian rules must be read consistently with the OECD Guidelines, and documentation is due within 30 days of a request.
A method you can explain on paper is worth more than a percentage that only looks reasonable.
At JS CPA Strategic Solutions, our Growth Mosaic ties intercompany pricing into your broader tax, CFO, and exit planning, drawing on more than $85M in enterprise value advised. Secure a cross-border pricing review before your next filing deadline.
What a Transfer Pricing Method Does
A transfer pricing method turns the arm’s length principle into a number you can test.
The arm’s length principle says that a Canadian company and its foreign affiliate should deal on the same terms two unrelated businesses would accept. According to the CRA’s transfer pricing guidance, applying that principle comes down to comparing your prices or profit margins with those of independent parties in similar transactions.
Each method makes that comparison differently. Some look at the price of a single transaction, some at a gross margin, and some at the net profit earned by one party, called the tested party.
The analysis now starts one step earlier. Under the section 247 amendments in Bill C-15, which received Royal Assent on March 26, 2026, you first delineate the transaction based on how the parties actually behave, then test it, and new subsection 247(2.03) requires the rules to be read consistently with the OECD Transfer Pricing Guidelines.
The 5 Transfer Pricing Methods Explained
The five methods fall into two families: traditional transaction methods and transactional profit methods.
Traditional transaction methods compare the price or gross margin of the intercompany deal itself. Transactional profit methods compare net profit, or divide the combined profit, when reliable transaction-level data is not available. The figures in each example below are illustrative only and depend on your facts.
Comparable Uncontrolled Price (CUP) Method
The CUP method compares your intercompany price directly with the price charged in a comparable transaction between unrelated parties.
An internal CUP uses your own sales to outsiders; an external CUP uses deals between two independent companies. Say your Canadian company sells a component to its US affiliate for $40 a unit and sells the same component to an unrelated US buyer for $46, on similar volumes and terms. The $46 sale is strong evidence of the arm’s length price, after adjusting for any differences in volume, freight, or payment terms.
CUP gives the most direct answer, so it carries weight when the data exists. The catch is comparability: small differences in product, contract terms, or market can make a price unusable.
Resale Price Method
The resale price method works backward from the price a related distributor charges its own outside customers.
You start with the resale price, subtract the gross margin a comparable independent distributor would earn, and the remainder is the arm’s length purchase price. If a US distribution affiliate resells a product for $1,000 and independent distributors performing similar functions earn a 25% gross margin, the arm’s length price paid to the Canadian maker is $750.
The method fits distributors that buy and resell without adding much value. The method weakens when the distributor transforms the product, owns a valuable brand, or performs functions comparable distributors do not.
Cost Plus Method
The cost plus method starts with the supplier’s costs and adds the gross markup an independent supplier would earn.
A Canadian contract manufacturer that incurs $600,000 in production costs for its US parent, where comparable independent manufacturers earn a gross markup of 8% on similar work, would charge $648,000. The method suits contract manufacturing and routine services, where the supplier carries limited risk.
Cost plus is only as reliable as the cost base underneath it. When we rebuilt the cost structure for a rapidly scaling service business, line-by-line contribution-margin reporting was what turned a 325% growth story back into a profitable one; the same discipline in tracking costs by activity is what makes a markup defensible.
Transactional Net Margin Method (TNMM)
The TNMM compares the net profit the tested party earns on a transaction with the net profit of comparable independent companies.
Net profit is measured against a base such as total costs, sales, or assets. Suppose a Canadian subsidiary develops software for its US parent at a total cost of $2,000,000, and independent service providers earn a net markup on total costs between 6% and 11%. A charge between $2,120,000 and $2,220,000 would fall within that range.
Net margins are less sensitive to small product differences than prices, and public financial data on independent companies is easier to find. Those two traits make the TNMM a frequent choice for routine service and distribution subsidiaries.
Transactional Profit Split Method
The profit split method divides the combined profit from a transaction between the related parties based on what each contributes.
Consider a Canadian company and its US affiliate co-developing a software platform, each bringing unique technology and know-how. If the combined operating profit is $3,000,000 and the analysis supports a 60% and 40% split based on relative contributions, Canada reports $1,800,000 and the US reports $1,200,000.
The method fits highly integrated operations where both sides make unique contributions that no single benchmark can capture. Applying it well takes careful work on how to measure each contribution.
Transfer Pricing Methods Compared
A side-by-side view helps show where each method tends to fit and where it tends to break.
| Method | What it compares | Data you need | Typical fit | Main limitation |
|---|---|---|---|---|
| Comparable uncontrolled price | Price of the same or similar transaction | Prices from comparable unrelated deals | Commodities, identical goods, loans | Small differences can destroy comparability |
| Resale price | Distributor’s gross margin | Gross margins of independent distributors | Buy-and-resell distributors | Weak when the distributor adds value |
| Cost plus | Supplier’s gross markup on costs | Gross markups of independent suppliers | Contract manufacturing, routine services | Depends on a consistent cost base |
| Transactional net margin | Tested party’s net profit | Net margins of comparable companies | Routine service and distribution entities | Less precise for unique contributions |
| Transactional profit split | Each party’s share of combined profit | Combined profit and contribution data | Integrated operations with unique value on both sides | Complex to measure and defend |
How the CRA Approaches Method Selection
Canada does not rank the methods in a fixed order, but it does expect you to justify the one you chose.
In CRA memorandum TPM-14, the CRA agrees that the focus should be the method that gives the most direct view of arm’s length pricing. The CRA also accepts a natural hierarchy: where a traditional method such as CUP and a profit method can be applied with equal reliability, the traditional method is preferred.
The most appropriate method is judged on four factors.
What each method measures well and where it falls short for your type of transaction.
Which method fits the deal, based on a functional analysis of what each party does.
Whether the data needed to apply the method actually exists and can be trusted.
How closely the comparables match your transaction, including how reliable any adjustments are.
How to Choose a Transfer Pricing Method in 5 Steps
Working with founders scaling between $1M and $10M, what we see consistently is a method picked by habit rather than by the facts. These five steps reverse that order.
Map and Delineate Each Transaction
Start by listing every intercompany flow and describing what really happens in each one.
Product sales, services, royalties, cost sharing, and loans each need their own analysis. Under the amended section 247, the delineation follows the actual conduct of the parties, so the written agreement is a starting point rather than the final word.
Run a Functional Analysis
Identify who performs the key functions, who owns the important assets, and who controls and carries the risks.
The functional analysis usually points to the right family of methods. A low-risk service provider looks very different from an entity that owns the technology and funds its development.
Pick the Tested Party
Choose the party whose results can be benchmarked most reliably, which is usually the less complex one.
A routine Canadian service subsidiary is often a better tested party than a US parent that owns the brand and the intellectual property. Testing the simpler entity makes the comparables easier to find and defend.
Test Each Candidate Method Against the Data
Work through the methods that fit the functional profile and check the quality of data available for each.
If a reliable CUP exists, the CRA’s natural hierarchy favours it. If it does not, a gross margin or net margin method may give the more reliable answer, and the reason belongs in your file.
Document Why the Chosen Method Wins
Record the method you selected, the methods you rejected, and the reasoning behind both.
An auditor reviewing your file is likely to ask why the method fits before checking whether the numbers fall in range. A clear record of that choice is often what separates an adjustment from a closed file.
3 Canadian Rules That Change How a Method Works
Three Canadian positions can change the result of a method even after the right one is selected.
Results Are Tested Year by Year
The CRA applies comparable data one year at a time when it reviews your transfer prices.
According to CRA memorandum TPM-16, multiple years of data can help select or reject comparables, but taxpayers should not average results over several years to support their prices in an audit. Multiple-year averages may play a role in an advance pricing arrangement, though results are still checked year by year.
Government Assistance Stays in the Cost Base
When you use a cost-based method, the CRA’s approach is that government assistance does not reduce the cost base unless reliable evidence shows independent parties would do so.
In the CRA’s own example in memorandum TPM-17, a Canadian company incurs $60 in research and development costs and $40 in other costs, then applies a 10% markup for a $110 transfer price. With $10 of assistance received, its net income is $20, so the full benefit of the assistance stays in Canada instead of passing to the foreign parent through a lower price.
For Canadian technology subsidiaries that perform contract development and claim research incentives, this point can change the taxable profit reported in Canada. Build it into the cost base calculation from the first invoice, and into your wider corporate tax planning.
Documentation Must Explain the Method on Request
For taxation years beginning after November 4, 2025, the CRA can ask for your contemporaneous documentation and expect it within 30 days, down from three months.
The same amendments raised the threshold for penalty consideration to the lesser of $10 million or 10% of gross revenue, and introduced simplified documentation when prescribed conditions are met. The CRA has said it will release updated transfer pricing memoranda over the coming months, so confirm current guidance with a qualified advisor before relying on these rules. Our guide to transfer pricing in Canada covers the documentation and penalty rules in more detail.
Method Alignment for Canada-US Groups
A Canada-US group has to satisfy two tax authorities with one set of intercompany prices.
The US rules under section 482 recognize the same core methods, with the comparable profits method serving as the US counterpart to the TNMM. The IRS documentation guidance applies a best method rule, which asks for the method that gives the most reliable measure of an arm’s length result, and the IRS also expects documentation within 30 days of a request.
The two systems point in the same direction, yet they can still reach different answers on the same transaction. When Canada and the US each claim the same profit, the result is double taxation, which competent authority assistance under the treaty or an advance pricing arrangement can help resolve.
Pricing decisions also follow a company into a sale. Buyers test intercompany arrangements during due diligence in Canada, and the structure behind them feeds directly into deal structuring and, for software founders, into selling a tech company at full value.
Frequently Asked Questions (FAQs)
Below are answers to questions owners often ask us about transfer pricing methods.
Conclusion
Transfer pricing methods are the reasoning behind every intercompany price your company charges or pays.
The five methods each answer the arm’s length question from a different angle. Choosing well means starting with the facts, testing the data honestly, and writing down why one method beats the others, especially now that the CRA can ask for that record within 30 days.
Remember, a defensible price starts with the right method and the record to prove it.