Canada: AgraCity Ltd v. Canada, 2015 FCA 288

By Robert Robillard - 20 January 2016

This blogpost originally appeared on rbrt.ca.

In AgraCity Ltd v. Canada, 2015 FCA 288, available at CanLII.org:

“[1] The main issue in this appeal is whether the Crown can have inconsistent pleadings in relation to appeals filed in the Tax Court of Canada by different taxpayers. Justice C. Miller of the Tax Court of Canada partially allowed the motion of AgraCity Ltd. (AgraCity) to strike parts of the reply filed by the Crown (Docket 2014-1537 (IT)G). AgraCity is appealing the decision to not strike the other parts of the reply that AgraCity was seeking to have struck on the basis that such parts are inconsistent with another reply that has been filed by the Crown in response to an appeal of another taxpayer. AgraCity is also appealing the Order that it serve and file a list of documents in accordance with Rule 82 of the Tax Court of Canada Rules (General Procedure) (the Rules).

[2] The Crown is cross-appealing the order to strike or rewrite parts of its reply. The main issue in the cross-appeal is whether the references to paragraphs 247(2)(a) and (c) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the Act) should have been struck.

3] For the reasons that follow, I would dismiss the appeal of AgraCity and allow, in part, the cross-appeal of the Crown.”

Although the facts are not thoroughly examined in this case, they provide an interesting background to the highly procedural appeals of both parties:

“[4] This matter is at the pleadings stage before the Tax Court of Canada. The actual facts of the case are not clear and are in dispute. It appears that there is no dispute that farmers in Canada wanted to buy a particular herbicide, ClearOut, which was to be imported into Canada. What is not clear is who was selling ClearOut.

[5] There are three companies that are relevant in this matter:

  • AgraCity, which is wholly owned by Jason Mann;
  • 101072498 Saskatchewan Ltd. (SaskCo), which is indirectly owned by Jason Mann and his brother, James Mann; and
  • NewAgco-Barbados, a company incorporated under the laws of Barbados, which is wholly owned by SaskCo.
[6] During the taxation years under appeal, NewAgco-Barbados reported significant profits from the sale of ClearOut and claimed that it had paid significant amounts to AgraCity as a service fee in relation to the sale of ClearOut.

[7] In the reply filed by the Crown in relation to AgraCity’s appeal to the Tax Court of Canada, the Crown pled that NewAgco-Barbados did not sell any ClearOut and therefore should not have been entitled to any profit from the sale of ClearOut. The Crown determined, under section 247 of the Act, that the fair market value of the services provided by AgraCity was equal to the amount that had been paid by NewAgco-Barbados plus the net profit that had been reported by NewAgco-Barbados from the sale of ClearOut, thus effectively reallocating all of the profit reported by NewAgco-Barbados from the sale of ClearOut to AgraCity.

[8] In the reply filed by the Crown in relation to SaskCo’s appeal to the Tax Court of Canada, the Crown pled that NewAgco-Barbados bought ClearOut and sold it to AgraCity. As noted by the Tax Court Judge, the pleadings of the Crown in relation to the appeals of AgraCity and SaskCo are irreconcilable.

[9] The only reply that is the subject of this appeal, is the reply related to AgraCity’s appeal to the Tax Court of Canada.”

With respect to the cross-appeal of the Crown, the FCA indicates:

“[33] It is implicit in the reasons of the Tax Court Judge that he found that, since the Crown assumed that no product had been sold by NewAgco-Barbados, paragraph 247(2)(a) of the Act could not apply because no arm’s length person would have entered into an agreement to provide services to NewAgco-Barbados in relation to the sale of a product that was not going to be sold by NewAgco-Barbados. As noted above, the Crown’s position in the reply related to AgraCity’s appeal is that AgraCity is entitled to all of the profit from the sale of ClearOut.

[34] However, this case was decided before this Court released its decision in Cameco Corp. v. The Queen, 2015 FCA 143 (CanLII), [2015] F.C.J. No. 774. In that case, the Crown was alleging that the non-resident corporation did not perform any services and therefore the amount that the resident corporation should have paid for services was nil. In confirming the Tax Court Judge’s decision to not strike the references to paragraph 247(2)(a) and (c) in that case, this court stated that:

51 No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike (Hunt at paras. 18, 28 and 43). The question whether a nil price can give rise to the application of paragraphs 247(2)(a) and (c) — in addition to paragraphs 247(2)(b) and (d) — is best left to be decided by the trial judge in the fullness of the evidence (Reasons at para. 27).

[35] In Cameco, the allegation of the Crown was that all of the services were provided by the company resident in Canada and therefore no amount should have been paid by that company to the non-resident corporation. The net effect was that the non-resident corporation, in the Crown’s view, was not entitled to any profit in relation to the transactions in issue.

[36] Although in Cameco the issue was whether the company resident in Canada should have paid nothing while the issue in this case is whether the company resident in Canada should have received all of the amount related to the sale of ClearOut, in both cases the net effect is that all of the profit would be reallocated to the company resident in Canada. In both cases the Crown is arguing that paragraphs 247(2)(a) and (c) of the Act could effectively allocate all of the profit to the company resident in Canada. Just as in Cameco, it seems to me that at this stage of the proceedings the paragraphs of the reply related to paragraphs 247(2)(a) and (c) of the Act should not have been struck and the Tax Court Judge committed an error in doing so.

[37] As a result I would allow the appeal of the Crown in relation to the part of the order striking paragraphs 15(a) and 17 of the reply.”

AgraCity Ltd v. Canada, 2015 FCA 288 (CanLII)

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

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