Marzen Artistic Aluminum Ltd. v. Minister of National Revenue,

• Jurisdiction: Federal Jurisdiction (Canada)
• Judge: Nadon, Scott and Rennie, JJ.A.
• Citation: (2016), 480 N.R. 306 (FCA),2016 FCA 34
• Court: Court of Appeal (Canada)
• Date: 29 January 2016

Marzen Artistic Aluminum v. MNR (2016), 480 N.R. 306 (FCA)

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[French language version follows English language version]

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

Temp. Cite: [2016] N.R. TBEd. FE.005

Marzen Artistic Aluminum Ltd. (appellant) v. Her Majesty The Queen (respondent)

(A-387-14; 2016 FCA 34; 2016 CAF 34)

Indexed As: Marzen Artistic Aluminum Ltd. v. Minister of National Revenue

Federal Court of Appeal

Nadon, Scott and Rennie, JJ.A.

January 29, 2016.

Summary:

Marzen was a Canadian corporation that manufactured windows. A sister company (SWI) in the U.S. was unsuccessful in penetrating the U.S. market. Marzen incorporated a wholly-owned subsidiary (SII) in Barbados and paid SII for sales, marketing and support services in the U.S. under a Marketing and Sales Services Agreement. The Minister of National Revenue applied ss. 247(2)(a) and (c) of the Income Tax Act (transfer pricing adjustments) to disallow the amount Marzen deducted from its income for fees paid to SII for 2000 and 2001 and impose a penalty provided for under the Act. The Minister determined that Marzen and SII did not deal at arm's length and the amount paid to SII was greater than the amount a person dealing at arm's length would have paid to SII for sales, marketing and support services. Marzen appealed.

The Tax Court of Canada, in a judgment reported 2014 TCC 194, dismissed the appeal except for a minor adjustment of US $32,500 in both of the years in issue. Marzen appealed.

The Federal Court of Appeal dismissed the appeal.

Income Tax - Topic 3047

Computation of income - Inadequate consideration - Payment to non-resident - Not at arm's length (ss. 247(2)(a) and (c)) - Marzen was a Canadian corporation that manufactured windows - A sister company (SWI) in the U.S. was unsuccessful in penetrating the U.S. market - Marzen incorporated a wholly-owned subsidiary (SII) in Barbados and paid SII for sales, marketing and support services in the U.S. under a Marketing and Sales Services Agreement - The Minister of National Revenue applied ss. 247(2)(a) and (c) of the Income Tax Act (transfer pricing adjustments) to disallow the amount Marzen deducted from its income for fees paid to SII for 2000 and 2001 and impose a penalty provided for under the Act - The Minister determined that Marzen and SII did not deal at arm's length and the amount paid to SII was greater than the amount a person dealing at arm's length would have paid - The Tax Court of Canada dismissed Marzen's appeal except for a minor adjustment - The Federal Court of Appeal dismissed Marzen's appeal - Identifying the fair market value of a transaction between related companies was the underlying principle in transfer pricing - While the Organization for Economic Co-operation and Development (OECD) Guidelines (1995) did not have the force of law, they were relied on by the courts to determine the reasonable amount parties dealing at arm's length would have paid for the services provided - Transfer pricing analysis was inherently fact driven - The Tax Court judge made no error in concluding that SII was essentially an empty shell with no personnel, no assets and no risk or in determining what an arm's length party would have paid for those services - The Guidelines provided for several methodologies - The rejection of the methodology proposed by Marzen in favour of the one proposed by the Minister was supported by the evidence - See paragraphs 47 to 58.

Income Tax - Topic 3048

Computation of income - Inadequate consideration - Payment to non-resident - "Reasonable amount" - Assessment of - Considerations (ss. 247(2)(a) and (c)) - [See Income Tax - Topic 3047].

Cases Noticed:

GlaxoSmithKline Inc. v. Minister of National Revenue, [2012] 3 S.C.R. 3; 435 N.R. 82; 2012 SCC 52, refd to. [para. 18].

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, refd to. [para. 32].

Minister of National Revenue v. General Electric Capital Canada Inc., [2011] C.T.C. 126; 414 N.R. 304; 2010 FCA 344, refd to. [para. 47].

Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 54].

Minister of National Revenue v. Salaison Lévesque Inc. (2014), 479 N.R. 199; 2014 FCA 296, refd to. [para. 54].

Guibord v. Minister of National Revenue, [2011] N.R. Uned. 196; 2011 FCA 346, refd to. [para. 59].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 247(2)(a), sect. 247(2)(c), sect. 247(3) [para. 14].

Counsel:

Steven M. Cook and S. Nathasha Reid, for the appellant, Marzen Artistic Aluminum Ltd.;

Michael Taylor and Selena Sit, for the respondent, Minister of National Revenue.

Solicitors of Record:

Thorsteinssons LLP, Vancouver, British Columbia, for the appellant, Marzen Artistic Aluminum Ltd.;

William F. Pentney, Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent, Minister of National Revenue.

This appeal was heard on November 19, 2015, at Vancouver, B.C., before Nadon, Scott and Rennie, JJ.A., of the Federal Court of Appeal.

On January 29, 2016, Scott, J.A., delivered the following judgment for the Court of Appeal.