CRA would apply the transfer pricing rule to an arm’s length group sale

A U.S. public company (Publico) and various subsidiaries, including a great-grandchild Canadian subsidiary (Canco) sold a business to an arm’s length non-resident purchaser (Acquireco1).  At closing, Canco transferred its assets of the business to an Acquireco1 subsidiary for their book value, which did not reflect significant value for intangible assets.

Head Office was inclined to apply s. 247(2) to Canco (presumably to impute higher proceeds for the intangibles) without any explanation of the basis for applying this rule to an arm’s length sale.  Publico received from Acquireco1 any excess of the consolidated sale price over the portions thereof paid to its subsidiaries, so that in that broad respect the value of the Canadian intangibles was paid to it.  After asserting that concurrence under s. 56(2) can be "passive or implicit," Head Office found that the payment of a dividend to the immediate non-resident parent of Canco (Parent) should be imputed under ss. 56(2) and 214(3)(a), on the basis that Parent had concurred in the conferral of a benefit on Publico.

The rule in s. 247(12) (deeming secondary adjustment amounts to be dividends) did not apply as its effective date was subsequent to the transactions.

Neal Armstrong.  Summaries of 15 November 2013 Memo 2013-0478621I7 F under s. 247(2), s. 56(2) and s. 69(4).