GlaxoSmithKline Inc. v. Minister of National Revenue, (2012) 435 N.R. 82 (SCC)

• Judge: McLachlin, C.J.C., Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 18, 2012
• Jurisdiction: Canada (Federal)
• Citations: (2012), 435 N.R. 82 (SCC);2012 SCC 52

GlaxoSmithKline Inc. v. MNR (2012), 435 N.R. 82 (SCC)

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[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2012] N.R. TBEd. OC.013

Her Majesty The Queen (appellant/respondent on cross-appeal) v. GlaxoSmithKline Inc. (respondent/appellant on cross-appeal)

(33874; 2012 SCC 52; 2012 CSC 52)

Indexed As: GlaxoSmithKline Inc. v. Minister of National Revenue

Supreme Court of Canada

McLachlin, C.J.C., Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis, JJ.

October 18, 2012.

Summary:

Between 1990 and 1993, GlaxoSmithKline Inc. (Glaxo) purchased ranitidine, the active pharmaceutical ingredient in a drug marketed by it under the brand name Zantac, from Adechsa SA, a related non-resident company, for between $1512 and $1651 per kilo. During that same period, two generic pharmaceutical companies, namely Apotex Inc. and Novopharm Ltd., purchased their ranitidine from arm's length suppliers for between $194 and $304 per kilo. The Minister of National Revenue reassessed Glaxo for taxation years 1990 through 1993. First, under s. 69(2), Part I of the Income Tax Act, the Minister increased Glaxo's income by the difference between the price paid by Apotex and Novopharm for their ranitidine and that paid by Glaxo for its ranitidine. Second, the Minister assessed Glaxo under Part XIII of the Act for amounts deemed to have been paid by it as dividends in the years at issue to Glaxo Group, a U.K. corporation (ss. 56(2), 212(2) and 214(3)). Glaxo appealed the reassessments.

The Tax Court of Canada, in a decision reported at 2008 TCC 324, allowed Glaxo's appeals. The matter was remitted to the Minister for reconsideration and reassessment, only to decrease the excess amounts paid by Glaxo for ranitidine by $25 per kilo and to adjust the amounts of withholding tax accordingly. Glaxo appealed. At issue was the proper interpretation of s. 69(2); specifically, whether the Tax Court erred in determining the circumstances relevant to the assessment of the amount referred to in s. 69(2) as "the reasonable amount".

The Federal Court of Appeal, in a judgment reported (2010), 405 N.R. 307, concluded that the Tax Court erred in interpreting s. 69(2). The court allowed the appeal, set aside the decision and remitted the matter to the Tax Court for rehearing and reconsideration. The Minister appealed. Glaxo cross-appealed.

The Supreme Court of Canada dismissed the appeal and the cross-appeal, and remitted the matter to the Tax Court for redetermination on the basis that the Licence Agreement was relevant and should have been considered by the Tax Court in determining the "reasonable amount" that Glaxo should have paid for ranitidine under s. 69(2) had the purchase been an arm's length transaction.

Income Tax - Topic 3047

Computation of income - Inadequate considerations - Payment to non-resident - Not at arm's length (s. 69(2)) - [See Income Tax - Topic 3048 ].

Income Tax - Topic 3048

Computation of income - Inadequate considerations - Payment to non-resident - "Reasonable amount" - Assessment of - Considerations (s. 69(2)) - Section 69(2) of the Income Tax Act concerned the diversion of profits from Canada where related entities of multinational corporations in different jurisdictions transferred property or provided services to one another - Under s. 69(2) the "reasonable amount" by which the price paid by the taxpayer for property to the related non-resident corporation (non-arms length transaction) exceeded what it would have paid in an arm's length transaction had to be added as taxable income - Glaxo paid significantly more for ranitidine to a related non-resident company than did two of its competitors for ranitidine from other sources - The Minister increased Glaxo's income by the price difference - Glaxo was conferred rights and benefits beyond the supply of ranitidine under a Licence Agreement - Prices were fixed by a Supply Agreement - The Tax Court held that the Licence Agreement was irrelevant in determining whether Glaxo paid a "reasonable amount" for ranitidine - The Supreme Court of Canada held that the Tax Court erred in not considering the Licence Agreement when determining whether the price paid by Glaxo for ranitidine would have been reasonable had Glaxo and the related company been dealing at arm's length - Regard must be had "for the 'economically relevant characteristics' of the arm's length and non-arm's length circumstances to ensure they are 'sufficiently comparable'" - The Licence Agreement, conferring rights and benefits in addition to the ranitidine, impacted the purchase price and was accordingly relevant to determining the reasonableness of the price paid - The objective was "to determine what an arm's length purchaser would pay for the property and the rights and benefits together where the rights and benefits are linked to the price paid for the property" - The prices paid for ranitidine by the two competitors, which did not involve other related rights and benefits, were not "comparable" - The matter was remitted to the Tax Court for reconsideration of what price was a "reasonable amount" having regard to the effect of the Licence Agreement - See paragraphs 1 to 65.

Income Tax - Topic 9543

Tax evasion and tax avoidance - Artificial transactions - What constitutes - Transfer pricing - [See Income Tax - Topic 3048 ].

Words and Phrases:

Reasonable in the circumstances - The Supreme Court of Canada considered the meaning of the phrase "reasonable in the circumstances", as found in s. 69(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 - See paragraphs 1 to 65.

Cases Noticed:

Singleton v. Minister of National Revenue, [2001] 2 S.C.R. 1046; 275 N.R. 133; 2001 SCC 61, dist. [para. 12].

Gabco Ltd. v. Minister of National Revenue (1968), 68 D.T.C. 5210, refd to. [para. 14].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, dist. [para. 32].

Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 32].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 69(2) [para. 18].

Counsel:

Wendy Burnham, Eric Noble and Karen Janke-Curliss, for the appellant/respondent on cross-appeal;

Al Meghji, Joseph M. Steiner, Amanda Heale and Pooja Samtani, for the respondent/ appellant on cross-appeal.

Solicitors of Record:

Attorney General of Canada, Ottawa, Ontario, for the appellant/respondent on cross-appeal

Osler, Hoskin & Harcourt, Toronto, Ontario, for the respondent/appellant on cross-appeal.

This appeal and cross-appeal were heard on January 13, 2012, before McLachlin, C.J.C., Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis, JJ., of the Supreme Court of Canada.

On October 18, 2012, Rothstein, J., delivered the following judgment in both official languages for the Court.