The taxpayer purchased its supplies of aluminium from a Burmudan affiliate ("Pillar International") which in turn purchased the aluminium from an arm's-length supplier ("Alcan"). Reed, J. accepted the Crown's contention that the closest arm's length comparable to the sales by Pillar International to the taxpayer were the sales by Alcan to Pillar International. In light of the relatively minor functions performed by Pillar International, the taxpayer was unable to justify the full 5% differential between the aluminium price paid by the taxpayer and the lower net price (after taking into account discounts paid by Alcan) paid by Pillar International.
In the Court of Appeal, it was further held that Reed, J. erred in concluding that a 1% differential was justified based on the fact that the global purchasing power of Pillar International permitted it to obtain from Alcan a price better than that which the taxpayer could have negotiated. "That greater bargaining power was exclusively due to the pooling of the purchasing power of a number of members of the Pillar group ... where non-arm's length parties combine to obtain an advantage from an outsider not available to them individually, any allocation of the advantage among them except on a pro rata basis has to be justified."