Classic Transfer Pricing Case: 1144020 Ontario Ltd. v. Canada 2005By Robert Robillard - 11 August 2014
This blogpost originally appeared on rbrt.ca.
In 1144020 Ontario Ltd. v. Canada (Minister of National Revenue), 2005 FC 813 (CanLII), the taxpayer asks for judicial review of three requirements pursuant to subsection 231.6(2) of the Income Tax Act because they are unreasonable or inappropriate.
The Court finds that the requirements are reasonable and commensurate with the “ordinary enforcement mechanisms under the Act” available to the Minister.
“ At issue in these applications for judicial review is whether three requirements for the production of information and documents, issued pursuant to subsection 231.6(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c-1 (“Act“) and one requirement for the production of information and documents, issued pursuant to subsection 231.2(1) of the Act, should be set aside or varied because they are unreasonable or inappropriate.”
In the course of the third audit of the taxpayer:
“ On October 6, 2003, Ms. Shields issued four letters (“Requirement Letters” or “Requirements”) to the applicant. The first Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding management/consulting services provided by Thistlefield. The second Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding director’s fees paid to Mr. Paraskeva. The third Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding consulting services provided by Sedko. The fourth Requirement Letter asked that the applicant provide, within 62 days, information or documents regarding management/consulting services provided by Thistlefield, director’s fees paid to Mr. Paraskeva, and consulting services provided by Sedko, all in respect of the applicant’s 1999 and 2000 taxation years. These Requirements were the first demands for information made to the applicant pursuant to subsections 231.2(1) and 231.6(2) of the Act.  On October 29, 2003, the applicant’s counsel wrote to Ms. Shields. In that letter counsel indicated the dates on which the information and documents demanded in the Requirement Letters had previously been provided to the CCRA. (In this regard, during the course of each audit, representatives of the applicant had answered questions put by the auditor, and Messrs. Sayson and Allibhai had exchanged correspondence whereby the applicant provided information and documents to Mr. Sayson). Counsel also provided answers to those questions contained in the Requirement Letters that, in counsel’s view, had not previously been answered by the applicant.  The applicant now says that any information or documents sought in the Requirement Letters, that has not already been provided to the CCRA, cannot be provided because:[…]  The applicant argues that the auditor “took it personally” when the Appeals Division vacated his assessment, disallowing the management fees of $827,473.00 and $945,619.00 paid to Thistlefield for the 1997 and 1998 taxation years. The applicant points to the following examples to establish the auditor’s attitude:
1) the information sought is unknown to the applicant;
2) the information or documents sought, if they do exist, cannot be obtained from arm’s length non-residents;
3) the information or documents sought do not exist in the detail sought; or
4) the information or documents sought do not exist at all. The applicant notes that the Minister filed no affidavit evidence in opposition to this application, and asks that the Court draw an adverse inference from this. […]  It is admitted that some new information and documents were provided by the applicant to CCRA as a result of the Requirement Letters.  On this evidence, I am not satisfied that the auditor was acting for any improper purpose, or that he was “overzealous”. The position and matters set out in the audit report, and in the auditor’s letter to the applicant of May 5, 2003, are, in my view, at least as consistent with a tenacious adherence to duty on the part of the auditor as with any personal vendetta, spitefulness or over zealousness. The evidence fails, therefore, to establish that the auditor was motivated by any improper purpose.”
1. Notwithstanding the content of Mr. Itwar’s e-mail set out above at paragraph 7, the auditor did the following three things which were inconsistent with Mr. Itwar’s advice:
i) he asked for the waiver to extend the audit period;
ii) when the waiver was revoked, the auditor issued a reassessment with respect to the 1999 taxation year; and
iii) in such reassessment the auditor disallowed management fees paid to Thistlefield.
2. The auditor ignored the request that, on any reassessment of the applicant’s 1999 taxation year, the applicant be allowed the maximum available deductions for CCA and CEC. Further, the auditor gave an illogical reason for failing to accede to the request.
3. This refusal was spiteful and prejudicial to the applicant because, as a large corporation, it was required by subsection 225.1(7) of the Act to pay at least 50% of the tax owing within 90 days of the reassessment.
“ […] I have found the Requirements not to be unreasonable or otherwise vitiated. I can see no reason that the ordinary enforcement mechanisms under the Act should not be available to the Minister. If such proceedings are brought, and are found to have been improperly brought, any improper behaviour may be sanctioned, either by costs in those proceedings, or otherwise as the applicant might seek.”
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
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