Supreme Court of Canada confirms divided jurisdiction in transfer pricing cases

Supreme Court of Canada confirms only the Federal Court can review discretionary decisions of the Minister of National Revenue in transfer pricing matters

On June 28, 2024 the Supreme Court of Canada (the “SCC”) issued its long anticipated decision in Dow Chemical Canada ULC v Canada, 2024 SCC 23. The issue before the SCC was whether it is Canada’s Federal Court or the Tax Court of Canada (“Tax Court”) that has jurisdiction when taxpayers challenge the Minister of National Revenue’s (“Minister’s”) refusal to make downward transfer pricing adjustments. Under s. 247(1) of the Income Tax Act (Canada) (“Tax Act”), downward transfer pricing adjustments are only made where, in the Minister’s opinion, they are appropriate in the circumstances. Dow Chemical argued that the Tax Court is the proper judicial forum for challenging refusals to make downward transfer pricing adjustments.

Justice Kasirer, writing for the 4-3 majority, dismissed Dow’s appeal. The majority held that only the Federal Court has jurisdiction to review the Minister’s discretionary decision regarding downward transfer pricing adjustments, since it is the only court that has the jurisdiction to apply the correct administrative law standard of review and necessary administrative law remedies. The majority held that the facts underlying the Minister’s exercise of discretion are not inextricably linked to the correctness of the assessment, making a clear distinction between the Minister’s determination and the assessment itself. Because the CRA’s decision in relation to downward pricing adjustments is not inextricably linked to a transfer pricing assessment, the Tax Court did not have jurisdiction.

Unless Parliament explicitly provides recourse to the Tax Court, taxpayers are required to institute proceedings in the Federal Court to challenge the Minister’s discretionary decisions, regardless of whether such decisions lead to an assessment of liability under the ITA. Where a discretionary decision results in an assessment (such as in Dow where the Minister denies a taxpayer’s request for a downward transfer pricing adjustment), taxpayers will need to protect their rights by instituting proceedings at both the Federal Court and the Tax Court.

Under the Federal Courts Act, the Federal Court has exclusive original jurisdiction to review and provide remedies for discretionary decisions of the Minister. The Federal Courts Act permits this original jurisdiction to be ousted where a federal statute provides for an appeal to another body such as the Tax Court.

Under the ITA and the Tax Court of Canada Act, the Tax Court has the exclusive original jurisdiction to hear and determine references and appeals with respect to matters arising under the ITA, certain parts of the ETA, and other statutes, when such references and appeals are specifically provided for under the legislation from which the appeal arises. Specifically, the Tax Court has jurisdiction to review the correctness of assessments arising under these statutes and to hear appeals seeking to vary or vacate such assessments.

Following a transfer pricing audit, the Minister concluded that some of Dow’s transactions with related non-residents did not take place on arm’s length terms, and so the Minister proposed certain transfer pricing adjustments.​ It was determined that, had the transactions been at-arms length, there would have been both ‘upward adjustments’ (i.e., increasing Dow’s income) and ‘downward adjustments’ (decreasing Dow’s income).​ Subsection 247(10) of the ITA provides that downward adjustments shall only be made where, “in the opinion of the Minister”, the circumstances are such that it would be appropriate to do so. The Minister reassessed Dow to make an upward adjustment for its 2006 year in respect of its manufacturing services (the "2006 Reassessment"). The 2006 Reassessment did not include a downward adjustment to reflect the interest expense Dow would have incurred in respect of an intercompany loan, had it been arms-length.  ​Dow requested that the Minister apply the downward adjustment, which the Minister denied. 

Dow appealed the 2006 Reassessment to the Tax Court. The Tax Court determined that it was within the Tax Court’s jurisdiction to review the Minister’s denial of Dow’s request for the downward adjustment.​ According to the Tax Court, the Minister must decide whether to grant the downward adjustment before an assessment of a taxpayer’s liability under the ITA can be made, and therefore the decision impacts the resulting assessment. Accordingly, the Tax Court determined that the decision must be correct in fact and law and was reviewable by the Tax Court. ​

The Minister appealed to the Federal Court of Appeal. The Federal Court of Appeal disagreed with the Tax Court, allowing the Minister’s appeal. The Federal Court of Appeal distinguished between the process and the product of the assessment, finding that the decision to deny the downward adjustment would form part of the process of the assessment. ​Additionally, the Federal Court of Appeal held that the Tax Court did not have the right to provide a remedy on a review of a decision of the Minister as it would require the power to quash or issue an order of mandamus. ​The Federal Court of Appeal noted that such a situation may require a parallel proceeding in the Tax Court because the Federal Court does not have the authority to vacate an assessment.

Dow sought leave to appeal to the SCC which was granted on February 23, 2023. The hearing of the appeal took place on November 9, 2023.

In dismissing the appeal, the majority focused heavily on the appropriate standard of review and remedies available to the courts when reviewing ministerial decisions. Justice Kasirer reaffirmed the SCC’s prior decision in Canada v Vavilov, 2019 SCC 65 which clarified the standard of review of ministerial discretionary decisions. The SCC in Vavilov emphasized that where Parliament chooses to delegate authority, the courts must apply a reasonableness standard of review.

The majority reaffirmed that the Tax Court’s jurisdiction is limited to reviewing the correctness of assessments. The majority held that an assessment is a purely non-discretionary determination of a taxpayer’s liability for tax under the ITA. Where that assessment is found to be incorrect, the Minister has no choice but to correct the assessment in accordance with the direction of the Tax Court. An appeal to the Tax Court is a de novo review process that does not allow for a reasonableness review.  

In contrast, a discretionary decision of the Minister can be made on policy considerations. If a discretionary decision is quashed by the Federal Court, the Minister is not required to make a different decision upon reconsideration, only to reconsider on the basis set out by the Federal Court.

The majority held that treating a discretionary decision as part of an assessment for the purposes of an appeal to the Tax Court would result in bifurcated streams of review where the Tax Court would be required to conduct a de novo review of the facts and law underlying the correctness of the assessment for tax and a reasonableness review for the purposes of the discretionary decision. The majority held that the definition of an “assessment” should not be expanded to include discretionary decisions even where discretionary decisions may result in an assessment.

Further, the majority held that only the Federal Court can grant the appropriate remedies for a challenge to a discretionary decision. The Federal Court has the power to quash the Minister’s discretionary decision and require the Minister to reconsider the decision. As noted above, the majority held that it is the mere existence of the Minister’s opinion that is relevant to determining the amount of tax owing, not the reasonableness of said decision. Accordingly, the Tax Court may only intervene in circumstances where the Minister has made a decision but fails to issue a reassessment correctly reflecting in the taxpayer’s liability when taking into account that Ministerial decision.

The majority reiterated that Parliament intentionally divided jurisdiction over tax matters between the Federal Court and the Tax Court and that it falls to Parliament to respond to concerns regarding jurisdictional issues.

Justice Côté, writing for the dissent, limited her decision to the specific Ministerial power granted under s.247(10). The dissent reasoned that s.247(10) of ITA is not permissive in the way that many discretionary decisions under the ITA are. Instead, the Minister is obliged to exercise the power under this provision to determine a taxpayer’s liability under the ITA. Accordingly, the dissent reasoned that the appeal should be allowed and that challenges regarding the Minister’s discretionary decisions under s.247(10) ought to proceed before the Tax Court as the discretionary decision goes directly to the correctness of a taxpayer’s assessment.

The majority decision in Dow is clear that the Tax Court is not a “one-stop shop” for tax disputes. In the transfer pricing context, until and unless Parliament steps in to amend the relevant legislation, taxpayers will continue to be required to institute two separate proceedings in transfer pricing cases if the Minister refuses a downward transfer pricing adjustment.