Alnasir Meghji

The appellant Crown appealed a Federal Court of Appeal decision holding that the respondent's Barbadian banking subsidiary qualified for the financial institution exception to the foreign accrual property income (FAPI) regime under the Income Tax Act.

The sole issue was whether the subsidiary conducted business principally with arm's length persons.

The Supreme Court unanimously dismissed the appeal, holding that a parent corporation does not conduct business with its controlled foreign affiliate when it provides capital or exercises corporate oversight.

Excluding capital injections and corporate oversight, the subsidiary's income-earning investment activities were conducted at arm's length for at least 86 percent of its income during the years in issue.

The arm's length requirement was therefore met and the respondent was entitled to the financial institution exception.

Following an appeal involving a dispute between a corporate appellant and the provincial Minister of Revenue, the court addressed the issue of costs.

The parties agreed on a fixed amount for legal fees and disbursements payable to the respondent.

The court endorsed the agreement and ordered that the respondent recover the agreed costs.

The decision reflects the court’s approval of negotiated costs following the disposition of the appeal.

The appellant corporation appealed Ontario corporate tax assessments arising from interest income earned through refinancing transactions within a corporate group.

The appellant argued the interest constituted income from property and therefore fell outside the scope of Ontario taxation under the pre‑2005 Corporations Tax Act regime applicable to non‑Canadian incorporated corporations.

The court held that the interest income formed part of a business carried on in Canada because the corporation’s core purpose was to facilitate financing transactions within the corporate group and administer the resulting debt instruments in Canada.

As a result, the interest income constituted income from a business carried on in Canada within the meaning of s. 115 of the Income Tax Act and was taxable in Ontario.

The court upheld the Minister’s assessments and found it unnecessary to conduct a full GAAR analysis.

The Court addressed transfer pricing under s. 69(2) of the Income Tax Act in a dispute over the reasonableness of amounts paid by a Canadian taxpayer to a non-arm’s length supplier for ranitidine.

It held that determining a reasonable arm’s length amount requires consideration of economically relevant circumstances, including linked agreements conferring rights and benefits beyond mere supply where those agreements affect pricing.

The Tax Court erred in excluding the Licence Agreement from the comparability analysis.

The matter was properly remitted for redetermination of the reasonable amount with regard to the linked rights and benefits.

The appeal and cross-appeal were dismissed.