The SC dismissed the appeal by the Canada Revenue Agency (CRA) of a ruling by the Federal Court concerning the deductibility of the price paid by GSK Canada to a Swiss related-entity. The CRA said the payment was not reasonable in the circumstances and a reasonable payment would have been that paid by generic companies.
GSK Canada said the consideration of reasonableness should take into account the licence agreement between the GSK group of companies and GSK Canada, which agreed a 6% royalty should be paid to the GSK group on sales of drugs covered by the agreement.
The trial judge ignored this and ruled the price GSK Canada should have paid was the highest of that paid by generic companies. This was overruled by the Federal Court in July 2010.
The SC held that the determination of an arm’s-length price must be informed by relevant surrounding economic circumstances, including other transactions that may be related to the purchasing transaction.
The case will now return to the Tax Court of Canada for redetermination because the SC also dismissed GSK’s cross-appeal, which asked it to overturn the decision of the Federal Court of Appeal to remit the matter to the Tax Court.
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