GlaxoSmithKline Inc. v. Minister of National Revenue, 2010 FCA 201

• Judge: Nadon, Layden-Stevenson and Stratas, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: March 08, 2010
• Jurisdiction: Canada (Federal)
• Citations: 2010 FCA 201;(2010), 405 N.R. 307 (FCA)

GlaxoSmithKline Inc. v. MNR (2010), 405 N.R. 307 (FCA)

MLB headnote and full text

Temp. Cite: [2010] N.R. TBEd. AU.008

GlaxoSmithKline Inc. (appellant) v. Her Majesty the Queen (respondent)

(A-345-08; 2010 FCA 201)

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

Federal Court of Appeal

Nadon, Layden-Stevenson and Stratas, JJ.A.

July 26, 2010.

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 Judge referred the matter back 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 Judge erred in his determination of the circumstances relevant to the assessment of the amount referred to in s. 69(2) as "the reasonable amount".

The Federal Court of Appeal concluded that the Judge erred in his interpretation of s. 69(2). The court allowed the appeal, set aside the decision and returned the matter to the Judge for rehearing and reconsideration of the matter in the light of the court's reasons for judgment.

Income Tax - Topic 3047

Computation of income - Inadequate considerations - Payment to non-resident - Not at arm's length (s. 69(2)) - [See second 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)) - The Minister of National Revenue reassessed GlaxoSmithKline Inc. for taxation years 1990 through 1993 - Under s. 69(2) of the Income Tax Act, the Minister increased Glaxo's income by the difference between the price paid by two generic pharmaceutical companies for their ranitidine and that paid by Glaxo to a related non-resident company (Adechsa) for its ranitidine - The tax court judge upheld the reassessment - Glaxo appealed - The issue pertained to the s. 69(2) requirement that the amount must be "greater than the amount that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length" - Glaxo argued that the judge erred in regard to the determination of the "reasonable amount" - Its main complaint was that the judge failed to consider key circumstances, including the License Agreement between Glaxo and Glaxo Group, which applied to the entire portfolio of Glaxo World drugs (Glaxo paid a royalty on its net sales in exchange for certain rights) - The Federal Court of Appeal held that the judge erred in concluding, on the basis of Singleton v. Minister of National Revenue (2001) (S.C.C.), that the License Agreement was an irrelevant consideration - Singleton, determined under s. 20(1)(c)(i), was directed to the question "to what use were the borrowed funds put?", while a determination under s. 69(2) was directed to "the amount that would have been reasonable in the circumstances" if the parties to the transaction had been dealing at arm's length - Because it was central to Glaxo's business reality, and would be so if it were dealing at arm's length with Adechsa, the License Agreement was "a circumstance" which had to be taken into account - See paragraphs 63 to 68, 78.

Income Tax - Topic 3048

Computation of income - Inadequate considerations - Payment to non-resident - "Reasonable amount" - Assessment of - Considerations (s. 69(2)) - The Minister of National Revenue reassessed GlaxoSmithKline Inc. for taxation years 1990 through 1993 - Under s. 69(2) of the Income Tax Act, the Minister increased Glaxo's income by the difference between the price paid by two generic pharmaceutical companies for their ranitidine and that paid by Glaxo to a related non-resident company for its ranitidine (sold under the Zantac trademark) - The tax court judge upheld the reassessment - He determined the "fair market value" of ranitidine, which he found to be the price paid by the two generics, and then found that anything paid by Glaxo over that amount, save for a minor upward adjustment, was in excess of "the reasonable amount" - The Federal Court of Appeal stated that the judge's approach was mistaken - The test in s. 69(2) was, if Glaxo had been dealing at arm's length, would the price it paid have been "reasonable in the circumstances" - In order to make that determination, the judge had to consider all relevant circumstances which an arm's length purchaser would have had to consider - The test mandated by s. 69(2) "does not operate regardless of the real business world in which the parties to a transaction participate" - The judge failed to consider the business reality which an arm's length purchaser was bound to consider if he intended to sell Zantac - The License Agreement between Glaxo and Glaxo Group (which the judge ignored) was a "crucial" consideration, arising from the market power attached to Glaxo Group's ownership of the intellectual property associated with ranitidine and the Zantac trademark - As a result, the judge erred in law in failing to apply the proper test - See paragraphs 69 to 76, 79 to 82.

Income Tax - Topic 3048

Computation of income - Inadequate considerations - Payment to non-resident - "Reasonable amount" - Assessment of - Considerations (s. 69(2)) - The Minister of National Revenue reassessed GlaxoSmithKline Inc. for taxation years 1990 through 1993 - Under s. 69(2) of the Income Tax Act, the Minister increased Glaxo's income by the difference between the price paid by two generic pharmaceutical companies for their ranitidine and that paid by Glaxo to a related non-resident company (Adechsa) for its ranitidine - The tax court judge upheld the reassessment - The Federal Court of Appeal concluded that the judge erred in law in failing to apply the proper test in determining "the amount that would have been reasonable in the circumstances" if Glaxo and Adechsa had been dealing at arm's length - The court declined to make the ultimate determination which Glaxo sought - The determination of "the reasonable amount" ought to be made by the judge, "who heard the parties for well over forty days", and not by the court - The court therefore allowed the appeal, set aside the Tax Court's decision and returned the matter to the judge for rehearing and reconsideration of the matter in the light of the court's reasons - See paragraphs 82 to 84.

Income Tax - Topic 3444

Computation of income - Non-arm's length transactions - What constitutes "arm's length" - [See first and second Income Tax - Topic 3048 ].

Income Tax - Topic 9543

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

Words and Phrases:

Reasonable in the circumstances - The Federal Court of Appeal considered the meaning of the legislative phrase, "reasonable in the circumstances", as that phrase appeared in s. 69(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 - See paragraphs 57 to 82.

Cases Noticed:

Singleton v. Minister of National Revenue, [2001] 2 S.C.R. 1046; 275 N.R. 133, consd. [para. 28].

Garbco Ltd. v. Minister of National Revenue (1968), 68 D.T.C. 5210 (Ex. Ct.), appld. [para. 40].

Bausch & Lomb v. Commissioner (1989), 92 T.C. 525 (U.S. Tax Court), refd to. [para. 63].

Safety Boss Ltd. v. Minister of National Revenue, 2000 D.T.C. 1767, refd to. [para. 71].

Petro-Canada v. Minister of National Revenue (2004), 319 N.R. 261; 2004 D.T.C. 6329; 2004 FCA 158, refd to. [para. 72].

Roche Product Pty Ltd. v. Commissioner of Taxation, [2008] A.A.T.A. 639, refd to. [para. 80].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 69(2) [paras. 5, 56].

Counsel:

Joseph Steiner, Al Meghji, Kevin O'Brien and McShane D. Jones, for the appellant;

Naomi Goldstein, Karen Janke, Myra Yuzak and Marla McKitrick, for the respondent.

Solicitors of Record:

Osler Hoskin & Harcourt LLP, Toronto, Ontario, for the appellant;

John H. Sims, Q.C., Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard at Toronto, Ontario, on March 8, 2010, by Nadon, Layden-Stevenson and Stratas, JJ.A., of the Federal Court of Appeal. In reasons written by Nadon, J.A., the Court delivered the following judgment at Ottawa, Ontario, on July 26, 2010.