Once Is Not Enough: Objecting to Transfer-Pricing Assessments

If the minister of national revenue believes that an amount paid by a Canadian taxpayer to a related non-resident entity is too high and thus that it inappropriately reduces the Canadian tax base, the minister may use section 247 of the Income Tax Act to adjust the amount downward, resulting in a transfer-pricing adjustment. The usual result is that two different types of assessments are issued, which creates confusion. If a taxpayer plans to file a notice of objection, it is important that it object to both assessments.

A transfer-pricing reassessment will usually result in an increase in part I tax payable. However, an additional assessment may arise in the form of part XIII tax payable if the transfer-pricing transaction occurred on a fully paid basis, because the amount paid by the Canadian taxpayer to the non-resident entity will now be in excess of the revised transfer price. The excess amount paid to the non-resident entity is considered a deemed dividend. Because the payment is made to a non-resident person, section 212 of the Act provides that part XIII withholding tax is payable by the Canadian taxpayer on the amount of the deemed dividend.

The minister may increase the liability of a taxpayer through a reassessment, an additional assessment, or both. The Exchequer Court in Abrahams [No. 1] v. MNR (66 DTC 5451) said that a reassessment "purports to fix the taxpayer's total tax for the year," whereas an additional assessment fixes an "amount of tax in addition to that which has already been assessed." In Walkem v. MNR (71 DTC 5288), the FCTD held that the distinction between a reassessment and an additional assessment lies in a determination whether the latter document replaces, or assesses taxes in addition to, a prior assessment or reassessment. In practice, the minister uses an additional assessment when taxes other than those arising under part I of the Act are involved.

Sometimes a taxpayer will receive the part XIII additional assessment before it receives the part I reassessment. When this happens, the taxpayer may not realize that the additional assessment results from a transfer-pricing adjustment until the part I reassessment arrives. In addition, there may be confusion over which assessment is valid. The receipt of the part I reassessment does not render the previously received part XIII additional assessment void. Although a reassessment renders any prior assessment or reassessment a nullity, an additional assessment is an amount that a taxpayer must pay in addition to the latest reassessment. Therefore, taxpayers are liable to pay both the part I reassessment and the part XIII additional assessment.

In the case of a transfer-pricing adjustment, a taxpayer will have to object to both the part XIII additional assessment and the part I reassessment in order to get access to full relief. In other words, a failure to object to the part XIII additional assessment is likely to be problematic if the taxpayer is successful in getting the underlying transfer-pricing adjustment reduced: there will be no procedural mechanism for the minister to reduce the related part XIII tax that flows from the reduction of the transfer-pricing adjustment. Further, it is important to ensure that both notices of objection are filed within the 90-day period specified in subsection 165(1).

Lisa Handfield
Heddema & Partners LLP, Calgary

Canadian Tax Focus
Volume 1, Number 1, May 2011
©2011, Canadian Tax Foundation