News of Note

In a companion case to Triad Gestco involving a similar loss-realization transaction (see previous post), the taxpayer's principal made a further argument that, because the series of transactions was implemented with the intention of giving him protection from creditors, and because he believed that "each and every step in the plan was essential" to effect such protection, no transaction in the series was aimed at achieving a tax benefit (and therefore was not an avoidance transaction).

Sharlow J.A. affirmed the trial judge's finding that at least one of the transactions in the series did not in fact advance any kind of creditor protection plan, and stated that what is required in the "avoidance transaction" branch of analysing  the general anti-avoidance rule is "ascertaining objectively the purpose of each step by reference to its consequences – rather than on the basis of the subjective motivation of Mr. Cross, or his subjective understanding of what may or may not have been required to achieve creditor protection."

Scott Armstrong.  Summaries of 1207192 Ontario Limited v. The Queen, 2012 FCA 259 under s. 245(3) and s. 245(4).

The previous version of Canada's statutory transfer-pricing rule effectively was engaged by the payment by a Canadian taxpayer to a non-resident affiliate of "an amount greater than the amount...that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length...."  The Canada Revenue Agency applied its version of the "CUP" method under this rule to reduce the deduction of a Canadian distributor, for a branded drug ingredient which it bought from an off-shore affiliate, to the much lower price at which generic drug distributors were purchasing the same drug in unbranded (generic) form in arm's length transactions.

Rothstein J. found that it was appropriate to take into account that, even if the taxpayer had been dealing at arm's length with the group members, it very well might have been required, under a licence to use the brand, to pay a higher price than the generic price for the ingredient given that it was distributing the related drug in Canada in branded form - and, in fact, the taxpayer had been required to enter into a licence with these terms with a second offshore affiliate which held the brand rights.  Rothstein J. also indicated that he thought this approach was consistent with the OECD Transfer Pricing Guidelines, which required that, even in the context of a transaction-by-transaction transfer pricing approach, regard must be had for the "economically relevant characteristics" of the arm's length and non-arm's length circumstances to ensure they were "sufficiently comparable."  He referred the dispute back to the Tax Court for a redetermination in light of these broader considerations.

Neal Armstrong.  Summary of GlaxoSmithKline Inc. v. The Queen, 2012 SCC 52 under s. 247(2).

In accordance with the Syspro decision (in which a tax court judge found that copyright entails distribution rights), CRA indicated that fees paid to a non-resident for the exclusive rights to distribute and sublicense software in Canada are exempt from Part XIII tax, pursuant to s. 212(1)(d)(vi).  However, CRA also suggested that fees for ongoing upgrades and support are service fees, and would not fall within s. 212(1)(d)(vi).

Given that software upgrades are themselves software, and therefore accorded copyright protection, it is not clear that ongoing upgrade fees should be excluded from s. 212(1)(d)(vi).  CRA's position appears to be based on the notion that fees for "upgrades and support" are predominantly for support services.  However, sophisticated "support" tickets are often bug reports and feature requests, which would themselves culminate in new, copyrighted software patches.

Scott Armstrong.  Summary of 23 August 2012 T.I. 2011-0427181E5 under s. 212(1)(d)(vi).

This morning's release of 14 severed letters by the Income Tax Rulings Directorate is available for your viewing.