The Minister reassessed the appellant under the transfer pricing rules in section 247 of the Income Tax Act, reallocating all profits earned by a related Barbados corporation from the sale of a herbicide to the appellant's income.
The Minister argued the transactions were a sham, or alternatively, that they should be recharacterised or adjusted because arm's length parties would not have entered into them or agreed to the same terms.
The Tax Court of Canada allowed the appeal, finding no evidence of deceit to support a sham.
The court held that the Barbados corporation bore real risks, owned the inventory, and performed valuable functions.
Furthermore, the appellant demolished the Minister's assumptions by providing unrefuted expert evidence that the service fee paid to the appellant was within a reasonable arm's length range.
The reassessments and associated penalties were vacated.
