The decision of the Supreme Court of Canada in GlaxoSmithKline was released on October 18, 2012, upholding the decision of the Federal Court of Appeal and referring the matter back to the Tax Court of Canada for redetermination. The issue in the case was the transfer price for ranitidine, the active ingredient in Zantac, an ulcer drug produced by GlaxoSmithKline. The issue in the appeal was what circumstances are to be taken into account in determining the reasonable arm’s length price against which to compare the non-arm’s length transfer price.
The Canada Revenue Agency (“CRA”) took the position that the purchases made by generic drug companies for ranitidine were the comparable transactions that should be used to determine the amount that was reasonable in the circumstances. Thus, according to the CRA, the arm’s length price which the taxpayer ought to have paid to Adechsa was that paid by the generic companies for their ranitidine.
The Supreme Court of Canada today released its judgment in St. Michael Trust Corp. et al v. The Queen, 2012 SCC 14, denying the taxpayer’s appeal and holding that the appellant trusts, both of which had a Barbados resident trustee and were formed under the laws of Barbados, were resident in Canada and subject to Canadian tax on the gains realized on the sale of certain shares.
This decision confirms that the test to be applied in determining the residency of a trust is the common law test of central management and control, which has long been the test to determine the residence of a corporation. The Court rejected that a trust is necessarily resident where its trustees are resident, which until now had generally been accepted in Canada as the test to determine trust residency. The Court held that there are many similarities between a corporation and a trust that justify the application of the central management and control test to determine the residence of a trust.
The thin capitalization rules limit the deductibility of an interest expense of a Canadian resident corporation in respect of debts owing to a specified non-resident shareholder generally where the debt to equity ratio in respect of debts owing to specified non-residents exceeds a ratio of 2-to-1. A specified non-resident is generally a non-resident person owning shares representing more than 25% of the votes or value of the corporation alone or together with any other non-resident that does not deal at arm’s length with a specified shareholder. The Advisory Panel on Canada’s System of International Taxation recommended the reduction of the debt to equity ratio. Budget 2012 reduces the debt to equity ratio for this purpose to 1.5-to-1.