Canada: Only Federal Court can review discretionary decisions of tax authority in transfer pricing matters

The Supreme Court of Canada on June 28, 2024, held (in a 4-3 decision) that only Canada’s Federal Court, and not the Tax Court of Canada, has jurisdiction when taxpayers challenge the Minister of National Revenue’s refusal to make downward transfer pricing adjustments.

The case is: Dow Chemical Canada ULC v Canada, 2024 SCC 23.

Under s. 247(1) of the Income Tax Act (ITA), downward transfer pricing adjustments are only made when, in the Minister’s opinion, they are appropriate in the circumstances. Under the Federal Courts Act (FCA), the Federal Court has exclusive original jurisdiction to review and provide remedies for discretionary decisions of the Minister, but the FCA permits this original jurisdiction to be ousted when 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 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 the taxpayer’s transactions with related nonresidents 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 arm’s length, there would have been both upward adjustments and downward adjustments.​ The Minister assessed the upward adjustment, but refused to apply the downward adjustment. 

The taxpayer appealed the upward adjustment and denial of the downward adjustment to the Tax Court, and the Tax Court determined that it was within its jurisdiction to review the Minister’s denial of the downward adjustment.​ The Minister appealed that decision to the Federal Court of Appeal, and the Federal Court of Appeal disagreed with the Tax Court and allowed the Minister’s appeal. The taxpayer then appealed to the Supreme Court, arguing that the Tax Court is the proper judicial forum for challenging refusals to make downward transfer pricing adjustments.

The Supreme Court 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 Minister’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 will continue to be required to institute two separate proceedings in transfer pricing cases if the Minister refuses a downward transfer pricing adjustment.

Read a July 2024 report prepared by the KPMG member firm in Canada