My small business does business with a related company abroad — can CRA audit our pricing?

Yes. The Income Tax Act contains transfer pricing rules requiring that transactions between related parties in different countries be priced at arm's-length terms — meaning the price that unrelated parties would agree to. CRA has a dedicated transfer pricing review group within its Large Business Audit directorate, but smaller businesses with cross-border related-party transactions are not exempt from scrutiny.

If you sell goods, provide services, or charge royalties to an affiliate abroad at prices that are not arm's-length, CRA can adjust the pricing to what an arm's-length amount would have been and reassess your income accordingly. Penalties for transfer pricing adjustments can be significant — a 10% penalty applies to adjustments exceeding certain thresholds if the taxpayer did not make reasonable efforts to determine an arm's-length price.

Contemporary documentation supporting your pricing methodology is the key defence. You should maintain records explaining how your prices were set and why they reflect what arm's-length parties would agree to. For many small businesses, the practical solution is a transfer pricing study performed by an accountant familiar with the methodology. If CRA has raised transfer pricing as an audit issue, seek specialist legal or accounting advice early, as these disputes can involve large adjustments and are technically complex.