Executive summary: Key legal and evidentiary issues

• Owens Corning Canada Holdings ULC sought a downwards transfer pricing adjustment to deduct over $3,000,000 per year in royalty payments from its foreign accrual property income (FAPI).

• The Respondent (the Crown) brought a motion to quash the appeal, arguing the Tax Court of Canada lacked jurisdiction to order such relief.

• Subsection 247(10) of the Income Tax Act reserves downward transfer pricing adjustments to the discretion of the Minister of National Revenue, as confirmed by the Supreme Court of Canada in Dow Chemical Canada ULC v. The King and the Federal Court of Appeal in Meglobal Canada ULC v. The King.

• The Appellant attempted to recharacterize its claim as a FAPI calculation issue rather than a transfer pricing adjustment, but the Court found no merit in this distinction.

• An argument that the "except to the extent that the context otherwise requires" language in paragraph 95(2)(f) excluded subsection 247(10) was rejected, as the obligation to seek the Minister's permission rested on the Appellant, not the foreign affiliate.

• The absence of a formal process for obtaining the Minister's opinion under subsection 247(10) in the FAPI context did not confer jurisdiction on the Tax Court.

The intellectual property licensing arrangement and the royalty deductions

Owens Corning Canada Holdings ULC ("the Appellant") is a Canadian resident connected to a global corporate group. Its controlled foreign affiliate, OC NL Invest Cooperatief UA ("Coop2"), licenced certain intellectual property from a non-arm's length non-resident named Owens Corning Holdings 5 CV ("IP Holder"). Coop2 then sublicenced that intellectual property to certain entities within the Owens Corning group and various third parties, earning passive income in the process. The agreement between Coop2 and IP Holder provided for the royalty to be calculated based on what an arm's length party would have paid; however, no payments were actually made or accrued.

When filing its tax returns for the taxation years ended December 31, 2017 and 2018, the Appellant calculated its foreign accrual property income from Coop2 and, in doing so, deducted over $3,000,000 per year in royalty payments. The Minister of National Revenue reassessed the Appellant to deny the deductions, prompting the Appellant to appeal to the Tax Court of Canada.

The Respondent's motion to quash and the jurisdictional question

The Respondent (His Majesty the King) brought a motion to quash the appeal under section 53(3)(a) of the Tax Court of Canada Rules (General Procedure), asserting that the Court had no jurisdiction to grant the relief sought. The Respondent's position rested on subsection 247(10) of the Income Tax Act, which clearly states that a taxpayer can only obtain a downward transfer pricing adjustment under subsection 247(2) if, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made. The Supreme Court of Canada's decision in Dow Chemical Canada ULC v. The King (2024 SCC 23) and the Federal Court of Appeal's decision in Meglobal Canada ULC v. The King (2026 FCA 24) clearly establish that, because downward transfer pricing adjustments are a discretionary decision of the Minister, the Tax Court does not have jurisdiction to order them.

The Appellant's recharacterization argument

The Appellant accepted that the Court lacks jurisdiction over downward transfer pricing adjustments. However, the Appellant asserted that it was not seeking a downward pricing adjustment, but rather simply looking to properly calculate its foreign accrual property income. Justice Graham found no merit in this attempted recharacterization. The Appellant relied on paragraph 95(2)(f) of the Act, which deems a foreign affiliate of a taxpayer to be resident in Canada for the purposes of, among other things, calculating its property income, and argued that the phrase "except to the extent that the context otherwise requires" should preclude the application of subsection 247(10). The Appellant contended that it would be inappropriate to require non-residents (i.e. Coop2 and IP Holder) to obtain permission from the Minister to make adjustments to their incomes. The Court agreed, but clarified that no one was asking Coop2 or IP Holder to obtain the Minister's permission — they were asking the Appellant, a Canadian resident, to do so as part of calculating its own income.

The absence of a formal process does not create jurisdiction

The Appellant also argued that, because there is no formal system in place to obtain the Minister's opinion under subsection 247(10) when FAPI is involved, that opinion is not required. Justice Graham disagreed for two reasons. First, the Appellant viewed this as an obligation placed on the foreign affiliate and was looking for a system whereby a foreign affiliate could apply to the Minister; however, the obligation was on the Appellant, not Coop2. Second, and more importantly, the fact that the Minister has set out a mechanism for obtaining his permission in certain circumstances but not in others does not somehow allow the Court to fill in the vacuum by seizing jurisdiction.

The ruling and outcome

Justice David E. Graham of the Tax Court of Canada granted the Respondent's motion. The appeals of the Appellant's taxation years ended December 31, 2017 and 2018 were quashed. Costs in the appeals were awarded to the Respondent. The Court noted that the Appellant has not yet asked the Minister to exercise his discretion, and if the Appellant eventually does so and the Minister refuses, the Appellant's recourse is to the Federal Court, not to the Tax Court. No specific monetary amount was ordered beyond costs, as the decision was procedural in nature — the appeals were quashed for lack of jurisdiction rather than adjudicated on the merits.