Transactions with the Parent Company: What to Watch in Transfer Pricing

Pricing related-party transactions, T106 filing, documentation requirements

Scott Tang, CPAUpdated 2026-11-032026 rules4 min read

When the subsidiary buys goods from the parent, pays it management fees or borrows from it, can the two companies set the prices themselves? Not arbitrarily. Transactions with foreign related parties must be priced under the arm's length principle — the price two unrelated companies would accept in similar circumstances. If the pricing isn't reasonable, CRA can adjust the profit and may also impose penalties.

$1 million

If transactions with foreign related parties total more than this in a year, you must file a T106

30 days

Deadline to hand over documentation after a written CRA request (new rules, for tax years beginning after November 4, 2025)

10%

Penalty on the adjustment amount if the adjustment exceeds the threshold and you have no adequate documentation

Which transactions need attention

Buying and selling goods
When the subsidiary buys goods from the parent for resale, a high purchase price means less profit in Canada — this is the item reviewed most often.
Management and service fees
For management fees charged by the parent, you need to be able to show that services were actually provided, that they were useful to the subsidiary and that the charge is reasonable. These are the most likely to be challenged.
Loans and interest
The interest rate should be at market level; borrowing too much also runs into the thin capitalization limits (see "Lending to Your Canadian Subsidiary: The Thin Capitalization Rules" in this series).
Brand and technology royalties
Using the parent's trademarks, patents or software requires a licence agreement and a reasonable royalty rate.

What it takes to support your pricing

1
Sign agreements
A written agreement for each type of transaction
2
Choose a method
Comparable prices, cost plus, profit margin comparisons and so on
3
Keep contemporaneous documentation
The transactions, functions and risks, and the basis for the pricing
4
File the T106
If the total exceeds $1 million, file it with the T2; transactions with a single non-resident under $100,000 don't need to be itemized
5
Review annually
When the business changes, adjust the pricing to match

Contemporaneous documentation must be ready by the T2 filing deadline. For tax years beginning after November 4, 2025 (the new rules), you must hand it over within 30 days of a written CRA request; tax years that began earlier follow the old rules. If you haven't prepared it along the way, there is simply not enough time to put it together at short notice.

The cost of non-compliance

Situation	Consequence
The pricing is adjusted	Canadian profit is increased; you pay additional corporate income tax plus interest
The adjustment exceeds the threshold (new rules: C$10 million or 10% of the company's revenue, whichever is lower) and you did not make "reasonable efforts"	An additional penalty of 10% of the adjustment
After the adjustment, the amount is treated as having been paid to the parent	Withholding tax may also be due
The T106 is filed late	Generally $25 a day, minimum $100, maximum $2,500; heavier penalties apply where the failure is knowing or due to gross negligence, or where the return still isn't filed after a formal demand

Even small companies need the basics

Transfer pricing isn't only for large groups — even below the T106 filing threshold, you still have to price on the arm's length principle. If related-party transactions have agreements and a pricing basis from the start, you can produce them later whenever CRA asks, the parent is audited or a buyer does due diligence when the company is sold. Also, the import value customs looks at and the pricing CRA looks at follow two different sets of rules; they need to be coordinated and explainable together (see the importing goods article in this series).

How Sheng Qian CPA can help

Set it up before transactions start
For goods, management fees, loans and royalties, we set a reasonable pricing method based on the business and prepare the agreements together with the parent.
File the T106 with the T2
We organize related-party transactions each year and, above the threshold, file the T106 with the T2 (T106 and transfer pricing documentation are quoted case by case).
Keep it separate in the books
Bookkeeping on the EasyU platform, with transactions with the parent recorded separately and matched to the agreements, so nothing has to be reconstructed at year-end.

For large transactions that need a full transfer pricing report, we work with dedicated transfer pricing advisers.

Sources

CRA: Transfer pricing · Form T106 – De Minimis Policy
CRA: Form T106 · Penalties for foreign reporting

Disclaimer

This article is general information only and is not tax advice. Every company's situation is different; please consult a CPA about your specific arrangements. Service fees are as set out in our written quote.