July 3, 2008
Transfer Pricing Decision —
Number 1895
GlaxoSmithKline Inc. v. The Queen
The long-awaited decision of GlaxoSmithKline Inc. v. The Queen was Revised Guides . . . . . . . .
recently released by the Tax Court of Canada, setting a precedent as amajor victory for the Canada Revenue Agency (the ‘‘CRA’’) in the transfer Revised Forms . . . . . . . . .
pricing arena. The decision, dated May 30, 2008, may serve to encourage Recent Cases . . . . . . . . . . .
the CRA to be more aggressive in its transfer pricing assessments againstCanadian companies that are part of a multi-national enterprise (‘‘MNE’’).
Importantly, the Court gave its blessing to the OECD and the CRA’s hier- archy of transfer pricing methodology. In addition, the decision demon- strates the importance that the Tax Court of Canada is increasingly placing on expert testimony in resolving tax disputes.
scholarship amountsreceived fromemployers, sharesreceived ascompensation, medical Background
expenses, and denialof CCA claims forcomputer software.
GlaxoSmithKline Inc. (‘‘Glaxo Canada’’) appealed from assessments in which the Minister of National Revenue (the ‘‘Minister’’) claimed that inthe 1990 through 1993 taxation years, Glaxo Canada overpaid for thepurchase of ranitidine to its non-arm’s length supplier, Adechsa S.A.
(‘‘Adechsa’’), contrary to subsection 69(2) of the Income Tax Act (the‘‘Act’’) (the ‘‘Part I assessments’’). Adechsa is a Swiss corporation that, likeGlaxo Canada, is a wholly owned subsidiary of Glaxo Group Limited(‘‘Glaxo Group’’), a U.K. corporation. Subsection 69(2) provided that: Where a taxpayer has paid or agreement to pay to a non-resident person with whom the taxpayer was not dealing at arm’s length as price,rental, royalty or other payment for or for the use or reproduction of anyproperty, or as consideration for the carriage of goods or passengers orfor other services, an amount greater than the amount (in this subsec-tion referred to as ‘‘the reasonable amount’’) that would have beenreasonable in the circumstances if the non-resident person and the Tax Topics
In addition to the Supply Agreement with Adechsa, taxpayer had been dealing at arm’s length, the reason- Glaxo Canada was party to a Licence Agreement with Glaxo able amount shall, for the purpose of computing the Group in respect of the production and distribution of taxpayer’s income under this Part, be deemed to have Zantac in Canada. The terms of the Licence Agreement been the amount that was paid or is payable therefore.
provided that Glaxo Canada would pay Glaxo Group a royalty of 6% on its net sales of Zantac, and in exchange,the Glaxo Group would provide Glaxo Canada with various Subsection 69(2) is the predecessor to section 247 of services and intangibles, including the right to manufacture the current Act, which provides for transfer pricing adjust- and sell Zantac; use the trademarks; use registration mater- ments and penalties. It is noteworthy that section 247 does ials prepared by Glaxo Group, to be adapted to the Cana- not contain the phrase ‘‘reasonable in the circumstances’’.
dian environment and submitted to Canadian regulators;and receive technical assistance — as well as access to new Ranitidine is the active pharmaceutical ingredient in products and improvements; marketing support; and the popular ulcer drug, sold in Canada as Zantac. During indemnification against damages arising from patent the years under appeal, two other pharmaceutical compa- nies were selling generic versions of Zantac in Canada, and In reassessing Glaxo Canada, the Minister denied the both companies purchased ranitidine from arm’s length deduction of the cost of purchasing ranitidine, to the suppliers for considerably less than the price paid by Glaxo extent that the amount paid exceeded the highest price Canada. During the relevant taxation years, Glaxo Canada per kilogram paid by the generic companies. In addition, paid approximately $1,600 per kilogram of ranitidine to the Minister treated the excess amount paid to Adechsa as Adechsa pursuant to the terms of a Supply Agreement, a deemed dividend paid to Glaxo Group, on the basis that while the generic companies paid between $200 and $300 it had directed or concurred with the payment or transfer per kilogram to their suppliers. The Supply Agreement also of the excess amount by Glaxo Canada to Adechsa as a provided protection against foreign currency exchange, benefit that Glaxo Group desired to confer on Adechsa, indemnity insurance and certain intellectual property.
within the meaning of subsection 56(2) and paragraph According to the Minister, a reasonable amount for Glaxo 214(3)(a) of the Act. The Minister reassessed Glaxo Canada Canada to have paid for ranitidine was the highest price for unpaid withholding taxes on such deemed dividends paid to Glaxo Group under Part XIII (the ‘‘Part XIII assess-ments’’).
Glaxo Canada’s position with respect to the Part I Published weekly by CCH Canadian Limited. For subscription assessments was that the price it paid for ranitidine was information, see your CCH Account Manager or call reasonable in the circumstances, within the meaning of 1-800-268-4522 or (416) 224-2248 (Toronto).
subsection 69(2), on the basis that its business model and circumstances were not comparable to those of the generic companies, and that the ranitidine purchased by Glaxo Canada from Adechsa was manufactured under Glaxo World’s standards, and produced in accordance with Glaxo World’s health, safety and environmental stan- dards and that the generic companies were not subject to Ultimately, the Minister was successful with some slight adjustments in respect of both the Part I assessment and PUBLICATIONS MAIL AGREEMENT NO. 40064546RETURN UNDELIVERABLE CANADIAN ADDRESSES TO Evidence and Findings of Fact
330–123 MAIN STTORONTO ON M5W 1A1 At trial, Glaxo Canada argued that its total cost of purchasing ranitidine included royalties paid under theLicence Agreement since, in the circumstances, the bene- fits available to it under the Licence Agreement were rele- vant in determining the proper price at which an arm’slength party would have been prepared to pay to purchase Tax Topics
ranitidine from Adechsa under the Supply Agreement.
whether its profits are in the form of royalty payments orpurchase price belittles the issue in these appeals.
Expert testimony revealed that both Glaxo Canada andGlaxo Group were concerned about the ‘‘net transfer Some of the evidence introduced at trial made this price’’, which would take into account both the cost of the case an uphill battle for the taxpayer. Particularly damaging ranitidine and the royalty, such that the total of the two was in the eyes of the Court was a letter written by the then the real cost to Glaxo Canada of selling ranitidine in CEO of Glaxo Canada, Jacques Lapointe, which discussed Canada and would reflect a true picture of what Glaxo an offer made in 1988 by ACIC, a Toronto manufacturer of Canada’s taxable income should have been. The experts ranitidine to sell its product to Glaxo Canada for a one time argued on behalf of Glaxo Canada that what was important payment of $240,000 for research, and then $350 to $400 for transfer pricing purposes was the appropriate profit that per kilogram. In the letter, Lapointe stated that Glaxo should have been attributable to the Canadian company.
Canada’s best course of action would be to stall ACIC for as This argument is consistent with the wording of subsection long as possible to prevent a similar offer from going to the 69(2), in that the provision would not require an adjust- generic companies. He pointed out that it would be much ment to Glaxo Canada’s income if it could show that even more difficult to defend against the generic companies if if the price it paid for the ranitidine was substantially higher the generics’ quality was equal to or superior to that than the price paid by its generic competitors, it might still offered by Zantac. In addition, Lapointe stated that because be considered ‘‘reasonable in the circumstances’’ where Glaxo Canada had already been challenged by the CRA on Glaxo Canada received other offsetting benefits that would the transfer pricing of ranitidine, ‘‘in view of the availability of raw material on the world market in the $350 pricerange’’, the offer by ACIC would have ‘‘significant financial However, Justice Rip agreed with the Crown and con- implications’’. In addition to Glaxo Canada’s argument that cluded that the Supply Agreement and the Licence Agree- their transfer pricing includes the development costs of ment covered separate matters and were to be considered Glaxo material, the letter stated that ACIC’s offering price of independently. The Court relied on the Supreme Court of ‘‘good quality’’ ranitidine manufactured in Canada at such Canada decision in Singleton (2001 DTC 5533) and con- a low price would undermine their argument that the cluded that ‘‘one must look at the transaction in issue and reason they do not purchase the cheaper ranitidine avail- not the surrounding circumstances, other transactions or able offshore is because it is of poor quality.
other realities because in order to give effect to the legalrelations, one has to view the agreements independently’’.
While Glaxo Canada’s position was that the European He went on to conclude that ‘‘it may well be that a 40% co-marketers of Zantac were the most appropriate compa- total profit to Glaxo Group is reasonable; however, the rators, the evidence at trial revealed that Adechsa had been issue before me is whether the purchase price of the rani- selling ranitidine to an unrelated Indian company for $225 tidine was reasonable. One cannot combine the two trans- per kilogram and to an unrelated Egyptian company for actions and ignore the distinct tax treatments that follow $630 per kilogram, where the price was determined based on ‘‘the need to compete with generic ranitidine’’. JusticeRip found these to be near-perfect comparable transac- The Court recognized that the difficulty in adopting a net transfer pricing approach is that it ignored the differingtax treatment for various payments. When one of the GlaxoCanada experts testified that as long as the innovator of the Transfer Pricing Methodology
drug gets his 40% profit, it does not matter whether theprofit is through the purchase price or through royalties or Perhaps the most significant aspect of the Court’s rea- a combination of both, Justice Rip scolded him: sons in this decision is that the Court fully endorsed theOECD’s hierarchy of transfer pricing methods (and the By suggesting that the taxation issue be minimized, CRA’s), but in doing so, made it abundantly clear that the Dr. Bell has demonstrated that he has a flawed under- comparable uncontrolled price (‘‘CUP’’) method should standing of a transfer pricing inquiry. The purpose always be the primary method and it is the only method behind this exercise is to determine a reasonable that will be accepted by the courts when a CUP is available.
purchase price for the API [active pharmaceutical ingre- Secondary methods will only be accepted when there is dient] and ultimately to determine the tax liability of the appellant. Royalty payments in Canada are subject towithholding tax and the profit will accrue to Glaxo Group In its transfer pricing analysis, Glaxo Canada relied on and be taxed in the United Kingdom. The purchase price the resale price method (‘‘RPM’’) and the transactional net for ranitidine is not subject to any withholding tax andthe profit accrues in Switzerland, and ultimately in Singa- margin method (‘‘TNMM’’), while the Crown relied on the pore. To suggest that Glaxo Group does not care cost-plus method to support its CUP analysis. Justice Rip Tax Topics
rejected the use of the RPM in this case on the basis that therefore are likely punitive to Glaxo Canada because the the RPM’s reliability is limited to situations where the return arm’s length principle is only applied in respect of the of only one function, such as marketing, is being measured.
Supply Agreement and the adjustments made in theassessments do not take into account any other costs orbenefits received by Glaxo Canada from the Glaxo corpo-rate group.
Expert Testimony
For example, Glaxo Canada was required to conduct Glaxo Canada’s expert testimony came largely from its business in accordance with Glaxo Group’s standards transfer pricing experts Dr. Gregory Bell and Dr. J. Gregory and was required to purchase its ranitidine from Ballentine, based in Washington D.C. The Crown’s expert, Glaxo-approved sources. In addition, these standards Dr. Jack Mintz, is a well-known Canadian economist as well required that Zantac be manufactured under Glaxo as tax policy specialist. He is often quoted in the Canadian Group’s standards of good manufacturing practices; granu- press and he has authored numerous papers on public lated to Glaxo Group standards; and produced in accor- policy. He is the former president and CEO of the C.D.
dance with Glaxo Group’s health, safety and environmental standards. This, as well as the many other conditions underwhich Glaxo Canada operated, was imposed on Glaxo It was evident throughout the decision that Justice Rip Canada, not by virtue of the Supply Agreement itself, but by very clearly preferred the testimony of Dr. Mintz over that of virtue of other agreements and the surrounding business the taxpayer’s experts. He mentioned several times environment of the Glaxo MNE as a whole. While these throughout the judgment that he thought the analysis and requirements were acknowledged by Justice Rip, he did conclusions of Glaxo Canada’s experts were unreasonable.
The fact that the experts played such a significant role inthe outcome of the decision is noteworthy, as this seems The GMP performed by Singapore may have increased to be a growing trend with complicated fact-based tax the value of its ranitidine but only to the extent that, as disputes. This was evident in the recent decisions of the stated earlier in these reasons, it gave some degree of Tax Court of Canada in Knights of Columbus v. The Queen comfort to the appellant that the product would prob- (2008 DTC 3648) and in Pr ´evost Car Inc. v. The Queen ably have less impurities and contaminants than that of (2008 DTC 3080). Litigants may find that they are spending its generic competition. No submissions were made asto what this extra consideration should be.
more time and money on hiring the ‘‘best’’ experts inorder to ensure that their expert is most convincing incourt.
Part XIII Reassessments
Denial of Deduction for Excess Purchase
Justice Rip went on to conclude that the excess amounts paid by Glaxo Canada to Adechsa for ranitidineshould be subject to withholding tax as a deemed divi-dend to its parent company, Glaxo Group.
In the end, the Court agreed with the Minister’s assess- ment and denied Glaxo Canada’s deduction in respect ofthe purchase of ranitidine to the extent it exceeded thehighest price paid by the generic companies in the taxationyears in dispute. The Court did make a minor adjustment to allow an additional $25 per kilogram in recognition ofthe fact that Glaxo Canada purchased granulated ranitidine It will be interesting to see if the taxpayer appeals the GlaxoSmithKline decision. While many of the fascinatingaspects of the reasons in this case relate to findings of fact, The result of the Court limiting its inquiry to an analysis there are some important interpretation issues that could of the price paid under the Supply Agreement without be considered in the Federal Court of Appeal. Because taking into consideration the surrounding circumstances is these reassessments related to adjustments under former that Glaxo Canada’s taxable income is likely inflated above subsection 69(2) of the Act and not under the current sec- the amount of income that it would have received had tion 247, an appeals court could consider whether the there been an overall analysis of the functions it performed words ‘‘reasonable in the circumstances’’ in the former and the risks it assumed in connection with the production subsection were appropriately considered and applied by and distribution of Zantac in Canada. The tax adjustments Tax Topics
● R107, Regulation 105 Waiver Application — Film Industry Conclusions
For multinational enterprises operating in Canada, this ● RC64, Children’s Special Allowances (Rev. 08) ● It is critically important that the terms of each ● RC65, Marital Status Change (Rev. 08) cross-border transaction between related parties reflectan arm’s length standard. While it may be possible tonegotiate multiple adjustments with a CRA auditor orthrough the mutual agreement procedure under an Recent Cases
applicable tax treaty, there is evidently no ability to take a‘‘net transfer pricing’’ approach before the Canadian Note that the paragraph references following the courts. In addition, under today’s transfer pricing rules, case digests below are to paragraphs in the ‘‘New section 247 will impose penalties where taxpayers have Matters’’ division in Volume 7. The full text of each not made reasonable efforts to determine appropriate case is reproduced in the publisher’s loose leaf ● The OECD hierarchy of transfer pricing methodology has now been accepted as law in Canada. Failure to utilize Corporate taxpayer statute-barred from
an available CUP in transfer pricing analysis is likely to claiming tax refund
face increased scrutiny by CRA auditors. The problem inthe Canadian context is that finding a true comparable Pursuant to the Minister’s arbitrary assessment in April can be extremely challenging and foreign transactions 2005 of tax owing for 2002 and 2003, the corporate tax- are seldom comparable. The Court in this case even payer made monthly tax payments, and eventually filed its quoted the OECD Commentary, which recognizes therarity of an arm’s length price in one country providing a 2002 return on September 26, 2006. On November 24, basis for determining an arm’s length price in another.
2006, the Minister reassessed for 2002, showing a credit of$5,842.96 in the taxpayer’s favour. On its appeal to the Tax ● The utilization and choice of experts in tax litigation are Court of Canada, the taxpayer argued that this $5,842.96 increasingly a critical component of successfully should be applied to tax owing for other years. The Min- ister’s position was that the appeal should be dismissed asan appeal from a nil reassessment or, in the alternative, that — Christopher Steeves, Partner, and Joanna Barsky, Asso- the Minister had no jurisdiction to refund the $5,842.96 to ciate, in the Tax Department of the Toronto Office of the taxpayer (which was a corporation) under subsec- tion 164(1) of the Act, because it had not filed its 2002return within the three-year period contemplated in thatsubsection.
Revised Guides
The taxpayer’s appeal was dismissed. As the Minister In this week’s print report, the following revised guides contended, the taxpayer was statute-barred from claiming have been reproduced in the ‘‘Guides’’ tab division in a refund under subsection 164(1). Also, since the taxpayer was a corporation, it could not avail itself of the refund ● T4114, Your Canada Child Tax Benefit — For the Period relief available to individuals under subsection 164(1.5). As well, the application of refunds to other debts under sub-section 164(2) was not available to the taxpayer. A ‘‘statu- ● T4127-JUL, Payroll Deductions Formulas for Computer tory set-off’’ signed by a Canada Revenue Agency collec- Programs — 85th Edition — Effective July 1, 2008 (Rev. 08) tion officer was also of no assistance to the taxpayer, sincethere was nothing actually ‘‘payable’’ to the taxpayer whenthat set-off document was executed. Finally, the 2002 reas- Revised Forms
sessment was a nil reassessment from which no appeal In this week’s print report, the following revised forms have been reproduced in the ‘‘Forms’’ tab division inVolume 7: ¶46,291, Landmark Auto sales Ltd., 2008 DTC 2966 Tax Topics
daughter had to maintain an annual academic average of Taxpayers entitled to deduct mortgage
at least 70%. For the reasons given in DiMaria v. The interest in proportion to their partnership
Queen, 2008 DTC 3027 (TCC), therefore, the $1,200 was interests
scholarship income in the hands of the taxpayer’s daughterunder paragraph 56(1)(n) of the Act. The Minister was The taxpayers (husband and wife) purchased a large lot (the ‘‘Property’’) in a 75%–25% partnership for $630,000,using the proceeds of sale of their former residence ($350,000), and financing the balance of the purchase pricewith a vendors’ mortgage of $280,000, which was later refi-nanced for $305,000. The Property was subdivided into fivelots, on one of which was a personal residence in which Taxpayer not entitled to foreign tax credits
the taxpayers lived. In reassessing the taxpayers for 2002 for amounts withheld from proceeds on
and 2003, the Minister disallowed their deduction of a por- the sale of U.S. securities
tion of the mortgage interest on the refinanced vendors’mortgage. The Minister’s position was that the ‘‘direct use’’ The taxpayer, who was employed by the Boeing Com- of the proceeds of this mortgage had been to finance the pany (‘‘Boeing’’), sold shares of Boeing that he had purchase of the entire Property, so that the personal resi- acquired under stock options granted to him by Boeing. In dence portion of the mortgage should not qualify for assessing the taxpayer for 2005, the Minister disallowed the interest deductions. The taxpayers appealed to the Tax deduction as a foreign tax credit of amounts withheld from the taxpayer’s proceeds of disposition of his Boeing sharesby the broker who had handled the sales transaction (the The taxpayers’ appeal was allowed. The purpose of the ‘‘Withheld Amounts’’). The Minister’s position was that the vendors’ mortgage was to secure the purchase of the por- taxpayer was not liable for any U.S. tax on his sale of his tion of the Property that was to be subdivided and sold. It Boeing shares, since he was neither a resident nor a citizen was not relevant that the vendors’ mortgage was secured of the U.S. and the capital gains resulting from this sale against the entire Property, or that the taxpayers resided in were exempt from U.S. tax under Article XIII of the the personal residence on one subdivided lot on the Prop- Canada–U.S. Tax Convention (the ‘‘Convention’’). On his erty. The taxpayers were therefore entitled to deduct all of appeal to the Tax Court of Canada, the taxpayer argued the interest on the vendors’ mortgage for the years under that he had no control over the Withheld Amounts and appeal, in their respective partnership portions of 75% and that they were a tax payable by him under the withholding provisions of section 1441 of the U.S. Internal RevenueCode (the ‘‘Code’’).
The taxpayer’s appeal was dismissed. The taxpayer failed to establish conclusively that the Withheld Amounts Scholarship amount received by taxpayer
should have been withheld under section 1441 of the for daughter’s benefit was not an
Code or that they were a tax at all, since they did not employment benefit
coincide with the amounts specifically referred to in sec-tion 1441. Also, the taxpayer took no steps to determine The taxpayer was a full-time employee of the Univer- his liability for U.S. tax as a result of the application of the sity of Western Ontario (‘‘UWO’’). In assessing the taxpayer provisions of the Convention. The Minister’s assessment for 2004, the Minister included in her income, as an employment benefit, $1,200 paid to her from the UWOScholarship Plan (the ‘‘Plan’’), and given by her to her daughter to be applied to the latter’s tuition at UWO. Thetaxpayer appealed to the Tax Court of Canada.
The taxpayer’s appeal was allowed. The taxpayer Minister’s assessments based on
received the $1,200 on a resulting trust for her daughter, settlement agreement between taxpayer
since there was a common intention between both the and Revenue Quebec set aside
taxpayer and the daughter that the latter would have thebeneficial interest in the $1,200. Also, the taxpayer received In assessing the corporate taxpayer for federal tax for no measurable economic advantage from the $1,200, so 1995, 1996, and 1998, the Minister added amounts to its that it was not an employment benefit in her hands. As reported income for those years. The Minister’s assess- well, to receive and retain the $1,200, the taxpayer’s ments were based on a settlement agreement reached by Tax Topics
the taxpayer with Revenue Quebec (the ‘‘Settlement’’). The of AVL for a specified number of USX shares. The taxpayer taxpayer appealed to the Tax Court of Canada.
received shares of AVL for a consideration of $1. The tax-payer’s AVL shares were exchanged for USX shares, which The taxpayer’s appeal was allowed. The Settlement were held in escrow under the terms of an escrow agree- was not relevant to this appeal. The Minister did not ana- ment. The shares were never distributed to the taxpayer lyze the figures used in the Settlement, but merely and continued to be held in escrow until USX’s successor, accepted them on their face value when producing the TC, ceased operations. In reassessing the taxpayer for 1999, federal assessments forming the subject matter of this the Minister included the value of the shares as income appeal. Conversely, the testimony offered by the taxpayer from an office or employment under subsection 5(1) and was sincere and credible. The taxpayer had only agreed to paragraph 6(1)(a) of the Act. The taxpayer appealed to the the Settlement to prevent its business from being termi- nated. The evidence given before the Tax Court was there-fore sufficient to discharge the onus of disproving the The taxpayer’s appeal was dismissed. The shares were validity of the Minister’s assessments.
issued to the taxpayer as compensation for his past serv-ices to his employer. As the taxpayer enjoyed full rights to the shares at the time they were issued, the shares consti-tuted income to the taxpayer. In addition, the issuance ofthe shares was not, in substance, economically equivalent Amounts paid by employer under
to the issuance of stock options and, therefore, the taxtreatment applicable for stock options did not apply. As a scholastic achievement program did not
result, the Minister’s assessment was correct and was constitute employment benefits
In assessing the taxpayer for 2004, the Minister included in his income as an employment benefit $3,000 received by his 21-year-old son, Andrew, from a gratuitousHigher Education Award Program (‘‘HEAP’’) instituted by thetaxpayer’s employer to recognize the scholastic achieve- Taxpayer entitled to medical expense tax
ments of employees’ children. The taxpayer appealed to credits for payments made to institutions
providing medical services
The taxpayer’s appeal was allowed. The taxpayer received no measurable economic advantage from the The taxpayer claimed a medical expense tax credit $3,000 received by Andrew, since he had no right to under subsection 118.2(1) of the Act in respect of pay- recover it from Andrew. Therefore, it was not an employ- ments made to two institutions for medical services pro- ment benefit in the taxpayer’s hands under para- vided by medical practitioners and nurses under the insti- graph 6(1)(a). Also, the benefits inclusion provisions of sub- tutions’ employ. In reassessing the taxpayer for 2004, the section 6(3) and 246(1) of the Act were inapplicable, since Minister disallowed the taxpayer’s medical expense credit the taxpayer never received any benefit. The purpose of claim on the basis that the respective payments were not the $3,000 HEAP award was to recognize scholastic made to a medical practitioner within the meaning of para- achievement, and the taxpayer was required to have a 70% graph 118.2(2)(a) of the Act. The taxpayer appealed to the grade average before applying for that award. Therefore, the $3,000 was scholarship income in Andrew’s handsunder paragraph 56(1)(n) of the Act.
The taxpayer’s appeal was allowed. The taxpayer issued payments to medical practitioners for medical serv- ices within the meaning of the Act and was entitled toclaim a medical expense tax credit. Based on the wordingof paragraph 118.2(2)(a), a payment for medical services Shares received were compensation for
could be issued either directly or indirectly to a medicalpractitioner. As a result, an amount paid to a medical prac- past employment services
titioner also included an amount paid to an institution in In 1999, the taxpayer’s corporate employer (‘‘AVL’’), of respect of medical services provided by the institution’s which the taxpayer was president and director, entered into an agreement with another corporation (‘‘USX’’) toeffect an exchange of all the issued and outstanding shares Tax Topics
potential revenues that could be derived from the Taxpayer entitled to deduct excess RRSP
Software. In reassessing the taxpayers for 1994 to 2000, the contributions
Minister disallowed CCA claimed on the Software. The Min- The taxpayer made excess contributions to her RRSP ister’s position was that: (a) the Software was not acquired for 1995 to 1998 and 2001. Upon becoming aware of this, to earn income; (b) the taxpayers acquired only a right to she withdrew $10,000 from her RRSP in 2005. In assessing market the Software, but did not acquire full ownership of the taxpayer for 2005, the Minister refused her a $10,000 it; (c) the Software was not ‘‘available for use’’ (as required deduction under the excess contribution provisions of under subsection 13(26) of the Act); (d) the taxpayers’ obli- subsection 146(8.2) of the Act. The taxpayer appealed to gation to pay the purchase price for the Software was con- tingent only, so that there was no cost for CCA purposes;and (e) the software had no value, so that its cost was nil The taxpayer’s appeal was allowed. The taxpayer’s under the non-arm’s length acquisition provisions of sec- undeducted (excess) contributions from 2004 and 2005 of tion 69 of the Act. The taxpayers appealed to the Tax Court $10,206 all related to the amount contributed to her RRSP in 2003. The $10,000 withdrawal made by her in 2005 fromher RRSP was therefore made within the time limitation The taxpayers’ appeals were dismissed. It was more periods set out in paragraph 146(8.2)(c) of the Act. Since likely than not that the taxpayers acquired the Software for the Minister did not plead paragraph 60(j.1) of the Act and tax deduction purposes only, with no ancillary did not lead any evidence respecting this paragraph, its income-earning purpose. Also, the Warranty was struc- application to the taxpayer’s appeal could not be consid- tured so as to give the taxpayers a chance to walk away ered. The Minister’s reassessment as vacated accordingly.
from their obligation to purchase the Software, since therevenue projections in the Warranty were unrealistic.
Hence, the taxpayers never incurred an absolute obligationto purchase the Software, even if their intention was toearn income. This obligation, therefore, was only contin- Taxpayers not entitled to deduct CCA on
gent, and the cost of the Software in the taxpayers’ hands acquisition costs for computer software
was nil. These conclusions made it unnecessary to con- In 1994, the taxpayers acquired computer software sider the Minister’s other arguments. The Minister’s reas- (the ‘‘Software’’) in what the Minister alleged to be a sessments were affirmed accordingly.
non-arm’s length transaction. A warranty was given to themby the vendor of the Software (the ‘‘Warranty’’) as to the Tax Topics is a registered trademark of CCH Canadian Limited.

Source: http://www.cma-canada.org/multimedia/ontario/centre/bl200807_tax_notes_1895.pdf

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