Common Tax Traps in Intercompany Transactions

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01. Transfer Pricing Risks

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CRA mandates “arm’s length” pricing among related companies. Artificially high or low pricing risks audits, penalties, and back taxes.

Tip: Document pricing using third-party data.

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02. Dividend Mistakes

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Misclassifying eligible vs. non-eligible dividends or mishandling the Capital Dividend Account (CDA) can cause tax surprises.

Tip: Carefully plan dividend flows and maintain accurate records.

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03. Loan Transactions

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Interest-free or poorly documented loans can be recharacterized as taxable benefits.

Tip: Formalize loans with clear interest rates and repayment terms.

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04. Capital Gains and Share Transfers

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Improper share or asset transfers may trigger capital gains taxes and affect small business deductions.

Tip: Use Section 85 rollovers and plan ahead.

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05. Expense Allocations

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Misallocation of shared expenses can result in disallowed deductions and GST/HST complications.

Tip: Maintain formal agreements and detailed documentation.

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How to Protect Your Business

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• Engage tax professionals early.

• Formalize all intercompany agreements in writing.

• Document pricing and valuations thoroughly.

• Use robust accounting to track transactions.

• Plan tax impacts proactively

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Final Thoughts

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Intercompany transactions can be valuable strategic tools but require expert advice and careful planning to avoid costly pitfalls

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