Pricing Between Your Canadian and US Companies

What should the Canadian company invoice when its team does the work?

The Canadian corporation should charge the US corporation for the functions it actually performs and the assets or rights it actually provides. If the Canadian team manages operations, develops software and ships goods, identify those activities before choosing prices; a single unexplained “management fee” hides what the US company bought. The CRA's service guidance asks who provided each service, who used it and what benefit the user received. If the US company finds customers and takes sales risks, its own work also needs a return; customer receipts alone do not set the Canadian invoice.

Start with the customer contracts, staff roles and time records. Identify who owns the software or inventory, who makes sales decisions, who bears customer and inventory risk, and what each company could do without the other. Then set out the transactions in a written agreement and match invoices to the work and rights delivered. The IRS applies its related-party pricing rule to goods, services and intangible property, while Canada examines the actual conditions and conduct.

What is an arm's-length price when one owner controls both companies?

It is a price and set of terms that independent companies would agree to in comparable circumstances. The owner cannot pick a charge solely to move profit across the border: Canada's section 247, the US section 482 rule and treaty Article IX allow adjustments when related parties' terms differ from independent terms.

Compare both the price and the contract terms: scope, payment period, warranties, ownership of intellectual property and risks. Prefer the companies' own comparable deals with unrelated customers or suppliers when those deals are genuinely comparable. Otherwise, explain the external data and method chosen, and why it fits the functions and risks. The IRS documentation guidance expects facts to be linked to the pricing method, rather than a list of facts without analysis. Canada's amended rule also looks at the parties' actual conduct, not just their written contract (CRA).

Should management services, software licences and goods use the same markup?

No single markup answers all three. First identify what changes hands, then choose a comparison that measures that transaction. The CRA describes comparisons using independent prices or margins; its service guidance says both the cost base and any markup need support.

A software development service is different from a licence to use software; a goods invoice is different from a management fee. Do not charge twice for the same work through both a product price and a service fee. The CRA warns that shareholder activities, duplicated services and pass-through costs require separate analysis. Its TPM-15 guidance predates Canada's amended section 247, so use its service examples alongside the current statute.

For eligible routine services, the US services cost method can support a charge at cost if the required records, including a statement of intent to use the method, are kept as the costs arise. The Canadian price must still be supportable under Canada's rule.

Can one company pay the other's bills without an invoice?

One company can pay a bill for the other, but both must record what the payment represents. A third-party cost paid as agent may be a reimbursement; staff work that benefits the other company may be a service; money advanced for later repayment may be a loan. The CRA says a contract or invoice alone does not prove a service occurred and asks how pass-through costs and markups were treated.

Keep the third-party bill, who ordered and used the item, how the amount was allocated, and whether either company earned a service return. Post matching receivable and payable entries. Calling every transfer a reimbursement does not settle its tax treatment; the facts and agreed terms do.

Do small companies need transfer-pricing records, and when?

Yes. Neither country gives a blanket small-company exemption from arm's-length pricing. Canada requires records for related non-resident transactions and ties its penalty defence to contemporaneous documentation; the IRS also expects timely, reasonable documentation to avoid certain transfer-pricing penalties.

Neither the T106 filing threshold nor a transfer-pricing penalty threshold excuses an unsupported price. Canada's amended deadlines apply to tax years beginning after November 4, 2025; check the prior rule for an earlier-starting year (CRA).

US corporations below US$10,000,000 in aggregated US gross receipts, or with gross foreign-related-party payments no more than US$5,000,000 and below 10% of US gross income, may be exempt from the special section 6038A record rules. They still need ordinary tax records and any required Form 5472 (US regulation).

What must each company report about invoices and balances?

The Canadian corporation may file Form T106; a qualifying US reporting corporation generally files Form 5472 for reportable related-party transactions. Each form has its own trigger. The books and tax returns must also reflect the underlying sale, service, licence or financing transaction.

The US corporation files a separate Form 5472 for each related party with reportable transactions, generally with its income tax return, including extensions. If a controlling US person reports all those transactions on Form 5471 Schedule M, a filing exception may apply. If the Canadian corporation owns at least 25% of the US company by vote or value, the foreign-ownership test is met. With a shared individual owner, check whether that person is foreign under US rules, including indirect and attributed ownership; living in Canada alone does not decide it. Form T106's threshold is a filing test, not a transfer-pricing exemption. A missing or substantially incomplete Form 5472 can trigger a US$25,000 penalty, with another US$25,000 for each 30-day period after 90 days from IRS notice (IRS).

If the Canadian corporation owns the US corporation as a foreign affiliate, it may also need Form T1134, generally due within ten months after its year-end (CRA).

What if an invoice remains unpaid or one company lends to the other?

An unpaid invoice remains a receivable in one company's records and a payable in the other's; it does not disappear because the companies have the same owner. Record the invoice date, currency, payments and year-end balance. The CRA's T106 guide calls for opening and closing balances and movements in loans and accounts; the Form 5472 instructions cover accrued transactions and loan balances. A US book payable does not settle the tax deduction date: the related-foreign-person rule can defer deduction until payment, subject to exceptions. Reconcile the balance to the US tax return.

If the balance becomes financing, document principal, due date, interest, security and repayment history. US related-party interest rules allow only limited interest-free periods for ordinary trade receivables; the applicable period depends on the transaction (US regulations). A Canadian corporation can face an income inclusion when a non-resident owes it an amount for more than a year without adequate interest; section 17(8) can except qualifying debts of its controlled foreign affiliate used in an active business, and section 247(7) then bars a Canadian transfer-pricing interest adjustment on that debt.

If the US company controls the Canadian lender, a loan may instead trigger Canada's shareholder-loan deemed-dividend rule. Where it applies, authorized officers of both corporations can jointly file Form T1521 to elect imputed interest instead; it is due by the Canadian corporation's return filing date for the year the debt arose. A late election can be valid within three years of that date with its penalty paid (CRA). An ordinary-course debt with bona fide repayment terms may also be excepted (section 15(2.3)). Review aged balances before writing them off or calling them capital.

When might a fee, royalty or interest payment need withholding?

Withholding depends on what the payment buys, where the income arises and whether the recipient qualifies for treaty relief. A US payment for work performed in Canada is generally foreign-source service income under the IRS source rules; a royalty for rights used in the US has a different source rule. Do not infer withholding from the word “management” or “software” on an invoice.

For services in Canada, the US provider or its authorized representative can request a Regulation 105 waiver on Form R105. The CRA recommends applying at least 30 days before services begin or the first payment; a waiver covers only later payments (CRA). For services in Québec, the payer also reports the payment on RL-1, box O, code RR, generally due by the last day of the following February. Québec withholding is due by the 15th of the following month for monthly, twice-monthly or weekly remitters; quarterly and annual remitters use their usual deadlines (Revenu Québec).

Before applying treaty relief to royalties or interest, check beneficial ownership, treaty residence, Article XXIX A eligibility, and whether a permanent establishment is connected to the right or debt. A company resident in both countries under domestic law is generally treated as resident where it was created under treaty Article IV(3), subject to its continuation rule. A Canadian payer should keep eligibility evidence, such as Form NR301 or equivalent information, and check Part XIII withholding and NR4 reporting even if treaty relief removes the tax. Part XIII tax is generally due by the 15th of the next month; the NR4 is due by the last day of March after the calendar year (CRA). For a US-source payment, Form W-8BEN-E can establish the Canadian corporation's foreign status or treaty claim; Form W-8ECI generally certifies effectively connected income. Forms 1042 and 1042-S are generally due March 15 after the calendar year (IRS Publication 515). If US tax was already withheld and reported on Form 1042-S, see US tax withheld on payments to Canadians.

The US withholding agent required to withhold can owe missed tax under section 1461; an owner or officer is not liable solely by title. Assessment is generally limited to three years after Form 1042 is filed, measured from the following April 15 if filed earlier; an unfiled return leaves it open indefinitely, with other exceptions (IRS). In Canada, the payer itself owes tax it failed to withhold on non-resident services under section 227(8.4) or Part XIII payments under section 215(6); section 227(10) permits assessment at any time. Failure to withhold can also bring a 10% penalty, rising to 20% for another failure in the same year made knowingly or with gross negligence (section 227(8)). Section 227.1 can also make a director serving when the corporation failed to withhold or remit jointly liable, including interest and penalties. It requires an unsatisfied collection step or timely insolvency claim, allows a due-diligence defence, and bars recovery proceedings more than two years after the director last ceased office.

What if the CRA or IRS changes the intercompany price?

An audit adjustment in one country does not automatically change the other country's return. The treaty provides for a corresponding adjustment if the other country agrees with the first adjustment and its competent authority is notified within six years after the affected tax year; limited relief may still be possible after that window. It also provides a mutual agreement process when the two countries disagree. Preserve the audit notice, years affected, invoices and pricing analysis, and address the other country's position promptly.

Canada can impose a 10% transfer-pricing penalty on the statutory adjustment amount when reasonable efforts are lacking and that amount exceeds the lesser of 10% of gross revenue or C$10,000,000 (section 247(3)). Relief from double taxation is conditional. Certain upward adjustments to a Canadian corporation can create a deemed dividend to the related non-resident under section 247(12), requiring a Part XIII withholding review; repatriation relief under section 247(13) is conditional. CRA competent authority services address treaty disputes; review an adjustment in both countries before changing invoices or returns.

Example

Illustrative only; all amounts are Canadian dollars, and the invoice price is assumed to have separate comparable-price support. A Canadian corporation incurs C$200,000 of staff and operating costs to provide services to its related US corporation. Assume comparable independent service agreements support a 15% return on those C$200,000 costs. The illustrative invoice is C$200,000 plus C$30,000, or C$230,000; 15% is not a standard markup. The US corporation pays C$180,000 by year-end, leaving C$50,000 due.

The Canadian corporation records the C$230,000 invoice and C$50,000 receivable. The US corporation records the matching payable and converts amounts for its US reporting. The unpaid C$50,000 is not another service fee or a loan merely because it is unpaid. If these are the Canadian corporation's only reportable related non-resident transactions, C$230,000 is below the Form T106 filing threshold. That does not remove its pricing records. If the US corporation is foreign-owned and has this reportable transaction, its Form 5472 service amount includes the accrued C$230,000 equivalent, not just the C$180,000 paid. Review financing terms if the balance remains unpaid.

Different for you?

• You are choosing between direct US sales and a separate company: compare structures in Canadian business expanding into the US.
• Your Canadian corporation itself earns income from US activity: check Canadian corporation US tax return.
• The payment is to you personally: use Paying yourself from a US company.
• Your US company performs services in Canada for the Canadian company: check Withholding on services in Canada.
• A payment already had US tax withheld: see US tax withheld on payments to Canadians.
• Software ownership is unclear, balances have aged, or either tax authority changed a price: gather both companies' agreements, invoices, work and cost records, comparables, loan terms and audit notices for cross-border tax review.