Agracity Ltd. v. HMQ 2020 TCC 91
Summary
The Tax Court of Canada (“TCC”) allowed the appeals relating to transfer pricing assessments on the basis that there was no sham and that there was insufficient evidence adduced at trial to establish that the transactions at issue did not involve arm’s-length pricing.
Background
Agracity is a succinct and cogent transfer pricing decision from the TCC.
There were two related appeals by AgraCity Ltd. (“AgraCity”) and 101072498 Saskatchewan Ltd. (“SaskCo”)[1], two related corporations. Both corporations are part of the Farmers of North America group of companies (the “FNA Group”). The FNA Group companies are ultimately controlled by brothers James and Jason Mann.
The crux of the issue was a Services Agreement between AgraCity and NewAgco Inc., a non-arm’s length Barbados international business corporation (“NewAgco Barbados”) in the years in question, and related to the sale by NewAgco Barbados directly to Canadian farmer-users of a herbicide (“ClearOut”).
In the period in question, ClearOut was not available or offered for sale in Canada as a Canadian registered product. Importantly, ClearOut could not be sold in Canada. An Agracity principal then created a new US corporation, NewAgco Inc. (“NewAgco US”), established in the state of Delaware to be used to purchase ClearOut in the US markets, to warehouse it in its rented warehouse facilities in North Dakota, and to sell it to FNA members.
NewAgco US used AgraCity to manage the logistical activities of its sales and deliveries to its Canadian buyers. This was set out in the aforementioned Services Agreement. Under its terms, AgraCity was paid an amount per litre of ClearOut sold to perform these services.
In 2006, NewAgco Barbados was incorporated and assumed all previous rights, inventory, and duties of NewAgco US.
In reassessing AgraCity for its 2007 and 2008 taxation years, the CRA used the transfer pricing provisions to re-allocate all NewAgco Barbados profits from these sales activities to the income of AgraCity.
Law
Sham
Surprisingly, the Crown relied on sham as its primary argument. The sham required that the Court consider whether AgraCity entered into agreements and transactions that were intended to deceive and mislead the Crown into believing that the rights and obligations between AgraCity and related parties were different than what they truly were. As stated by Justice Boyle, “Sham is a serious allegation requiring convincing evidence to conclude that a Canadian taxpayer was deceitful on a balance of probabilities. Often this may involve circumstantial evidence. This can be expected to require more then the Respondent’s suspicions.”[2]
247 (b) & (d)
These are commonly referred to as the recharacterization rules. These rules apply only where a taxpayer and non-arm’s length non-resident have entered into a transaction or a series of transactions that would not have been entered into between any two persons dealing at arm’s length, under any terms or conditions.
These rules require the Court to consider:
(i) whether the relevant transactions would not have been entered into between arm’s length parties;
(ii) whether the relevant transactions can be considered to have been entered into primarily for bona fide purposes other than to obtain a tax benefit; and
(iii) what transactions would have been entered into between notional arm’s length parties and on what terms and conditions.
If these rules apply, the quantum and nature of income amounts are redetermined based on substituted arm’s length transactions and not the transactions entered into by the parties.
247 (a) & (c)
These rules adjust the actual transfer price paid and received by the parties. The Court will consider whether the terms or conditions of the transactions would have been agreed to by arm’s length parties and, if not, what terms and conditions would arm’s length parties have agreed to.
Crown’s Position
The Crown’s three bases for the reassessments were as follows (and in this order):
- Sham was the Crown’s primary position. The Crown argued that the transactions in question amounted to a sham and were designed to deceive the CRA into concluding that NewAgco Barbados was conducting the sales business and assuming all related risks instead of AgraCity. Specifically, the Crown alleged that the Services Agreement was a sham to camouflage the operations of AgraCity as those of NewAgco Barbados, which gave the illusion that NewAgco Barbados was selling ClearOut to Canadian farmers when the evidence shows that the activities were those of AgraCity. The Crown argued that Barbco was simply a shell and that the Services Agreement was entered into to deceive the Minister into believing the profits were earned in a low tax jurisdiction.
- 247(2)(b) and (d) transfer pricing provisions permitted the recharacterization of the transactions because arm’s length parties would not have permitted Barbco to be part of the transactions or to earn any of the profits.
- 247(2)(a) and (c) transfer pricing provisions apply to reallocate all of the profit booked by Barbco into AgraCity’s income.
Decision & Analysis
The TCC found that the evidence fell short of establishing sham. The TCC listed 14 separate reasons why there could be no finding of sham.[3] To identify a few of the reasons:
- NewAgco Barbados simply supplanted NewAgco US in the years at issue, and the initial transactions were not conducted in a low tax jurisdiction.
- It was clearly NewAgco Barbados that purchased the ClearOut.
- NewAgco Barbados bore material risk in these transactions. It assumed foreign exchange risk as it sold in Canadian dollars but purchased in US dollars, paid for its warehouse rent in US dollars and paid commercial transport in US dollars.
As in most transfer pricing decisions, the expert evidence was largely determinative of the result. Sir Trevor Carmichael gave expert evidence (unrefuted in the Court’s view) that all was done properly by NewAgco Barbados and in accordance with applicable Barbados corporate and commercial law.
The TCC summarily dismissed the recharacterization argument on the basis that the Crown did not make any factual assumptions on the matter, nor was there any evidence proffered by the Crown to establish that arm’s length parties would not enter into the transactions at issue.
Crown’s Arguments Dismissed
As for 247(a) & (c) adjustments, the Crown’s position was that 100% of the profits should have been booked by AgraCity and not Barbco. The Crown’s expert relied on a functional analysis to conclude that AgraCity performed all the functions and should therefore have booked those profits. Ultimately this position fell apart upon further scrutiny, since AgraCity could not legally sell ClearOut and Barbco negotiated all the contracts. This assessing position thus failed as well. The only evidence the Court had on this point suggested that the services provided by AgraCity were remunerated using something comparable to what arm’s length parties would have earned.
The Court concluded by indicating that the Appellant lead helpful evidence, whereas the Crown did not[4]:
[117] I conclude that the Appellant has met its initial onus to “demolish” the Respondent’s assumptions as set out by the Supreme Court of Canada in Hickman Motors and again by the Federal Court of Appeal in House. The Appellant has gone far beyond making out a prima facie case. The Respondent has failed to produce satisfactory evidence from its own witnesses or those of the Appellant to prove on a balance of probabilities that its relevant assumptions, or its further allegations and positions, were correct. Therefore the taxpayer succeeds in this appeal.
[118] I can add that, even if Justice Webb’s arguably more attractive, fair and equitable approach to burden of proof and onus with respect to tax appeals in Sarmadi and Eisbrenner were the approach required or chosen to be applied, I would also find for the Appellant. The taxpayer has provided credible, unchallenged, uncontested and unrefuted expert evidence based on available data that confirms the amount reported by AgraCity as its profit over the costs of its services to NewAgco Barbados was well within the somewhat rough, but in my view acceptable, range of what an arm’s length service provider might have enjoyed in circumstances similar to what I have found to be the transactions between NewAgco Barbados and AgraCity.
The appeals were allowed with costs to the Appellants.
[1] SaskCo was reassessed for its 2006 and 2007 taxation years on the basis that the profits of its subsidiary and controlled foreign affiliate NewAgco Barbados constituted foreign accrual property income or fapi. The Crown
conceded the SaskCo appeal at trial, because there was no evidence that could support a finding that NewAgco Barbados did not deal at arm’s length with its Canadian farmer-customers or that NewAgco Barbados sold ClearOut to AgraCity who in turn sold it to farmer‑users. The appeal was therefore allowed with costs.
[2] Agracity Ltd. v. HMQ 2020 TCC 91, at para. 20.
[3] Agracity Ltd. v. HMQ 2020 TCC 91, at para. 78.
[4] Agracity Ltd. v. HMQ 2020 TCC 91, at paras. 117-118.
