AgraCity - Tax Court of Canada rejects transfer-pricing attack on an arrangement for the sale of product into Canada by a Barbados CFA

Barbados international business corporation (“NewAgco Barbados”), that was a subsidiary of a Canadian company owned by two Canadian brothers, purchased a herbicide in the US and sold it to Canadian farmers, and paid management fees to another Canadian company (“AgraCity”) wholly-owned by one of the two brothers for assisting in making this happen.

In reassessing AgraCity, CRA relied upon the transfer pricing rules in ss. 247(2)(a) and (c) and re-allocated an amount equal to all of NewAgco Barbados’ profits from its sales to the income of AgraCity. However, in its arguments before Boyle J, the Crown’s primary position was now that the transactions were a sham or window dressing; in the alternative, that ss. 247(2)(b) and (d) applied to recharacterize the transactions; and in the further alternative, ss. 247(2)(a) and (c) resulted in a transfer pricing adjustment.

Boyle J found that the evidence presented did not establish sham or any deceptive window dressing, stating inter alia that “confused books and records … are not, on their own, evidence of a sham unless their inaccuracies, inconsistencies and/or omissions can be shown to favor a particular, but clearly inaccurate, recording of the party’s rights, obligations, revenues etc.”

Respecting s. 247(2)(d), a crucial fact was that the Health Canada rules prohibited sales of the herbicide by Canadian companies – but a non-resident company could purchase the herbicide in the U.S. and have it imported into Canada. Thus, there was no alternative transaction under which AgraCity could itself have sold the herbicide. Thus, the Crown case based on s. 247(2)(d) crumbled.

As for the conventional transfer pricing rule in s. 247(2)(c), Boyle J stated:

There was nothing … that could provide material support for the Respondent’s position that if NewAgco Barbados and AgraCity were arm’s length parties, they would have entered into a Services Agreement on terms and conditions that gave 100% of the [herbicide] sales profits to AgraCity and no share whatsoever of those profits to NewAgco Barbados … .

The only evidence the Court has on the point indicates that the amount paid to AgraCity generated a return on its costs that was in the range of what somewhat comparable arm’s length parties earn. …

Boyle J also noted that the Crown had dropped its FAPI case against the Canadian parent of NewAgco Barbados on the basis that this CFA’s sales of the herbicide were arm’s length.

Neal Armstrong. Summaries of Agracity Ltd. v. The Queen, 2020 TCC 91 under s. 247(2)(b), s. 247(2)(a), General Concepts – sham, onus, s. 95(2)(a.1).