The Tax Court of Canada, on June 10, ruled in Marzen Artistic Aluminum Ltd. that marketing fees paid to Marzen’s wholly owned subsidiary, Starline International Inc (SII), were not arm’s length.
SII was incorporated in Barbados to act as Marzen’s agent for sales of windows in the U.S. Although SII had no personnel, no assets and no intangibles or intellectual property, Marzen claimed SII’s managing director provided valuable marketing services to the company on behalf of SII, which justified large fees paid by Marzen to SII.
The Court disagreed, stating that some of the claimed services were performed in the managing director’s personal capacity rather than on behalf of SII and that the value of other services were overstated.
The Court reduced the marketing fees charged in 2000 and 2001 from CAD $4,168,551 and CAD $7,837,082, respectively, to US $32,500 for each of those years using the comparable uncontrolled price (CUP) method. The Court used as an internal CUP the annual fee charged for the personal services of SII’s managing director and fees charged by the director’s company, Longview Associates, for local management and administrative services provided to SII.
The Court also found the taxpayer liable for a penalty for the 2001 tax year under subsection 247(3) as the company was deemed not to have made reasonable efforts to determine and use arm’s length transfer prices. Marzen Artistic Aluminum Ltd. v. The Queen
