An Advance Pricing Agreement (APA) is an agreement, usually for multiple years, between a taxpayer and at least one tax authority specifying on transfer pricing methods to allocate income between related parties. The APA program is designed to provide increased certainty regarding, and to assist tax payers in resolving, future transfer pricing issues in a cooperative manner as opposed to the traditional examination process.

While an APA focuses on future tax years, tax authorities will often agree to resolve transfer pricing issues pending from prior years. For tax payers and the tax administration, this has the advantage of resolving many years of potential tax issues, existing transfer pricing audits or adjustments in a single process.

Other benefits of APAs include:

• The security and tax certainty of an APA provides taxpayers the ability to prepared improved budget forecasts for related party transactions
• APA also reduces the incidence of double taxation,
• The APA process is a cooperative approach to resolving potential transfer pricing disputes. With the sharing of information between the taxpayer and tax authority, the potentially adversarial nature of a transfer pricing audit is avoided.
• Taxpayers will avoid the expense of undertaking regular documentation studies for transactions covered by the APA since an executed APA satisfies Canadian transfer pricing documentation requirements.