Executive Summary: Key Legal and Evidentiary Issues

• MEGlobal sought a downward transfer pricing adjustment under subsection 247(2) of the Income Tax Act for its 2008, 2010, and 2011 taxation years involving sales of ethylene glycol products to a non-arm's length non-resident corporation.

• Subsection 247(10) of the Act stipulates that a downward transfer pricing adjustment can only be made if, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.

• The majority of the Supreme Court of Canada in Dow Chemical Canada ULC v. Canada, 2024 SCC 23, confirmed that the Tax Court lacks jurisdiction to review the Minister's decision under subsection 247(10).

• Tax Court's remedial powers under subsection 171(1) do not include authority to refer a matter back to the Minister for reconsideration of an issue that may lead to a reassessment contingent on the Minister's future discretionary decision.

• Allowing MEGlobal's request would in effect create double non-taxation since there is no taxation of this income in the UAE jurisdiction.

• The proper forum to challenge the Minister's decision is the Federal Court, pursuant to its exclusive jurisdiction in judicial review.

Background of the transfer pricing dispute

MEGlobal Canada ULC's predecessor sold ethylene glycol products to a non-resident corporation with whom MEGlobal was not dealing at arm's length. The purchase price that was agreed upon was the resale price minus a discount of 10%. In March 2013, MEGlobal determined, based on an analysis that it had undertaken of its transfer pricing methodology, that the non-resident purchaser should have paid less for the ethylene glycol products—the resale price minus a discount of 15% instead of 10%.

The CRA audit and subsequent reassessments

Following an audit by the Canada Revenue Agency, the Minister of National Revenue reassessed MEGlobal's 2008, 2010, and 2011 taxation years based on upward transfer pricing adjustments made under subsection 247(2) of the Income Tax Act. MEGlobal filed notices of objection to the reassessments objecting to the upward transfer pricing adjustments and requesting a downward transfer pricing adjustment to reflect a selling price based on a 15% discount. In 2016, the Minister issued notices of reassessment to reverse the upward transfer pricing adjustments, thereby returning MEGlobal to its original filing position. The Minister refused the request for a downward transfer pricing adjustment.

MEGlobal's legal challenge and the jurisdictional issue

MEGlobal filed notices of objection to the 2016 notices of reassessment on the basis that the price at which the ethylene glycol products were sold for 2008, 2010, and 2011 should be reduced under subsection 247(2) of the Act. The only issue raised by MEGlobal was the requested downward transfer pricing adjustment. The Minister, by a letter dated October 29, 2018, denied MEGlobal's request for a downward transfer pricing adjustment. MEGlobal filed an appeal with the Tax Court and a judicial review application with the Federal Court. The Tax Court quashed MEGlobal's appeal on the basis that the Tax Court does not have the jurisdiction to address the issues raised in the appeal (2025 TCC 50).

The Supreme Court precedent and Tax Court limitations

The majority of the Supreme Court of Canada in Dow Chemical Canada ULC v. Canada, 2024 SCC 23, confirmed that the Tax Court does not have the jurisdiction to review the Minister's decision to not allow a downward adjustment under subsection 247(10) of the Act. The Supreme Court stated that when the Minister has exercised her discretion under subsection 247(10) to deny a taxpayer's request for a downward pricing adjustment, that decision falls outside of the jurisdiction of the Tax Court, and the proper forum to challenge the Minister's decision is the Federal Court, pursuant to its exclusive jurisdiction in judicial review. Despite this lack of jurisdiction, MEGlobal argued that the Tax Court could determine whether applying subsection 247(2) of the Act, in isolation, would result in a downward transfer pricing adjustment. However, the Federal Court of Appeal held that subsection 247(2) of the Act cannot be read in isolation when the results of applying subsection 247(2) would reduce the income of the resident taxpayer. Even if subsection 247(2), in isolation, would result in a downward transfer pricing adjustment, no such adjustment can be made without the opinion of the Minister as set out in subsection 247(10).

The Minister's rationale for denial

In denying the requested downward adjustment, the Minister stated that the request seeks a reduction of the reported taxable income as filed in the 2008, 2010, and 2011 taxation years in Canada only. While there is an alleged over-reporting of the income for Canadian tax purposes, there is no corresponding under-reporting of the income for UAE tax purposes since there is no taxation of this income in that jurisdiction. The Minister stated that allowing the request would in effect create double non-taxation. The Minister further noted that subsection 247(10) is a relief provision aimed at situations where a taxpayer wants to correct an improper allocation of income and expenses between entities in two jurisdictions, and to the extent there is no taxation in the other jurisdiction or no double taxation, no relief should be granted under section 247.

The Federal Court of Appeal's ruling

The Federal Court of Appeal found no basis to interfere with the decision of the Tax Court. The Court held that the requested relief cannot be granted by the Tax Court. Even if the Tax Court were to find that the application of subsection 247(2) of the Act, in isolation, would result in the reductions as proposed by MEGlobal, the matter could not be referred back to the Minister for reconsideration and reassessment, as no reassessment to reflect a downward transfer pricing adjustment could be issued in the absence of the opinion of the Minister that the circumstances are such that it would be appropriate to make such adjustments. The only relief that the Tax Court can grant in relation to the disposition of an appeal from a reassessment is set out in subsection 171(1) of the Act: dismissing it, vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment. There is no authority to refer a matter back to the Minister for reconsideration of an issue that may lead to a reassessment if the Minister exercises his discretion to allow a downward transfer pricing adjustment. MEGlobal's appeal was dismissed with costs. The exact amount of costs was not specified in the judgment.