Background Canada v GlaxoSmithKline Inc

molecular structure of ranitidine

in 1976, predecessor of glaxosmithkline ( gsk ) discovered drug ranitidine, approved sale in canada in 1981 , marketed zantac. ranitidine s primary manufacture conducted related companies located in united kingdom , singapore, , subsequently sold adechsa sa, related company located in switzerland, further sale other group companies , unrelated distributors @ prices dictated parent company.

in addition, following intercompany agreements entered glaxo canada:

in 1972, consultancy agreement glaxo group limited covering services , intangibles provided glaxo canada in exchange 5% royalty
in 1983, supply agreement adechsa purchase of ranitidine
an amendment 1972 agreement, cover services , intangibles relating zantac
in 1988, licence agreement glaxo group limited replaced 1972 agreement, , covered various services , intangibles, in exchange 6% royalty on net sales of drugs

during taxation years 1990 1993, glaxo deducted , remitted withholding tax respect royalty payments made glaxo group limited under 1988 agreement, not respect payments adechsa under 1983 agreement, considered deductible cost of goods sold.

by 1990, generic drug manufacturers such apotex , novopharm able acquire ranitidine on open market @ prices less glaxo canada paying under 1983 agreement. minister of national revenue subsequently reassessed glaxo canada s 1990–1993 taxation years under:

s. 69(2), applied taxpayer not dealing @ arm s length non-resident , pays amount greater amount have been reasonable in circumstances if non-resident person , taxpayer had been dealing @ arm s length . in such case, transfer price deemed reasonable amount determined on arm s length basis.
s. 56(2), resulted in deemed dividend adechsa, , assessment withholding tax under part xiii of ita.

glaxo canada subsequently appealed reassessments tax court of canada.