Executive Summary: Key Legal and Evidentiary Issues

• Jurisdiction over the Minister’s discretionary decision under subsection 247(10) lies with the Federal Court, not the Tax Court of Canada.

• The appeal sought a remedy—the downward transfer pricing adjustment—not available through the Tax Court’s statutory powers.

• Subsection 247(2) mandates upward adjustments when arm’s length pricing rules are not met; subsection 247(10) introduces a discretionary exception for downward adjustments.

• The Minister’s refusal to make a downward adjustment is a discretionary act and not an assessment subject to appeal in the Tax Court.

• The Appellant’s proposal to obtain a declaration on transfer pricing methodology was viewed as a collateral challenge to the Minister’s discretion.

• The motion to quash was granted without leave to amend, and the Respondent was awarded costs.

Facts and outcome of the case

Background and transactions at issue

MEGlobal Canada ULC (“the Appellant”) appealed the Minister of National Revenue’s refusal to grant a downward transfer pricing adjustment under subsection 247(10) of the Income Tax Act in relation to its 2008, 2010, and 2011 taxation years. The reassessments issued were dated August 14, 2013 for the 2008 year and March 27, 2014 for the 2010 and 2011 years.

The Appellant’s predecessor had entered into a sales agreement for the sale of ethylene glycol to a non-arm’s length non-resident corporation, with pricing based on a contractual formula. In March 2013, an internal analysis led the Appellant to conclude that the affiliate should have paid a lower price. The Minister initially applied an upward adjustment under subsection 247(2), which was later vacated. However, the Minister denied the Appellant’s request for a corresponding downward adjustment.

The Appellant simultaneously filed an appeal to the Tax Court of Canada and an application for judicial review to the Federal Court. Both proceedings were held in abeyance pending the outcome of Dow Chemical Canada ULC v R, 2024 SCC 23, as both matters raised the same jurisdictional issue regarding subsection 247(10).

Positions of the parties

The Appellant asserted that the correct application of subsection 247(2) had not been determined and that such a determination was within the Tax Court’s jurisdiction. It contended that only once that was established could the Minister appropriately exercise her discretion under subsection 247(10). The Appellant warned that a dismissal would render the relevant taxation years statute barred for reassessment.

The Respondent moved to quash the appeal under rule 53(3)(a) of the Tax Court of Canada Rules (General Procedure), arguing that the appeal was effectively a challenge to a discretionary decision by the Minister—an issue that falls exclusively within the jurisdiction of the Federal Court. The Respondent emphasized that the Minister may choose to exercise, or not exercise, discretion under subsection 247(10) before, after, or independently of any subsection 247(2) analysis.

Policy terms and statutory framework

Subsection 247(2) provides a mandatory rule for upward adjustments to income where transactions between non-arm’s length parties are not priced at arm’s length. In contrast, subsection 247(10) authorizes the Minister to make a downward adjustment, but only in her discretion.

The Supreme Court in Dow held that discretionary decisions under subsection 247(10) are distinct from assessments and cannot be appealed to the Tax Court. Rather, they can only be challenged through judicial review before the Federal Court. The Court clarified that a downward adjustment cannot be compelled by the Tax Court and must be predicated solely on the Minister’s opinion that it is appropriate.

Court’s reasoning and conclusion

Justice MacPhee ruled that the Appellant’s request for the Tax Court to determine the correct transfer pricing methodology under subsection 247(2), while avoiding direct reference to subsection 247(10), was still aimed at indirectly challenging the Minister’s discretionary decision.

The Court noted that the Tax Court cannot act as an expert tribunal to guide the Minister’s discretion or produce a judgment that may influence proceedings in the Federal Court. The Appellant’s proposed amendment to the Notice of Appeal—which sought a declaration on the correct application of subsection 247(2) and a referral back to the Minister—was found to exceed the Tax Court’s statutory powers under subsection 171(1)(b)(iii) of the Income Tax Act.

Relying on paragraph 121 of the Supreme Court’s ruling in Dow, the Court emphasized that subsection 247(10) decisions fall outside the Tax Court’s jurisdiction. Consequently, the Appellant’s remedy lies solely with the Federal Court.

Outcome

• The Respondent’s motion to quash the appeal was granted pursuant to rule 53(3)(a).

• The Appellant was denied leave to amend its Notice of Appeal.

• The Court confirmed its lack of jurisdiction to review or compel discretionary decisions under subsection 247(10).

• Costs were awarded to the Respondent, with a provision for submissions on quantum should the parties disagree. No amount was specified.