AgraCity – Federal Court of Appeal notes that the boundary between ss. 247(2)(a) and (b) is unresolved

A Barbados corporation reported substantial profits from the sale of a herbicide to Canadian farmers, and deducted amounts paid to a non-arm’s length Canadian corporation (AgraCity – which was the taxpayer in the case) as service fees. The Crown’s pleadings in support of its assessment of AgraCity stated that the Barbados corporation did not sell any herbicide, and that the fair market value of the fees received by AgraCity should be increased by all of the profit reported by the Barbados corporation. However, in pleadings in support of an assessment of the Canadian parent of the Barbados corporation, the Crown pled that the Barbados corporation sold the herbicides to AgraCity, thereby giving rise to FAPI under s. 95(2)(a.1) to the Canadian parent.

In finding that these inconsistent pleadings were acceptable, Webb JA noted that it is inherent in separate persons (including related persons) being separate taxpayers that inconsistent assessments and, thus, inconsistent pleadings may result - and that the Crown acknowledged that it did not seek to have both assessments upheld.

Webb JA also found that at the pleadings stage it was acceptable for the Crown to rely both on ss. 247(2)(a) and (c) (re terms of the transactions departing from arm’s length terms) and on ss. 247(2)(b) and (d) (re the transactions themselves being something that arm’s length persons would not have entered into), quoting with approval a statement in Cameco (2015 FCA 143):

No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike… .

Neal Armstrong. Summaries of AgraCity Ltd. v. The Queen, 2015 FCA 288 under s. 247(2) and Tax Court Rules, s. 82.