On June 28, 2024, the Supreme Court of Canada released its decisions in Dow Chemical Canada ULC v. Canada1 and Iris Technologies v. Canada,2 which addressed the question of jurisdiction in tax matters.
Tax Jurisdiction in Canada
Two courts in Canada have jurisdiction to hear tax matters: the Tax Court of Canada ("Tax Court") under the Tax Court of Canada Act, R.S.C. 1985 c. T-2 and the Federal Court under the Federal Courts Act, R.S.C. 1985, c. F-7 ("FCA").
The Tax Court has jurisdiction over various tax matters, including under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) ("ITA") and Excise Tax Act, R.S.C., 1985, c. E-15 ("ETA"), dealing with the Goods and Services Tax ("GST"). The Tax Court has exclusive jurisdiction over the correctness of tax assessments under the ITA and ETA and has jurisdiction to hear appeals and references regarding tax matters. However, the Tax Court has limited remedial powers; it cannot provide administrative law remedies and can only remit a decision back to the Minister of National Revenue (the "Minister") for reconsideration.
The Federal Court has jurisdiction to judicially review decisions from federal boards and tribunals, including discretionary decisions made by the Minister regarding tax matters. However, the Federal Court does not have jurisdiction to hear appeals of tax assessments or other non-discretionary decisions relating to tax matters. Unlike the Tax Court, the Federal Court has broad remedial powers, may grant administrative law remedies, and can compel the Minister to take, or refrain from taking, certain actions.
Dow Chemical Canada ULC v. Canada
FactsIn Dow Chemical, Dow Chemical Canada ULC ("Dow") entered into a non-arm's length loan agreement with a related Swiss company. As a result, Dow incurred expenses for its 2006 and 2007 taxation years and reported income for the 2006 taxation year in respect of the toll manufacturing services it provided to the Swiss company.
Following a review of the transactions between Dow and the Swiss company, the Minister reassessed Dow for its 2006 taxation year, applying the transfer pricing rule set out in s. 247(2) of the ITA and significantly increasing Dow's income for that year. Section 247(2) states that where a taxpayer is dealing with a non-arm's length and non-resident person, the amounts in a given transaction will be adjusted to reflect what would have been agreed to if the person was at arm's length.
Dow requested that the Minister use her discretion under s. 247(10) of the ITA to make a downward transfer pricing adjustment. Section 247(10) provides that where an amount is identified that would decrease the taxpayer's income, a downward adjustment cannot be made unless the Minister decides that the circumstances are appropriate. Here, the Minister refused. Dow...
