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Published: July 23, 2020

Bayer Inc. v. Attorney General of Canada – A Canadian Tax Lawyer Analysis of Document Production During a Transfer Pricing Audit

Introduction – Limitations to Canada Revenue Agency Powers to Request for Documents During an Audit
The Canada Revenue Agency (CRA) has been auditing Bayer Canada for its 2013 to 2015 taxation years since 2016. Bayer Canada is a wholly-owned subsidiary of Bayer AG, a multi-national group of pharmaceutical and life science corporations. The transfer pricing tax audit by the Canada Revenue Agency is highly concerned with whether improper “transfer pricing” occurred with Bayer Canada and its parent company.

Transfer pricing is the process of pricing what one corporation charges another corporation for products and services when the corporations are in the same group of companies, such as sharing a parent or holding corporation. Transfer pricing agreements must be negotiated at arm’s length, such that the corporation providing the products or service, or their competitors, would charge any other company a similar price. This prevents multi-national enterprises from improperly shifting profits to a corporation which resides in a jurisdiction with lower tax rates.

The Canada Revenue Agency doesn’t claim that improper transfer pricing occurred within Bayer AG’s group of corporations. However, the CRA wanted arepresent youdditional documents from Bayer Canada to audit whether there was suspicion of improper transfer pricing.

The Canada Revenue Agency made many requests between December 2017 and August 2018 for copies of agreements that Bayer Canada negotiated at arm’s length with other businesses. Bayer Canada repeatedly claimed that these agreements were irrelevant to the ongoing transfer pricing tax audit. The Canada Revenue Agency then issued a “Requirement” to provide foreign-based information and documents, as per subsection 231.6(2) of the Income Tax Act.

Subsection 231.6(2) allows the Canada Revenue Agency to require any Canadian resident or non-resident carrying business in Canada to provide any foreign-based information or document. Specifically, the Canada Revenue Agency wanted agreements between Bayer AG and other members of the Bayer Group and 21 named pharmaceutical and life science companies at arm’s length with Bayer AG.

Subsection 231.6(4) allows any person served with a Requirement to ask a judge to review it within 90 days. Bayer Canada, in this case, wanted a judicial review at the Federal Court with respect to the Canada Revenue Agency’s subsection 231.6(2) requirements. A judicial review is a process where a court can review the decision of a government body, such as the Canada Revenue Agency, to ensure they complied with all applicable laws when coming to its decision and that their decision was reasonable.

Bayer Canada’s Canadian tax lawyers took the position that the request by the Canada Revenue Agency was overboard and irrelevant to the transfer pricing tax audit.

The Federal Court raised four issues:

  • What is the standard of review?
  • Was the Requirement procedurally fair?
  • Was the Requirement reasonable?
  • What is the appropriate remedy?

The Federal Court ultimately determined that the Requirement was subject to a standard of reasonableness. The Court also found that the Requirement was procedurally fair, as Bayer Canada knew what information the Canada Revenue Agency wanted and the consequences of non-compliance.

The Canadian tax lawyers that represented Bayer Canada argued that the Requirement was unreasonable because the connection between the information sought and the subject-matter of the transfer pricing tax audit was too remote. The Federal Court agreed that “a rational connection must exist between the information sought and the administration and enforcement on the [Income Tax Act]”.

The Canada Revenue Agency made the Request to audit Bayer Canada to see whether there may have been improper transfer pricing. However, the Canada Revenue Agency never claimed improper transfer pricing actually occurred. Since transfer pricing involves non-arm’s length groups, it didn’t make sense for the Canada Revenue Agency to request the contracts and agreements that Bayer AG made with 21 arm’s length corporations. The only explanation that the Canada Revenue Agency could provide for requesting the information pertaining to the 21 companies is that, “Contracts entered into by Bayer AG with companies at which it operates at arm’s length may be relevant to determining whether the arrangements between Bayer Inc. and non-resident, non-arm’s length parties are in accordance with the arm’s length principle”.

As a result, the Federal Court found the Requirement unreasonable and determined that the remedy was that the Canada Revenue Agency must only seek information and documents that have a rational connection to the administration and enforcement of the Income Tax Act.

Pro Tax Tips – Limitations to Canada Revenue Agency Information and Document Requests

The Canada Revenue Agency has broad powers to administer and enforce the Income Tax Act; however, their powers are not without limits. Bayer Inc v. AGC shows us that decisions made by the Canada Revenue Agency to request certain documents under a section of the Income Tax Act must be reasonable. In this case, reasonable meant that there was a rational connection between the requested documents and information and the on-going tax audit or procedure.

If the Canada Revenue Agency subjects you to a Requirement under a particular section of the Income Tax Act, such as subsection 231.6(2), during a tax audit, it is important to find an experienced Canadian tax lawyer to represent you. A lawyer with knowledge in tax law and experience dealing with the Canada Revenue Agency can bring the Canada Revenue Agency’s decisions to Federal Court for a judicial review. That way, you can make sure that the CRA is limited to doing what is reasonable and legally correct.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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