Transfer Pricing and Controlled Foreign Subsidiaries

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Transfer Pricing and Controlled Foreign Subsidiaries

 Mazen Artistic Aluminum Ltd. v. The Queen, 2014 TCC 194

At issue were amounts paid by the Canadian resident corporation to its wholly owned subsidiary, located in a low-tax jurisdiction, for services provided to the Canadian resident corporation.  Specifically, whether the terms and conditions as between the related parties were ones that differ from what would have been agreed to by parties at arm’s-length.


The Canadian resident corporation, on advice from professionals, set up a structure whereby it incorporated a wholly owned subsidiary in a low-tax jurisdiction, paid amounts to this subsidiary in pursuit of active business profits internationally (Marketing, promotions, management, and administrative), and paid these amounts back to itself tax free (deducting dividend under s 113).

The MNR reassessed these payments as not meeting proper transfer-pricing guidelines as a violation of the arm’s-length principle, under s 247(2).


The Court noted that the foreign company could do nothing on its own – it was an empty shell devoid of personnel and tangible or intangible property/assets.  It reviewed the potential service provided and value added by the foreign corporation and found there to be little evidence of anything.

The court the summarized the arm’s length principle:

[170]   The arm’s length principle assumes that independent enterprises “… will compare the transaction to other options realistically available to them, and they will only enter into the transaction if they see no alternative that is clearly more attractive”.

The Court concluded, on the evidence, that there was no benefit other than a tax benefit to be found in the arrangement (para 172), neither of which would be available for arm’s-length parties.

The Court then considered the appropriateness of the quantum of fees paid.  The ITA does not provide much guidance in subsection 247(2) as to how to determine the arm’s length price, and courts have held that recourse to the OECD Guidelines is appropriate: Canada v. GlaxoSmithKline, 2012 SCC 52; The Queen v. General Electric Capital of Canada, 2010 FCA 344; and Alberta Printed Circuits Ltd. v. The Queen, 2011 TCC 232  , as is reference to the CRA’s IC 87-R2.

Transfer pricing analysis is highly fact-driven.  The first step is identifying the transaction under review.  Once this is done, the next step is determining the appropriate method to use so as to arrive at an arm’s length transfer price appropriate for the facts.  The Court noted that although the 2010 OECD Guidelines don’t provide a preference of methods, the 1995 OECD Guidelines listed the various methods in decreasing order of reliability, being:

1. Traditional Transaction Methods:

  • Comparable Uncontrolled Price method (“CUP Method”) Respondent [108] and [160] – value of Mr. Csumrik and Longview
  • Resale Price method
  • Cost Plus method

2. Transactional Profit Methods:

  • Profit Split method
  • Transactional Net Margin method (“TNMM”)

The Court preferred the CRA’s expert method using CUP over the Appellants method using TNMM, on the facts.   Specifically, the court used the internal CUP being the price negotiated between the third party advisor and the Canadian Parent as the appropriate comparator.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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