The taxpayer, AgraCity Ltd. (“AgraCity”), successfully appealed to the Tax Court of Canada (“TCC”) from the Minister’s reassessment of its 2007 and 2008 taxation years. AgraCity had entered into a service agreement with a non-arm’s length Barbadian corporation (“NewAgco Barbados”) to provide promotional and administrative services in respect of herbicide (“ClearOut”) sales to Canadian farmers. The Minister relied on the transfer pricing rules in subsection 247(2) of the Income Tax Act (Canada) (the “Act”) to reallocate to AgraCity 100% of the sales profits on the basis that NewAgco Barbados performed no business function.
At the time of writing, no appeal has been filed with the Federal Court of Appeal.
THE MINISTER’S POSITION
The Minister reassessed AgraCity based on paragraphs 247(2)(a) and (c) to reallocate all profits from NewAgco Barbados to AgraCity. At trial, the Minister altered her position, alleging that the transactions between NewAgco Barbados and AgraCity were a sham because AgraCity performed all business functions; or, in the alternative, paragraphs 247(2)(b) and (d) applied to recharacterize the transactions because arm’s length parties would not have allowed NewAgco Barbados to receive profits; or, in the further alternative, paragraphs 247(2)(a) and (c) applied.
THE TAX COURT DECISION
Sham
The TCC held that in a tax context, there will be a finding of sham where the parties misrepresented their arrangements in a bid to achieve a tax benefit that would be denied if the nature of their arrangements were properly disclosed.
The TCC rejected the Minister’s argument, based on the following three findings:
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