Marzen Artistic Aluminum – Tax Court of Canada shifts 100% of the income of a U.S. marketing operation from Barbados to Canada

The taxpayer, a Canadian window manufacturer which sold its windows in B.C. and the U.S., generated essentially all its profits in its Barbadian subsidiary (SII), which essentially had no assets or employees other than its (very part-time) Barbadian managing director: the taxpayer sold windows for the U.S. market to its U.S. subsidiary ("SWI") at their retail price; SII charged "marketing fees" to the taxpayer which were sufficient to reduce the taxpayer’s income to nil; SII paid fees to SWI for the SWI employees ("seconded" to SII) who did the marketing work at SWI’s payroll cost plus 10%; and SII paid dividends (out of exempt earnings generated from the substantial mark-up of its fees over those of SWI) to the taxpayer which essentially were equal to 100% of the profit of the consolidated group.

Sheridan J applied s. 247(2)(c) to reduce the marketing fees to the sum of: the fees paid by SII to SWI; and those paid to its managing director (which she treated as the comparable uncontrolled price for SII’s services to the taxpayer). One effect of this adjustment was that 100% of the profits of SWI, which it might have earned had it been charged for windows at the wholesale rather than retail price, were shifted from Barbados to Canada, i.e., it was not just profits which normatively should have been earned in Canada which were shifted back to Canada.

This point was not argued directly, but it came up indirectly respecting the approach of the taxpayer’s transfer pricing expert, who considered that the marketing fees paid by the taxpayer were appropriate if they were treated as paid to SII/SWI as an "amalgam." Sheridan J found this to be contrary to the separate entity approach mandated in the 1995 OECD Guidelines (which she referred to rather than the subsequent 2010 Guidelines).

Neal Armstrong.  Summaries of Marzen Artistic Aluminum v. The Queen, 2014 DTC 1145 [at 3433], 2014 TCC 194 under s. 247(2) and s. 247(4).