Canada: The CRA Continues To Aggressively Audit International Transactions

Last Updated: February 18 2013
Article by Mark Kirkey and Jamal Hejazi

Most Read Contributor in Canada, October 2018

Legislators and judiciaries alike have lent a hand in 2012 to modify aspects of the transfer pricing landscape, which is in constant evolution, leading to various interpretations by multinationals and the governing tax authorities. Confusion around transfer pricing is understandable considering that related parties must assume they are independent of one another when determining intercompany prices, thus creating a fictitious event. Recent legal developments in Canada will require the Canada Revenue Agency to consider all relevant intercompany transactions, not only a singular transaction that may be taken out of context. As well arbitration provisions, added to the Canada-US Income Tax Treaty, will help to ensure that double tax cases are not only resolved but resolved in a more timely manner.

l. Supreme Court Upholds Federal Court of Appeal's Glaxo Decision

A. Case Overview

In 2008, The Tax Court of Canada (''TCC'') delivered a controversial decision against GlaxoSmithKline Inc. (''GSK'') upholding a reassessment by the Canada Revenue Agency (''CRA'') over the price that GSK paid Adechsa, a related party, for the active ingredient ranitidine, found in Zantac. The case also involved a licence agreement between GSK and its parent Glaxo Group for services and intangibles owned by Glaxo Group. The TCC's (and MNR's) position was that the licence agreement should be ignored when determining the arm's length price of the ranitidine. The Federal Court of Appeal ruled in favour of GSK in its July 2010 decision, when it held that the TCC erred in failing to consider the licence agreement between GSK and the Glaxo Group. It decided that it was necessary to take into account all relevant factors that an arm's length purchaser would have to consider, including the market power attaching to the Zantac trademark. While an approach that factors in real-world business circumstances is welcomed, this less mechanical method of valuation makes it less likely that multinational corporations and governments will arrive at the same outcome.

A seven member panel of the Supreme Court of Canada (''SCC'') heard the Minister's appeal on January 13, 2012. The SCC unanimously agreed with the FCA that Rip A.C.J. erred in refusing to take account of the Licence Agreement. Rothstein J. also agreed with Justice Nadon that ''the amount that would have been reasonable in the circumstances'' if GSK and Adechsa had been dealing at arm's length has yet to be determined, which will require a close examination by the TCC of the terms of the Licence Agreement and the rights and benefits granted to GSK under that agreement.

The SCC considered the Organisation for Economic Co-operation and Development's (''OECD'') guidelines in finding that, while a transaction-by-transaction approach may be ideal, such an approach is not appropriate in all cases. Thus, if transactions other than the purchasing transaction are relevant in determining whether the transfer price was greater than the amount that would have been reasonable in the circumstances, these transactions must not be ignored.

B. SCC Decision and Rationale

The SCC held that in determining what an arm's length purchaser would be prepared to pay for the same rights and benefits conveyed from a Glaxo Group source, one must recognise the various features of the Licence Agreement. ''It is only after identifying the circumstances arising from the Licence Agreement that are linked to the Supply Agreement that arm's length comparisons under any of the OECD methods or other methods may be determined.''

In the present case, the SCC recognised that GSK could only purchase ranitidine from two approved sources, one of which was Adechsa, if it wanted to take advantage of the benefits offered by the Licence Agreement. This requirement was a product of Glaxo Group's control of the trademark and patent of Zantac, rather than the non-arm's length relationship between the relevant parties. Thus, this same requirement would likely apply to an arm's length distributor wishing to market Zantac.

ll. Mandatory Arbitration

Multinational companies are facing increased scrutiny of their international transactions involving related parties which is leading to assessments that result in the taxation of the same income in two jurisdictions. In some cases achieving a negotiated settlement, between the two countries, over which country should tax the income is not possible. In those cases where a settlement cannot be reached there is now a provision included in the Fifth Protocol to the Canada-US Tax Treaty that deals with arbitration of such disputes.

Arbitration under the Canada-US treaty is a new option available to taxpayers who have been assessed by either the US or Canadian tax authorities on certain income including transfer pricing adjustments and where such assessments result in double tax that the two countries cannot resolve within a 24 month period. Previously, negotiations in competent authority could go on endlessly, sometimes for five or more years. Now, after a taxpayer submits all the relevant documents that the competent authorities need to negotiate the file they will only have 24 months to reach a resolution. After this time expires the taxpayer has the right to request arbitration. The arbitration provision in the Canada-US treaty contemplates that the decision be made by three arbitrators, one assigned by each country and one selected by the arbitrators. The final decision will be made using ''baseball'' arbitration wherein the arbitrators must select one of the two proposals submitted by the two governments with no changes.

The arbitration provisions in the Canada-US Treaty will motivate competent authority analysts to reach a principled decision and will hopefully reduce the number of extreme positions put forward by each country. Neither country will want the decision making process handed off to arbitrators, except in the rarest of cases, and as such will force the analysts of each country to work diligently towards a conclusion.

The CRA's most recent MAP report reflects a significant increase in the number of cases closed. We believe this is a direct result of the arbitration provisions and the lack of desire by either the CRA or the IRS to go to arbitration. The CRA and IRS do not publish any statistics on arbitration, however it is our understanding that since the arbitration provision have been in place there have been three cases heard and that all have gone in favour of the IRS. Details of the cases are not available. What we can interpret from the number of cases closed by CRA in their last fiscal year is that the governments appear motivated to avoid going to arbitration in all but rare cases. The provisions have had the intended effect of getting both the US and Canadian competent authorities to settle cases more quickly.

III. CRA Aggressively Pursues Transfer Pricing Adjustments

The CRA continues to aggressively audit international transactions, looking for taxpayers who stray too far from the ''norm''. This in fact no different than other close trading partners with Canada, see comments by President Obama in the US and recent headlines in the UK about Starbucks, Google and The CRA auditors, supported by economists and senior analysts have certain benchmarks in mind when they look at an intercompany transaction. When the margins reported fall short of what is expected, a more detailed audit will be conducted and in a number of cases an adjustment will be proposed often with what looks like a ''shoot first, ask questions later'' attitude. This aggressive stance by the CRA (along with other governments around the world) is expected to continue into the foreseeable future and increases the need for business to take a balanced approach to transfer pricing and prepare detailed documentation in support of their intercompany transactions.

This article was originally published in the January 2013 issue of Transfer Pricing International Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions