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Supreme Court of Canada C: Canada V. Glaxosmithkline Inc., 2012 SCC 52, (2012) 3 D: 20121018 D: 33874 B: Her Majesty The Queen
Supreme Court of Canada C: Canada V. Glaxosmithkline Inc., 2012 SCC 52, (2012) 3 D: 20121018 D: 33874 B: Her Majesty The Queen
CITATION: Canada v. GlaxoSmithKline Inc., 2012 SCC 52, [2012] 3 DATE: 20121018
S.C.R. 3 DOCKET: 33874
BETWEEN:
Her Majesty The Queen
Appellant/Respondent on cross-appeal
and
GlaxoSmithKline Inc.
Respondent/Appellant on cross-appeal
v.
2012 SCC 52
Present: McLachlin C.J. and Deschamps, Abella, Rothstein, Cromwell, Moldaver and
Karakatsanis JJ.
reassessing taxpayer by increasing its income on basis that taxpayer had overpaid
account in determining reasonable arms length price against which to compare non-
taken into account Whether Federal Court of Appeal erred in remitting matter to
Tax Court for rehearing and reconsideration Income Tax Act, R.S.C. 1985, c. 1
name anti-ulcer drug Zantac, from Adechsa S.A., a related non-resident company, for
between $1,512 and $1,651 per kilogram. During the same period, two Canadian
ranitidine from other sources for use in their generic anti-ulcer drugs for between
a Supply Agreement set the transfer prices of ranitidine. The combined effect of the
Licence and Supply agreements enabled Glaxo Canada, among other things, to
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purchase ranitidine, put it in a delivery mechanism, and market it under the trademark
Zantac.
Canada for the taxation years 1990, 1991, 1992, and 1993, pursuant to the then
applicable s. 69(2) of the Act (now s. 247(2)) on the basis that the prices it paid for
ranitidine were greater than an amount that would have been reasonable in the
circumstances had they been dealing at arms length. Glaxo Canada appealed to the
Tax Court of Canada, where, with one minor revision, the reassessment was upheld
on the basis that the Licence and Supply agreements were to be considered
independently. The Federal Court of Appeal allowed the appeal and remitted the
matter back to the Tax Court for redetermination of the reasonable amount payable
Section 69(2) requires the court to determine whether the transfer price
was greater than the amount that would have been reasonable in the circumstances,
had the parties been dealing at arms length. If transactions other than the purchasing
transaction are relevant in determining this question, they must not be ignored.
Section 69(2) does not, itself, offer guidance as to how to determine the reasonable
amount that would have been payable had the parties been dealing at arms length.
The OECDs 1979 Guidelines and the OECDs 1995 Guidelines are not controlling as
if they were a Canadian statute. However, they suggest a number of methods for
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determining whether transfer prices are consistent with prices determined between
had for the economically relevant characteristics of the arms length and non-arms
length circumstances to ensure they are sufficiently comparable. Where there are
situations being compared may make it necessary to consider other transactions that
impact the transfer price under consideration. In each case, it is necessary to address
Such circumstances will include agreements that may confer rights and
benefits in addition to the purchase of property where those agreements are linked to
purchaser would pay for the property and the rights and benefits together where the
rights and benefits are linked to the price paid for the property. However, transfer
pricing is not an exact science and it is highly unlikely that any comparisons will
yield identical circumstances and the court will be required to exercise its best
In this case, Glaxo Canada was paying for at least some of the rights and
benefits under the Licence Agreement as part of the purchase prices for ranitidine
from Adechsa. As such, the Licence Agreement could not be ignored in determining
the reasonable amount paid to Adechsa under s. 69(2), which applies not only to
payment for goods but also to payment for services. Considering the Licence and
Supply Agreements together offers a realistic picture of the profits of Glaxo Canada.
The prices paid by Glaxo Canada to Adechsa were a payment for a bundle of at least
some rights and benefits under the Licence Agreement and product under the Supply
Agreement. The generic comparators used by the Tax Court do not reflect the
economic and business reality of Glaxo Canada and, at least without adjustment, do
not indicate the price that would be reasonable in the circumstances, had Glaxo
Canada and Adechsa been dealing at arms length. It is only after identifying the
circumstances arising from the Licence Agreement that are linked to the Supply
Agreement that arms length comparisons under any of the OECD methods or other
The assumption that the prices paid by Glaxo Canada for ranitidine were
greater than the amount that would have been reasonable in the circumstances had
Glaxo Canada and Adechsa been dealing at arms length has not been demolished.
As found by the Federal Court of Appeal, the matter should be remitted to the Tax
Court to be redetermined, having regard to the effect of the Licence Agreement on the
prices paid by Glaxo Canada for the supply of ranitidine from Adechsa. Whether or
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not compensation for intellectual property rights is justified in this particular case is a
Cases Cited
1046; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; referred to: Gabco Ltd. v.
Act to amend the Income Tax Act and to make certain provisions and alterations in
the statute law related to or consequential upon the amendments to that Act,
S.C. 1970-71-72, c. 63, s. 1.
Act to amend the Income War Tax Act, S.C. 1939, c. 46, s. 13.
Income Tax Act, R.S.C. 1952, c. 148, ss. 17(3) [rep. 1970-71-72, c. 63, s. 1], 69(2)
[ad. idem].
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 20(1)(c)(i), 69(2) [rep. 1998, c. 19,
s. 107], 212(1)(d), 215(1), 247(2) [ad. idem, s. 238].
Income Tax Amendments Act, 1997, S.C. 1998, c. 19, ss. 107, 238.
Income War Tax Act, R.S.C. 1927, c. 97, s. 23B [ad. 1939, c. 46, s. 13].
Authors Cited
Appeal (Nadon, Layden-Stevenson and Stratas JJ.A.), 2010 FCA 201, 405 N.R. 307,
2010 D.T.C. 5124, [2010] 6 C.T.C. 220, [2010] F.C.J. No. 953 (QL), 2010
CarswellNat 2409, setting aside a decision of Rip A.C.J., 2008 TCC 324, 2008 D.T.C.
3957, [2008] T.C.J. No. 249 (QL), 2008 CarswellNat 1666. Appeal and cross-appeal
dismissed.
appellant/respondent on cross-appeal.
Al Meghji, Joseph M. Steiner, Amanda Heale and Pooja Samtani, for the
respondent/appellant on cross-appeal.
ROTHSTEIN J.
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I. Introduction
These entities do not deal at arms length and, thus, transactions between these
entities may not be subject to ordinary market forces. Their absence may result in
prices being set so as to divert profits from the appropriate tax jurisdiction. Since
1939, the Income Tax Act has included provisions under which a Canadian taxpayer
may be reassessed to include, in Canadian profits, the difference between the prices
for property paid to a non-resident with which it does not deal at arms length and
what those prices would have been had they been dealing at arms length.
(Glaxo Canada) for the taxation years 1990, 1991, 1992, and 1993, pursuant to the
then-applicable s. 69(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the
Act), on the basis that the prices Glaxo Canada paid to a supplier with which it did
not deal at arms length, for ranitidine, the active ingredient in the anti-ulcer drug
Zantac, were greater than an amount that would have been reasonable in the
circumstances had they been dealing at arms length. (Section 69(2) of the Act was
repealed in 1998 (S.C. 1998, c. 19, s. 107) and has been replaced by s. 247(2) of the
Act (ad. idem, s. 238)). The reassessment increased Glaxo Canadas income by the
difference between the highest price paid by generic pharmaceutical companies and
that paid by Glaxo Canada for ranitidine. Glaxo Canada appealed to the Tax Court of
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Canada, where Rip A.C.J. (as he then was) upheld, with one minor revision, the
allowed the appeal and remitted the matter to the Tax Court for reconsideration. The
what circumstances are to be taken into account in determining the reasonable arms
length price against which to compare the non-arms length transfer price. Glaxo
Canada cross-appeals the decision of the Federal Court of Appeal to remit the matter
to the Tax Court for rehearing and reconsideration. If this Court denies the Ministers
appeal, Glaxo Canada argues that the matter should not be remitted because it has
taxpayers burden in appealing the reassessment. For the reasons that follow, I would
II. Facts
[4] Between 1990 and 1993, the respondent, Glaxo Canada, purchased
Zantac, from Adechsa S.A., a related non-resident company, for between $1,512 and
$1,651 per kilogram. During the same period, two Canadian generic pharmaceutical
companies, Apotex Inc. and Novopharm Ltd., purchased ranitidine from other sources
for use in their generic anti-ulcer drugs for between $194 and $304 per kilogram.
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[5] At the relevant time Glaxo Canada was a wholly owned subsidiary of
Glaxo Group Ltd., which itself was a wholly owned subsidiary of Glaxo Holdings
Glaxo Group was the parent of other companies, which discovered, developed,
then placed in a delivery mechanism such as a tablet, liquid or gel and marketed and
sold throughout the world through subsidiaries such as Glaxo Canada or independent
[6] During the taxation years in issue, Glaxo Canada acted as a secondary
manufacturer and marketer which meant that it acquired the active pharmaceutical
ingredient, ranitidine, and put it into a delivery mechanism and packaged and
marketed Zantac, a patented and trademarked drug used to treat stomach ulcers.
Glaxo Group owned the Zantac trademark and the patent for its active ingredient,
ranitidine, and granted rights under the patent and trademark to Glaxo Canada under a
[7] At the heart of this appeal are these two agreements. The Licence
1. the right under the patents to manufacture, use and sell Glaxo Group
2. the exclusive right to the use of the trademarks owned by Glaxo Group,
6(1));
7. the right to have a Glaxo World Group company sell to the appellant any
and literature, market research data, and any other information that may
10. technical assistance for setting up new product lines at Glaxo Canadas
12. Glaxo Canada to have an opportunity to sub-license any new third party
13. in regard to third party products, Glaxo Group to provide any information
14. Glaxo Group to arrange that technical information in regard to third party
[8] Under the Supply Agreement, Glaxo Group set the transfer prices of the
active ingredient, ranitidine, using the resale-price method as described by Rip A.C.J.:
product was sold for $20 in France, the transfer price would be $8.
Appellants counsel described the process as follows:
the starting point for determining the price to the distributor was the
in-market price for the finished ranitidine product;
This method resulted in prices of over $1,500 per kilogram for ranitidine paid by
Glaxo Canada to Adechsa. The combined effect of the Licence and Supply
agreements enabled Glaxo Canada, among other things, to purchase the active
trademark Zantac.
[9] During the taxation years in issue, two Canadian generic pharmaceutical
in Canada. These companies purchased ranitidine at lower prices than Glaxo Canada,
between $194 and $304 per kilogram, from arms length suppliers. There was no
[10] These generic companies were able to market generic versions of drugs
whose patent was still in effect by reason of the compulsory licensing scheme that
Amendment Act, 1992, S.C. 1993, c. 2). This scheme allowed generic versions of
a royalty payment to the patent owner. The licences granted to Apotex and
idem, s. 11(1)).
[11] The Minister reassessed Glaxo Canada for its 1990, 1991, 1992, and 1993
taxation years, increasing its income by some $51 million under s. 69(2) of the Act on
the basis that it had paid Adechsa more than a reasonable amount for the purchase of
ranitidine.
III. Tax Court of Canada, 2008 TCC 324, 2008 D.T.C. 3957 (Rip A.C.J.)
[12] Rip A.C.J. affirmed the Ministers reassessment. He found that Singleton
v. Canada, 2001 SCC 61, [2001] 2 S.C.R. 1046, required the Licence and Supply
the rights and benefits under the Licence Agreement were a relevant circumstance in
determining the appropriate arms length price for the supply of ranitidine.
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[13] Rip A.C.J. employed the comparable uncontrolled price (CUP) method,
Committee on Fiscal Affairs (1979) (the 1979 Guidelines) and the OECDs revised
transaction was the highest price paid by the generic pharmaceutical companies for
ranitidine from arms length suppliers. Under this approach, he found the prices
Glaxo Canada paid to Adechsa for ranitidine were greater than the reasonable amount
had they been dealing at arms length. Aside from allowing a $25 per kilogram
IV. Federal Court of Appeal, 2010 FCA 201, 405 N.R. 307 (Nadon, Layden-
Stevenson and Stratas JJ.A.)
[14] Nadon J.A., writing for a unanimous panel, found that the Tax Court had
erred in not considering the Licence Agreement when determining whether the prices
paid by Glaxo Canada for ranitidine were reasonable under s. 69(2). He said that
Singleton was not relevant and that the test of reasonable in the circumstances
included all circumstances that an arms length purchaser would have to consider.
Based on Gabco Ltd. v. Minister of National Revenue (1968), 68 D.T.C. 5210 (Ex.
Ct.), Nadon J.A. adopted the reasonable business person test, which required an
inquiry into the circumstances that an arms length purchaser would consider relevant
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when deciding what price to pay (para. 69). He found that Rip A.C.J. had erred when
he assessed the fair market value of ranitidine based on the amounts paid by the
[15] Having determined that Singleton did not preclude looking at both the
Supply and Licence agreements and applying the reasonable business person test,
Justice Nadon found that the Licence Agreement was central to Glaxo Canadas
business reality, and that it would be so even if the relationship with Adechsa was at
arms length. Therefore, it was a circumstance that had to be taken into account
when determining whether the prices paid by Glaxo Canada for ranitidine were
reasonable. In his view, the Tax Court erred in using the purchase prices of ranitidine
[16] However, Nadon J.A. found that the burden on the taxpayer had not been
Canadas ranitidine transactions. He remitted the matter to the Tax Court for
redetermination.
V. Analysis
[17] The first transfer pricing provision in the Canadian Income Tax Act was
enacted as s. 23B of the Income War Tax Act, R.S.C. 1927, c. 97, by An Act to amend
the Income War Tax Act, S.C. 1939, c. 46, s. 13. The provision was re-enacted as s.
17(3) of The Income Tax Act, S.C. 1948, c. 52, and again as s. 17(3) of the Income
Tax Act, R.S.C. 1952, c. 148. Section 17(3) of the 1952 Act is almost identical to s.
69(2) first enacted in 1971 (S.C. 1970-71-72, c. 63, s. 1), with immaterial
[18] The 1985 version of s. 69(2) applicable to the years 1990-1993 reads:
[19] On the facts of this case, the section asks whether the prices Glaxo
Canada paid Adechsa for ranitidine were greater than what would have been
reasonable if Adechsa and Glaxo Canada had been dealing at arms length. The
challenge is to find an arms length proxy that replicates the circumstances of Glaxo
[20] In the courts below and in this Court, there has been reference to the 1979
Guidelines and the 1995 Guidelines (the Guidelines). The Guidelines contain
the Guidelines are not controlling as if they were a Canadian statute and the test of
rather than any particular methodology or commentary set out in the Guidelines.
[21] Section 69(2) does not, itself, offer guidance as to how to determine the
reasonable amount that would have been payable had the parties been dealing at
arms length. However, the Guidelines suggest a number of methods for determining
whether transfer prices are consistent with prices determined between parties dealing
at arms length.
[22] In the Tax Court, the parties relied on four methods from the Guidelines
to assess the reasonableness of the prices Glaxo Canada paid Adechsa. The Minister
relied on the CUP method and the cost plus method (see 1979 Guidelines, at paras. 48
and 63). The CUP method compares the prices in comparable transactions between
parties dealing at arms length with the transfer prices paid by the taxpayer being
reassessed. The Guidelines say this is the most direct way of determining the arms
length price. This is the method under which the Minister compared the Glaxo
Canada transfer prices with the prices paid by Apotex and Novopharm.
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[23] However, the 1995 Guidelines also say that the arms length transactions
must be carefully considered for comparability with the transfer price transactions.
1. None of the differences (if any) between the transactions being compared or
[24] The cost plus method is based upon the foreign suppliers costs, plus an
appropriate mark-up. However, the 1979 Guidelines say that the method raise[d]
problems both as regards assessing costs . . . and the appropriate mark-up for profit
(para. 63). They suggest its usefulness may be as a means of verifying prices after
other methods have been applied. The Minister used the cost plus method to verify
[25] Glaxo Canada relied on the resale price, the transactional net margin and
the CUP methods, using a set of European comparators. As described above, the
resale-price method starts with the price charged by the reseller (Glaxo Canada) in the
market for the product (Zantac). The price is then reduced by the proportion
representing the resellers cost and appropriate profit, i.e. the resellers gross profit
margin. The balance is the transfer price for the product purchased from the related
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non-resident supplier (Adechsa). This gross profit margin is then compared to the
gross profit margin earned by independent arms length resellers. The 1979
Guidelines observe that this method is the most useful when applied to marketing
operations. Glaxo Canada compared its gross profit margin with those of independent
[26] The transactional net margin method looks at the net profit relative to a
base such as costs, sales or assets in a controlled transaction as compared to the net
this is not possible, consideration may be given to the net profit relative to costs, sales
[27] Glaxo Canadas CUP approach utilized the prices paid by European
[28] Rip A.C.J. rejected Glaxo Canadas evidence and submissions. Utilizing
the CUP method, Rip A.C.J. compared the prices paid by Glaxo Canada with those
paid by the Canadian generic companies for ranitidine and found that the highest
generic prices paid were in the range of $300 per kilogram, while Glaxo Canada was
[29] Glaxo Canada had argued that the comparison with generic companies
was inappropriate. It said that the Licence Agreement must be taken into account, as
it conferred certain rights and benefits related to the purpose for which its ranitidine
was purchased.
[30] However, Rip A.C.J. found that Singleton precluded him from
considering the Licence Agreement. Absent the Licence Agreement, the prices paid
under the Supply Agreement had to be considered as being only for ranitidine. There
could thus be no compensation for other rights or benefits under the Supply
Agreement. Because the prices paid by Glaxo Canada and the generic companies
were both solely for ranitidine, there were no differences between the transactions
that might justify higher transfer prices than the prices paid by Apotex and
Novopharm (aside from a $25 per kilogram charge for granulation that Glaxo Canada
was allowed).
[31] The question before Rip A.C.J. was the determination of the reasonable
price under s. 69(2). Critical to that determination was whether the Licence
[32] The Minister argues that this Courts decisions in Singleton and Shell
Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, along with the Guidelines, require a
determining the reasonable transfer price under s. 69(2). In the Tax Court, the
(1) Singleton
[33] The Minister submits that Singleton and Shell, decided under s. 20(1)(c)
(i) of the Act, are authority for the proposition that a transaction-by-transaction
approach must be followed under s. 69(2). Singleton involved the deductibility from
income of interest paid and payable on borrowed money under s. 20(1)(c)(i), of the
Income Tax Act. In Singleton, the taxpayer used funds from his capital account at his
law firm to assist in financing the purchase of a home. He then used borrowed funds
to replace the funds he was withdrawing from his capital account. The sole issue was
whether borrowed money was used for the purpose of earning income. This Court
found that the borrowed funds were used to invest in the law firm for the purpose of
earning income and, therefore, the interest payable thereon was deductible for income
tax purposes. The fact that the borrowing occurred because the taxpayer wanted to
use his equity in the firm to buy a house was irrelevant for determining the use of the
transaction withdrawing funds from the firm to purchase the house and the borrowing
transaction to replenish the capital account at the firm. It was the requirement to treat
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the two transactions separately that caused Rip A.C.J., at para. 78, to say that s. 69(2)
[34] With respect, the approach of the Tax Court judge and the argument of
the Minister ignore the difference between s. 20(1)(c)(i) and s. 69(2). Nothing in s.
20(1)(c)(i) entitles a court to search for anything other than the use to which the
borrowed funds are put. The factual determination is simply whether the use of
[35] Section 20(1)(c)(i) does not ask whether it is unreasonable to claim the
the transfer price was greater than the amount that would have been reasonable in the
circumstances, had the parties been dealing at arms length. If transactions other than
the purchasing transaction are relevant in determining this question, they must not be
ignored.
(2) Shell
[36] The issue in Shell similarly involved s. 20(1)(c)(i). Again the issue
involved whether borrowed funds were used for the purpose of earning income. In
Shell, the taxpayer had entered into an agreement to borrow $150 million in New
Zealand currency at an interest rate of 15.4 percent. The taxpayer converted these
funds into U.S. currency, which was then used for business purposes. Through a
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series of foreign currency transactions relating to the devaluation of the New Zealand
currency over the course of the loan, Shell was able to reduce its effective rate of
interest to 9.1 percent, while still claiming an income tax deduction based on the 15.4
[37] The issue in Shell, as in Singleton, turned on whether the borrowed funds,
once converted into U.S. currency, could properly be considered to be used for the
purpose of earning income. The Court found that it was irrelevant that the funds had
been converted into U.S. currency as part of a sophisticated tax scheme. The Minister
was not entitled to re-characterize the taxpayers bona fide legal relationships.
taken into account to determine whether the actual price was or was not greater than
the amount that would have been reasonable had the parties been dealing at arms
[39] The Minister also relied on para. 1.42 of the 1995 Guidelines to justify
The Minister submits that para. 1.42 requires the court to focus only on the particular
transaction at issue and, thus, does not permit the Licence Agreement to inform the
determination of the reasonableness of the prices paid for ranitidine under the Supply
Agreement.
[40] However, para. 1.42 is not as restrictive as the Minister submits. It also
provides:
[41] Further, the general statement in the 1995 Guidelines regarding the arms
length principle at para. 1.15 also provides guidance as to when related transactions
[42] Thus, according to the 1995 Guidelines, a proper application of the arms
length principle requires that regard be had for the economically relevant
characteristics of the arms length and non-arms length circumstances to ensure they
related transactions are not relevant to the determination of the reasonableness of the
necessary to consider other transactions that impact the transfer price under
relevant circumstances.
[43] For the above reasons, in my respectful opinion, Rip A.C.J. was in error
when he found that he was precluded from considering the Licence Agreement.
Nonetheless, while consideration of the Licence Agreement was not precluded, the
[44] Because s. 69(2) requires an inquiry into the price that would be
reasonable in the circumstances had the non-resident supplier and the Canadian
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taxpayer been dealing at arms length, it necessarily involves consideration of all the
circumstances of the Canadian taxpayer relevant to the price paid to the non-resident
supplier. Such circumstances will include agreements that may confer rights and
benefits in addition to the purchase of property where those agreements are linked to
purchaser would pay for the property and the rights and benefits together where the
rights and benefits are linked to the price paid for the property.
[45] The business of Glaxo Canada was the secondary manufacturing and
engaged in research and development although there is no indication that its research
[46] Rip A.C.J. found, at para. 86, that it was by virtue of the Licence
Agreement that the appellant was required to purchase its ranitidine from Glaxo
[47] There were only two approved sources, one of which was Adechsa. Thus,
in order to avail itself of the benefits of the Licence Agreement, Glaxo Canada was
required to purchase the active ingredient from one of these sources. This
requirement was not the product of the non-arms length relationship between Glaxo
Canada and Glaxo Group or Adechsa. Rather, it arose because Glaxo Group
controlled the trademark and patent of the brand-name pharmaceutical product Glaxo
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Canada wished to market. An arms length distributor wishing to market Zantac might
[48] The effect of the link between the Licence and Supply agreements was
that an entity that wished to market Zantac was subject to contractual terms affecting
the price of ranitidine that generic marketers of ranitidine products were not.
[49] As such, the rights and benefits of the Licence Agreement were
designated by Glaxo Group. The result of the price paid was to allocate to Glaxo
supplier, would escape the requirement to have its prices measured against arms
length prices (para. 89). However, whatever price was determined by Glaxo Group
would be subject to s. 69(2) and the requirement that the transfer pricing transactions
be measured against transactions between parties dealing with each other at arms
length.
[51] Thus, it appears that Glaxo Canada was paying for at least some of the
rights and benefits under the Licence Agreement as part of the purchase prices for
ranitidine from Adechsa. Because the prices paid to Adechsa were set, in part, as
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compensation to Glaxo Group for the rights and benefits conferred on Glaxo Canada
under the Licence Agreement, the Licence Agreement could not be ignored in
determining the reasonable amount paid to Adechsa under s. 69(2), which applies not
[52] Considering the Licence and Supply agreements together offers a realistic
picture of the profits of Glaxo Canada. It cannot be irrelevant that Glaxo Canadas
function was primarily as a secondary manufacturer and marketer. It did not originate
new products and the intellectual property rights associated with them. Nor did it
undertake the investment and risk involved with originating new products. Nor did it
have the other risks and investment costs which Glaxo Group undertook under the
Licence Agreement. The prices paid by Glaxo Canada to Adechsa were a payment
for a bundle of at least some rights and benefits under the Licence Agreement and
[53] I agree with the Federal Court of Appeal that Rip A.C.J. erred in refusing
to take account of the Licence Agreement. It was that refusal which led him to find
that the prices the generic pharmaceutical companies paid for ranitidine were
comparable under the CUP method. However, the generic comparators do not reflect
the economic and business reality of Glaxo Canada and, at least without adjustment,
do not indicate the price that would be reasonable in the circumstances, had Glaxo
[54] I agree with Justice Nadon that the amount that would have been
reasonable in the circumstances if Glaxo Canada and Adechsa had been dealing at
arms length has yet to be determined (para. 79). This will require a close
examination of the terms of the Licence Agreement and the rights and benefits
[55] However, with respect to royalties, I would observe that the Licence
[56] Glaxo Canadas pleadings in the Tax Court did not rely on s. 212(1)(d) or
s. 215(1) of the Act, which provide for tax payable by non-residents on royalties or
similar payments for the right to use any patent or trademark in Canada and for
Canada withheld any amounts of the prices it paid to Adechsa in respect of royalties
for the use or the right to use the ranitidine patent or Zantac trademark.
[57] Although I said above that the purchase price appeared to be linked to
some of the rights and benefits conferred under the Licence Agreement, I make no
determination in these reasons as to whether the rights under the ranitidine patent
granted to Glaxo Canada to manufacture and sell Zantac and the exclusive right to use
the Zantac trademark are linked to the purchase price paid by Glaxo Canada to
consistency between that and Glaxo Canadas position with respect to Part XIII
withholding tax. This issue was not specifically argued in this Court and may be
addressed by the parties in the Tax Court and considered by the Tax Court judge when
considering whether any specific rights and benefits conferred on Glaxo Canada
under the Licence Agreement are linked to the price for ranitidine paid to Adechsa.
[58] In any event, there are rights and benefits under the Licence Agreement
referred to in para. 7 above, other than the patent and trademark rights granted to
Glaxo Canada. For example, guaranteed access to new products, the right to the
supply of raw materials and materials in bulk, marketing support, and technical
assistance for setting up new product lines all appear to have some value.
[59] In addition, while, as Rip A.C.J. found, Glaxo Canadas ranitidine and
generic ranitidine are chemically equivalent and bio-equivalent, he also found that
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there was value in the fact that Adechsas ranitidine manufactured under Glaxo
Groups good manufacturing practices may confer a certain degree of comfort that
(para. 118). Zantac is priced higher than the generic products, presumably, at least in
[60] These are all features of the Licence Agreement and the requirement to
purchase from a Glaxo-approved source that add value to the ranitidine that Glaxo
Canada purchased from Adechsa over and above the value of generic ranitidine
without these rights and benefits. They should justify some recognition in
determining what an arms length purchaser would be prepared to pay for the same
rights and benefits conveyed with ranitidine purchased from a Glaxo Group source. It
is only after identifying the circumstances arising from the Licence Agreement that
are linked to the Supply Agreement that arms length comparisons under any of the
[61] I would offer the following additional guidance with respect to the
redetermination. First, s. 69(2) uses the term reasonable amount. This reflects the
fact that, to use the words of the 1995 Guidelines, transfer pricing is not an exact
science (para. 1.45). It is doubtful that comparators will be identical in all material
respects in almost any case. Therefore, some leeway must be allowed in the
determination of the reasonable amount. As long as a transfer price is within what the
satisfied. If it is not, the court might select a point within a range it considers
appropriate statistical measure, having regard to the evidence that the court found to
be relevant. I repeat for emphasis that it is highly unlikely that any comparisons will
yield identical circumstances and the Tax Court judge will be required to exercise his
[62] Second, while assessment of the evidence is a matter for the trial judge, I
would observe that the respective roles and functions of Glaxo Canada and the Glaxo
manufacturing and marketing of Zantac. Glaxo Group is the owner of the intellectual
property and provided other rights and benefits to Glaxo Canada. Transfer pricing
should not result in a misallocation of earnings that fails to take account of these
different functions and the resources and risks inherent in each. As discussed above,
[63] Third, prices between parties dealing at arms length will be established
having regard to the independent interests of each party to the transaction. That
means that the interests of Glaxo Group and Glaxo Canada must both be considered.
An appropriate determination under the arms length test of s. 69(2) should reflect
these realities.
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[64] Fourth, in this case, there is some evidence that indicates that arms
length distributors have found it in their interest to acquire ranitidine from a Glaxo
Group supplier, rather than from generic sources. This suggests that higher-than-
generic transfer prices are justified and are not necessarily greater than a reasonable
[65] I would dismiss the appeal, and for the reasons below, dismiss the cross-
appeal and remit the matter to Rip A.C.J. (now Chief Justice) for redetermination.
VI. Cross-Appeal
[66] Glaxo Canada cross-appeals, arguing that the decision of the Federal
Court of Appeal to remit the matter to the Tax Court for redetermination should be
overturned. It asks this Court to set aside the reassessment on the basis that it has
satisfied its burden as a taxpayer because it has demolished the assumptions of the
Minister.
[67] The Federal Court of Appeal remitted the matter to the Tax Court on the
basis that Glaxo Canada had not discharged its burden of demonstrating that the
The Federal Court of Appeal declined to make such a determination on the basis that
it could not properly assess the adequacy of the record on this point and remitted the
matter to the Tax Court judge to consider whether a decision can be made on the basis
[68] Glaxo Canada argues that the choice of the generic comparator
Therefore, the burden on Glaxo Canada was only to demonstrate that the transactions
of the generic pharmaceutical companies were not the proper comparator. In Glaxo
Canadas view, such a finding would demolish the basis of the assessment, thus,
[69] The Minister argues that the basis of the assessment was the
determination that the prices Glaxo Canada paid for ranitidine were not reasonable.
The selection of the generic comparators was only a means which the Minister had
[70] The basis of the assessment is found in the assumptions in the Ministers
p) the Appellant paid Adechsa, with whom it was not dealing at arms
length, a price for ranitidine which was greater than the amount
that would have been reasonable in the circumstances if the
Appellant and Adechsa had been dealing at arms length;
r.A) any amounts paid by the appellant to Adechsa over and above the
prices paid by other Canadian pharmaceutical companies (as
detailed in Schedule A attached) were not for the supply of
ranitidine;
[71] Glaxo Canada argues, in effect, that only assumption 14r.A) constitutes
the basis of the assessment and that it has demolished that assumption. The Minister
argues that the basis of the assessment is assumption 14p). The text of the
assumptions supports the position of the Minister. Here assumption 14p) sets out the
statutory basis for the reassessment, placing the reassessment squarely under s. 69(2).
The taxpayers liability is governed by the Act and the Ministers authority to reassess
assumptions made by the Minister but no more (para. 92 (emphasis deleted)). Here,
it is safe to say that assumption 14r.A) by the Minister of the prices paid by Apotex
[73] Indeed, at the Tax Court, Glaxo Canada sought to establish the
reasonableness of the prices it paid, though its evidence and argument were not
accepted by the Tax Court judge. In other words, it accepted the burden of
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demonstrating that the prices it paid were reasonable within the meaning of s. 69(2).
Had it been successful in establishing that the prices it paid were reasonable,
[74] As it stands, the assumption that the prices paid by Glaxo Canada for
ranitidine were greater than the amount that would have been reasonable in the
circumstances, had Glaxo Canada and Adechsa been dealing at arms length, has not
[75] At the Federal Court of Appeal, Glaxo Canada argued that that court
could determine the reasonable amount. If the Federal Court of Appeal could
determine the reasonable amount, I cannot see why it could not remit the matter to the
[76] Like the Federal Court of Appeal, I would remit the matter to the Tax
Court to be redetermined, having regard to the effect of the Licence Agreement on the
prices paid by Glaxo Canada for the supply of ranitidine from Adechsa. The Tax
Court judge should consider any new evidence the parties seek to adduce and that he
VII. Conclusion
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[77] I would dismiss the appeal with costs throughout; dismiss the cross-
appeal with costs in this Court and remit the matter to the Tax Court for
redetermination.
Harcourt, Toronto.