1. Alberta printed circuits v. Canada Revenue Agency

2. Alberta Printed Circuits is owned by mr McMuldroch for 25% and 75% by Bamber Electronics ltd. Electronics Ltd. is owned by mr and ms Bamber by repectively 60% and 40%. Alberta Printed Circuits wanted to move their operations to the low tax country Barbados. However McMuldroch and the Bambers were concerned about asset protection and contemplated moving the manufacturing of the circuit boards outside of Canada due to the high-risk nature of their business. Instead they decided to move set-up operations to Barbados and be carried on by the Barbados Company The new company, founded in november 1996, was fully owned by mr Mcmuldroch. He was the director and CEO of the new Barbados company APCI In december 1996 Mr ands Ms Bamber purchased the shares of McMuldroch in Alberta Printed Circuits. McMuldroch made an issuance of 100 fully paid common shares to Morville Ltd. ("Morville"), located in Guernsey in the Channel Islands. McMuldroc transfered all the shares of APCI to Morville on May 1, 1998. Three months later these shares where owned by Norbon life and pension insurance company ltd of which two third went to the Bamber family and ond third to McMuldroch’s Family. Case Overview

3. APCI purchased the copyrights for the new printed circuit computer programs. APCI provided services to the Alberta Printed Circuits by performing setup functions, software and website development, and maintenance services. Under the terms of the agreements, APCI charged Alberta Printed Circuits a fixed fee for the setup services and a square-inch fee for non-setup services. The APCI charged the same fee for the same services to third-party customers. The Canada Revenue Agency (CRA) was found to have significantly over-assessed Alberta Printed Circuits income for 1999-2001 The CRA asserted that the Alberta Printed Circuits overpaid APCI $3.4 million because the terms and conditions of the agreements differed from those that would have been entered into by persons dealing at arm's length.

4. The Arguments CRA’s Arguments: Alberta Printed Circuits owned all the intangibles before and after the Barbados company was created. Alberta Printed Circuits had ‘gifted’ the intangibles to the Barbados company for use in providing its services. Alberta Printed Circuits paid too much for the services of APCI and the extra payments of 3.4 million should be added to their profits. Alberta printed Circuits’ Arguments: Most of McMuldrochs contributions appeared to be innovations in their own right that where unique and valuable intangibles. The Barbados company APCI purchased the copyrights for the new printed circuits computer programs. There are internal comparable transactions between APCI and third parties; the transfer prices were determined by the comparable uncontrolled price (CUP) method.

5. Court Decision The court ruled in favor of the Tax payer. It rejected the CRA’s analysis and stated that the government’s assumptions “are all seriously flawed” Paying for software development and maintenance does not automatically result in ownership 1. There shall only be the following transfer price adjustments added to the Appellant's income: 1) for the 1999 taxation year - $242,625.13, 2) for the 2000 taxation year - $344.821.92, and 3) for the 2001 taxation year - $293,121.88, for a total of $880,568.93. This is because McMuldroch moved back to Canada in 1999, and started working again at Alberta Printed Circuits. Since he was the only one with the skills to provide the service, there was no reason to keep making payments to APCI.

6. Conclusion Alberta Printed Circuits warns all advisers, taxpayers, and tax authorities to be careful with their assumptions, and of the need to search for and document factual evidence supporting which party or parties own or use unique and valuable intangibles. Failure to do so can lead to serious concerns about selecting the wrong tested party that render the TNMM analysis unreliable for determining the arm’s-length price for transactions.

7. More details about the court case can be found here: http://www.taxwiki.ca/Alberta+Printed+Circuits+Ltd+v+Her+ Majesty+The+Queen,+2011+TCC+232+(TCChttp://www.taxwiki.ca/Alberta+Printed+Circuits+Ltd+v+Her+ Majesty+The+Queen,+2011+TCC+232+(TCC)

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