# What does arm length relationship mean and median

faster, or were discounted more, than similar non-arm's length homes during the same period. These small “mom-and-pop” investors took on average days to purchase, If a discount does exist, properties resold after being purchased at a . This attorney serves as the trustee in a three-way relationship between the. It is the CRA's policy that the determination of arm's length prices Therefore, taxpayers should not average results over multiple years for . Various tests can be applied to the numerical value actually observed in relation to. Relation between the arm and the median of a triangle: The lengths of the medians can be obtained from Apollonius' theorem as.

Buying a home can be a tricky, expensive and stressful process. In some situations, you may consider buying a home from a family member or friend. Real estate transactions can be broken down into two broad categories: Each party is confidently able to act in their own self-interest. This can include family members, friends, business partners, etc. This type of relationship between buyers and sellers is known as an identity of interest.

When a relationship like this exists, there is a greater chance that one party could manipulate the other party in some way, or both parties could work together to try to cheat the fair market price of the home.

This is an example of mortgage fraud. Sam — who knows that Mary trusts him — is trying to use his relationship with his niece to inflate the price of the house and get more money. This behavior can be considered mortgage fraud. Luckily for Mary, there are entire teams within mortgage companies and governmental organizations whose job it is to sift through these types of transactions looking for shady situations.

This protects one or more parties from being manipulated by an inflated market value. The difference between the use of multiple year data and the use of statistical tools The proper use of multiple year data and the application of statistical tools are different issues. Given the discussion in the previous section on the terms data and use, it is clear that statistical tools do not meet the necessary criteria to be able to improve a comparability analysis.

## Arm's Length Definition:

The use of multiple year data is often confused with the use of averages over multiple years of outcomes, and sometimes the pooling of outcomes from both multiple years and multiple comparable transactions. Statistical tools, such as averages, applied to observed historical outcomes from comparables may be useful as they may provide a single-point descriptor when setting or testing prices for the transaction under review.

The average and median are descriptive statistical tools Footnote 3 that reduce quantitative observations of one characteristic of a sample group to a single point. For example, taking the average of all observed outcomes from transactions accepted as comparable to the transaction under review can provide a single point description of the information that has been observed. Within a single year, averaging comparable outcomes can therefore be helpful if a single point is required to describe the observed outcomes in order to select a representative point of the range.

A single point description may be necessary when determining the price that is most appropriate to be used. In this case, using the average allows all of the information determined to relate to comparable transactions to be incorporated into the single data point.

### Arm's Length Definition

However, when the observations are taken from different years, at least some of the relevant economic characteristics that are expected to have an impact on comparability are expected to be different as these characteristics change over time. As a result, the data points will not represent comparable economic outcomes from year to year because the relevant economic characteristics that relate to comparability change over time.

Another statistical tool that describes a large set of numbers in a simplified way is the range. A range describes the highest and lowest point within a set of numbers.

**arm's length**

However, for the reasons given above, determining a range across multiple years often referred to as pooling is not an acceptable use of statistical tools. Footnote 5 In the absence of the proper use of multiple years of data, the use of statistical tools may actually result in the loss of information and a reduction in comparability.

As comparability is the cornerstone of transfer pricing, measures that reduce opportunities to consider information pertaining to the relevant comparability factors of the transactions under review are likely to reduce rather than enhance the reliability of the transfer pricing analysis.

Selecting the most appropriate point in the range In accordance with paragraph 3. If, however, the price or margin falls outside the established range, the CRA will determine the most appropriate point within the range using the most suitable measure of central tendency under the circumstances. Where no further distinction can be made on the basis of comparability, the most appropriate point may usually be determined by using the average. The average gives equal weight to each observation being considered, while the use of the range minimizes the potential impact of any unknown or unquantifiable comparability defects.

While multiple years of data may be useful to select, reject, or determine the degree of comparability of potentially comparable transactions, transfer prices for a given year should be determined based on the results of a single year of data from each of the comparable transactions.

Therefore, taxpayers should not average results over multiple years for the purpose of substantiating their transfer prices in an audit context. The CRA will look at the results for comparable data and apply them on a year-by-year basis. Multiple year averages may, however, play a role in an APA context.

Descriptive statistical tools are used to describe a set of numerical data in one or a few data points. For example, a median describes in one data point the middle observation of a set of numbers. The top and bottom valued observations describe in two data points the range of numbers in the entire set. Descriptive statistical tools incorporate limited amounts of information about the set of numbers they are describing in order to simplify the description.

As a result, information is lost when comparing the information available by reviewing all of the data in a set to the single point descriptor such as the median.

Statistics only work where the characteristics being described by the statistics can be reduced to numerical form. Statistics simply provide a numerical representation of a certain characteristic of the subject under review. However, in a transfer pricing situation, as there is no scale of comparability, it is not possible to use statistics to describe the relative comparability of different observations.

For example, given a normal probability distribution which looks like a bell curve and a large enough set of observations usually more than 30the mean of the current set of observations is found to give the best prediction of the numerical value of the next observation taken from an unknown population. Various tests can be applied to the numerical value actually observed in relation to the set of observations already made to determine the probability that the new observation is actually from the same population.

However, as discussed above under descriptive tools, this is not possible. There is no numerical value or scale for comparability; therefore there are no direct numerical indicators of comparability.

Instead, a comparability analysis is undertaken to determine which transactions are comparable to the related party transaction under review, including looking at the functions performed by the parties to the transactions, taking account of assets used and risks assumed.

After determining which transactions are comparable enough to rely on, the outcomes from those transactions are applied to the related party transaction under review. There is no opportunity for inferential statistical tools to be used in determining comparability of an individual observation or improving the comparability of a set of observations. Indeed, the use of inter-quartile ranges Footnote 6 is based on the assumption that the comparable transactions, whose observed financial outcomes are outside this range, are not comparable, simply on the basis of these observed outcomes rather than any consideration of the other economic characteristics of the transactions.

Again, it is imperative to note that such uses of statistical tools do not measure the comparability of transactions, simply the outcomes of those transactions.

Therefore, rejection of data on the basis of statistical analysis alone is not appropriate. Footnotes Footnote 1 Paragraph 3. However, those paragraphs on statistical tools do not suggest that averages should be appropriate across multiple years.