Classic Transfer Pricing Case: Safety Boss Ltd. v. The Queen 2000

By Robert Robillard - 16 June 2014

Safety Boss Ltd. v. The Queen, 2000 CanLII 216 (TCC) relates to the amount paid by a Canadian corporation to its sole owner. Is this management fee in line with the arm’s length principle? The Court said it was. Highlights:

“[1] These appeals concern two assessments under Part I of the Income Tax Act for the 1991 and 1992 taxation years as well as an assessment under Part XIII of non-resident withholding tax and penalties.

[2] In 1991, the appellant paid a bonus to its president and 99% shareholder, Mr. Michael Miller, who at the time was a non-resident of Canada. In 1992, it paid a fee to Mr. Miller’s non-resident company. The Minister of National Revenue disallowed a portion of the bonus paid to Mr. Miller and of the fee paid to his company on the basis that these amounts were in excess of the amounts that would have been reasonable had the parties been dealing at arm’s length. In addition, the Minister treated the amount disallowed as a benefit conferred on Mr. Miller and accordingly imposed non-resident withholding tax and a penalty. The issue is whether the Minister was right in doing so.

[3] The appellant carries on the business of oilfield firefighting and the capping of blow-out oil and gas wells. Its fiscal period is August 31.

[…] [39] The premises that form the foundation of the assessments and the assessments themselves are flawed for a number of reasons:

(a) They fail to take into account the fact that the existence of the contract with Kuwait and its fulfilment were attributable to Mr. Miller. However competent the other employee may have been he was nonetheless an employee of Mr. Miller’s company whom Mr. Miller hired and directed. That employee did not, to put it colloquially, bring in the business. He participated in performing the work that Mr. Miller brought in. To relegate Mr. Miller to the position of just another employee, when he was the driving force behind the company without which neither the company nor its contract with Kuwait would have existed, is both demeaning to Mr. Miller and commercially unrealistic.

(b) The assessments fail to take into account the years in which Mr. Miller struggled to keep the company afloat during the lean years, and in which he accepted no or reduced remuneration. Indeed, the Minister sought to justify the assessments for 1991 and 1992 by referring to the remuneration Mr. Miller received in the earlier lean years. I should have thought that precisely the opposite inference ought to be drawn.

(c) The justification advanced for ignoring the fact that Mr. Miller was the person who single-handedly brought in the business is that when he was paid the bonus in 1991 and when his company was paid a fee of $800,000 per month for about 2½ months in 1992, the contract was already in place, and therefore what he did in the past to bring about the company’s profits was simply past history and could have no bearing on what he was to be paid when, as the result of his efforts, the company was in a position to pay him amounts that were commensurate with his contributions to its profits. This theory is not sustainable, either as a matter of commercial practice or of common sense. It is quite common to reward valued employees in profitable years in recognition of services rendered in prior years. In any event, the contract with Kuwait was entered into in 1991.

(d) What seems obvious to me — and it was evidently not obvious to the departmental officials — is that the substantial amounts paid by Kuwait to the Appellant were paid because of Mr. Miller. It was he who predominantly contributed to the appellant’s profits. He was the rainmaker.”

To see the full transfer pricing case click here. Aussi disponible en français sur ce lien. Safety Boss Ltd. v. The Queen, 2000 CanLII 216 (TCC) Safety Boss Ltd. c. La Reine, 2000 CanLII 216 (CCI)

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at”

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