Daniel Sandler, Lisa Watzinger, "Disputing Denied Downward Transfer-Pricing Adjustments", Canadian Tax Journal, (2019) 67:2, 281-308

Quaere whether s. 247(11) accords the TCC jurisdiction to hear an appeal of a s. 247(10) downward adjustment (p. 288)

[I]f subsection 247(10) is accepted as an exercise in ministerial discretion, one would expect that the appropriate forum in which to challenge the minister's decision is the Federal Court, by way of an application for judicial review of the decision. However, subsection 247(11) incorporates certain provisions of division I (including the provisions dealing with the minister's power to assess and reassess, as well as the objection provisions) and all of division J (dealing with appeals to the Tax Court and the Federal Court of Appeal) into part XVI.1 (the transfer-pricing provisions) "with such modifications as the circumstances require." Consequently, it is arguable that the Tax Court's jurisdiction to hear an appeal from a denied downward adjustment flows from subsection 247(11), since the denial is pursuant to a provision found in part XVI.1.

Quaere whether s. 247(11) gives the TCC rather than FC authority to review s. 247(10) downward adjustment (pp. 295-296)

The analysis in JP Morgan highlights the crux of the issue with downward adjustments: Subsection 247(10) of the ITA allows the minister to exercise his or her discretion to deny a downward adjustment and therefore suggests that review of the denial is within the Federal Court's jurisdiction; but subsection 247(11) mandates that certain sections, including sections 165 and 169, apply to part XVI.1 with such modifications as the circumstances require, suggesting that appeals in respect of subsection 247(10) can lie to the Tax Court. Furthermore, the decision to deny the J downward adjustment affects the computation of the taxpayer's income and tax liability, which are matters within the purview of the Tax Court….

Quaere whether TCC could accept a denial letter as an appealable assessment (p. 297)

The express incorporation of subsection 247(11) by Parliament suggests that an appeal dealing with any provision in part XVI.1 of the ITA can be made to the Tax Court, at least in those circumstances in which there is a notice of assessment to which the taxpayer can validly object Where there is no assessment to which the taxpayer can object, it is questionable whether subsection 247(11) permits the taxpayer to treat the letter denying the downward adjustment as tantamount to a notice of assessment to which the taxpayer can object or appeal. In other words, it is questionable whether the courts would accept a modification to sections 165 and 169, as they apply for the purposes of part XVI.1, to include a reference to the minister's communication of a denied downward adjustment.

S. 247(10) downward adjustment denial is appealable to TCC if embedded in s. 247(2) assessment (pp. 299-300)

[W]here the CRA undertakes an adjustment pursuant to subsection 247(2) of the ITA and, in so doing, denies a downward adjustment request under subsection 247(10), the assessment issued will be valid and binding, and the only way in which the taxpayer may have it varied or vacated is through the objection and appeals process, as was held by the Federal Court of Appeal in Optical Recording v. Canada…. .

… The difficulty with solely relying on section 12 of the TCC Act,…is that there are situations…in which a downward adjustment is denied but there is no assessment to which the taxpayer has the statutory right to object under section 165 of the ITA.

TCC to apply correctness standard to quantum and reasonableness standard to decision to make a s. 247(10) downward adjustment

[G]iven that the Tax Court, like the Exchequer Court before it, has the exclusive jurisdiction to hear appeals on matters that arise under the ITA when appeals to the Tax Court are provided for in the ITA, the Tax Court should have, under subsection 247(11), the jurisdiction to review the exercise of the minister's discretion under subsection 247(10), at least in circumstances where the taxpayer can appeal an assessment that reflects the minister's decision. If a taxpayer can appeal to the Tax Court a decision of the minister under subsection 247(10), the Tax Court must adhere to principles of administrative law when reviewing the exercise of the minister's discretion and apply the appropriate standard of review… . Accordingly, in reviewing a denied downward adjustment request, the Tax Court could review the decision to ensure both that the amount of the downward adjustment request by the taxpayer is correct and that the minister has exercised his or her discretion appropriately (that is, the minister's decision-making process contains a rational justification that is transparent and intelligible, and the decision itself falls within a range of possible, acceptable outcomes that are defensible in respect of the facts and the law).

[I]n our view, it is not appropriate that the Tax Court have jurisdiction in some circumstances (where the denied downward adjustment is reflected in an assessment to which he taxpayer has filed a notice of objection) but not in others (where the denial does not result in an assessment.) ….

Advisability of a protective appeal to FC where s. 247(10) downward adjustment (p. 308)

[E]ven in those situations in which it appears that the taxpayer can object to and appeal an assessment that does not include a requested downward adjustment, until the courts have pronounced themselves on the matter, it would be prudent for the taxpayer to file an application for judicial review in the Federal Court within 30 days of the decision and request that the application be stayed while the taxpayer appeals the assessment to the Tax Court… .