court file no. 33874 between - canadian tax litigation · subsidiaries of glaxo holdings pic,...

Court File No. 33874

IN THE SUPREME COURT OF CANADA

(ON APPEAL FROM THE FEDERAL COURT OF APPEAL)

BETWEEN:

HER MAJESTY THE QUEEN

- and -

GLAXOSMITHKLINE INC.

Appellant (Respondent)

Respondent (Appellant)

FACTUM OF THE APPELLANT ON APPEAURESPONDENT ON CROSS-APPEAL (REDACTED)

(Pursuant to Rules 42 and 43 of the Rules o/Supreme Court o[Canada, S0Rl2011-74)

Counsel for the appellant

Myles J. Kirvan Deputy Attorney General of Canada Department of Justice Bank of Canada Bui lding East Tower, 9th Floor 234 Wellington Street Ottawa, Ontario K IA OH8

Per: Wendy Burnham Tel. : (6 13) 957-4820 Fax: (613) 941-2293 Email: [email protected]

Counsel for the respondent

Osler, Hoskin & Harcourt LLP Barristers and Solicitors I First Canadian Place Toronto, Ontario M5X 18 8

Per: Tel. : Fax: Email:

AI Meghji (416) 862-5677 (416) 862-6666 amcgh; i<?oslcLcom

Agent for the appellant

Department of Justice Bank of Canada Building East Tower, Room 1216 234 Well ington Street Ottawa, Ontario KIA OH8

Per: Christopher Rupar Tel.: (6 13) 946-235 1 Fax: (6 13) 954-1920 Email: chri~topher.rupar@justice . gc.ca

Agent for the respondent

Osler, Hoskin & Harcourt LLP Suite 1900 340 Albert Street Ottawa, Ontario KIR 7Y6

Per: Tel.: Fax: Emai l:

Patricia Wi lson (613) 787-1009 (613) 235-2867 [email protected]

1

TABLE OF CONTENTS PAGE

PART I - STATEMENT OF FACTS ........................................................................................... 1

Overview ............................................................................................................................... 1

Background Facts ................................................................................................................... 2

Proceedings in the courts below ............................................................................................... 6

PART II - QUESTIONS IN ISSUE ..................................................................................................... 9

PART ill - ARGUMENT .................................................................................................................. 10

1. ARGUMENT ON APPEAL

A. Transfer pricing and arm's length principles ........................................................................ 10

B. The Federal Court of Appeal's interpretation does not respect the text, context or purpose ofs. 69(2) of the Act ................................................................................... 12

(a) l'ext ...................................................................................................................................... 12

(b) Context and purpose .. ..... ... ........ ...... ........ ....... .... ....... .............. ......... ....... ................ ........... 13

C. The Federal Court of Appeal erred in adopting the Gabco test .............................................. 17

(a) The Gabco test is incompatible with the arm's length principle .......................................... 18

(b) Adoption of the Gabco test caused the Federal Court of Appeal to ask the wrong question ..................................................................................................... 21

(i) The Court of Appeal's approach cannot yield an arm's length comparable ................. 23

(ii) The Court of Appeal's question does not respect the separate entity approach ............ 29

(iii) The Court of Appeal ignored the respondent's structure and did not apply the transactional approach ......................................... , ....................................................... 30

D. Conclusion ................................................................................................................................... 33

2. RESPONSE ON THE CROSS-APPEAL

A. Introduction ................................................................................................................................. 35

B. The first argument: the respondent has not discharged the onus ...................................... 35

C. The second argument: referral to the trial judge does not defeat the limitation periods in the Act ....................................................................................................................... 36

D. The Federal Court of Appeal has discretion to refer a matter back ................................... 38

PART IV - COSTS ............................................................................................................................. 39

PART V - ORDER SOUGHT ............................................................................................................ 39

PART VI - TABLE OF AUTHORITIES ......................................................................................... 40

PART VII - STATUTES RELIED ON ............................................................................................. 43

1

PART I - STATEMENT OF FACTS

Overview

1. Cross-border transfer pricing within multinational groups - the prices at which an

enterprise transfers property or provides services to an associated enterprise - can result in a

number of problems for both taxing authorities and for the multinationals themselves. Transfer

prices are commonly determined in the absence of market competition and may be set with a

view to shifting profits to low-tax jurisdictions. Parliament's response to transfer pricing issues

in the years in question included s. 69(2) of the Income Tax Act which deemed the transfer price

to be the reasonable arm's length price. In interpreting this provision, however, the Federal Court

of Appeal has applied a test that is not compatible with the arm's length principle and has left

Canadian jurisprudence at odds with the approach adopted by its partners in the Organization for

Economic Cooperation and Development (OECD).

2. The OECD has, for many decades, advocated consistent treatment of cross-border

transactions through the application of the arm's length principle. Integral to its application is the

requirement that taxing authorities treat members of a multinational group as if they were

operating as separate entities rather than as inseparable parts of a single unified business and,

ideally, that the standard be applied to each transaction independently of other transactions. As a

member of the OECD, Canada adheres to this principle.

3. Between 1990 and 1993, the respondent bought the drug ranitidine from its non-resident

sister company for five times the price that two Canadian generic drug companies were paying

for the same commodity~ The Minister of National Revenue reassessed to apply s. 69(2) to the

purchase, reducing the price to the arm's length price paid by these Canadian companies. The

trial judge accepted the comparators chosen by the Minister as appropriate indicators of the arm's

length price that was reasonable in the circumstances and, with a slight adjustment, upheld the

reassessments.

4. The Federal Court of Appeal overturned the decision of the trial judge. In doing so, it

interpreted s. 69(2) in a way that conflicts with the words, context and purpose of the provision

and is incompatible with OECD principles. It fell into this error by concluding that the

2

"reasonable business person" test articulated in Gabco Limited v. Minister o/National Revenue

a case decided for a different purpose under a different provision - applied to detennine the

reasonable ann's length amount in a transfer pricing situation. By adopting this test, the court

lost sight of the particular transaction and the particular good being transferred and swept into the

analysis a number of considerations that have no place in ascertaining what the reasonable price

for the purchase ofranitidine would be ifit had been bought on an ann's length basis.

5. This decision is contrary to this Court's statements on the meaning of ann's length and that

a taxpayer's transactions are to be respected. It is also contrary to the OECD's approach that the

ann's length principle should ideally be applied on a transactional basis.

6. While the Court of Appeal overturned the trial judge's decision, it did not substitute its own

opinion as to the transfer price. Instead, it sent the matter back to the trial judge for

reconsideration taking into account the circumstances it identified as relevant under the Gabco

test. The respondent has cross-appealed on the basis that the Court of Appeal ought to have

allowed the appeal and set aside the judgment of the Tax Court alleging that the reassessments

were "demolished". Since the Court of Appeal made no finding as to the correctness ofthe

reassessments or the factual assumptions underlying the reassessments, the reassessments

remained valid. Having decided that the detennination of the transfer price ought to be made by

the trial judge who heard the evidence, the Court of Appeal was correct to send the matter back

for reconsideration.

Background Facts

7. The respondent, GlaxoSmithKline Inc., is the successor corporation of Glaxo Canada, a

wholly owned subsidiary of Glaxo Group Limited, a United Kingdom corporation, which, in tum,

is wholly owned by Glaxo Holdings pIc, also a United Kingdom corporation. Glaxo Holdings pIc

heads a group of integrated multinational corporations which discover, develop, manufacture and

distribute phannaceutical products throughout the world, using both subsidiary companies and

unrelated distributors in local markets. I

1 Reasons for Judgment of the Tax Court of Canada (Tax Court Reasons), Appellant's Record, Vol. I, p. 7, para. 10.

3

8. In 1972, Glaxo Group Limited and Glaxo Canada entered into a Consultancy Agreement

whereby Glaxo Group Limited granted to Glaxo Canada various services and intangibles,

including the right to manufacture, use the trademarks, have access to information about, be

provided with technical assistance, and sell specified Glaxo Group Limited drugs. Glaxo Canada

paid a 5% royalty to Glaxo Group Limited for these intangibles.2

9. In 1976, Glaxo Group Limited discovered the pharmaceutical ingredient ranitidine, which

relieved stomach ulcers without the need for surgery. Ranitidine formulations were approved for

sale in Canada in 1981 and were launched for sale by Glaxo Canada in 1982 under the brand

name Zantac.3

10. The primary manufacture of ranitidine within the Glaxo group was undertaken by two

subsidiaries of Glaxo Holdings pIc, Glaxochem Ltd., based in the United Kingdom, and Glaxo

Pharmaceuticals (Pte) Limited, based in Singapore.4 The profits from the manufacture and sale

of ranitidine in Singapore were tax free between 1982 and 1992 and taxed at 10% thereafter. 5

11. Both primary manufacturing companies sold the ranitidine mostly to Adechsa S.A., a

related company located in Switzerland. Adechsa, in turn, sold the ranitidine to Glaxo Canada,

other related parties and unrelated distributors throughout the world at prices dictated by Glaxo

Holdings plc.6

12. On October 1, 1983, Glaxo Canada signed a Supply Agreement with its sister company,

Adechsa, for the purchase of ranitidine. 7 For the years 1990 to 1993, Glaxo Canada paid

Adechsa between $1,512 and $1,651 per kilogram for ranitidine.8

2 Consultancy Agreement dated December 8,1972 between Glaxo Group Limited and Glaxo Canada Inc., Exhibit A-0074, Appellant's Record, Vol. IV, pp. 56-81.

3 Tax Court Reasons, Appellant's Record, Vol. I, p. 5, para. 3.

4 Ibid., p. 8, para. 12.

5 Ibid., para. 13.

6 Ibid., para. 12.

7 Supply Agreement dated October 1,1983 between Adechsa and Glaxo Canada - Ranitidine, Exhibit A-0075, Appellant's Record, Vol. IV, pp. 82-91.


4

13. The average actual cost to Glaxo Phannaceuticals (Pte) Limited of producing ranitidine

during the period in question was $146 per kilogram.9

14. The 1972 Consultancy Agreement with Glaxo Group Limited was amended to add

provisions for services and intangibles relating to Zantac. IO

15. On July 1, 1988, the Consultancy Agreement was replaced with a Licence Agreement

between Glaxo Canada and its parent, Glaxo Group Limited. In return for paying a royalty of 6%

on net sales of drugs, including Zantac, Glaxo Canada received the following services and

intangibles: 11

(a) the right to manufacture, use and sell products;

(b) the right to the use of the trademarks owned by Glaxo Group Limited, including

Zantac;

( c) the right to receive technical assistance for its secondary manufacturing requirements;

(d) the use of registration materials prepared by Glaxo Group Limited, to be adapted to

the Canadian environment and submitted to the Health Protection Branch;

( e) access to new products, including line extensions;

(f) access to improvements in drugs;

(g) the right to have Glaxo group companies sell Glaxo Canada any raw materials;

(h) marketing support; and

(i) indemnification against damages arising from patent infringement actions.

9 Report of Dr. Jack Mintz dated January 10, 2006, Exhibit R-0504, Appellant's Record, Vol. VIII, pp. 42-3, para. 72; Report of Clark Valuation Services Ltd. dated April 15, 2005, Exhibit R-0418, Appellant's Record, Vol. VII, p. 39 , Table 2; Transcript of Doug Welsh, April 26, 2006, Appellant's Record, Vol. III, p. 109,1. 18- p. 113,1. 1.

10 Consultancy Agreement between Glaxo Group Limited and Glaxo Canada dated December 8, 1972, Exhibit A-0074, Appellant's Record, Vol. IV, pp. 56-7.

II Tax Court Reasons, Appellant's Record, Vol. I, p. 9, para. 14; Licence Agreement dated July I, 1988 between Glaxo Group Limited and Glaxo Canada Inc., Exhibit A-0072, Appellant's Record, Vol. IV, pp. 1-55.

5

16. The corporate structure of the Glaxo group of companies relevant to this appeal was as

follows: 12

Glaxo Holdings pIc (United Kingdom)

+ / Glaxo Group Limited -------. Giaxo Far East (Pte) Ltd.

(United Kingdom) Clearing Company

I (Singapore)

~

Glaxochem Ltd. I Glaxo Canada I Adechsa ~

RanitMine Jactory Clearing Company Glaxo Pharmaceuticals (United Kingdom) (Switzerland) (Pte) Limited

RanitMine Jactory (Singapore)

17. During the taxation years in issue, 1990 to 1993, Glaxo Canada remitted withholding tax in

respect of the royalties it paid to Glaxo Group Limited under the Licence Agreement for the

services and intangibles received, as set out in paragraph 15 above. On the other hand, Glaxo

Canada treated the amounts paid to Adechsa for the purchase of ranitidine as fully deductible

costs of goods sold. No withholding taxes were remitted in respect of the purchases of ranitidine

from Adechsa.13

18. The tax strategy of Glaxo Holdings pIc was to make as much profit in Singapore, tax free,

and then to make as much ofthe remainder of the Glaxo group's profit in the United Kingdom.

The amounts paid to Adechsa by Glaxo Canada for the purchase of ranitidine basically flowed

through Adechsa to Singapore tax free. 14

19. By 1990, two Canadian drug companies, Apotex Inc. and Novopharm Ltd., were selling

generic ranitidine formulations in Canada in direct competition with Zantac in the market for

anti-ulcer drug therapies. Both companies purchased their ranitidine from arm's length

12 Tax Court Reasons, Appellant's Record, Vol. I, p.76, Appendix III.

13 Ibid., p. 29, para. 77.

14 Ibid., p. 8, para. 13 and p. 29, para. 77.

6

manufacturers, paying between $194 and $304 per kilogram. 15 Like Glaxo Canada, these

companies acquired ranitidine by way of simple purchase and sale agreements, without any

intangibles as part oftheir purchase. 16

20. The Minister of National Revenue disallowed the deduction of the price paid to Adechsa in

excess of the highest monthly price per kilogram of ranitidine paid by Apotex and Novopharm to

their arm's length manufacturers. 17 The disallowance was based on s. 69(2) of the Income Tax

Act,18 which applies where a taxpayer is not dealing at arm's length with a non-resident and pays

an amount greater than the amount "that would have been reasonable in the circumstances if the

non-resident person and the taxpayer had been dealing at arm's length". In such a case, the

transfer price is deemed to be the reasonable amount determined on an arm's length basis.

Proceedings in the courts below:

Tax Court of Canada

21. At trial, the issue was whether the transfer prices for ranitidine applied by the Minister,

based on the prices paid in arm's length purchases by Apotex and Novopharm, were appropriate.

The respondent argued that Apotex and Novopharm were not good comparators because the

ranitidine they purchased was different from Glaxo-manufactured ranitidine and the

circumstances surrounding their purchase transactions were different. The respondent urged the

court to find that the third party European licensees were the best comparators. 19 Both parties

agreed that CUP (comparable uncontrolled price) was the preferred method for determining

transfer prices in this case.20

22. The trial judge accepted the CUP methodology and, after reviewing the evidence in light of

the criteria established by the OECD for determining comparability, concluded that Apotex and


16 Ibid., p. 46, para. 131.

171bid., p. 6, para. 7.

18 R.S.C. 1985, c. 1 (5th Supp.), as amended.


20 Ibid., p. 26, para. 64.

7

Novophann were appropriate comparators.21 He rejected the respondent's reasons for asserting

that they were not.22 He also rejected the respondent's argument that the European licensees were

good comparators, concluding that the European markets and transactions differed significantly

from the Canadian markets and transactions and it was not possible to adjust for the differences.23

In particular, he found that the transactions between Adechsa and the European licensees were

fundamentally different from its transactions with Glaxo Canada because the European licensees

generally received the ranitidine and a variety of intangibles for a single consideration.24 He also

found that, in any case, the respondent had not established the transfer price to the European

licensees.25

23. The respondent's reliance on the European licensees as comparators required it to argue

that what was at issue was the cost of selling Zantac in Canada (i.e., including the cost of the

intangibles and not just the cost of purchasing the commodity, ranitidine). 26 The respondent's

expert, Dr. Ballentine, bundled the royalty payments that Glaxo Canada made to Glaxo Group

Limited under the Licence Agreement with the transfer price it paid to Adechsa under the Supply

Agreement in order to attempt to achieve comparability.27

24. The trial judge concluded that the only transaction in issue was the purchase of ranitidine

under the Supply Agreement, unencumbered by intangibles which were acquired and paid for in a

separate transaction with a different party.28 There was no issue concerning the royalty amount

paid for the intangibles under the Licence Agreement. The Supply Agreement and the Licence

Agreement covered separate matters; each stood alone and was to be considered independently.29

21 With a $25 per kilogram adjustment for granulation in the respondent's favour.

22 Tax Court Reasons, Appellant's Record, Vol. I, pp. 30-34, paras. 80-92.

23 Ibid., p. 47, para. 134.

24 Ibid., p. 48, para. 138.

25 Ibid., p. 47, para. 134.

26 Ibid., p. 28, para. 75.


28 Ibid., p. 10, para. 16.

29 Ibid., p. 28, para. 74, p. 29, para. 78 and p. 30, para. 79.

8

Federal Court of Appeal

25. At the Federal Court of Appeal, the respondent argued, for the first time, that in order to

determine the transfer price under s. 69(2) of the Act, it was necessary to interpret the words

"reasonable in the circumstances" in accordance with the reasonable business person test

articulated by the Exchequer Court in Gabco Limited v. Minister o/National Revenue.3o The

court agreed and formulated the question to be "whether an arm's length Canadian distributor of

Zantac would have been willing, taking into account the relevant circumstances, to pay the price

paid by the appellant [Glaxo Canada] to Ade.chsa".31

26. The court concluded that the trial judge erred in applying the "fair market value" as

evidenced by the Apotex and Novopharm purchases ofranitidine and in ignoring the Licence

Agreement. 32 It listed five relevant circumstances - all arising from the Licence Agreement or

Glaxo Canada's position in the Glaxo group - that it held had to be considered in determining

whether a distributor of Zantac would have been willing to pay the price the respondent paid.33 It

allowed the appeal and remitted the matter back to the Tax Court for reconsideration.34

30 Gabco Limited v. Minister o/National Revenue, 68 DTC 5210 at 5216 (Ex. Ct.) (Appellant's Book of Authorities, Tab 8).

31 Reasons for Judgment of the Federal Court of Appeal (Federal Court of Appeal Reasons), Appellant's Record, Vol. I, p. 110, para. 81.

32 Ibid., p. 108, para. 76.

33 Ibid., p. 109, para. 79.


9

PART II - QUESTIONS IN ISSUE

27. Did the Federal Court of Appeal err by applying the reasonable business person test to the

interpretation of s. 69(2) of the Act?

28. Did the Federal Court of Appeal err in interpreting s. 69(2) by failing to apply the ann's

length principle on a transaction-by-transaction basis and on the basis that members ofthe

multinational group are operating as separate entities?

29. In the cross-appeal, did the Federal Court of Appeal err in ordering that the matter be

returned to the trial judge for further determination?

10

PART III - ARGUMENT

1. ARGUMENT ON THE APPEAL

A. Transfer pricing and arm's length principles

30. Transfer prices are defmed by the OECD as "the prices at which an enterprise transfers

physical goods and intangible property or provides services to associated enterprises".35 Shared

interests of members of a multinational group can result in the avoidance of tax through price

distortions in transactions between members.36 Since transfer prices within the group are

determined in the absence of market competition, they are often set with a view to transferring

profits to low-tax jurisdictions in order to minimize tax payable. Pricing decisions within a

multinational group, therefore, can have a significant impact upon the profits of an individual

member of the group and upon the tax revenues of the country in which it operates.

31. While transfer pricing is an international problem, and one which the OECD member

countries have tackled through agreement on certain basic principles, nevertheless it is the

responsibility of each country to legislate its own solutions within its taxation regime consistent

with these principles. For the taxation years in issue in this case - 1990 to 1993 - s. 69(2) of the

Act was Canada's transfer pricing provision intended to ensure that the amount a taxpayer paid or

agreed to pay to a non-resident for a particular good or service may not, for tax purposes, exceed

a reasonable arm's length price.37 Although s. 69(2) has since been replaced by s. 247(2),

effective for the 1998 and subsequent taxation years, both provisions incorporate the arm's length

principle. Section 69(2) stated:

69. (2) Where a taxpayer has paid or 69. (2) Lorsqu'un contribuable a paye ou agreed to pay to a non-resident person est convenu de payer it une personne nonwith whom the taxpayer was not dealing residente avec qui i1 avait un lien de

35 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), preface, para. 11 (Appellant's Book of Authorities, Tab 32).

36 The Queen v. General Electric Capital Canada Inc., 2010 FCA 344 at para. 55,2011 DTC 5011 (Appellant's Book of Authorities, Tab 9); Report of the Royal Commission on Taxation, Vol. 4 (1966), p. 561 (Appellant's Book of Authorities, Tab 31); Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), preface, paras. 2-3 (Appellant's Book of Authorities, Tab 30).

37 Information Circular 87-2, International Transfer Pricing and Other International Transactions (IC 87-2), para. 6 (Appellant's Book of Authorities, Tab 33).

11

at arm's length as price, rental, royalty or dependance, soit a titre de prix, loyer, other payment for or for the use or redevance ou autre paiement pour un bien reproduction of any property, or as ou pour l'usage ou la reproduction d'un consideration for the carriage of goods or bien, soit en contrepartie du transport de passengers or for other services, an .marchandises ou de voyageurs ou d'autres amount greater than the amount (in this services, une somme superieure au subsection referred to as "the reasonable montant qui aurait ete raisonnable dans amount") that would have been les circonstances si la personne nonreasonable in the circumstances if the residente et Ie contribuable n'avaient eu non-resident person and the taxpayer had aucun lien de dependance, ce montant been dealing at arm's length, the raisonnable est repute, pour Ie calcul du reasonable amount shall, for the purpose revenu du contribuable en vertu de la of computing the taxpayer's income presente partie, correspondre a la somme under this Part, be deemed to have been ainsi payee ou payable. [Non souligne the amount that was paid or is payable dans l'original] therefor. [Emphasis added]

32. The Minister detennined that the provision was engaged in this case because Glaxo Canada

paid to Adechsa (a non-resident with whom it was not dealing at ann's length) a price for the

purchase of ranitidine that was greater than "the reasonable amount" - being the amount "that

would have been reasonable in the circumstances if ... [Adechsa] and ... [Glaxo Canada] had been

dealing at ann's length". The Minister reassessed the respondent to disallow the portion of the

price that exceeded that reasonable ann's length price.

33. The trial judge upheld the Minister's assessment except for a small adjustment of $25 per

kilogram to reflect the cost of granulation of the ranitidine. However, the Federal Court of

Appeal applied the test of the reasonable business person in interpreting s. 69(2) and concluded

that the question to be asked was "whether an ann's length Canadian distributor ofZantac would

have been willing, taking into account the relevant circumstances, to pay the price paid by the

appellant [Glaxo Canada] to Adechsa".38

34. In adopting a test developed under s. 67 of the Act (limiting deductible expenses to those

that are "reasonable in the circumstances"), the Court of Appeal has failed to interpret the words

of s. 69(2) in a manner consistent with this Court's directions on statutory interpretation. As a

result, the decision is incompatible with a proper interpretation of the provision and with

Canada's commitment to adhere to the transfer pricing principles adopted by the OECD member

countries.

38 Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 107, para. 71 and p. 110, para. 81.

12

B. The Federal Court of Appeal's interpretation does not respect the text, context or purpose of s. 69(2) of the Act

35. It is now well-established that in interpreting the words of a statute, it is necessary to

detennine the intention of the legislator by considering the text, context, and purpose of the

provisions at issue.39 Where the words of a statute are clear and unequivocal, those words will

playa dominant role in the interpretative process. Where the words of a statute give rise to more

than one reasonable interpretation, the ordinary meaning of words will playa lesser role, and

greater recourse to the context and purpose ofthe Act may be necessary.40

(a) Text

36. The issue is what interpretation ought to be given to the words "reasonable in the

circumstances if the non-resident person and the taxpayer had been dealing at arm's length". By

using these words, Parliament has clearly indicated its intention that the price for cross-border

goods and services between related entities - " the reasonable amount" - must be detennined on

the basis of the ann's length principle.

37. The arm's length concept has been in the Act for many years and was considered by this

Court in 1972 in Swiss Bank41 and more recently in McLarty.42 In both cases, this Court

described an ann's length transaction as one that "will reflect ordinary commercial dealing

between parties acting in their separate interests". The "reasonable amount" for purposes of

s. 69(2) is, therefore, the amount at which parties acting in their separate interests in ordinary

commercial dealing would transact. To use the words of the trial judge in a recent transfer

pricing case: 43

39 Lipson v. Canada, 2009 SCC 1 per Lebel J. at para. 26, [2009] 1 SCR 3 (Appellant's Book of Authorities, Tab 12).

40 Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20 per Lebel J. at para. 22, [2006] 1 SCR 715 (Appellant's Book of Authorities, Tab 15).

41 Swiss Bank Corp. et al. v. Minister of National Revenue, [1974] SCR 1144 at 1152 (Appellant's Book of Authorities, Tab 24). '

42 Canada v. McLarty, 2008 SCC 26 at para. 43, [2008] 2 SCR 79 (Appellant's Book of Authorities, Tab 4).

43 General Electric Capital Canada Inc. v. The Queen, 2009 TCC 563 at para. 196,2010 DTC 1007 (Appellant's Book of Authorities, Tab 9).

13

... the concept of "dealing at arm's length" used in the context of the transfer pricing rules to determine a market price for a transaction refers to how independent parties negotiating with each other in the marketplace would behave -- the vendor or service provider, for the purpose of achieving the highest price or best terms for his goods or services, and the other party, the purchaser, for the purpose of acquiring the goods or services at the lowest price.

38. The words of s. 69(2) also indicate Parliament's intention that the arm's length principle be

applied separately to each price paid: "where a taxpayer has paid ... as price ... for ... property ...

the reasonable amount shall ... be deemed to have been the amount that was paid ... ". That is to

say, s. 69(2) requires taxpayers to treat each purchase of a particular good or service as a discrete

transaction for purposes of applying the arm's length principle.

39. On the facts in this case, the question becomes what price would Glaxo Canada pay to buy

ranitidine in a hypothetical arm's length transaction in which the vendor and purchaser were

acting in their separate interests - Adechsa seeking the highest price and Glaxo Canada seeking

the lowest price.

(b) Context and purpose

40. The mischief Parliament was addressing with s. 69(2) - the problem of transfer pricing - is

an important element in the interpretation of the provision. As indicated above in paragraph 30,

multinational corporations can, through transfer pricing, distort prices as between members of the

group. For a national tax authority, the concern is that the appropriate income and expenses of a

company that is part of a larger multinational group be taken into account in its jurisdiction.44

41. Canada's response was to deem the transfer price to be the reasonable arm's length price.

This solution was in keeping with her obligations as a member of the oEcn45 and its Model Tax

44 Transfer Pricing Guidelinesfor Multinational Enterprises and Tax Administrations (OECD: July 1995) preface, para. 2 (Appellant's Book of Authorities, Tab 32).

45 See OECD Council recommendation of May 16, 1979 attached as an annex to Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), pp. 55-57 (Appellant's Book of Authorities, Tab 30); OECD Council recommendation of July 13, 1995 in Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), pp. A-I to A3 (Appellant's Book of Authorities, Tab 32); Article 5(b) of the OECD Convention (Appellant's Book of Authorities, Tab 28); and paragraph 18(b) of the OECD Rules of Procedure (Appellant's Book of Authorities, Tab 29).

14

Convention on Income and on Capital.46 The central tenet of the international transfer pricing

regime is the arm's length principle. Article 9(1) of the Model Tax Convention, which has

remained unchanged since it was introduced in 1963, describes the principle in terms of

"independent enterprises".47 It reads, in part, as follows: 48

[Where] conditions are made or imposed between ... two [related] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

42. In addition to the Model Tax Convention, the OECD has issued commentaries on Article

9(1) in respect to transfer pricing principles and methodologies: the principal report being issued

in 1979,49 followed by a more comprehensive commentary or guidelines in 1995.50 As noted by

the trial judge, these documents (referred to as commentaries for simplicity) are reflected in

CRA's Information Circular 87-2, International Transfer Pricing and Other International

Transactions51 and form the basis of the Minister's assessing policy with respect to transfer

pricing.52

46 Model Tax Convention on Income and on Capital (OEeD, 1997) (Appellant's Book of Authorities, Tab 27).

47 Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OEeD: 1979), p. 57, footnote 2 (Appellant's Book of Authorities, Tab 30).

48 Model Tax Convention on Income and on Capital (OEeD, 1997) (Appellant's Book of Authorities, Tab 27).

49 Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OEeD: 1979) (Appellant's Book of Authorities, Tab 30).

50 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OEeD: July 1995) (Appellant's Book of Authorities, Tab 32).

51 Dated February 2, 1987 and replaced on September 27, 1999 by Information Circular 87-2R, International Transfer Pricing (IC 87-2R).

52 Tax Court Reasons, Appellant's Record, Vol. I, p. 23, para. 59; IC 87-2R, para. 4 (Appellant's Book of Authorities, Tab 27).

15

43. The parties were in agreement in the courts below, and the courts accepted, that the

interpretation and application ofs. 69(2) of the Act is informed by the OECD commentaries,53 a

position consistent with this Court's endorsement of their use in treaty interpretation. 54 Although

the 1995 commentary postdates the years under appeal, both parties and the trial judge relied on

it, the trial judge noting that it was more detailed and provided more examples than the 1979

commentary and that neither party could point to any inconsistencies with its predecessor. 55 A

further revision was issued in 2010 but it contains no changes which are relevant to the

circumstances of this appeal.

44. According to the 1995 commentary, the OECD endorses the arm's length principle because

it produces "appropriate levels of income between members of ... [multinational groups],

acceptable to tax administrations".56 It achieves this by providing "the closest approximation of

the workings of the open market in cases where goods and services are transferred between

associated enterprises".57 It has been accepted worldwide as the international norm and is

included in most Canadian tax treaties. 58

45. In order to ensure that the arm's length principle is applied in a way that minimizes the risk

of double taxation, the OECD members have accepted that fundamental to the principle is the

53 See also SmithKline Beecham Animal Health Inc. v. R., 2002 FCA 229 at para. 8, [2002] 4 CTC 93 (Appellant's Book of Authorities, Tab 22).

54 Crown Forest Industries Ltd. v. Canada, [1995] 2 SCR 802 at paras. 54-57 (Appellant's Book of Authorities, Tab 6); see also Prevost Car Inc. v. Canada, 2009 FCA 57 at paras. 8-12, [2010] 2 FCR 65 (Appellant's Book of Authorities, Tab 16).


56 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), para. 1.13 (Appellant's Book of Authorities, Tab 32).

57 Ibid.

58 Li, Jinyan et aI., International Taxation in Canada: Principles and Practices, Lexis Nexis 2006. p. 255 . (Appellant's Book of Authorities, Tab 26); see also, DSG Retail Ltd. v. Revenue and Customs

Commissioners, [2009] UKFTT 31 (TC) (Appellant's Book of Authorities, Tab 7); Bausch & Lomb Inc. v. Commissioner, (1989) 92 T.C. 525; affirmed at 933 F.2d 1084 (U.S. Court of Appeals for the Second Circuit) (Appellant's Book of Authorities, Tab 2); Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (U.S. Court of Appeals for the Ninth Circuit) (Appellant's Book of Authorities, Tab 25); Serdia Pharmaceuticals (India) Private Limited v. Assistant Commissioner of Income Taxation, ITA nos. 24691Muml06, 3032IMuml07 and 2531IMuml08 (Appellant's Book of Authorities, Tab 19); Roche Products Pty Limited v. Commissioner of Taxation, [2008] AATA 639 (Appellant's Book of Authorities, Tab 17); Commissioner o/Taxation v. SNF (Australia) Pty Ltd. [2011] FCAFC 74 (Appellant's Book of Authorities, Tab 5).

16

assumption that each member of a multinational group is to be treated as a separate entity rather

than as an inseparable part of a single unified business and is subject to tax on the income arising

to it.59 In this way, considerations which relate to its relationship within the multinational group

that would not be present in an open market transaction can be elimina!ed.6o Attention is thus

focused on the nature of the dealings between those members and the particular transaction

generating the inquiry.61

46. As well, integral to the arm's length principle is the application of the transactional

approach. As stated in paragraph 1.42 of the OECD's 1995 commentary "[i]deally, in order to

arrive at the most precise approximation of fair market value, the arm's length principle should

be applied on a transaction-by-transaction basis".62 As indicated above, the words of s. 69(2)

require that each transfer is to be treated as a separate transaction. 63

47. Under the transactional approach, generally the structure of the actual transaction should be

respected. In exceptional circumstances, outlined in the same commentary, the transaction can be

recharacterized, but none of those exceptions is applicable in this case.64 At paragraph 1.36 of

the commentary the OECD states:

A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III.[ ... ]

This is consistent with this Court's approach in cases such as Shell Canada and Singleton.65

59 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (DECD: July 1995), preface, para. 5; para. 1.6 (Appellant's Book of Authorities, Tab 32).

60 Ibid., preface, para. 6.

61 Ibid., paras. 1.6, 1.42.

62 Ibid., para. 1.42.

63 See above, para. 38.

64 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (DECD: July 1995), para. 1.37 (Appellant's Book of Authorities, Tab 32).

65 Shell Canada Ltd. v. Canada, [1999] 3 SCR 622 at para. 39 (Appellant's Book of Authorities, Tab 20); Singleton v. Canada, 2001 SCC 61 per Major 1. at para. 34, [2001] 2 SCR 1046 (Appellant's Book of Authorities, Tab 21).

17

48. Consistency in application of the ann's length principle throughout the international

community results in advantages for both states and taxpayers. One of its major advantages is

that it provides broad parity of tax treatment between multinational entities and independent

enterprises.66 As well, it provides assurance both to national tax authorities that appropriate

amounts are being reported in their jurisdictions and to the multinational corporations that they

will not be subject to double taxation, as can happen if different tax authorities take different

views of the adjustments which ought to be made for the purposes of computing tax liability.67

49. A proper interpretation of s. 69(2) requires that it be interpreted in the context of the

problem the provision was intended to address - namely, the issues arising frOln transfer pricing.

There has been no suggestion by either party or the courts below that s. 69(2) is incompatible

with the OECD principles nor that these principles should not be followed. A proper

interpretation requires that the transfer price be an arm's length price determined on the

assumption that the non-resident and the taxpayer are operating as separate entities, that the

inquiry focus on the particular transaction in issue and that the structure adopted by the taxpayer

be respected by the taxing authorities. The trial judge's interpretation is a textual, contextual and

purposive interpretation of s. 69(2) compatible with Canada's commitment to apply these

principles. The Federal Court of Appeal's interpretation is not.

C. The Federal Court of Appeal erred in adopting the Gabco test

50. The test endorsed by the Federal Court of Appeal is not compatible with the application of

the arm's length principle expressly mandated in s. 69(2). For that reason, it is not an appropriate

mechanism for ascertaining "the reasonable amount" for purposes of a transfer pricing

adjustme.nt under that provision. It is also not consistent with the OECD requirements that in

applying that principle the focus must ideally be restricted to the particular transaction, the

purchase of ranitidine. 68


67 Ibid., preface, para. 12; Report of the aECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), para. 32 (Appellant's Book of Authorities, Tab 30).


18

51. The court applied the reasonable business person test enunciated by the Exchequer Court in

1968 in Gabco Limited.69 The issue in that case was whether the remuneration paid to one of the

company's employees (who was also one of the two principal shareholders and the younger

brother of the managing shareholder), and deducted by the company in computing its income,

was "reasonable in the circumstances" under s. 12(2) of the Act (now s. 67). The court

formulated the test as follows: 70

It is not a question of the Minister or [t]his court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind.

In concluding that the amounts paid were reasonable, the court looked at all of the circumstances

and stated that the company was not restricted to payment commensurate with the work done,

but could also take into account other considerations such as expected future benefits that would

accrue to the company as a result of having the younger brother involved in the business. Under

s. 67, it is not for the Minister or the courts to second-guess a taxpayer's business judgment.

Providing the judgment is reasonable having only the business considerations of the taxpayer in

mind, s. 67 will not apply to disallow the deduction.

(a) The Gabcotest is incompatible with the arm's length principle

52. While the courts have accepted the Gabco test as an appropriate test to determine whether

an outlay or expense is "reasonable in the circumstances" under s. 67 ofthe Act/1 prior to the

Federal Court of Appeal's decision in this case, the test had not been applied in any case to

interpret "the reasonable amount" in s. 69(2). Although the Court of Appeal referred to the Tax

Court case of Safety Boss, in support of its conclusion that the Gabco test should govern in

69 Gabco Limited v. The Minister o/National Revenue, 68 DTC 5210 (Ex. Ct.) (Appellant's Book of Authorities, Tab 8).

70 Ibid., at 5216.

71 Petro-Canada v. Canada, 2004 FCA 158 at para 62, 2004 DTC 6329 (Appellant's Book of Authorities, Tab 14); see also, Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 107, para. 72.

19

matters arising under s. 69(2), no such determination was made by the Tax Court in that case.72

Furthermore, in Shell Canada Ltd., this Court noted that "Parliament intended s. 67 to apply

primarily to those deductions claimed under the provisions of the Act that do not have their own

internal limiting clauses" and that s. 67 could not apply in such a case "without distorting the

plain meaning of the more specific provision".73 Since s. 69(2) is a specific provision with its

own internal limiting clause, it is not appropriate to interpret it by applying a test developed under

the more general s. 67. As indicated below, application ofthe Gabco test does, in fact, distort the

meaning of s. 69(2).

53. The analysis required under s. 69(2) is very different from the s. 67 analysis; the former

requires a determination of the arm's length price, the latter does not. As the words in s. 69(2)

make clear, the question is not simply whether the price paid was "reasonable in the

circumstances", but "reasonable in the circumstances if the non-resident person and the taxpayer

had been dealing at arm's length". The Court of Appeal appears to have focused only on the

words "reasonable in the circumstances" and, at best, paid lip service to the arm's length

requirement.

54. The facts of Gabco itself illustrate that the situation of the reasonable business person is not

the same as that of ordinary commercial dealing between parties acting in their separate interests.

In Gabco, the court held that the remuneration paid to the younger brother was reasonable even

though it did not reflect payment commensurate with the work done as one would expect in an

arm's length relationship. Under the reasonable business person test, there may be other

considerations that affect the reasonableness in the circumstances - considerations that would not

be present in an analysis of an arm's length situation.

55. For evidence in this case of such considerations, one need look no further than the example

cited by the trial judge in which Glaxo Canada was offered the opportunity to buy ranitidine from

72 Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 106, para. 71; Safety Boss Limited v. The Queen, 2000 DTC 1767 at paras. 27-28 (TCC), [2000] 3 CTC 2497 (Appellant's Book of Authorities, Tab 18).

73 Shell Canada Ltd. v. Canada, [1999] 3 SCR 622 at para. 51 (Appellant's Book of Authorities, Tab 20).

20

ACIC (a non-Glaxo source) at a significantly lower cost than ranitidine from Adechsa.74 The

respondent and its parent decided not to make the purchase, expressing concern, inter alia, that

such a purchase would jeopardize Glaxo group's worldwide transfer pricing strategy.75 The

decision may well have been a rational one. However, Glaxo group's transfer pricing strategy is

not a circumstance that is relevant in determining an arm's length price.

56. Under s. 69(2), the price deemed to be the transfer price is not the price that a reasonable

business person in his circumstances would consider reasonable - it is the price that a purchaser

in an arm's length transaction would pay. Unlike s. 67, where the inquiry into reasonableness

determines whether, in all of the circumstances, the amount is reasonable, in s. 69(2) Parliament

has mandated that the Minister and the courts must limit their analysis to those circumstances

which would be considered if the parties were dealing at arm's length. This is done by

comparing the price paid in a similar arm's length transaction with the price paid by the taxpayer

or by other methods appropriate in the circumstances.

57. Paragraph 1.15 of the OECD's 1995 commentary states that the application of the arm's

length principle is generally based on a comparison of the conditions in a controlled transaction

with the conditions in transactions between independent enterprises.76 The deeming provision in

s. 69(2) reflects the need to determine what the comparable arm's length price would be. Indeed,

the OECD commentaries provide explicit guidelines on the methodology acceptable to ensure

that the arm's length principle is applied. In this case, the parties' experts agreed that the

appropriate methodology was the CUP (comparable uncontrolled price) methodology but

disagreed as to which CUP was comparable.77 For both parties, however, the issue at trial was to

find an arm's length price for the purchase ofranitidine that could be used as a comparator with

the price paid by Glaxo Canada to Adechsa. It was not, as the Federal Court of Appeal would

require, to determine whether the price the respondent paid was reasonable given the

circumstances arising from the Licence Agreement.


75 Ibid.

76 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (DECO: July 1995), para. 1.15 (Appellant's Book of Authorities, Tab 32).

77 See above, paras. 21-2.

21

58. The reasonable business person analysis does not require the use of a comparable arm's

length transaction. A price may be reasonable under the Gabco test, but not necessarily be an

arm's length price. Applying the Gabco test to the facts in this case, as the Federal Court of

Appeal would do, can only tell us whether it mayor may not have been reasonable for Glaxo

Canada, given all its circumstances (including those arising from its Licence Agreement with its

parent) to agree to pay the price for ranitidine dictated by Glaxo Holdings pIc. It can tell us

nothing about what the arm's length price for the simple purchase of ranitidine would be in the

open market.

(b) Adoption of the Gabco test caused the Federal Court of Appeal to ask the wrong question

59. Having decided that the appropriate test was the reasonable business person test, the

Federal Court of Appeal incorrectly concluded that the trial judge was required "to determine

whether an arm's length Canadian distributor of Zantac would have been willing, taking into

account the relevant circumstances, to pay the price paid by the appellant to Adechsa.,,78 It

stated:79

In a real business world, presumably an arm's length purchaser could always buy ranitidine at market prices from a willing seller. However, the question is whether that arm's length purchaser would be able to sell his ranitidine under the Zantac trademark. In my view, as a result of the approach which he took, the Judge failed to consider the business reality which an arm's length purchaser was bound to consider if he intended to sell Zantac. [emphasis added]

The court concluded that the trial judge erred by "iglloring" the circumstances arising from the

Licence Agreement with Glaxo Group Limited which it viewed as "a crucial consideration" in

ascertaining the arm's length price for the ranitidine purchased from Adechsa.80

60. For the years under appeal, Glaxo Canada was subject to two distinct contractual

agreements with respect to ranitidine.81 The first was a Licence Agreement with its parent Glaxo

78 Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 110, para. 81.

79 Ibid., p. 108, para. 76.



22

Group Limited signed in 1988 (replacing an earlier 1972 agreement) in which Glaxo Canada

acquired a number of services and intangibles from its parent in return for payment of a 6%

royalty on net sales of drugs. The services and intangibles included, inter alia, the right to

manufacture, use and sell products and to use trademarks owned by Glaxo Group Limited,

including Zantac.82 Although there was no express term in the contract that Glaxo Canada was

required to purchase ranitidine or any other active ingredient from a Glaxo-approved source, the

trial judge found that such a requirement did, in fact, apply to the agreement. 83

61. The second contract was a Supply Agreement with Adechsa, a Swiss-based Glaxo

clearinghouse for the sale ofranitidine to the local Glaxo companies, including Glaxo Canada.84

Under this contract, Glaxo Canada purchased ranitidine at a price set by Glaxo Holdings plc.85

The trial judge found as a fact that the only item of value received by Glaxo Canada under the

Supply Agreement was ranitidine.86

62. The Minister's reassessment adjusted the price paid by Glaxo Canada for the purchase of

ranitidine under the Supply Agreement; the royalty rate applicable to the services and intangibles

under the Licence Agreement was not in issue. In fact, the respondent's expert at trial testified

that he had seen no evidence to suggest that the royalty rate was an inadequate return to Glaxo

Group Limited.87 The only transaction in issue is the purchase of ranitidine and the only parties

involved are Glaxo Canada and Adechsa.

63. By adopting the Gabco test of the reasonable business person, the court was misled in

formulating the question as it did. The inquiry it advocates is not consistent with s. 69(2) nor

with OECD principles. In particular, the court's question cannot provide the objective

comparables required to determine whether the prices paid to Adechsa are arm's length; nor does

it respect the separate entity or transaction-by-transaction approaches.

82 Ibid.; for the complete list, see above, para. 15.

83 Ibid., p. 32, para. 86; p. 33, para. 89.

84 Ibid., p. 8, para. 12.

85 Ibid., p. 10, para. 15.

86 Ibid., p. 10, para. 16.

87 Transcript of Dr. Bell, April 4, 2006, Appellant's Record, Vol. III, p. 106, lines 10-22; see also, Transcript of Dr. Ballentine, April 6, 2006, Appellant's Record, Vol. III, pp. 107-108, p. 3320,1. 7 to 3321,1. 15. .

23

(i) The Court of Appeal's approach cannot yield an arm's length comparable

64. The starting point in determining the appropriate transfer price is this Court's statement that

an arm's length transaction "will reflect ordinary commercial dealing between parties acting in

their separate interests".88 Since s. 69(2) only applies where the transaction in issue is a non

arm's length transaction, the provision requires that the price be determined on the basis of an

assumed arm's length transaction. Appropriate comparators or other appropriate methods will

then provide the Minister with a means of establishing a benchmark transfer price.

65. The notional arm's length transaction, according to the OECD's 1995 commentary,

assumes independent parties in comparable transactions and comparable circumstances.89 The

comparable circumstances that must be considered are those circumstances that can affect the

arm's length price. The commentary states that "[i]n order for such comparisons to be useful, the

economically relevant characteristics of the situations being compared must be sufficiently

comparable".90 [emphasis added]

66. In a CUP analysis, it is necessary to review the circumstances of the uncontrolled

transaction(s) to ensure that the economically relevant characteristics are sufficiently comparable

with those of the controlled transaction under scrutiny.91 The OECD commentaries set out a

number of circumstances that can affect the price.92 The trial judge considered these

circumstances, namely the market,93 the goods,94 the point in the chain where goods are sold,95



90 Ibid., para. 1.15.

91 Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), para. 48 (Appellant's Book of Authorities, Tab 30); Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), paras. 1.15-1.70 (Appellant's Book of Authorities, Tab 32).

92 Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), paras. 49-55 (Appellant's Book of Authorities, Tab 30).

93 Tax Court Reasons, Appellant's Record, Vol. I, pp. 43-44, paras. 120-125; p. 47-48, paras. 135-137.

94 Ibid., pp. 44-45, paras. 126-127.

95 Ibid., p. 45, para. 128.

24

the contractual terms,96 the functions97 and the business strategies98 and found that the prices paid

by the Canadian generic drug companies were an appropriate comparator and that the prices paid

by the European licensees were not. He applied the arm's length principle by ascertaining what

circumstances were, in his judgment, relevant economic circumstances.

67. The Federal Court of Appeal erred in stating that the trial judge "ignored" the five

circumstances arising from the Licence Agreement which it enumerated in paragraph 79 of its

Reasons.99 The trial judge did, in fact, consider the respondent's circumstances. The respondent

set out a number of circumstances and strategies that it argued distinguished it from the generic

drug companies and the trial judge reviewed each one. lOO He acknowledged, for example, that

the requirement to buy from a Glaxo-approved source might justify an adjustment to the price to

account for the value attributable to the comfort derived from the good manufacturing practices

(GMP) employed by the Glaxo group, but that the respondent had provided no evidence

quantifying the value. 101 As well, he agreed that the lack of granulation of the generic ranitidine

justified an upward adjustment to the price and he included $25 per kilogram to reflect the

difference. Otherwise, he concluded that the circumstances raised by the respondent had no

bearing on the determination of the transfer price. I 02

68. Unlike the s. 67 inquiry in which all the circumstances the business person considers in

making the decision are relevant in determining the reasonableness of the expense being

challenged, the considerations for the arm's length analysis are the factors that parties bargaining

at arm's length would consider relevant in arriving at a mutually agreeable price for a particular

good. The Federal Court of Appeal's question does not ask how the price Glaxo Canada paid for

ranitidine compares to arm's length prices, but only whether a Glaxo Canada, who could sell

96 Ibid., p. 46, para. 131; p. 48-49, paras. 138-139.

97 Ibid., pp. 45-46, paras. 129-130 and p. 49, para. 140.

98 Ibid., pp. 30-34, paras. 79-92.

99 Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 110, para. 81.



102 Ibid., pp. 33-34, para. 92.

25

ranitidine as Zantac, acted reasonably in paying the amount that it did. In asking that question,

the court has imported considerations that are incompatible with an arm's length analysis.

69. An arm's length party will aim to maximize its profits. While paying more may be a

rational feature of a Glaxo worldwide transfer pricing strategy that is intended to minimize tax, it

will not be a consideration where the excess paid will go to an arm's length vendor outside the

Glaxo group, as it necessarily would in an arm's length transaction.

70. From the Court of Appeal's perspective, Glaxo Canada's "business reality" is relevant to

determining whether the price it paid to Adechsa was reasonable in the circumstances - the

circumstances flowing from the Licence Agreement. By framing the question as one importing

the rights arising from the Licence Agreement - such as, for example, the right to manufacture

and sell Glaxo group products in Canada, the right to use the trademark Zantac and access to new ,

Glaxo group products - the Court of Appeal has bundled these intangibles with the ranitidine.

This is clearly the wrong approach since Glaxo Canada has already paid a 6% royalty under the

Licence Agreement for these rights. Adjusting the price paid by Glaxo Canada to Adechsa for its

ranitidine would be asking Glaxo Canada to pay twice for the right to use these intangibles and

would be providing Adechsa with additional income for intangibles that it did not own.

71. Since Adechsa cannot provide the intangibles to Glaxo Canada and the only product it was

selling under the Supply Agreement was ranitidine, the arm's length price must be a price for

ranitidine alone. The arm's length transaction in the present case would be one where the

respondent, having the benefit of the Licence Agreement with its parent, is purchasing ranitidine

from an arm's length entity.

72. The Court of Appeal's reliance on the Australian case of Roche Products to justify

incorporating the intangibles from the Licence Agreement in the analysis is misplaced.103 By

drawing upon a statement from that decision in which very different considerations were at issue,

the court asserted that "[i]t is the intellectual property which is really the product, not the pill or

capsule by which it is dispensed". In doing so, the court lost sight of the fact that the product in

103 Roche Products Pty Limited v. Commissioner o/Taxation, [2008] AATA 639 at para.153 (Appellant's Book of Authorities, Tab 17), quoted in Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 110, para. 80.

26

issue is ranitidine - not Zantac and other intangible items - and the only transaction is the

purchase and sale transaction between Glaxo Canada and Adechsa.

73. The ann's length principle is an objective one; there must be evidence of the bargain that

independent parties would reach. The trial judge applied an objective standard and found that

there was such evidence - namely, the ranitidine purchases made by the generic companies.104

Since the evidence established that ranitidine of equivalent quality could be obtained on the open

market, there was no necessity for requiring that the ranitidine be Glaxo-manufactured ranitidine,

and the trial judge so found. 105 The respondent's own witness admitted that "ranitidine is

ranitidine is ranitidine". 106

74. Although the Licence Agreement did not specifY that Glaxo Canada was required to buy its

ranitidine from a Glaxo-approved source, the trial judge found that to be the case. However, he

also found that the Glaxo group set the price at which Adechsa could sell the ranitidine to the

respondent, noting that the reason why Glaxo Canada "did not purchase ranitidine for $225 (US)

like Glaxo India did was because Glaxo Group would not allow it".107 As such, the trial judge

concluded that the requirement to buy from a Glaxo-approved source was a non-ann's length

factor that cannot be considered in determining the arm's length price. 108 He stated: "[i]fthe

legislature intended that the phrase "reasonable in the circumstances" in subsection 69(2) should

include all contractual terms there would be no purpose to subsection 69(2) ... [n]o MNE

[multinational entity] would ever have its transfer prices measured against ann's length prices

••• ".109 As he noted, this does not mean that Glaxo Canada cannot buy from Adechsa; it means

only that, for tax purposes, the price paid will be deemed to be the price that would be paid if

Glaxo Canada were buying the ranitidine from an ann's length supplier and bargaining for the

lowest price it could get.


105 Ibid., p. 42, para. 118.

106 Ibid.

107 Ibid., p. 32, para. 87.


109 Ibid., p. 33, para. 89.

27

75. An example of such a third party situation was in evidence. Since the requirement was to

buy from a Glaxo-approved source rather than from Adechsa specifically, it was possible that the

Glaxo group could approve a true third party source - as it did with the supply of the drug

salbutamol (used by Glaxo Canada in manufacturing Ventolin inhalers).llo In that case, the price

was not a price dictated by Glaxo Holdings pIc, as was the case with ranitidine, but a price

determined as the result of bargaining between arm's length parties. I II

76. It is no answer for Glaxo Canada to argue that its business judgment in paying an inflated

price for ranitidine is entitled to respect because Glaxo Canada received a premium from selling

under the Zantac name. It tells us nothing about whether the ability to command a premium price

for Zantac ought to translate into an adjustment to the generic price to arrive at the reasonable

arm's length price for ranitidine. The respondent did not lead any evidence at trial which would

suggest that such an adjustment should be made or could be quantified, and the trial judge found

that the right to sell Zantac had already been acquired and priced in a separate and independent

transaction.

77. As the trial judge found, the transfer pricing inquiry mandated by s. 69(2) is focused on the

price paid for the particular good or service and whether the price is an arm's length price. 112 The

evidence at trial confirmed that the ability to sell Zantac at a premium price had nothing to do

with the fact that the ranitidine was Glaxo-manufactured ranitidine purchased from Adechsa.

Rather, it was the marketing efforts of Glaxo Canada and the value of the Zantac brand name that

resulted in the price premium for Zantac. l13 Furthermore, while Glaxo Canada sold Zantac to

consumer pharmacies at a premium, it also sold Zantac to hospital pharmacies at a significant

discount, such that the price was in the same range as the generic ranitidine products. I 14 As well,

it sold manufactured ranitidine tablets identical to Zantac to Kenral Inc., a third party, to compete

llO Ibid., p. 28, para. 73.

111 See Huhtamaki Request to Admit, Exhibit R-0057, Appellant's Record, Vol. IV, p. 97, para. 11 and p. 99, para. 18 and Huhtamaki Response to Request to Admit, Exhibit R-0058, Appellant's Record, Vol. IV, p. 106, paras. 5 and 8.

112 Tax Court Reasons, Appellant's Record, Vol. I, ,p. 29, para. 78 and p. 33, para. 90.

113 Ibid., p. 33, para. 90.

114 Ibid., p. 16, para. 37.

28

in the generic market. 1 15 Yet the ranitidine used in all three situations was the same ranitidine

purchased from Adechsa at prices dictated by Glaxo Holdings pIc in the United Kingdom.

78. There is no merit in arguing, as the respondent did in the Federal Court of Appeal, that the

result reached by the Minister and the trial judge is "unreasonable" on the basis that it would have

Glaxo Canada purchasing ranitidine at generic prices but charging brand-name prices for its end

product. In the years in issue, Glaxo Canada's gross profit margin from sales of Zantac •

116 Moreover, purchasing at a

generic price and selling the end product at a brand-name price is precisely what Glaxo Canada

did when it purchased salbutamol from a generic supplier at a generic price to use in its brand

name drug Ventolin. II7 As noted by the trial judge, Glaxo Canada could have done exactly the

same thing with Zantac, but for the requirement under the Licence Agreement that it purchase its

ranitidine from a "Glaxo-approved source" and the Glaxo group's self imposed standards. 1 18

79. Nor is there any merit in the respondent's attempt to demonstrate that purchasing

generically-priced ranitidine and selling at brand-name prices results in unreasonably high

amounts of income for Glaxo Canada as compared with other North American manufacturers and

distributors. The trial judge did not accept that the examples put forward for comparison by

Glaxo's expert were suitable ones, noting that there was insufficient evidence of the functions

undertaken by these companies. 1 19 Furthermore, the evidence _ that, in the years in

115 Ibid., p. 18, para. 42.

116 Clark Valuation Service Ltd. Report dated April 15, 2005, Exhibit R-0418, Appellant's Record, Vol. VII, p. 107, paras. 191-2; Report of Dr. Jack Mintz dated January 10,2006, Exhibit R-0504, Appellant's Record, Vol. VIII, p. 50-51, paras. 87-88.

117 See above, para. 75; Supply Agreement dated February 4,1987 between Huhtamaki Oy Pharmaceuticals and Glaxo Canada Inc., Exhibit R-0059, Appellant's Record, Vol. IV, p. 108; Transcript of Jacques Lapointe (fonner President and CEO of Glaxo Canada), March 1,2006, Appellant's Record, Vol. III, p. 92,1. 13 to p. 101,1. 20]; Huhtamaki Request to Admit, Exhibit R-0057, Appellant's Record, Vol. IV, p. 97, para. 11 and p. 99, para. 18 and HuhtamaId Response to Request to Admit, Exhibit R-0058, Appellant's Record, Vol. IV, p. 106, paras. 5 and 8 ..


119 Ibid., p. 55, para. 156.

29

80. It is also no answer for Glaxo Canada to now argue that the generic price should be adjusted

to take into account other factors, already addressed and paid for under the Licence Agreement,

when no evidence was led at trial that any other quantifiable adjustments needed to be made to

determine the reasonable arm's length price for ranitidine.

81. The Court of Appeal's approach fails to recognize that the trial judge has not ignored the

respondent's "business reality", but that he has put it in the context of the requirement under

s. 69(2) that the transfer price at issue be the arm's length price for ranitidine. The arm's length

transaction is one in which the purchaser has already acquired the intangibles and no part of the

price in issue is allocable to them. The analysis must focus on finding an arm's length price for

ranitidine, whether by way of the CUP methodology (as was done by the trial judge) or one of the

other OECD accepted methodologies, should that have been necessary. The analysis is not, as

the Court of Appeal states, "to determine whether an arm's length Canadian distributor ofZantac

would have been willing, taking into account the relevant circumstances, to pay the price paid by

the appellant to Adechsa,,121 when those "relevant circumstances" are ascertained on the basis of

the Gabco reasonable business person test rather than the arm's length principle as enunciated by

theOECD.

(ii) The Court of Appeal's question does not respect the separate entity approach

82. Reliance on the Gabco test has caused the Court of Appeal to depart from the OECD's

separate entity approach. By considering Glaxo Canada's "business reality" to be a relevant

factor in determining an arm's length price, the court has not respected the fundamental

assumption that in applying the arm's length principle each member of the multinational group

must be treated as a separate entity rather than as part of a single unified business. 122 In this case,

120 Clark Valuation Service Ltd. Report dated April 15, 2005, Exhibit R-0418, Appellant's Record, Vol. VII, p. 101, para.18I.


122 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), preface, para. 5; para. 1.6 (Appellant's Book of Authorities, Tab 32).

30

Glaxo Canada and Adechsa must be viewed as independent entities such that the transaction in

issue, being the purchase ofranitidine, can be isolated from other transactions within the

multinational group.

83. The s. 69(2) analysis is concerned only with determining the arm's length price for

ranitidine under the Supply Agreement. Since the trial judge found that the Licence Agreement

and the Supply Agreement were separate, stand alone contracts between different parties, the

purchase of ranitidine was to be viewed independently from the acquisition of the services and

intangibles under the Licence Agreement. By concluding that the respondent's "business reality"

(being the circumstances arising from the Licence Agreement and Glaxo Canada's position in the

Glaxo group) was relevant to the determination of the arm's length price, the Federal Court of

Appeal has failed to differentiate between the respondent's role in the simple purchase of

ranitidine from its sister company, Adechsa, and its overall role in the Glaxo business. In that

business, it used Glaxo trademarks and patents and other Glaxo services acquired from its parent

under the Licence Agreement, and it sold ranitidine under the Glaxo trademark, Zantac. The

court was viewing Glaxo Canada and its "business reality" as an inseparable part of the larger

Glaxo group - the very approach that the OEeD has rejected.

(iii) The Court of Appeal ignored the respondent's structure and did not apply the transactional approach

, 84. According to the OECD's 1995 commentary, the arm's length principle should be applied

on a transaction-by-transaction basis.123 The respondent's position at trial was that the European

licensees provided the best arm's length comparators. However, because they generally acquired

their ranitidine and certain intangibles, including the right to sell Zantac, in one contract for one

price, the respondent was required to argue that what was at issue was the cost of selling Zantac

in Canada in order to attempt to achieve comparability.124

85. The trial judge correctly concluded that the Licence Agreement and the Supply Agreement

were separate, stating that "[b loth the Licence Agreement and the Supply Agreement can stand

123 See above, para. 46; Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD: July 1995), para. 1.42 (Appellant's Book of Authorities, Tab 32).


31

alone; neither is ancillary to the other".125 As separate transactions, they had to be considered

independently. The trial judge relied on this Court's decision in Singleton and the transfer

pricing decision in Bausch & Lomb in which the United States Tax Court (affinned by the Court

of Appeals for the Second Circuit) recognized that where transactions between two parties are

interdependent, separate treatment may not be necessary, but where they are not interdependent,

they must be treated separately.126 In this case, the trial judge concluded that the transactions

were not interdependent and, in any case, they were not between the same two parties.

86. The trial judge also noted that combining the two transactions ignored the distinct tax

treatments that follow from each.127 As Infonnation Circular 87-R2 indicates, some types of

payments attract withholding tax under Part XIII of the Act, while others do not, and tax treaties

may subject different types of payments to different rates of withholding tax.128

87. The Federal Court of Appeal's decision has the effect of combining the Supply and Licence

Agreements based on "business realities" and ignores the legal structure used by the parties. Its

analysis results in services and intangibles purchased under the Licence Agreement being

considered as part of an overall transaction for the purchase of ranitidine. The decision marks a

significant departure from the transactional approach and results in confusion and uncertainty

about what is to be valued in a transfer pricing scenario.

88. Had the ranitidine been supplied together with the intangibles for a single undivided

consideration, as was the case with some of the European licensees during the same time

period,129 it would have been necessary (for withholding tax purposes) to make an allocation as

between the ranitidine and the intangibles.130 However, the need for such an allocation did not

125 Ibid., p. 28, para. 74.

126 Ibid.; Singleton v. Canada, 2001 SCC 61 per Major J. at para. 34, [2001] 2 S.C.R. 1046 (Appellant's Book of Authorities, Tab 21); Bausch & Lomb Inc. v. Commissioner, (1989) 92 T.C. 525 at 584, affirmed 933 F.2d 1084 at 1090 (Appellant's Book of Authorities, Tab 2).


128 IC 87-2R, International Transfer Pricing, para. 41 (Appellant's Book of Authorities, Tab 34); Tax Court Reasons, Appellant's Record, Vol. I, p. 29, para. 77.


130 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OBCD: July 1995), para. 1.43 (Appellant's Book of Authorities, Tab 32).

32

arise on the facts of this case because Glaxo Canada acquired the services and intangibles from

its parent in a separate transaction from its purchase of ranitidine from Adechsa. Although

paragraph 1.42 of the 1995 OECD commentary provides that transactions that are "so closely

linked or continuous that they cannot be evaluated adequately on a separate basis" may be

considered together,131 this was not the case here in view of the trial judge's unchallenged finding

of fact that the agreements in question "can stand alone" and that "neither is ancillary to the

other" .132

89. Moreover, the transactions evidenced in the two contracts were deliberately kept separate

as part of a sophisticated tax plan adopted on the advice of Glaxo Group Limited's lawyers and

tax planning specialists. 133 The respondent admitted and the trial judge found that the strategy of

the Glaxo group of companies was to minimize its taxes worldwide by first, making as much

profit as possible in Singapore; second, by making as much of the remainder of the profit in the

U.K.; and third, by ensuring that taxes are not paid twice on the same profit. 134 One element of

that strategy involved the manufacture ofranitidine in Singapore by Glaxo Pharmaceuticals (Pte)

Limited and its sale to Adechsa. From there it was sold to local companies at prices set by Glaxo

Holdings pIc based on the price of Zantac that the local market could be expected to bear.135

90. As well, both Glaxo Canada and the Minister treated the transactions as separate for tax

purposes. To allow the respondent to now disregard the form of the transactions that were

purposefully created and to consider the net effect of the two transactions together is tantamount

to ignoring the legal relationships adopted by the respondent to minimize tax.



133 See, for example, Group Trading Arrangements, Exhibit R-0165, Appellant's Record, Vol. IV, p. 132; Letter from Glaxo Holdings pIc to Glaxo Canada Inc. dated July 1, 1988 re: Draft Licence Agreement, Exhibit R-0009, Appellant's Record, Vol. IV, p. 92; Intra-Group Arrangements for Intellectual Property, Exhibit R-0167, Appellant's Record, Vol. IV, p. 139; Transcript ofG. Fisk, March 21,2006, Appellant's Record, Vol. III, p. 102,1. 3 to p. 105,1. 9.

134 Tax Court Reasons, Appellant's Record, Vol. I, p. 8, para.B.

135 Ibid., p. 8, para. 12.

33

91. Since use of the brand name and other intangibles including the availability of the ranitidine

patent were already paid for by way of royalty under the Licence Agreement, the purchaser will

only be bargaining for ranitidine and nothing more.136 To consider the intangibles again in

ascertaining the arm's length price for the ranitidine would amount to potential double counting.

By framing the question as whether that arm's length purchaser would be able to sell his

ranitidine under the Zantac trademark, the Court of Appeal has swept into the transaction royalty

payments that form the consideration for the Licence Agreement and that have already been

accounted for in this manner by Glaxo Canada. Those royalty payments, moreover, are subject to

a distinct tax treatment under Part XIII tax. The OECD commentaries warn against such double

counting in determining the arm's length price for intangibles, particularly in circumstances in

which an intangible is transferred together with a good or other tangible property.137

92. There is no factual or legal reason to treat the Supply Agreement and the Licence

Agreement together. To the contrary, the agreements were with different parties signed at

different times, covered discrete subject matter, involved different payments and had different tax

consequences. 138 The Federal Court of Appeal was led into this error - contrary to the position

expressed by both the OECD in its commentaries and Parliament in the words of s. 69(2) - as a

result of endorsing the reasonable business person test and its requirement to consider all the

business considerations of the taxpayer, rather than only those factors relevant in ascertaining an

arm's length price.

D. Conclusion

93. In a transfer pricing inquiry, the search for the arm's length comparator must focus on the

particular good, the particular transaction and the particular parties to that transaction.

136 Licence Agreement dated July 1, 1988 between Glaxo Group Limited and Glaxo Canada Inc., Exhibit A-OOn, Appellant's Record, Vol. IV, p.l.

137 Report of the OECD Committee on Fiscal Affairs, entitled "Transfer Pricing and Multinational Enterprises" (OECD: 1979), para. 93 (Appellant's Book of Authorities, Tab 30); Transfer Pricing Guidelinesfor Multinational Enterprises and Tax Administrations (OECD: July 1995), para. 6.17 (Appellant's Book of Authorities, Tab 32).


34

94. The issue in any transfer pricing case is whether the amount agreed upon by the non-arm's

length parties is one that would have been negotiated by parties acting in their own commercial

interests. The trial judge quite sensibly concluded that had Glaxo Canada been acting at ann's

length, it would not have struck a deal which resulted in it paying more than five times the world

price.

95. The reasonable business person test adopted by the Federal Court of Appeal is ill-suited to

resolving transfer pricing disputes requiring the detennination of an ann's length price.

Developed in the context of s. 67 of the Act, the test requires that the Minister take the

circumstances as they are and ask whether, having regard to those circumstances, a reasonable

business person could nonetheless decide to proceed with an expenditure. Section 69(2), on the

other hand, requires that the Minister ignore the non-arm's length circumstances that affect the

price in order to ascertain the price at which parties acting in their separate interests would

complete the transaction.

96. Section 69(2) deems the transfer price for ranitidine to be the reasonable arm's length price.

The trial judge concluded that the price paid by the generic drug companies was the appropriate

transfer price and that the intangibles acquired by Glaxo Canada under the Licence Agreement

had no role to play in ascertaining that price. The Court of Appeal's reliance on the wrong test

resulted in a misguided focus on "business realities" and caused it to wrongly conclude that the

intangible rights were relevant in the detennination.

97. If s. 69(2) is interpreted in a manner consistent with the text, context and purpose of the

provision, the internationally agreed upon arm's length principle is respected. The effect of the

Federal Court of Appeal's decision is to put Canada at odds with other OECD member countries

and to create significant uncertainty for both taxpayers and the Minister when dealing with

transfer prices. The Federal Court of Appeal's decision should be set aside and the trial judge's

decision be restored.

35

2. RESPONSE ON THE CROSS-APPEAL

A. Introduction

98. In granting the applications for leave to appeal and leave to cross-appeal, this Court directed

that each party be restricted to one factum to address both the appeal and the cross-appeal.

Accordingly, the Crown's submissions on the cross-appeal are made on the assumption that the

respondent's arguments on the cross-appeal will be the same as those set out in its application for

leave to cross-appeal. For ease of reference, the parties will continue to be referred to as they are

in the appeal.

99. The respondent appears to make two arguments. The first is that because the Federal Court

of Appeal determined that the trial judge applied the wrong legal test, the respondent had

discharged its onus to establish "the existence of facts or law showing an error in relation to the

taxation imposed" and its appeal ought to have been allowed and the reassessments vacated. 139

The second is that by referring the matter back to the trial judge, the Court of Appeal has defeated

the statutory limitation period for assessments. Both arguments are groundless.

B. The first argument: the respondent has not discharged the onus

100. Under the Act, an assessment is deemed to be valid. 140 Since this Court's decision in

Anderson Logging Company in 1924 it has been understood in tax litigation that a taxpayer who

wishes to challenge his assessment has the onus of showing that it is wrong. 141 One of the ways a

taxpayer can establish this is by "demolishing" the factual underpinning on which the taxation

rests. But the burden of proof rests with him. If it were otherwise, as this Court said in Johnston,

the Crown would be placed in the position of a plaintiff or an appellant. 142

139 See Memorandum filed by GlaxoSmithKline Inc. in Application for Leave to Cross-Appeal, paras. 17, 19-21.

140 Subject to being varied or vacated by the Minister or a subsequent reassessment; s. 152(8) of the Act.

141 Anderson Logging Company v. His Majesty the King, [1925] SCR 45 at 50 (Appellant's Book of Authorities, Tab 1).

142 Johnston v. Minister of National Revenue, [1948] SCR 486 at 489-490 (Appellant's Book of Authorities, Tab 11).

36

101. The Federal Court of Appeal did not make any determination as to the correctness of the

Minister's reassessments or their factual underpinnings. Rather, it articulated the legal

framework that, in its view, the trial judge ought to have applied, and sent the matter back to be

determined on that basis. The ultimate determination of whether the amount paid was, in fact, a

reasonable arm's length price was left open for the trial judge to resolve. Until he has done so,

the reassessments remain valid. As noted by the Federal Court of Appeal, the trial judge heard

the parties for well over 40 days and he is in the best position to make that determination.143

102. Furthermore, the respondent was unsuccessful in establishing that the price it paid was not

greater than the amount that would have been reasonable in the circumstances if Adechsa and the

respondent had been dealing at arm's length. The trial judge not only concluded that the

European licensees were not good comparators because the European markets and the European

transactions differed significantly from the Canadian market and the Canadian transactions, but

also that the respondent had not established what the European transfer price was. 144

103. The Federal Court of Appeal made no finding as to whether the amount determined by the

trial judge was, or was not, a reasonable amount. Nor did it suggest that the Minister's

reassessments were fundamentally flawed or should be vacated. Contrary to the respondent's

arguments, the reassessments were not "demolished" nor were any of the facts on which the tax

assessments rested "demolished". Indeed, the respondent did not challenge any of the trial

judge's [mdings of fact. If the trial judge were to apply the legal framework identified by the

Federal Court of Appeal, it is possible that he would arrive at the same decision as before.

c. The second argument: referral to the trial judge does not defeat the limitation periods in the Act

104. The referral of the matter back to the trial judge does not offend the limitation periods in the

Act. Should the matter be returned to the trial judge, the inquiry will not involve the assessment

of any new amounts of income, or any increase to the amount of tax. Nor would the Minister, by

continuing to defend the reassessments, be seeking to assess any new amounts or increase the

143 Federal Court of Appeal Reasons, Appellant's Record, Vol. I, p. 111, para. 82; Hollis v. Dow Corning Corp., [1995] 4 SCR 634 at para. 33 and Sopinka J. in dissent at paras. 88 to 95 (Appellant's Book of Authorities, Tab 10).


37

amount of tax assessed. The limitation period in s. 152(4) does not come into play in this

situation.

105. There is no basis for the respondent's contention that by sending the matter back, the

Federal Court of Appeal would be permitting the Minister to advance a new basis for the

reassessments after the expiry of the limitation period, thereby permitting the Minister to bypass

the limitation period in s. 152(4).145 The Minister's argument remains that the amounts paid by

the respondent were not reasonable amounts under the arm's length principle within the meaning

of s. 69(2). This is not a new argument. Unlike the situation in Pedwell,146 the Minister is not

suggesting a different transactiQn as a basis for the assessment. There is only one "transaction" at

issue, the respondent's purchase of ranitidine from a related non-resident company.

106. In any event, s. 152(9) expressly permits the Minister to advance a new argument or basis

for an assessment. As held by the Federal Court of Appeal, there is no difference between a new

"basis" of assessment and a new "argument" in support of an assessment; whichever description

is used, s. 152(9) permits the Minister to rely upon an alternative argument in support of an

assessment. 147 Nothing in the wording of s. 152(9) suggests that its use is limited to initial trial

proceedings. Such an alternative argument is permitted regardless of whether it is made at the

initial trial in the Tax Court, or upon a rehearing in the Tax Court that is ordered by an appellate

court. On its face, s. 152(9) allows the Minister to advance an alternative argument in either

scenario.

145 Memorandum filed by GlaxoSmithKline Inc. in Application for Leave to Cross-Appeal, paras. 2 and 22 to 27; SmithKline Beecham Animal Health Inc. v. The Queen, 2000 DTC 1526 at para. 17, [2000] 1 CTC 2552 (TCC); affd 2000 DTC 6141 (FCA) (leave to appeal to the Supreme Court of Canada denied SCC no. 27850) (Appellant's Book of Authorities, Tab 23).

146 Pedwell v. Canada, [2000] 4 FC 616, 2000 DTC 6405 (FCA) (Appellant's Book of Authorities, Tab 13).

147Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294 at para. 38,2003 DTC 5512 (Appellant's Book of Authorities, Tab 3).

38

D. The Federal Court of Appeal has discretion to refer a matter back

107. Under s. 52(c)(ii) of the Federal Courts Act/48 the Federal Court of Appeal may refer a

matter back to the lower court for determination in accordance with such directions as it

considers appropriate. Although the appellant's position is that the Federal Court of Appeal was

wrong to find that the trial judge had erred in law, having come to that conclusion, its referral of

the matter to the Tax Court for reconsideration was within its discretion.

108. The respondent's suggestion that this disposition was inappropriate is unfounded and is in

direct contradiction to its consent during oral argument before the Federal Court of Appeal that

the matter be remitted to the Tax Court.149

109. Although the appellant accepts that the Federal Court of Appeal had the authority to make

the order that it made, permitting additional evidence to be called on reconsideration by the trial

judge is prejudicial. Both parties had an opportunity to put their case before the trial judge and

any further deliberation should be undertaken on the basis of the trial record.

148 RS.C. 1985, c. F-7.

149 Memorandum filed by GlaxoSmithKline Inc. in Application for Leave to Cross-Appeal, para. 13, footnote 14.

39

PART IV - COSTS

110. As no reason exists to depart from the usual order as to the costs, the appellant asks for her

costs of both the appeal and the cross-appeal and costs in the Federal Court of Appeal.

PART V - ORDER SOUGHT

111. That the appeal be allowed and the cross-appeal be dismissed with costs to the appellant

in this court and in the Federal Court of Appeal, that the decision of the Federal Court of Appeal

be set aside, and that the decision of the Tax Court of Canada be restored.

ALL OF WHICH is respectfully submitted.

DATED at Ottawa, Ontario, this 16th day of July, 2011.

w!f:j; ~tw~ Eric Noble Karen Janke

Of counsel for the Deputy Attorney General of Canada

Department of Justice Bank of Canada Building East Tower, 9th Floor 234 Wellington Street Ottawa, Ontario K1AOH8 Tel.: (613) 957-4820 Fax: (613) 941-2293 Email: [email protected]

40

PART VI - TABLE OF AUTHORITIES

CITED AT PARAS.

JURISPRUDENCE

Anderson Logging Company v. His Majesty the King, [1925] SCR 45 100

Bausch & Lomb Inc. v. Commissioner, (1989) 92 T.C. 525; affinned at 933 F.2d 44,85 1084 (U.S. Court of Appeals for the Second Circuit)

Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294, 2003 DTC 5512 106

Canada v. McLarty, 2008 SCC 26, [2008] 2 SCR 79 37

Commissioner o/Taxation v. SNF (Australia) Pty Ltd., [2011] FCAFC 74 44

Crown Forest Industries Ltd. v. Canada, [1995] 2 SCR 802 43

DSG Retail Ltd. v. Revenue and Customs Commissioners, [2009] UKFTT 31 44 (TC)

Gabco Limitedv. Minister o/National Revenue, 68 DTC 5210 (Ex. Ct.) 4,25,51,52, 54,58,63,82

General Electric Capital Canada Inc. v. The Queen, 2009 TCC 563 37

Hollis v. Dow Corning Corp., [1995] 4 SCR 634 101

Johnston v. Minister o/National Revenue, [1948] SCR 486 100

Lipson v. Canada, 2009 SCC 1, [2009] 1 SCR 3 35

Pedwell v. Canada, [2000] 4 FC 616, 2000 DTC 6405 (FCA) 105

Petro-Canada v. Canada, 2004 FCA 158, 2004 DTC 6329 52

Placer Dome Canada Ltd. v. Ontario (Minister o/Finance), 2006 SCC 20, [2006] 35 1 SCR 715

Prevost Car Inc. v. Canada, 2009 FCA 57, [2010] 2 FCR 65 43

Roche Products Pty Limitedv. Commissioner o/Taxation, [2008] AATA 639 44, 72

Safety Boss Limited v. The Queen, 2000 DTC 1767 (TCC), [2000] 3 CTC 2497 52

41

Serdia Pharmaceuticals (India) Private Limited v. Assistant Commissioner of 44 Income Taxation, ITA nos. 24691Muml06, 3032IMuml07 and 2531IMuml08

Shell Canada Ltd. v. Canada, [1999] 3 SCR 622 47,52

Singleton v. Canada, 2001 SCC 61, [2001] 2 SCR 1046 47,85'

SmithKline Beecham Animal Health Inc. v. The Queen, 2002 FCA 229, [2002] 4 43 CTC93

SmithKline Beecham Animal Health Inc. v. The Queen, 2000 DTC 1526, [2000] 1 105 CTC 2552 (TCC); aff'd 2000 DTC 6141 (FCA)

Swiss Bank Corp. et al. v. Minister of National Revenue, [1974] SCR 1144 37

The Queen v. General Electric Capital Canada Inc., 2010 FCA 344, 2011 DTC 30 5011

Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (U.S. Court of Appeals for the Ninth 44 Circuit)

SECONDARY SOURCES AND OTHER MATERIALS

Li, Jinyan et aI., International Taxation in Canada: Principles and Practices, 44 Lexis Nexis 2006, p. 255

Model Tax Convention on Income and on Capital (OECD, 1997) 41,42

OECD Convention, Article 5 (b) 41

OECD Rules of Procedure, paragraph 18(b) 41

Report o/the DECD Committee on Fiscal Affairs, entitled "Transfer Pricing and 30,41,42,48, Multinational Enterprises" (OECD: 1979) 66,91

Report o/the Royal Commission on Taxation, Vol. 4 (1966) 30

(

42

Transfer Pricing Guidelines for Multinational Enterprises and Tax 30,40,41,42, Administrations (DECD: July 1995) 44,45,46,47,

48, 57, 65, 66, 82,84,88,91

GOVERNMENT DOCUMENTS

Information Circular 87-2, International Transfer Pricing and Other 31,42 International Transactions, February 2, 1987

Information Circular 87-2R, International Transfer Pricing, September 27, 1999 42,86

43

PART VII - STATUTES RELIED ON

Federal Courts Act, R.S.C. 1985, c. F-7, as amended

Section 52

Powers of Federal Court of Appeal

52. The Federal Court of Appeal may

(a) quash proceedings in cases brought before it in which it has no jurisdiction or whenever those proceedings are not taken in good faith;

(b) in the case of an appeal from the Federal Court,

(i) dismiss the appeal or give the judgment and award the process or other proceedings that the Federal Court should have given or awarded,

(ii) in its discretion, order a new trial if the ends of justice seem to require it, or

(iii) make a declaration as to the conclusions that the Federal Court should have reached on the issues decided by it and refer the matter back for a continuance of the trial on the issues that remain to be determined in light of that declaration; and

( c) in the case of an appeal other than an appeal from the Federal Court,

(i) dismiss the appeal or give the decision that should have been given, or

(ii) in its discretion, refer the matter back for determination in accordance with such directions as it considers to be appropriate.

Pouvoirs de la Cour d'appel federale

52. La Cour d'appe1 federale peut :

a) arreter les procedures dans les causes qui ne sont pas de son res sort ou entachees de mauvaise foi;

b) dans Ie cas d'un appel d'une decision de la Cour federale :

(i) soit rejeter l'appel ou rendre Ie jugement que la Cour federate aurait dfi rendre et prendre toutes mesures d'execution ou autres que celle-ci aurait dfi prendre,

(ii) soit, it son appreciation, ordonner un nouveau proces, si l'interet de la justice parait I' exiger,

(iii) soit enoncer, dans une declaration, les conclusions auxquelles la Cour federale aurait dfi arriver sur les points qU'elle a tranches et lui renvoyer l'affaire pour poursuite de l'instruction, it la lumiere de cette declaration, sur les points en suspens;

c) dans les autres cas d'appel :

(i) soit rejeter l'appel ou rendre la decision qui aurait dfi etre rendue,

(ii) soit, it son appreciation, renvoyer I' affaire pour jugement conformement aux instructions qu'e1le estime appropriees.

44

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended

Section 67

General limitation re expenses

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Restriction generale relative aux depenses

67. Dans Ie calcul du revenu, aucune deduction ne peut etre faite relativement it une depense it l' egard de laquelle une somme est deductible par ailleurs en vertu de la presente loi, sauf dans la mesure OU cette depense etait raisonnable dans les circonstances.

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (for the years in issue)

Section 69(2)

69. (2) Where a taxpayer has paid or agreed to pay to a non-resident person with whom the taxpayer was not dealing at arm's length as price, rental, royalty or other payment for or for the use or reproduction of any property, or as consideration for the carriage of goods or passengers or for other services, an amount greater than the amount (in this subsection referred to as "the reasonable amount") that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length, the reasonable amount shall, for the purpose of computing the taxpayer's income under this Part, be deemed to have been the amount that was paid or is payable therefor.

69. (2) Lorsqu'un contribuable a paye ou est convenu de payer it une personne non-residente avec qui i1 avait un lien de dependance, soit it titre de prix, loyer, redevance ou autre paiement pour un bien ou pour l'usage ou la reproduction d'un bien, soit en contrepartie du transport de marchandises ou de voyageurs ou d'autres services, une somme superieure au montant qui aurait ete raisonnable dans les circonstances si la personne non-residente et Ie contribuable n'avaient eu aucun lien de dependance, ce montant raisonnable est repute, pour Ie calcul du revenu du contribuable en vertu de la presente partie, correspondre it la somme ainsi payee ou payable.

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Section 152(4)

Assessment and reassessment

(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

(a) the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year;

(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect ofthe year and

(i) is required pursuant to subsection 152(6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein,

Cotisation et nouvelle cotisation

(4) Le ministre peut etablir une cotisation, une nouvelle cotisation ou une cotisation supplementaire concernant l'impot pour une annee d'imposition, ainsi que les interets ou les penalites, qui sont payables par un contribuable en vertu de la presente partie ou donner avis par ecrit qu'aucun impot n'est payable pour l'annee a toute personne qui a produit une ' declaration de revenu pour une annee d'imposition. Pareille cotisation ne peut etre etablie apres l'expiration de la periode normale de nouvelle cotisation applicable au contribuable pour l'annee que dans les cas suivants :

a) Ie contribuable ou la personne produisant la declaration :

(i) soit a fait une presentation erronee des faits, par negligence, inattention ou omission volontaire, ou a commis quelque fraude en produisant la declaration ou en fournissant quelque renseignement sous Ie regime de la presente loi,

(ii) soit a presente au ministre une renonciation, selon Ie formulaire prescrit, au cours de la periode normale de nouvelle cotisation applicable au contribuable pour I' annee;

b) la cotisation est etablie avant Ie jour qui suit de trois ans la fin de la peri ode normale de nouvelle cotisation applicable au contribuable pour I' annee et, selon Ie cas :

(i) est a etablir en conformite au

(ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection 152(6) of tax payable by another taxpayer,

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(iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length,

(iii. 1 ) is made, if the taxpayer is nonresident and carries on a business in Canada, as a consequence of

(A) an allocation by the taxpayer of revenues or expenses as amounts in respect of the Canadian business (other than revenues and expenses that relate solely to the Canadian business, that are recorded in the books of account of the Canadian business, and the documentation in support of which is kept in Canada), or

(B) a notional transaction between the taxpayer and its Canadian business, where the transaction is recognized for the purposes of the computation of an amount under this Act or an applicable tax treaty.

(iv) is made as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country,

(v) is made as a consequence of a reduction under subsection 66(12.73) of an amount purported to be renounced under section 66, or

(vi) is made in order to give effect to the application of subsection 118.1 (15) or 118.1(16);

paragraphe (6) ou Ie serait si Ie contribuable avait deduit un montant en presentant Ie formulaire prescrit vise it ce paragraphe au plus tard Ie jour qui y est mentionne,

(ii) est etablie par suite de I'etablissement, en application du present paragraphe ou du paragraphe (6), d'une cotisation ou d'une nouvelle cotisation concernant I'impot payable par un autre contribuable,

(iii) est etablie par suite de la conclusion d'une operation entre Ie contribuable et une personne non residente avec laquelle it avait un lien de dependance,

(iii. 1 ) si Ie contribuable est un nonresident exploitant une entreprise au Canada, est etablie par suite:

(A) soit d'une attribution, par Ie contribuable, de recettes ou de depenses au titre de montants relatifs it I' entreprise canadienne (sauf des recettes et des depenses se rapportant uniquement it I' entreprise canadienne qui sont inscrits dans les documents comptables de celle-ci et etayes de documents conserves au Canada),

(B) soit d'une operation theorique entre Ie contribuable et son entreprise canadienne, qui est reconnue aux fins du calcul d'un montant en vertu de la presente loi ou d'un traite fiscal applicable,

(iv) est etablie par suite d'un paiement supplementaire ou d 'un remboursement d'impot sur Ie revenu ou sur les benefices effectue au gouvernement d'un pays etranger, ou d'un etat, d'une province ou autre subdivision politi que d'un tel pays, ou par ce gouvernement,

( c) the taxpayer or person filing the return has filed with the Minister a waiver in prescribed form within the additional3-year period referred to in paragraph (b); or

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(d) as a consequence of a change in the allocation of the taxpayer's taxable income earned in a province as determined under the law of a province that provides rules similar to those prescribed for the purposes of section 124, an assessment, reassessment or additional assessment of tax for a taxation year payable by a corporation under a law of a province that imposes on the corporation a tax similar to the tax imposed under this Part (in this paragraph referred to as a "provincial reassessment") is made, and as a consequence of the provincial reassessment, an assessment, reassessment or additional assessment is made on or before the day that is one year after the later of

(i) the day on which the Minister is advised of the provincial reassessment, and

(ii) the day that is 90 days after the day of sending of a notice of the provincial reassessment.

(v) est etablie par suite d'une reduction, operee en application du paragraphe 66(12.73), d'un montant auquel i1 a ete censement renonce en vertu de I' article 66,

(vi) est etablie en vue de l'application des paragraphes 118.1 (15) ou (16);

c) Ie contribuable ou la personne produisant la declaration a presente au ministre une renonciation, selon Ie formulaire prescrit, au cours de la peri ode additionnelle de trois ans mentionnee a I' alinea b);

d) par suite d'un changement intervenu dans I' attribution du revenu imposable du contribuable gagne dans une province, determine selon la legislation d'une province qui prevoit des regles semblables a celles etablies par reglement pour l'application de l'article 124, une cotisation, une nouvelle cotisation ou une cotisation supplementaire (appelee « nouvelle cotisation provinciale » au present alinea) est etablie a l'egard de l'impot a payer par une societe pour une annee d'imposition en vertu d'une loi provinciale aux termes de laquelle la societe est assujettie a un impot semblable a celui prevu par la presente partie et, par suite de la nouvelle cotisation provinciale, une cotisation, une nouvelle cotisation ou une cotisation supplementaire est etablie au plus tard Ie jour qui suit d'une annee Ie demier en date des jours suivants :

(i) Ie jour ou Ie ministre est avise de la nouvelle cotisation provinciale,

(ii) Ie quatre-vingt-dixieme jour suivant la date d'envoi de l'avis de la nouvelle cotisation provinciale.

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Income TaxAct, R.S.C.1985, c. 1 (5th Supp.), as amended.

Section 152(8)

Assessment deemed valid and binding

(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.

Presomption de validite de la cotisation

(8) Sous reserve des modifications qui peuvent y etre apportees ou de son annulation lors d'une opposition ou d'un appel fait en vertu de la presente partie et sous reserve d'une nouvelle cotisation, une cotisation est reputee etre valide et executoire malgre toute erreur, tout vice de forme ou toute omission dans cette cotisation ou dans toute procedure s'y rattachant en vertu de la presente loi.


Section 152(9)

Alternative basis for assessment

(9) The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act

(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and

(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.

Nouvel argument a l'appui d'une cotisation

(9) Le ministre peut avancer un nouvel argument a l'appui d'une cotisation apres l'expiration de la periode normale de nouvelle cotisation, sauf si, sur appel intetjete en vertu de la presente loi :

a) d'une part, il existe des elements de preuve que Ie contribuable n'est plus en mesure de produire sans l'autorisation du tribunal;

b) d'autre part, il ne convient pas que Ie tribunal ordonne la production des elements de preuve dans les circonstances.

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Section 247(2)

Transfer pricing adjustment

(2) Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length (or a partnership of which the non-resident person is a member) are participants in a transaction or a series of transactions and

(a) the terms or conditions made or imposed, in respect of the transaction or series, between any of the participants in the transaction or series differ from those that would have been made between persons dealing at arm's length, or

(b) the transaction or series

(i) would not have been entered into between persons dealing at arm's length, and

(ii) can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit,

any amounts that, but for this section and section 245, would be determined for the purposes of this Act in respect of the taxpayer or the partnership for a taxation year or fiscal period shall be adjusted (in this section referred to as an "adjustment") to the quantum or nature of the amounts that would have been determined if,

(c) where only paragraph 247(2)(a) applies, the terms and conditions made or imposed, in respect of the transaction or series, between the participants in the

Redressement

(2) Lorsqu'un contribuable ou une societe de personnes et une personne non-residente avec laquelle Ie contribuable ou la societe de personnes, ou un associe de cette demiere, a un lien de dependance, ou une societe de personnes dont la personne non-residente est un associe, prennent part it une operation ou it une sene d' operations et que, selon Ie cas :

a) les modalites conclues ou imposees, relativement it I' operation ou it la serie, entre des participants it I' operation ou it la serie different de celles qui auraient ete conclues entre personnes sans lien de dependance,

b) les faits suivants se verifient relativement it I' operation ou it la serie:

(i) elle n'aurait pas ete conclue entre personnes sans lien de dependance,

(ii) il est raisonnable de considerer qU'elle n'a pas ete principalement conclue pour des objets ventables, si ce n'est l'obtention d'un avantage fiscal,

les montants qui, si ce n'etait Ie present article et l'article 245, seraient determines pour I' application de la presente loi quant au contribuable ou la societe de personnes pour une annee d'imposition ou un exercice font l'objet d'un redressement de fa<;on qu'ils correspondent it la valeur ou it la nature

transaction or series had been those that would have been made between persons dealing at ann's length, or

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(d) where paragraph 247(2)(b) applies, the transaction or series entered into between the participants had been the transaction or series that would have been entered into between persons dealing at ann's length, under tenns and conditions that would have been made between persons dealing at ann's length.

des montants qui auraient ete detennines si:

c) dans Ie cas ou seull' alinea a) s' applique, les modalites conclues ou imposees, relativement a I'operation ou a la serie, entre les participants avaient ete celles qui auraient ete conclues entre personnes sans lien de dependance;

d) dans Ie cas ou l' alinea b) s'applique, I'operation ou la serie conclue entre les participants avait ete celle qui aurait ete conclue entre personnes sans lien de dependance, selon des modalites qui auraient ete conclues entre de telles personnes.

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