Bayer Canada Wins Judicial Review to Narrow an “Unreasonable” Transfer Pricing Audit Query

Canada’s Federal Court has intervened to limit an information request issued by the Canada Revenue Agency (CRA) during a transfer pricing audit of Bayer Inc. (Bayer Canada) on the grounds that it was unreasonable. The CRA had requested many documents that were not in the records of the Canadian taxpayer but which were expected to be in the possession of related parties outside of Canada. The court held that the scope of the information request was unreasonable, largely because the CRA had not explained why it was broader than certain preceding requests and narrowed the information request by adding several limiting conditions.

Though this judicial review was successful for the taxpayer, the outcome shows that the CRA still has broad authority to seek information held by affiliated entities outside of Canada. Taxpayers would be well advised to manage the information sharing that occurs during a transfer pricing audit, to reduce the risk of the CRA issuing a formal requirement notice.


Canada’s Minister of National Revenue (“Minister”) has broad information-gathering powers under the Income Tax Act, which are delegated to the CRA, and it is typical for taxpayers to receive several lengthy information requests during Canadian transfer pricing audits. Recent years have seen an increase in the breadth and depth of such information requests, including for foreign-based information, and more cases of the CRA issuing formal notices (“Requirements”) when the requested information is not forthcoming. Under subsection 231.6(2) of Canada’s Income Tax Act, the CRA can issue Requirement notices to Canadian taxpayers to obtain information or documents located outside of Canada. If the taxpayer fails to “comply substantially” with all of what is requested in that Requirement by law, they will not be able to introduce any of the requested items in court if the tax issue proceeds to litigation.

Since 2016, the CRA has been auditing Bayer Canada’s 2013-15 taxation years, including a review of its transfer pricing arrangements with related parties outside of Canada. Between December 2017 and August 2018, the CRA requested copies of several agreements negotiated between arm’s length parties and Bayer Canada’s non-resident affiliates. Bayer Canada took the position that the requested documents were not relevant to the audit, and were outside of Bayer Canada’s possession or control. Discussions between the CRA and the taxpayer resulted in a narrowing of the information requested, but no agreement was reached on what would be provided.

In November 2018, the Minister issued a formal Requirement notice for the foreign agreements, which was broader in scope than what had been previously requested. Bayer Canada sought a judicial review of the Requirement, as allowed within 90 days pursuant to subsection 231.6(4).

The Court’s Decision

The Federal Court considered whether the Requirement was procedurally fair, and also whether it was reasonable.

The court found the requirement to be procedurally fair because the CRA had respected Bayer Canada’s right to be heard and considered the taxpayer’s objections before the Requirement was issued. The taxpayer had a right to know what information the CRA was seeking in the initial requests and the consequences if it was not provided. The court found that the CRA had met those requirements and considered the taxpayer’s objections concerning relevance, overbreadth and the burden of compliance. The Requirement was found to have been procedurally fair, but the relatively broad scope of the requests led the court to consider whether it was also reasonable.

Unlike the previous information requests, the formal Requirement did not include any limits relating to time period involved, the identities of the contracting parties, the geographic regions the agreements relate to, or the overall number of agreements to be provided. The CRA explained that the purpose of the Requirement was to identify internal comparables for Bayer Canada’s transactions with related parties, but no explanation was provided as to why the Requirement was broader than the previous information requests.

The Federal Court found the Requirement unreasonable, because of the “dramatic increase” in the scope of information requested, and the CRA’s failure to explain the removal of “pragmatic limits” reflected in previous requests. The court’s remedy was to vary the Requirement to include nine limiting criteria described in a previous information request, and to further limit it to agreements involving 21 arm’s length counterparties previously identified by the CRA.

Comparison to the Soft-Moc Case

Bayer Canada’s judicial review was successful, counter to the outcome of a similar 2013 judicial review of a Requirement notice for foreign-based information issued to Soft-Moc Inc. (“Soft-Moc”). 

Over two years into a transfer pricing audit of Soft-Moc, the Minister issued a Requirement that repeated 74 questions from previous audit queries, where the CRA considered the taxpayer’s responses to have been incomplete or lacking in detail. Soft-Moc challenged the Requirement on the basis that it was overly broad, required information that is not relevant to the audit, and included information that could not be provided, for example, because it does not exist or is confidential and proprietary. 

In the Soft-Moc case, the Federal Court found the Requirement to be both relevant and reasonable, noting that “the threshold for relevance is low.” The court noted that section 231 allows the Minister to request documents that “may be relevant,” not that are already demonstrated to be relevant, and that the Minister has no way of knowing whether the material is relevant before he/she receives it. The court sided with the Minister and did not vary the Soft-Moc Requirement.

One clear distinction between Soft-Moc and Bayer Canada is that the Soft-Moc Requirement included only a repetition of questions previously submitted during the audit, whereas the Bayer Canada Requirement was notably broader than the CRA’s previous audit queries. Furthermore, in Soft-Moc, the foreign parties holding the records were considered to be essentially captive subsidiaries of the Canadian parent, whose only business was with the Canadian taxpayer under audit. In the Bayer case, the CRA was asking for commercial agreements between non-resident Bayer entities and various third parties that had no direct link back to Bayer Canada. The Soft-Moc Requirement was for 74 specific questions, while the Bayer Canada Requirement was for an indefinite number of agreements.

In both cases, the taxpayer ultimately faced a lengthy Requirement notice for foreign-based information, with consequences for non-compliance.


The Bayer Canada judicial review decision seems unlikely to dissuade the CRA from issuing lengthy requests to taxpayers for foreign-based information, or from issuing formal Requirement letters when taxpayers decline to respond completely to audit queries. Requirement notices used to be rare in Canadian transfer pricing audits but appear to have become more commonly used as an enforcement lever in recent years, especially since the OECD’s base erosion and profit shifting (BEPS) action plan was announced in 2015. 

Bayer Canada’s win at the Federal Court did not exempt the taxpayer from receiving a formal Requirement for foreign-based information, or from the consequences of non-compliance. Ultimately, the scope of the revised Bayer Canada Requirement is similar to what the CRA had originally requested during the transfer pricing audit.

When it comes to foreign-based information, a Canadian taxpayer’s group can still decline to provide the information to the CRA. However, if the taxpayer fails to “comply substantially” with all of what was requested in a formal Requirement letter, the consequence is that they will not be able to introduce any of the requested items in court if the tax dispute proceeds to litigation. Because of this, Requirement letters are sometimes broad and include a mix of items the taxpayer would likely want to provide into evidence in the court if need be.

The CRA’s transfer pricing audits proceed based on the audit team’s perceptions of tax risk (i.e., how much income and hence tax might be at stake due to transfer pricing) and also behavioral risk (i.e., how cooperative the taxpayer is, and how confident the CRA team is that they are seeing the full picture). Taxpayers might be tempted to manage the CRA’s perception of tax risk by limiting what they share during the early stages of a transfer pricing audit, while inadvertently creating a concern about behavioral risk, which in extreme cases can lead to Requirement notices.

Dealing with formal Requirements under a transfer pricing audit is usually riskier, more expensive and more time-consuming for a taxpayer when compared to more conventional forms of tax audit queries, so they are still best avoided where possible.

Read Transfer Pricing Times – Third Quarter 2020

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