Agracity Ltd. v. The Queen

Agracity Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-08-27
Neutral citation
2020 TCC 91
File numbers
2014-1526(IT)G, 2014-1537(IT)G
Judges and Taxing Officers
Patrick J. Boyle
Subjects
Income Tax Act
Decision Content
Docket: 2014-1537(IT)G
BETWEEN:
AGRACITY LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 3, 4, 5, 6, 10, 11, 12 and 13, 2018 January 28, 29, 30, 31, February 1, 2019, July 15, 16 and 17, 2019 at Toronto, Ontario and September 18, 19 and 20, 2019 at Montreal, Quebec
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the Appellant:
Justin Kutyan
Martin Gentile
Kristen Duerhammer
Counsel for the Respondent:
Pascal Tétrault
Vincent Bourgeois
John Krowina
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 2007 and 2008 taxation years is allowed, with costs, in accordance with the attached reasons for judgment.
Signed at Montreal, Quebec, this 27th day of August 2020.
“Patrick Boyle”
Boyle J
Docket: 2014-1526(IT)G
BETWEEN:
101072498 SASKATCHEWAN LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 3, 4, 5, 6, 10, 11, 12 and 13, January 28, 29, 30, 31, February 1, 2019, July 15, 16 and 17, 2019 at Toronto, Ontario and September 18, 19 and 20, 2019 at Montreal, Quebec
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the Appellant:
Justin Kutyan
Martin Gentile
Kristen Duerhammer
Counsel for the Respondent:
Pascal Tétrault
Vincent Bourgeois
John Krowina
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 2006 and 2007 taxation years is allowed, with costs, in accordance with the attached reasons for judgment.
Signed at Montreal, Quebec, this 27th day of August 2020.
“Patrick Boyle”
Boyle J.
Citation: 2020 TCC 91
Date: 20200827
Dockets: 2014-1537(IT)G
2014-1526(IT)G
BETWEEN:
AGRACITY LTD.,
101072498 SASKATCHEWAN LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1] These two related appeals are by AgraCity Ltd. (“AgraCity”) and 101072498 Saskatchewan Ltd. (“SaskCo”), two related corporations. Both corporations are part of the Farmers of North America group of companies (the “FNA Group”). The FNA Group companies are ultimately controlled by James Mann and/or his brother Jason Mann. AgraCity is wholly owned by Jason Mann; SaskCo is equally owned by James Mann and Jason Mann indirectly through their respective holding companies.
[2] AgraCity had entered into a Services Agreement with NewAgco Inc., a non-arm’s length Barbados international business corporation (“NewAgco Barbados”) in the years in question in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) (being a generic version of Bayer-Monsanto’s RoundUp).
[3] In reassessing AgraCity for its 2007 and 2008 taxation years [1] the Canada Revenue Agency (“CRA”) relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity.
[4] In its Amended Reply in this Court the Respondent’s position is that:
1. The paragraph 247(2)(a) and (c) transfer pricing provisions justify the reassessments including all of the sales profits in AgraCity’s income;
2. The paragraph 247(2)(b) and (d) transfer pricing provisions permit the recharacterisation of the transactions because arm’s length parties, unlike AgraCity, would not have allowed NewAgco Barbados to be part of the transactions or to make any of the profits; and
3. The transactions in question amount to a sham or window dressing designed to deceive the CRA into concluding that NewAgco Barbados, not AgraCity, was undertaking the sales business and incurring real risks.
[5] At the opening of trial, the Respondent indicated that sham would be its primary position.
[6] After the evidence was in, the Respondent indicated in its written submissions that its first alternative would be paragraph 247(2)(b) and (d) recharacterisation and that the paragraph 247(2)(a) and (c) pricing adjustment would be its second alternative argument.
[7] These effectively reversed the ordering of these three bases of supporting the AgraCity reassessments:
1. The Respondent’s primary position is now that the transactions were a sham or window dressing;
2. In the alternative, paragraphs 247(2)(b) and (d) apply to recharacterise the transactions; and
3. In the further alternative, paragraphs 247(2)(a) and (c) result in a transfer pricing adjustment.
[8] AgraCity was reassessed transfer pricing penalties under subsection 247(3) in respect of the transfer pricing adjustments. AgraCity concedes that it can not raise the due diligence defence in that provision since it did not satisfy the contemporaneous documentation prerequisite to being able to make such an argument.
[9] In addition, AgraCity was assessed a so-called gross negligence penalty under subsection 163(2) in respect of the same income adjustment on the basis that it knowingly understated its income.
[10] SaskCo was reassessed for its 2006 and 2007 taxation years [2] on the basis that the profits of its subsidiary and controlled foreign affiliate NewAgco Barbados constituted foreign accrual property income or fapi. SaskCo was also assessed a late filing penalty under subsection 162(1). The reassessment of SaskCo was a protective assessment issued by the Respondent as an alternative assessment to be relied upon if AgraCity prevailed in its appeals. The Respondent was clear that it did not seek to prevail against both AgraCity and SaskCo. [3]
[11] In the Respondent’s written submissions filed following the conclusion of the evidence and days in advance of oral argument, it indicated to the Court and the Appellants that it was conceding the SaskCo appeal. The reason given for this was that there was no evidence that could support a finding that NewAgco Barbados did not deal at arm’s length with its Canadian farmer-customers or that NewAgco Barbados sold ClearOut to AgraCity who in turn sold it to farmer‑users. Accordingly, the appeal of SaskCo is allowed with costs. [4]
[12] Hereafter in these reasons any reference to the Appellant is a reference to AgraCity.
[13] No other Canadian company in the FNA Group was reassessed to include in its income any of the ClearOut sales profits or any other amount in respect of the transactions involving NewAgco Barbados under the transfer pricing rules in section 247, or by virtue of the sham alleged by the Respondent, or in respect of the conferral or receipt of any benefit, or otherwise.
[14] The Respondent has not relied upon the general anti-avoidance rule GAAR set out in section 245 of the Act, although paragraphs 247(2)(b) and (d) set out a specific anti-avoidance rule that in part uses somewhat similar concepts.
[15] The dispute in this Court has been defined by the parties, initially by the Respondent’s reassessments, and thereafter by both parties’ pleadings. It is not open to this Court to make it about something or someone else.
[16] The Appellant’s position was to focus on demolishing the Respondent’s key assumptions, which are primarily those dealing with (i) the purchase and sale of the ClearOut by NewAgco Barbados, (ii) the legitimacy of the Services Agreement, (iii) the risks taken or borne by NewAgco Barbados in the transactions eg. inventory, foreign currency etc., and (iv) NewAgco Barbados being a key party participating in the transactions that brought real value eg: sourcing of ClearOut etc. [5]
The Tax Law Principles and Provisions Engaged
(1) Sham or Window Dressing
[17] The issue of whether the sale structure was a sham requires the Court to consider whether AgraCity entered into agreements and transactions that were intended to deceive and mislead others, primarily the Respondent, into believing that the rights and obligations between the Appellant and related parties were different than what they truly were. The deceit can be evident from looking at both how the transactions were constructed and how they were conducted: Continental Bank Leasing Corp. v. HMQ [1998] 2 SCR 298 at paragraph 20.
[18] The classic definition of a sham is set out in Snook v. London & West Riding Investments Ltd., [1967] 1 All ER. 518. The concept of a sham has most recently been set out by this Court in Cameco Corporation v. The Queen, 2018 TCC 195 and in Paletta v. The Queen, 2019 TCC 205. [6] The Respondent’s unsuccessful appeal of Cameco to the Federal Court of Appeal [7] did not challenge Justice Owen’s decision in this Court that the transactions in question were not a sham.
[19] In Paletta Justice Hogan wrote as follows on the acceptance and interpretation by the Federal Court of Appeal and Supreme Court of Canada of the Snook definition of sham for Canada tax law purposes:
[121] There appears to be no dispute between the parties as to the meaning of sham. They both referred to the case of J. Snook v. London & West Riding Investments, Ltd.57 In Snook, Diplock L.J. stated that “sham”:
. . . means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities . . . that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived. . . 58
[122] Canadian courts adopted the Snook definition of sham in 1972. 59 The Supreme Court of Canada reaffirmed and followed this definition of sham in Stubart Investments Ltd. V. The Queen 60 In Stubart, Justice Estey defined sham as:
. . . a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality. . . 61
[123] Two more recent decisions of Justice Noël of the Federal Court of Appeal discuss sham. In Antle v. The Queen, he said, in obiter:
. . . The required intent or state of mind is not equivalent to mens rea and need not go so far as to give rise to what is known at common law as the tort of deceit . . . . It suffices that parties to a Transaction present it as being different from what they know it to be . . . 62
[124] In 2529-1915 Québec Inc. v. The Queen, he said:
[59] It follows from the above definitions that the existence of a sham under Canadian law requires an element of deceit which generally manifests itself by a misrepresentation by the parties of the actual transaction taking place between them. When confronted with this situation, courts will consider the real transaction and disregard the one that was represented as being the real one.63
[125] In a tax context, a Court will arrive at a finding of sham when the evidence shows that the parties misrepresented their arrangements in a bid to achieve a tax benefit that would be denied if the nature of their arrangements was properly disclosed. In tax matters, the party that is deceived by the sham is the Canada Revenue Agency (“CRA”).
[126] In considering sham, the Court must examine the objective reality surrounding the arrangements to discern whether the transaction documents truly reflect the parties’ intent. Direct evidence of sham is rare where a case proceeds to court; in the absence of an admission, the court is left to weigh circumstantial evidence.
[127] […]The factors that inform the objective reality of the arrangements include:
i) the circumstances surrounding the development of the transaction structure;
ii) the Appellants’ due diligence, involvement and oversight, or lack thereof, in evaluating and participating in the transactions;
iii) the ordinary business and investment practices of the Appellants;
iv) the parties’ stated goals and reasons for entering into the transactions; and
v) the legal rights and obligations as defined in the transaction documents.
[128] This list is non-exhaustive. Taken together, these factors inform a court’s analysis of whether the legal rights and obligations described in the transaction documents are consistent with the parties’ avowed intent.
[129] I stress that searching for the objective reality of a transaction does not conflate sham (i.e.,misrepresentation and deceit) and the notions of “economic substance” or “business purpose”. It is well established that a transaction is not a sham because it is devoid of economic substance, lacks a business purpose or serves a tax avoidance purpose. I shall look instead at whether the parties misrepresented the nature of their arrangements to the CRA.
[130] One final point is that sham must be distinguished from abuse. Sham is not an overall scheme that is abusive; it is a matter of the parties having misrepresented the legal effect of a transaction. Accordingly, I must point to certain transactions that are misrepresented. The structure in these appeals is complex and comprises many different transactions, and it is important not to combine all the transactions and steps into one, to paint every step as a sham – that would be to misconstrue what sham is. […]
______________________
57 [1967] 1 All ER 518 [Snook]
58 Snook, at page 528
59 M.N.R. v. Cameron, [1974] S.C.R. 1062
60 [1984] 1 S.C.R. 536 [Stubart]
61 Stubart, at pages 545 and 546
62 2010 FCA 280 at para 20
63 2008 FCA 398 at para 59
[20] Sham is a serious allegation requiring convincing evidence to conclude that a Canadian taxpayer was deceitful on a balance of probabilities. Often this may involve circumstantial evidence. This can be expected to require more then the Respondent’s suspicions.
(2) Recharacterisation Pursuant to Paragraphs 247(2)(b) and (d)
[21] The relevant provisions are set out in Appendix 1. So-called recharacterisation transfer pricing adjustments under these provisions require the Court to consider:
(i) whether the parties’ transactions would not have been entered into between notional arm’s length parties;
(ii) whether the transactions can reasonably be considered to have been entered into primarily for bona fide purposes other than to obtain a tax benefit; and
(iii) what transactions would have been entered into between notional arm’s length parties and on what terms and conditions.
If paragraphs (b) and (d) apply, the quantum and nature of income amounts are redetermined on the basis of substituted notional arm’s length transactions and not the transactions entered into by the parties.
These provisions were most recently considered by the Federal Court of Appeal in Cameco wherein Justice Webb wrote:
C. Conclusion with Respect to Paragraphs 247(2)(b) and (d) of the Act
81 Parliament has chosen to indirectly address the issue of a Canadian taxpayer shifting profits to a non-arm’s length person located in another jurisdiction by implementing the transfer pricing rules found in Part XVI.1 of the Act. These rules will adjust prices paid for goods purchased and sold and for services provided in transactions between a taxpayer and a non-resident person with whom that taxpayer is not dealing at arm’s length, if such prices differ from the amount that would be paid in an arm’s length transaction. By adjusting prices for goods and services, the profit realized by the Canadian taxpayer will be adjusted. However, the rules in paragraph 247(2)(b) and (d) of the Act are not as broad as the Crown suggests. They do not allow the Minister to simply reallocate all of the profit of a foreign subsidiary to its Canadian parent company on the basis that the Canadian corporation would not have entered any transactions with its foreign subsidiary if they had been dealing with each other at arm’s length.
82 Paragraphs 247(2)(b) and (d) of the Act apply only where a taxpayer and non-arm’s length non-resident have entered into a transaction or a series of transactions that would not have been entered into between any two (or more) persons dealing at arm’s length, under any terms or conditions. In such a situation, the transaction or series of transactions that would have been entered into between arm’s length persons is substituted for the transaction or series of transactions in question, with the appropriate terms and conditions. In particular, paragraphs 247(2)(b) and (d) of the Act cannot be used to simply reallocate all of the profits earned by CEL to Cameco, its Canadian parent corporation, in the circumstances of this case. Of course, in another situation where these paragraphs would apply, the substituted transactions may well result in adjustments to the income (and the profit) of a Canadian taxpayer.
(3) Transfer Pricing Adjustments Under Paragraphs 247(2)(a) and (c)
[22] The relevant provisions are set out in Appendix 2. Transfer pricing adjustments under these provisions require the Court to consider:
(i) whether the terms or conditions of the parties’ transactions would have been agreed to by arm’s length parties; and
(ii) if not, what terms and conditions would arm’s length parties have agreed to.
[23] The terms and conditions subject to review under paragraphs (a) and (c) are not limited to those setting out a price or cost or other amount. If paragraphs (a) and (c) apply, the quantum or nature of income amounts are redetermined on the basis of the parties’ transactions reflecting substituted notional arms’ length terms and conditions.
[24] The difference between paragraph (a) and (c) transfer pricing adjustments and paragraph (b) and (d) transfer pricing adjustments is that income amounts are redetermined as to quantum and/or nature under paragraph (c) by reference to revised terms and/or conditions of the parties’ transactions, whereas under paragraph (d) it is by reference to substituted notional transactions. That distinction is clear from the text of the provisions. The nature and/or the quantum of income amounts can be redetermined under either sets of provisions.
[25] These provisions were also most recently considered by the Federal Court of Appeal in Cameco which made it clear that these provisions require that adjustments be made having regard to either the terms and conditions of the parties’ transactions or notional arms’ length transactions, and that they do not permit simply reallocating profits to a taxpayer because that taxpayer would not have engaged its affiliate had that affiliate been arms’ length.
(4) Penalties
[26] AgraCity has been assessed a subsection 247(3) transfer pricing penalty in respect of the ClearOut sales profit amount added to its income.
[27] If the Respondent is successful in its primary position of sham, the Court would still be required to carry on and decide the Respondent’s alternative positions in order to determine if the subsection 247(3) transfer pricing penalty was properly assessed.
[28] AgraCity was also assessed a penalty under subsection 163(2) for knowingly understating its income. If the Appellant is not completely successful with respect to the Respondent’s alternative positions, the Appellant’s position requires the Court to consider whether penalties can be assessed under both subsection 247(3) and subsection 163(2) in respect of the same income adjustments.
Witnesses
[29] The Court heard from the following material/fact witnesses :
1. James Mann:
James Mann is the founder of Farmers of North America Inc. which was a predecessor to Farmers and Families of North America Inc. (“FNA”) and its FNA Group. He held a Chief Executive Officer role in the FNA Group companies. He has a Bachelor of Agriculture from the University of Saskatchewan.
2. Jason Mann:
Jason Mann is James Mann’s younger brother. He completed post-secondary studies in Agriculture and in Chemical Technology. He grew up on a working farm, became a farmer, became involved in custom seeding and harvesting in Canada and the US before moving on to construction and real estate development in British Columbia. He returned to work with his older brother James at FNA Group in the years in question. He was the President of AgraCity throughout the period. He became director and sole owner of AgraCity when James Mann transferred the shares to him in December 2006.
3. Jeff Bergen
Mr. Bergen is a certified professional accountant CPA. He holds a Bachelor of Commerce from the University of Saskatchewan. He worked at Ernst & Young Regina, KMPG Saskatoon and the University of Saskatoon’s College of Medicine and its Central Accounting Department. During the period in question he was the Controller of the FNA Group of companies responsible for general ledgers, accounting systems, preparation of financial statements and tax compliance for all corporations controlled by James or Jason Mann.
4. Spencer Vance:
Mr. Vance was the President of Albaugh North America (“Albaugh”) for about 20 years including the years in question. He was responsible for all functions, commercial and otherwise, across the United States and Canada. Albaugh had worldwide revenues of about US $1,000,000,000 in the period in question and North America generated close to half of that. He holds a Bachelor of Science in Animal Science and Agriculture from the University of Nebraska. Albaugh was the principal supplier/source for ClearOut sold by NewAgco Barbados in the years in question.
5. Lyle Forden:
Mr. Forden is a farmer and business owner. He holds a degree in Agricultural Science and Crop Farming from the University of Saskatchewan. He owns and operates a family farm engaged in mixed farming of Simmental cattle and crops. He also worked at FNA as a Member Service Representative (“MSR”) and as National Member Service Manager in the years in question.
6. Scott Kilbride:
Mr. Kilbride is a fourth generation family farmer with a Crop Science degree from the University of Guelph. In the years in question he operated his family farm through Kildare Acres in Wallaceburg, Ontario. He was a FNA member and a purchaser of ClearOut from NewAgco Barbados.
7. Ashley Skinner:
Mr. Skinner did contract work at FNA and AgraCity before and during the period in question, doing general consulting work on member and membership issues including the FNA newsletter. He was not involved in business decision-making or in the management of any FNA Group companies. [8]
8. Angela Spence:
Ms. Spence is currently an engineering technologist with the City of Courtenay, British Columbia. She worked for the FNA Group in the years in question as a MSR and did related work for AgraCity.
9. Dr. Karen Dodds:
In the years in question Dr. Dodds was the Executive Director of the Pest Management Regulatory Agency (“PMRA”) at Health Canada responsible for the regulation of pesticides throughout the country. She holds a B.Sc., an M.Sc. and a Ph.D. in Biology, Chemistry and Micro-Biology from the University of Waterloo and the University of Guelph. Following her time at Health Canada, she went on to be the Assistant Deputy Minister of the Science and Technology Branch at Environment Canada.
10. Karen McCullagh:
Ms. McCullagh was the Director General of Compliance and Laboratory Services at the PMRA in the years in question, responsible for compliance across headquarters, regions and labs, chemistry evaluations, and enforcement.
11. Bob Friesen:
Mr. Friesen was the President of the Canadian Federation of Agriculture (“CFA”) in the years in question; he had previously been its vice-president. CFA is a federation of provincial agricultural organisations and commodity organisations which operates as a Canadian agricultural umbrella quasi-lobbying group that works with the Canadian government. He was a member of the PMRA’s Own Use Import OUI Task Force in the years in question. He handles government relations for the FNA.
[30] All of the material/fact witnesses were intelligent, educated and clear spoken. They gave credible evidence. They gave overall reliable evidence, usually making it clear where their understanding, perception or knowledge of particular aspects or details was limited given their role in the organizations or the transactions. While there was a history of contentious litigation and allegations between the Mann brothers’ business and Ashley Skinner involving appropriation of business opportunities relating to FNA promoted products including ClearOut, it is not relevant to what I have to decide.
[31] In addition the Court heard from the following expert witnesses:
1. Sir Trevor Carmichael:
Sir Carmichael is an Attorney-at-Law in Barbados and is an expert in Barbados corporate law.
2. Brad Rolph:
Mr. Rolph is a partner at Grant Thornton where he is an economist specialising in transfer pricing.
3. Dr. Muris Dujsic:
Dr. Dujsic is a transfer pricing economist specialist who testified as an expert economist in transfer pricing. He is a partner and Chief Economist at Deloitte. He holds a Bachelor in Economics, a Masters in Finance and Accounting and a Doctorate in Economic Sciences from the University of Novi Sad in Serbia.
4. Oliver Rogerson:
Mr. Rogerson was called by the Respondent as an expert in the economic analysis of transfer pricing. Mr. Rogerson holds a Masters degree in Economics from Wilfrid Laurier University and a Bachelors level degree in economics from Royal Military College. Mr. Rogerson has 18 years of experience as a transfer pricing economist at CRA where for 13 years he was the Chief Economist in the International Tax Division and for five years was an Economist in that division. He was a member of the CRA’s Transfer Pricing Review Committee. [9] While he was at the CRA, Mr. Rogerson was the Canadian delegate to the OECD Working Party Six responsible for updating and maintaining the transfer pricing guidelines which are the extended commentary to Article 9 of the OECD model tax treaty dealing with transfer pricing. Since 2016 he has been at the Department of Finance as the Director of the International Tax Division in its Business Income Tax Directorate (“BIT”). In 2017 he became the Director of the Resource and Environmental Taxation Group in BIT. At Finance, he continued to be a delegate to the OECD Working Party Six. He was qualified as an expert in the field of economic analysis of transfer pricing in Marzen Artistic Aluminium Ltd. v. The Queen, 2014 TCC 194 in our Court in 2014 (Affirmed: 2016 FCA 34). In Marzen his Expert Report was ruled inadmissible but Justice Sheridan went on to rely on his Rebuttal Report.
FNA Group of Companies
[32] FNA is described by its founder James Mann as a business alliance of farmers from across Canada and parts of the United States designed to change how markets function in order to increase farmer profitability. In his words, it was to counter the observation that farmers are the only business people who buy retail and sell wholesale. FNA’s strategy is to achieve its objectives on behalf of its membership by:
i) creating competition and enhancing negotiation,
ii) creating efficiencies in the marketplace in favour of farmers,
iii) moving up and down the value chain to capture those margins, and
iv) reducing technological risk, for example through the development and implementation of information systems.
[33] FNA is a member and membership services-based organization. Virtually all of its revenues come from selling memberships to its members. Where the FNA Group provides products, commodities or services to members, those are promoted by FNA but are provided through separate FNA Group companies. There are a significant number of different FNA Group companies as they work in different markets with different suppliers and with different co-investors unique to the product, service, or business being developed.
Regulation of Glyphosate-Based Herbicides:
[34] In Canada glyphosate-based herbicides, such as ClearOut, are subject to the federal Pest Management Control Act (“PMCA”) which is administered by the PMRA.
[35] The sale, distribution and use of regulated products such as glyphosate‑based herbicides, including ClearOut, in Canada requires that the particular product itself be registered. Registration in Canada is a lengthy, detailed and complicated process, as one would expect, requiring chemical evaluations of the glyphosate sourced by the applicant as well as the overall product formula for which it is an active ingredient. The process of registering a regulated product in Canada can be somewhat shortened if the product has already been registered in the United States by the Food and Drug Administration (“FDA”).
[36] In the period in question, ClearOut was not available or offered for sale in Canada as a Canadian registered product. The initial US manufacturer of the ClearOut had applied for and obtained registration in Canada in 2006, but this was not known to the FNA Group or the Mann brothers at that time. The PMRA did register ClearOut in May 2006 but it was not made available in Canada in accordance with the registration and under the conditions of registration until sometime in 2008 after Albaugh had become the owner, manufacturer and supplier of the product. This resulted in Canadian farmers thereafter being able to buy ClearOut directly from Canadian suppliers which promptly ended FNA’s role as sponsor of ClearOut under the Canadian OUI program, and NewAgco Barbado’s business of selling ClearOut to FNA members under the OUI program.
[37] In the years in question, it was the US FDA registration of ClearOut that permitted FNA to apply as sponsor to the PMRA for ClearOut’s acceptance under the OUI program to be eligible for Canadian farmers to be able to purchase it in the US, from any source whether or not affiliated with FNA Group in any manner, and to import it into Canada for themselves for their own use.
[38] The PMCA also regulates who may use the registered product, as well as the location, timing and purpose of any use.
The OUI Program
[39] The OUI program was established to allow Canadian users to import designated pesticides themselves for their own use. It was aimed at ensuring Canadian agricultural producers would have access to competitively priced pesticides by giving them potential access to lower priced foreign pesticides that are chemically equivalent to Canadian pesticides, thereby giving them access to a larger range of regulated products than the Canadian market provides at any time in the agricultural sector. Only products that could be shown to be equivalent to products already registered in Canada could be approved. The OUI program has since been replaced with the Grower Request Own Use program (“GROU”).
[40] The OUI program was a two-step process. In the first step, individuals, or a user/commodity group or sponsor for such persons, applied to have a foreign product accepted in the OUI program. At this stage the applicant had to provide detailed technical chemical analyses of both the foreign and Canadian registered products sufficient to establish their chemical equivalency, both as to the active ingredient and the formula. The applicant was required to submit a copy of a “label” for the foreign registered product and the draft “label” for the equivalent Canadian registered product. The word “label” is a misnomer. These are extensive booklets or brochures approved by the FDA or PMRA that are capable of being affixed to each product container in adhesive sleeves. The Canadian labels had to comply with Canadian labelling requirements under all applicable federal legislation.
[41] In the second step each farmer was required to obtain approval for each import from the PMRA. Actual users or groups of users applied for individual import permits to bring a specified volume of the product into Canada for a specified use at a specified time on specified property. Such a permit allowed them to bring it into Canada through customs. Individual users were required to obtain an import permit for each importation and the product to be imported had to be separately packaged, identified and labelled as belonging to the particular user and fully comply with the specific detailed terms of the permit.
[42] The PMRA inspectors audited OUI importers to verify invoices, permits, storage and use, including time of use, to ensure strict compliance with the import permits. The PMRA officials also reviewed FNA’s publications to ensure FNA as a Canadian corporation was only viewed by PMRA as promoting the availability of ClearOut for import under the OUI program, and not promoting the sale of ClearOut.
[43] While it appears that the OUI program may have initially anticipated individual farmers each using their own vehicles to personally purchase and collect their product in the US and to drive it through customs and into Canada themselves, the PMRA in the case of ClearOut permitted the use of independent trucking companies using third party customs brokers to collect all of the individual purchases by FNA members each season, by picking up and importing on behalf of each farmer their individually segregated and labelled containers of ClearOut and delivering those to them at their farm, all as arranged by FNA as the purchaser’s agent, with the US suppliers, the trucking companies and customs brokers etc.
[44] Prior to ClearOut being accepted into the OUI program by the PMRA in February/March of 2005, there had only been a few products accepted at the first step of the process. None of these products ever got to the second stage of actual importation. This is because Canadian markets promptly recognized the price discipline mechanics imposed by acceptance into the OUI program. That is, Canadian prices of the Canadian registered equivalent products dropped to more closely align with the price of the US registered equivalent product in the US market which could then begin entering Canada under the OUI program. That was not to be the case for ClearOut. The PMRA received thousands of import permit applications (in quintuplicate) from Canadian farmers, virtually all being FNA members using FNA as their agent. Over 4,500 applications were received in 2005 and 2006. In 2005, over 3,000 permits were issued for almost six million litres of ClearOut. The PMRA Executive Director described receiving boxes of chemical equivalency application materials and of import applications by the semi trailer truck load full at both stages of the process. In 2005, the FNA Group grew from a one million dollar enterprise to a twenty seven million dollar enterprise. The US ClearOut FNA made available to its members allowed FNA to grow its membership base accordingly.
The Transactions in Question
2005:
[45] Following the acceptance of ClearOut into the OUI program, FNA Group put in place a business operations structure by which FNA would be able to promote the availability of ClearOut under the OUI program to its members and to facilitate their purchases and importations.
[46] Following their extensive consultations and numerous meetings with the PMRA, the Manns and FNA understood that ClearOut and the OUI program could be promoted by FNA to its members but, that it remained forbidden for anyone to offer ClearOut for sale in Canada or to sell it in Canada. Further, they understood from their PMRA consultations, materials and meetings that this meant that their members would have to purchase the ClearOut from a non‑Canadian supplier outside Canada. The regulator described the difference between offering for sale and promoting availability as a fine line to draw or walk. I find on the evidence that this was a perfectly reasonable understanding of PMRA’s position, and in any event would have been the prudent business decision to make to avoid any adverse interpretation of the provisions of the PMCA by the PMRA or any challenge by Canadian glysophate-based herbicide suppliers who would be significantly affected by dropping prices or sales as a result of ClearOut being available under the OUI program. [10]
[47] To this end, in 2005 James Mann caused a new US corporation, NewAgco Inc. (“NewAgco US”), to be established in the state of Delaware to be used to purchase ClearOut in the US markets, to warehouse it in its rented warehouse facilities in North Dakota, and to sell it to FNA members.
[48] In that year NewAgco US sourced its ClearOut in the US from a large number of suppliers with ClearOut available at a fraction of the price that glysophate-based herbicides were selling for in Canada. Their suppliers included Chemical Products Technology (“CPT”) who was then the manufacturer of ClearOut (and who later sold its rights to ClearOut to Albaugh), as well as a number of other agricultural supply distributors across the US who had available ClearOut product. NewAgco US’ demand for ClearOut from FNA members in Canada was very significant and greatly reduced the available supply in the US such that NewAgco US worked very hard and went to considerable lengths to locate and acquire all the ClearOut they could from available sources.
[49] NewAgco US sold ClearOut to individual FNA members FOB their individual farms in Canada. NewAgco US typically purchased ClearOut from its US suppliers in large quantities, paid for them upon purchase, and arranged for it to be delivered by transport truck to their US warehouse facilities. From there individual containers (being either totes of 1,000 litres or drums of 200 litres) would be specifically identified as having been purchased by specific Canadian purchasers and each purchaser’s Canadian labels would be affixed, along with the purchaser’s individual OUI permit and necessary customs forms, all in multiple copies and while maintaining the integrity of the US FDA labeling. This would include the purchaser’s Import/Export Account Number from CRA which was typically newly obtained by FNA as agent for a farmer upon their first purchase unless they had previously imported goods into Canada commercially. NewAgco US would arrange and pay for third party truck transport to the Canadian buyers. After a short period of time, NewAgco US engaged third party customs brokers to clear customs on behalf of each individual purchaser and that purchaser’s ClearOut containers. These were dedicated transport trucks filled only with ClearOut that Canadian farmers had purchased from NewAgco US. The number of truck loads measured in the hundreds.
[50] NewAgco US used AgraCity to attend to the logistical and related activities of its sales and deliveries to its Canadian buyers. This was set out in a written Services Agreement between these two corporations. Under its terms, AgraCity was paid an amount per litre of ClearOut sold to perform these services. That amount was revised and adjusted upwards twice between 2005 and 2007 to ensure it was and remained profitable for AgraCity in practice.
[51] AgraCity and its staff would coordinate with FNA MSRs and other FNA staff once an order for ClearOut was placed with FNA by a member to attend to all of the purchase, import and customs paperwork, labeling and arranging payment and delivery. FNA would promote the availability of ClearOut at a price per litre fixed by NewAgco US and communicated to FNA. FNA was responsible for all of its member service activities up to placing the order and fixing its terms for payment delivery and importation. FNA worked with each member to facilitate and administrate the OUI process as well as to organise and direct delivery to the member’s farm. Members would appoint FNA their a