Judicial review application preserved in transfer pricing penalty case
October, 06th 2014
A recent Federal Court of Appeal (FCA) case illustrates how contentious transfer pricing disputes can be – even one a taxpayer believed had been resolved! It also represents a rare situation in which the taxpayer’s application for judicial review, alleging abuse on the part of the Minister of National Revenue, was not struck out as the Minister had requested.
In ?2007, Sifto Canada made a voluntary disclosure to CRA to correct the transfer price of rock salt sold to a US affiliate in the years 2004-2006. CRA’s voluntary disclosure program provides relief from penalties and interest to taxpayers that come forward to the tax authorities to correct past misfilings and who meet the program’s conditions. Sifto Canada’s voluntary disclosure was accepted and the Canadian and US Competent Authorities reached an agreement on the transfer price, which Sifto Canada accepted, on the basis that the agreed price was final and binding and no penalties would apply. Despite that agreement, in 2012, the Minister reassessed Sifto Canada for a $60-million penalty for failing to make reasonable efforts to determine and use an arm’s length transfer price.
Sifto Canada brought two applications for judicial review alleging the Minister had abused her discretion in issuing the reassessment because the successful voluntary disclosure application absolved Sifto Canada of penalties and also that the ?transfer price agreed through the Competent Authority proceeding was binding on the CRA for all purposes of the Income Tax Act (by virtue of s. 115.1(1) of the Income Tax Act).
The Minister sought to have the applications struck on the basis that they lacked any possibility of success. The prothonotary hearing the applications in the first instance declined to strike the motions and the prothonotary’s decision was upheld on appeal by the Minister to the Federal Court. The Minister further appealed to the Federal Court of Appeal, relying on the 2013 decision of the FCA? in another case,JP Morgan Asset Management, which was released after the Federal Court’s decision in Sifto Canada. In the JP Morgan case, which involved allegations of abuse of discretion by CRA concerning withholding tax reassessments, the FCA appeared to send a clear message to taxpayers and tax advisors that judicial review applications are too common and often are nothing more than “artful” and invalid collateral attacks on the exclusive jurisdiction of the Tax Court of Canada to determine the validity of tax reassessments.
It is therefore interesting – and significant – that the FCA ?declined to grant the Minister’s appeal to strike out Sifto Canada’s application for judicial review. (One application was dropped by the time the matter reached the FCA so only the application regarding the transfer pricing penalty was ruled on by the Court.) While the FCA noted that some aspects of an income tax penalty are the proper subject of an appeal to the Tax Court, the Court stated that the Tax Court does not have jurisdiction to determine if the Minister properly exercised his or her discretion to waive or cancel a penalty. This can only be decided by way of application for judicial review to the Federal Court. The FCA also rejected the Minister’s arguments that Sifto Canada’s application was premature and also invalid because the relief sought was improperly drafted stating (at para 25) “if the application is not perfectly drafted at this stage, the Federal Court has ample scope for permitting amendments if required to ensure that the actual dispute is properly before the Court.”
The Sifto Canada case is an important case that confirms that taxpayers do have recourse to the Federal Court by way of judicial review in circumstances where there is alleged to have been an improper exercise of discretion on the part of the Minister by failing to waive or cancel a penalty