As noted in our earlier blog post, the Crown was granted leave to appeal the Federal Court of Appeal’s decision and GSK was granted leave to cross-appeal. The Crown contends in its factum that the FCA gave short shrift to the arm’s length principle which it was required to apply under subsection 69(2) of the Income Tax Act as developed in the OECD Guidelines. The Crown argues that the FCA has replaced the arm’s length standard with a “reasonable business person” test.
In its factum, GSK argues that the approach taken by the FCA in determining “reasonable in the circumstances” is consistent with the OECD Guidelines which call for the application of the arm’s length principle in light of the actual business circumstances faced by the taxpayer. Neither subsection 69(2) of the Income Tax Act nor the arm’s length principle require courts to ignore the circumstances of the marketplace. GSK also says that the Crown’s approach effectively reads out the phrase “in the circumstances” as used in subsection 69(2) of the Income Tax Act.
Finally, by way of cross-appeal, GSK takes issue with the FCA’s order that the matter be re-heard by the Tax Court of Canada, contending that that the FCA ought simply to have set the assessments aside.