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The authors examine details from the Alberta Printed Circuits trial that were omitted from or obscured in the Tax Court of Canada's 2011 opinion to better explain the type, ownership, use, and value of intangibles at issue in the case and their impact on the transfer pricing analysis.
In Alberta Printed Circuits Ltd. v. The Queen, the Canada Revenue Agency was found to have significantly over-assessed a custom circuit board manufacturer's income for 1999-2001. 1
In its April 29, 2011, decision, the Tax Court of Canada held that the CRA used the wrong method to determine the arm's-length value of setup fees paid by the manufacturer to a related offshore company. At trial, the Agency's assumption that Alberta Printed Circuits owned all of the intangibles led it to use the transactional net margin method (TNMM) to dispute the price paid for services performed during the years at issue. Judge Frank J. Pizzitelli rejected the CRA's use of the method given that there was sufficient evidence to support the use of the much-preferred comparable uncontrolled price (CUP) method.
This article explores the court's reasoning for rejecting TNMM as well as the factors that were relevant in analyzing the intangibles, the tested party, and the use of the method in the case.
Parties, Transactions
Alberta Printed Circuits began in 1984, manufacturing custom prototype circuit boards using a then-new "serial" manufacturing process developed by its president, Wayne Bamber. This allowed the company to sell prototype circuit boards at a lower price than offered by its competitors.
The production of custom circuit boards involves three steps: receiving customer data, preparing the data for use in manufacturing (setup), and manufacturing the board. The setup process was entirely manual until Daniel McMuldroch joined in the late 1980s and began to automate the process and other aspects of the company's business.
The Barbados company APCI Inc. was incorporated in November 1996, and soon after received from Alberta Printed Circuits McMuldroch, one other employee, and the technology and software needed to perform setups. An important fact, stated in paragraph 34 of the reasons for judgment, was that APCI purchased the copyrights for the new printed circuit computer programs.
Alberta Printed Circuits and the Barbados company entered into a written agreement for...