A Canadian importer (Canco) purchases goods from an arm’s length U.S. supplier at a price of C$30/unit. The Canadian company’s gross annual revenue is $6 million. The Canadian importer incorporates a subsidiary (BCo) in a low tax jurisdiction. The U.S. supplier begins to sell the goods to BCo at the C$30/unit price. The Canadian importer purchases the goods from BCo at a price of C$40/unit. The goods are shipped directly to the Canadian importer’s customers.

REQUIRED

(1) Will a transfer pricing adjustment apply to Canco?

(2) Will a penalty apply to Canco?