Tax Court of Canada decision
Federal Court of Appeal decision
Supreme Court of Canada decision


On October 18 2012 the Supreme Court of Canada released a unanimous decision penned by Justice Rothstein in GlaxoSmithKline Inc v The Queen that provides guidance on the Canadian transfer pricing rules.(1) Although the transfer pricing provisions in the Income Tax Act have changed since the years in issue in this case, GlaxoSmithKline is nevertheless expected to have a major influence on the interpretation and application of Canada's transfer pricing rules. In a nutshell, the Supreme Court has confirmed a broadening of the economic circumstances that can be considered in determining an appropriate transfer price between non-arm's-length parties.


Between 1990 and 1993 GlaxoSmithKline Inc (Glaxo Canada) purchased ranitidine, the active ingredient in the brand name anti-ulcer drug Zantac, from a related non-resident vendor for between C$1,512 per kilogram and C$1,651 per kilogram. During the same period, two-generic pharmaceutical companies in Canada purchased ranitidine from other arm's length sources for use in their generic anti-ulcer drugs for between C$194 per kilo gram and C$304 per kilogram. Glaxo Canada was reassessed under Section 69(2) of the Income Tax Act (now Section 247(2)) based on the minister of national revenue's assumption that the purchase price paid by Glaxo Canada was greater than an amount that "would have been reasonable in the circumstances" had the parties "been dealing at arm's length".

Two agreements figured prominently in the transfer pricing analysis conducted at each judicial stage of this appeal:

  • Supply agreement – Glaxo Canada purchased ranitidine from Adechsa SA, a related company located in Switzerland, under a supply agreement. As a secondary manufacturer, Glaxo Canada acquired the ranitidine, put it into a delivery mechanism and then packaged and marketed it as Zantac, a patented and trademarked drug.
  • Licence agreement – Glaxo Group Ltd, another related company, owned the ZANTAC trademark and the patent for ranitidine. Glaxo Group granted rights under the patent and trademark to Glaxo Canada under a licence agreement. The licence agreement conferred other rights and benefits on Glaxo Canada, including:
    • access to new products;
    • the right to the supply of raw materials and materials in bulk;
    • marketing support; and
    • technical support for setting up new product lines.


Glaxo Canada argued that the determination of the appropriate transfer price for ranitidine should be influenced by the rights and benefits conferred by the licence agreement because it was inextricably linked to the supply agreement. The minister argued that the appropriate transfer price ought to be determined on a transaction-by-transaction basis (ie, on the basis of the supply agreement without regard to the licence agreement).

Tax Court of Canada decision

The Tax Court of Canada held that the licence agreement and the supply agreement must be considered independently and, accordingly, it did not consider whether the rights and benefits under the licence agreement were "relevant in the circumstances" when determining the arm's-length price for the supply of ranitidine.

The Tax Court selected the comparable uncontrolled price (CUP) approach as the preferred transfer pricing methodology and accepted the highest price paid by the generic pharmaceutical companies from arm's-length suppliers as the relevant CUP. Apart from allowing a minor increment of C$25 per kilo gram, the Tax Court affirmed the reassessment.

Federal Court of Appeal decision

The Federal Court of Appeal held that the Tax Court had erred by not considering the licence agreement. Relying on jurisprudence regarding whether an amount paid is 'reasonable' under Section 67 of the Income Tax Act, it adopted the 'reasonable business person' test, which requires an inquiry into the circumstances that an arm's-length purchaser would consider relevant when deciding what price to pay.

The Federal Court of Appeal remitted the matter back to the Tax Court to determine the reasonable amount in the circumstances, with a direction that the Tax Court consider the licence agreement as a relevant circumstance. The minister appealed on the basis that the Tax Court had made no error. Glaxo Canada cross-appealed to the Supreme Court on the basis that the matter should not have been remitted back to the Tax Court because it had 'demolished' all of the assumptions underlying the minister's assessments.

Supreme Court of Canada decision

The Supreme Court denied both the appeal and cross-appeal and remitted the matter back to the Tax Court with the same direction as the Federal Court of Appeal – that the licence agreement was a relevant consideration – and provided further guidance.

The Supreme Court considered and responded to the main reasons why the Tax Court concluded that the licence agreement was not a relevant consideration:

  • Jurisprudence – the Tax Court pointed to jurisprudence, including earlier Supreme Court decisions in Singleton v Canada(2) and Shell Canada Ltd v Canada.(3) The Supreme Court concluded that these cases were not relevant, primarily on the basis that the tax provisions involved did not expressly call for an examination of relevant circumstances, whereas this examination is expressly required in Section 69(2).
  • Organisation for Economic Cooperation and Development (OECD) guidelines – with respect to the OECD guidelines, published in 1979 and 1995, the Supreme Court acknowledged (as pointed out by the Tax Court) that the guidelines state that "ideally" the "arm's length principle should be applied on a transaction-by-transaction basis". However, the Supreme Court noted that the guidelines also provide that "there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis".

After rejecting the minister's view that the licence agreement cannot be considered, the Supreme Court next addressed whether the licence agreement should be considered. Again adopting the OECD guidelines, the Supreme Court held that a separate agreement such as the licence agreement should be considered where the "the economically relevant characteristics of the situations being compared [are] sufficiently comparable". The licence agreement was relevant because "Glaxo Canada was paying for at least some of the rights and benefits under the Licence Agreement as part of the purchase prices for ranitidine from Adescha".

The Supreme Court summarised its approach as follows:(4)

"Because [Section] 69(2) requires an inquiry into the price that would be reasonable in the circumstances had the non-resident supplier and the Canadian taxpayer been dealing at arm's length, it necessarily involves consideration of all circumstances of the Canadian taxpayer relevant to the price paid to the non-resident supplier. Such circumstances will include agreements that may confer rights and benefits in addition to the purchase of property where those agreements are linked to the purchasing agreement. The objective is to determine what an arm's length purchaser would pay for the property and the rights and benefits together where the rights and benefits are linked to the price paid for the property."

Potential tax effect of linked intangibles
Interestingly, the Supreme Court observed that the separate agreements may have resulted in the effective conversion of a royalty (on which withholding tax would be payable) to a purchase price (which was not subject to withholding tax) and, if so, any resulting tax advantage might affect the price that an arm's-length party would pay in the circumstances. The Supreme Court suggested, without deciding the point, that if the price paid for ranitidine included compensation for IP rights granted to Glaxo Canada under the licence agreement, that fact would have to be consistent with Glaxo Canada's position with respect to withholding tax. Ultimately, the Supreme Court left it open for the parties and the Tax Court to address this issue before the Tax Court.

Additional observations and guidance
In addition to concluding that the matter must be returned to the Tax Court to determine the reasonable arm's-length price, considering the rights and benefits received by Glaxo Canada under the licence agreement, the Supreme Court provided the following additional observations and guidance.

Without making any determination, the Supreme Court noted that Glaxo Canada appears to have received some value for rights and benefits under the licence agreement that may affect the price that will be determined by the Tax Court:

"For example, guaranteed access to new products, the right to the supply of raw materials and materials in bulk, marketing support, and technical assistance for setting up new product lines all appear to have some value."

The Supreme Court agreed with the Tax Court that there was evidence supporting some enhanced value for the ranitidine purchased from Adechsa because, unlike the generic comparables, Adechsa was obligated to comply with Glaxo Group's approved "good manufacturing practices".

The Supreme Court also noted that the respective roles and functions of the parties must be considered and it will up to the Tax Court to determine "whether or not compensation for intellectual property rights is justified in this particular case". Further, the price arrived at by the Tax Court must carefully take into account the independent interests of each party.

Finally, the Supreme Court acknowledged that the setting of a transfer price by a trial judge is not an exact science, and the trial judge should be afforded deference and "some leeway in the determination of the reasonable amount".

In the cross-appeal, Glaxo Canada argued that it had demolished the minister's assumptions and, as such, the reassessment should be set aside without returning the matter to the Tax Court to determine the appropriate transfer price. The Supreme Court reviewed the pleadings and held that the taxpayer had not demolished the minister's assumption, as set out in its reply, that Glaxo Canada "paid a price for ranitidine which was greater than the amount that would have been reasonable in the circumstances" had the parties been dealing at arm's length.


GlaxoSmithKline provides important guidance on the factors that taxpayers (and tax authorities and judges) can or should consider in determining appropriate transfer prices in non-arm's-length transactions. However, the decision also cautions that if non-arm's-length parties enter into international agreements where value is shifted from one agreement to another, for tax or other reasons, this value shift can also inform the determination of the appropriate transfer price. Ultimately, it may be up to the trial judge to determine the extent to which the shifted value and any tax savings that flow from the shifted value may be relevant considerations.

For further information on this topic please contact Salvatore Mirandola at Borden Ladner Gervais LLP's Toronto office by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email ( Alternatively, contact Patrick Lindsay at Borden Ladner Gervais' Calgary office by telephone (+1 403 232 9500), fax (+1 403 266 1395) or email ( ALternatively, contact


(1) 2012 SCC 52.

(2) 2001 SCC 61.

(3) [1999] 3 SCR 622.

(4) Paragraph 44.

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