AgraCity Ltd. v. The Queen, Case Study

• Published date: 24 November 2020
• Subject Matter: Tax, Income Tax, Transfer Pricing, Tax Authorities
• Law Firm: Gardiner Roberts LLP
• Author: Mr Lorne Saltman

In a recent case in the Tax Court of Canada, the Minister of National Revenue failed to support a reassessment of AgraCity Ltd. (the "Taxpayer") under the transfer pricing rules of the Income Tax Act (Canada)(the "ITA").

The Taxpayer was part of a corporate group in Saskatchewan, the Farmers of North America ("FNA"), that was established to act as agent to purchase a glyphosate-based herbicide, "ClearOut" (being a generic version of Bayer-Monsanto's RoundUp), for sale to farmers in Canada. Originally, FNA used an American subsidiary to act as the wholesaler, but then caused the activities to be transferred to a Barbados subsidiary of the Taxpayer, "NewAgco Barbados", apparently in order to reduce the high taxes payable in the U.S.A. New Agco Barbados would acquire its inventory of ClearOut from an arm's length supplier, and determined its selling price on the basis of its costs plus a markup for profit.

NewAgco Barbados and the Taxpayer entered into a service agreement under which the Taxpayer provided logistical and related support for the sales and deliveries to the Canadian buyers. Meanwhile, the FNA group promoted the sales of ClearOut to the target market of Canadian farmers.

The Canada Revenue Agency (the "CRA") reassessed the Taxpayer on several bases and allocated all of the profits of NewAgco Barbados to the Taxpayer in respect of the sales of ClearOut to FNA's Canadian farmers.

First, the CRA asserted that the transactions were a sham. The CRA alleged that NewAgco Barbados held no assets and performed no economic activities; it performed no value-add functions and assumed no risk; in fact it was the Taxpayer that undertook all of the functions and assumed all of the risks. In addition, the service agreement did not reflect the true agreement between the parties. These parties acted in concert to give the false appearance that NewAgco Barbados was carrying on the business of selling ClearOut. The parties knew that the profits reported by NewAgco Barbados from selling ClearOut were actually the profits of the Taxpayer,

Second, the CRA asserted that under the transfer pricing rules of section 247 of the ITA, the transactions were primarily entered into to obtain tax benefits under the ITA; the parties' transactions would not have been entered into between arm's length parties; and the terms and conditions of the transactions were not the same as those that would have applied between arm's length parties.

The Court found against the CRA on the issue...