Indalex Ltd. v. Minister of National Revenue, (1986) 1 F.T.R. 1 (TD)

• Judge: Reed, J.
• Court: Federal Court (Canada)
• Case Date: January 14, 1986
• Jurisdiction: Canada (Federal)
• Citations: (1986), 1 F.T.R. 1 (TD)

Indalex Ltd. v. MNR (1986), 1 F.T.R. 1 (TD)

MLB headnote and full text

Indalex Ltd. v. Minister of National Revenue

(T-3236-79)

Indexed As: Indalex Ltd. v. Minister of National Revenue

Federal Court of Canada

Trial Division

Reed, J.

January 14, 1986.

Summary:

This dispute between a taxpayer and the Minister of National Revenue (M.N.R.) involved the issue of transfer pricing. Indalex, an aluminum molding corporation, ordered aluminum from Alcan through a Bermuda company related to Indalex, Pillar International. Indalex paid Pillar International for the aluminum. Pillar International in turn paid Alcan. Alcan then paid to Pillar International a portion of discounts off the purchase price. The M.N.R. claimed that the discounts were income for Indalex for tax purposes and that Indalex should have paid withholding tax on the amounts retained by Pillar International in Bermuda. The Federal Court of Canada, Trial Division, allowed the M.N.R.'s action.

Income Tax - Topic 8711

Non-resident withholding tax - Deemed payments to non-residents (Income Tax Act, s. 245(2)) - Indalex, an aluminum molding corporation, ordered aluminum from Alcan through a Bermuda company related to Indalex, Pillar International - Indalex paid Pillar International for the aluminum - Pillar International in turn paid Alcan - Alcan then paid a portion of discounts relating to the purchase price back to Pillar International in Bermuda - The M.N.R. claimed that Indalex should have paid withholding tax on the payments from Alcon retained in Bermuda by Pillar International - The Federal Court, Trial Division, agreed that Indalex was responsible for the withholding tax - See paragraphs 83 to 96.

Income Tax - Topic 9541

Tax evasion - Artificial transactions - Income Tax Act, s. 245(1) - S. 245 (1) provided that in computing income from a transaction or operation no deduction may be made for expenses which would unduly or artificially reduce the income - The Federal Court, Trial Division, held that the fact that a transaction is artificial is not enough to disallow an expense under s. 245(1); the expense must also result in a reduction of income - See paragraphs 40 to 44.

Income Tax - Topic 9543

Tax evasion - Artificial transactions - What constitute - The Income Tax Act, s. 245(1), provided that in computing income from a transaction or operation no deductions were permitted for expenses which would unduly or artificially reduce income - The Federal Court, Trial Division, stated that s. 245(1) is directed "not only at sham transactions but to something less as well ..." and that "artificially" carries the meaning "not in accordance with normality" - See paragraph 43.

Income Tax - Topic 9543

Tax evasion - Artificial transactions - What constitute - Transfer pricing - Indalex ordered aluminum from Alcan through a Bermuda company related to Indalex, Pillar International - Indalex paid Pillar International for the aluminum - Alcan paid a portion of discounts attributable to the purchase price back to Pillar International in Bermuda - The M.N.R. claimed that these discounts were income of Indalex - The Federal Court, Trial Division agreed that these discounts created income, held that the purchase of aluminum was an artificial transaction and that the price paid by Indalex to Pillar International was unreasonable in the circumstances and would if considered an expense unduly reduce Indalex's income contrary to s. 245(1) - See paragraphs 40 to 82.

Income Tax - Topic 9545

Tax evasion - Artificial transactions - Sham - Defined - The Federal Court, Trial Division, stated that when a taxpayer enters into a transaction or arrangement solely for the purpose of avoiding tax, with no other bona fide business purpose, the transaction will not be considered a "sham" for tax purposes unless there is also an element of deception - See paragraphs 32, 33.

Income Tax - Topic 9545

Tax evasion - Artificial transactions - Sham - Defined - Transfer pricing - Indalex, an aluminum molding corporation, ordered aluminum from Alcan through a Bermuda company related to Indalex, Pillar International - Indalex paid Pillar International for the aluminum - Pillar International in turn paid Alcan - Alcan then paid a portion of discounts off the purchase price back to Pillar International in Bermuda - The M.N.R. claimed that the discounts were income of Indalex and that the involvement of Pillar International was a sham - The Federal Court, Trial Division, examined the transaction and held that it was not a sham - See paragraphs 32 to 34.

Income Tax - Topic 9546

Tax evasion - Artificial transactions - Business purpose test - Income Tax Act, s. 245(1) - S. 245(1) provided that in computing income from a transaction or operation no deductions were permitted for expenses which would unduly or artificially reduce income - The Federal Court, Trial Division, stated that the absence of a bona fide business purpose for a transaction is not a condition precedent to the application of s. 245(1), if artificiality is otherwise established - The court held therefore that where the Minister of National Revenue alleged that certain expenses claimed by a taxpayer artificially reduced income, it was unnecessary to determine whether the taxpayer in its transaction had a bona fide business purpose - See paragraphs 40 to 42.

Income Tax - Topic 9549

Tax evasion - Artificial transactions - Ineffective or incomplete transaction - Transfer pricing - Indalex, an aluminum molding corporation, ordered aluminum from Alcan through a Bermuda company related to Indalex, Pillar International - Indalex paid Pillar International for the aluminum - Pillar International in turn paid Alcan - Alcan paid a portion of discounts attributable to the purchase price to Pillar International in Bermuda - The Minister of National Revenue claimed that these discounts were income of Indalex, because the involvement of Indalex was artificial and the purchase of aluminum was pursuant to an ineffective contract - The Federal Court, Trial Division, examined the contractual arrangements and held that there was an enforceable contract between Indalex and Pillar International - See paragraphs 35 to 39.

Practice - Topic 7021

Costs - Party and party - Successful party - Exceptions - Conduct - Where successful party presented case in confused and disorganized manner - The Minister of National Revenue was successful in a dispute with a taxpayer over the taxpayer's income - The Federal Court, Trial Division, refused to award costs to the Minister where the Crown's handling of the case at trial was confused and disorganized - See paragraph 98.

Words and Phrases

Artificially reduce income - Meaning of phrase as found in s. 245(1) of the Income Tax Act, S.C. 1970-71-72, c. 63 - See paragraphs 40 to 82.

Cases Noticed:

Stubart Investments Limited v. Minister of National Revenue (1984), 53 N.R. 241; 84 D.T.C. 6305, folld. [para. 32].

I.R.C. v. Duke of Westminster, [1936] A.C. 1, folld. [para. 32].

Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518, folld. [para. 33].

M.N.R. v. Cameron, 72 D.T.C. 6325, refd to. [para. 34].

Brewster v. R., 76 D.T.C. 6046 (F.C.T.D.), refd to. [para. 34].

Produits L.D.G. Products Inc. v. Minister of Revenue (1976), 13 N.R. 438; 76 D.T.C. 6344 (F.C.A.), refd to. [para. 34].

R. v. Esskay Farms Limited, 76 D.T.C. 6010 (F.C.T.D.), refd to. [para. 34].

Massey-Ferguson Ltd. v. Minister of Revenue (1976), 14 N.R. 316; 77 D.T.C. 5013 (F.C.A.), refd to. [para. 34].

Dominion Bridge Co. Ltd. v. R., 75 D.T.C. 5150 (F.C.T.D.), refd to. [para. 34].

Smith, Stone and Knight Ltd. v. Birmingham Corporation, [1939] 4 All E.R. 116 (K.B.D.), refd to. [para. 34].

Bonavista Cold Storage Company Limited v. M.N.R., 83 D.T.C. 89 (T.R.B.), refd to. [para. 34].

M.N.R. v. Leon et al., 76 D.T.C. 6299, refd to. [para. 34].

R. v. Vivian, 84 D.T.C. 6447, 6452, refd to. [para. 34].

May & Butcher, Ltd. v. R., [1934] 2 K.B. 17 (H.L.), refd to. [para. 36].

Hillas & Co., Ltd. v. Arcos Ltd., [1932] All E.R. Rep. 494 (H.L.), refd to. [para. 36].

Foley v. Classique Coaches, Ltd., [1934] 1 K.B. 2 (C.A.), refd to. [para. 36].

Courtney and Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., [1975] 1 All E.R. 716 (C.A.), refd to. [para. 36].

Mallozzi v. Carapelli S.P.A., [1976] Ll. R. 407, refd to. [para. 36].

British Crane Hire Corp. v. Ipswich Plant Hire Ltd., [1975] Q.B. 303 (C.A.), refd to. [para. 36].

Victoria Fur Traders Ltd. v. Roadline (U.K.) Ltd. and British Airways Board, [1981] Ll. R. 570, refd to. [para. 36].

British Bank for Foreign Trade Ltd. v. Novimex Ltd., [1949] 1 All E.R. 155, refd to. [para. 36].

Bushwall Properties Ltd. v. Vortex Properties Ltd. [1975] 2 All E.R. 214, refd to. [para. 36].

Consolidated-Bathurst Limited v. R., 85 D.T.C. 5120, refd to. [para. 42].

Don Fell Limited et al. v. M.N.R. (1981), 81 D.T.C. 5282 (F.C.T.D.), appld. [para. 43].

Sigma Explorations Ltd. v. R., [1975] F.C. 624, appld. [para. 43].

Shulman v. M.N.R., [1961] Ex. C.R. 410, appld. [para. 43].

Spur Oil Limited v. R. (1981), 42 N.R. 131; 81 D.T.C. 5168 (F.C.A.), refd to. [para. 44].

Army and Navy Department Stores v. M.N.R., 53 D.T.C. 1185 (S.C.C.), refd to. [para. 84].

W.L. Craddoch v. M.N.R., [1969] 1 Ex. C.R. 23, refd to. [para. 92].

R. v. Immobiliare Canada Ltd., [1977] C.T.C. 481, refd to. [para. 93].

Guilder News Company (1963) Ltd. v. M.N.R., 73 D.T.C. 5048 (F.C.A.), refd to. [para. 95].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 15(1) [paras. 83]; sect. 56(2) [para. 85]; sect. 67 [para. 45]; sect. 69(1)(a), sect. 69(2) [para. 46]; sect. 212(1) [para. 89]; sect. 212(2), sect. 214(3)(a) [para. 83]; sect. 215 [para. 88]; sect. 245(1) [para. 40]; sect. 245(2) [para. 87]; sect. 248(1) [para. 84]; Part XIII [paras. 83, 91].

Authors and Works Noticed:

Driedger, E.A., Construction of Statutes (2nd. Ed. 1983), p. 87 [para. 91].

Counsel:

Appearances: W.L.N. Somerville, Q.C., T.A. Sweeney, and L.V. Tkachenko, for plaintiff;

C.T.A. MacNab, C.G. Pearson, and D. Winters, for the defendant.

Solicitors of Record:

Borden & Elliott, Toronto, Ontario, for the plaintiff;

Frank Iacobucci, Deputy Attorney General of Canada, for the defendant.

This case was heard at Toronto, Ontario, on October 29-31, November 1, 4-8, 1985, before Reed, J., of the Federal Court of Canada, Trial Division, who delivered the following decision on January 14, 1986: