Canada vs AgraCity Ltd. and Saskatchewan Ltd. August 2020, Tax Court, 2020 TCC 91

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AgraCity Canada had entered into a Services Agreement with a group company, NewAgco Barbados, in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) a generic version of Bayer-Monsanto’s RoundUp.

In reassessing the taxable income of AgraCity for 2007 and 2008 the Canada Revenue Agency relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity.

According to the Canadian Revenue Agency the value created by the parties to the transactions did not align with what was credited to AgraCity and NewAgco Barbados. Hence, 100% of the net sales profits realized from the ClearOut sales by NewAgco Barbados to FNA members – according to the Revenue Agency – should have been AgraCity’s and none of those profits would have been NewAgco’s had they been dealing at arm’s length.

“arm’s length commercial parties would never agree to let NewAgco Barbados have any of the profits if it served no function in the transactions given that it had no assets, employees, resources, or other role or value to contribute to the profit making enterprise or to bring thereto.

The Tax Court found that the purchase, sale, and related transactions with NewAgco Barbados were not a sham, nor was any individual transaction in the series of transactions beginning with the incorporation of NewAgco Barbados for the ClearOut sales activity a sham. The transactions that occurred and were documented were the transactions the parties intended, agreed to, and that the parties reported to others including the Canadian Revenue Agency. Any shortcomings in any paperwork was not intended to deceive the CRA or anyone else.

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