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Several months ago, in addition to Transport Canada,  we wrote to both Industry and Revenue Canada concerning Fair Automobile Pricing for Canadians.   We encouraged our members to do so as well.  Both departments have been very slow to repond, yet we can see from some of the announcements last week that the Government is starting to move in our direction.

One of our members, also wrote a very good letter concerning the Trade and Tax avoidance issue that is still not being addressed.  He has yet to receive a reply! 

We thought we would publish it here for you, please use it to write further letters and exert more pressure!

Here is the substance of a letter (slightly updated) sent by email about three months ago to The Honourable Jim Prentice, M.P., Minister of Industry in Ottawa. To date, the Minister has not responded to this letter on its merits, although his Parliamentary Assistant has acknowledged its receipt.

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The Honourable Jim Prentice, M.P.
Minister of Industry
Ottawa, Ontario

Dear Mr. Minister:

I am writing this letter to you as a friend, a fellow Progressive Conservative and a concerned citizen of Canada.

There has been much discussion lately about the very large price differentials in the retail pricing of new vehicles in Canada versus those in the USA and how the Canadian public is being cheated in this regard. I am of the very strong opinion that the federal government must deal with this issue on an immediate basis and in particular, by standardizing Canadian vehicle requirements with those in the US. Let me explain my reasons. I will use BMW (with which I have some familiarity) as an example. However, the reasoning also relates to the other foreign car manufacturers.

Background

BMW Canada buys its cars from its foreign corporate parent, Bayerische Motoren Werke AG (“BMW Germany”). (A similar buying structure would apply to other Canadian subsidiaries of foreign car manufacturers.) Similarly, in the US, BMW of North America (“BMW USA”) also buys its cars from the same foreign corporate parent (BMW Germany).

The following illustrates the wholesale pricing differential between Canadian and US marketed BMWs. I have used the example of a high priced BMW to better demonstrate the numbers, although the principle applies across the board with all levels of pricing. For a 2008 BMW 650 coupe (base car, no options), the wholesale price to a Canadian dealer from BMW Canada is about $92,000 (with a retail price to the public of $101,500). However, in the US the wholesale price to a US dealer is about $67,000 (with a retail price to the public of about $76,600) - almost a $25,000 difference. No doubt, these wholesale prices are the direct result of the pricing agreements that each of BMW Canada and BMW USA has with their corporate parent (BMW Germany).

The Glaring Income Tax Issue

As an income tax lawyer, I will deal firstly with an outstanding and glaring income tax issue in such arrangements. Section 247 of the Income Tax Act (Canada) relates specifically to transactions or arrangements between a taxpayer (such as BMW Canada) and a non-resident person with whom that taxpayer does not deal at arm’s length (i.e., BMW Germany). The transfer prices adopted by a group of non-arm’s length parties (such as between BMW Germany and BMW Canada) directly affect the profits to be reported by each of those parties in their respective countries. Canada’s transfer pricing legislation embodies the arm’s length principle and requires that, for tax purposes, the terms and conditions agreed to between non-arm’s length parties (BMW Canada and BMW Germany) in their commercial arrangements be those that one would have expected had the parties been dealing with each other at arm’s length.

In effect, if BMW Canada were to buy a new BMW 650 from BMW Germany for the same price as BMW USA pays (which is probably about $25,000 less than it now pays), then on the resale of the vehicle for $101,500, the profit recorded by BMW Canada would be $25,000 higher. Instead, that $25,000 of extra income is reported and taxed in Germany in the hands of BMW Germany and is not taxed in Canada. Hence, the Canada Revenue Agency (formerly Revenue Canada) is receiving tax on about $25,000 less income on the sale of the BMW 650 in Canada (which at a 35% tax rate is about $9,000 less tax) than it would be entitled to receive than if BMW Canada were paying the same price to BMW Germany as BMW of NA pays to BMW Germany.

The transfer pricing rules allow the Canada Revenue Agency to treat BMW Canada’s cost of the vehicle as the lower amount (even thought it pays the higher amount). As a result, this would increase the income taxed in Canada by $25,000 and give the Canadian government (and not the German government) the additional $9,000 in tax revenue.

In other words, the Canada Revenue Agency should be auditing the income tax reporting of BMW Canada (as well as the other Canadian marketing subsidiaries of foreign car manufacturers) to ensure that if these cross border pricing discrepancies continue, Canada gets its fair share of the extra income tax from each sale.

The transfer pricing rules in Canada are designed to ensure that Canadian taxpayers (such as BMW Canada), who are non-arm’s length members of a corporate group that engages in transactions with a non-resident member of that group (such as BMW Germany), report substantially the same amount of income as they would if they had been dealing with each other at arm’s length. Section 247 of the Income Tax Act also contains penalty provisions where the transfer pricing rules are violated. These penalties can be substantial.

The Real Cause of the Pricing Discrepancy

At the end of the day, the real cause of the higher Canadian vehicle prices is the pricing regime set by the foreign car manufacturers when selling cars to their Canadian subsidiaries. I sympathize with the Canadian dealers, who are caught in the middle and are forced to sell their cars at prices higher than their own dealer costs, or lose money themselves on each sale. I would much prefer to purchase from a Canadian dealer, but in order for that to happen Canadian dealers must be able to buy their cars at wholesale prices which are competitive with US dealer costs. If this were happening, the system would balance out and Canadians would get the benefit of their higher Canadian dollar.

If “jobs” are being lost in Canada because of Canadians buying cars in the US, it is the direct result of the foreign car manufacturers inflating their prices to their Canadian subsidiaries, contrary to the transfer pricing rules discussed above. This inflated pricing regime is facilitated by all of the impediments to importing US sourced vehicles (such as Canadian vehicle requirements being intentionally different than those in the US and all of the unreasonable fees and unnecessary vehicle modifications which are now being imposed on purchasers - with the implied consent of Transport Canada).

Ordinary Canadians are simply trying to save money on one the largest purchases that they will make. If the impediments to importing US sourced vehicles are eliminated (by standardizing Canadian vehicle requirements with those in the US), the flood of imported cars from the US would VERY VERY quickly cause the foreign car manufacturers to lower their wholesale prices to their Canadian dealers to be competitive with those US prices. People would then STOP buying cars in the US and would gladly buy their cars in Canada. The result would be the lowering of vehicle prices across the board in Canada.

A Reduction of Inflation in Canada

On this latter point, if Canadian vehicle requirements were standardized with those in the US, the Canadian inflation rate would take a HUGE drop as the price of new vehicles would immediately drop to US levels. All Canadians would then begin realizing the full value of their Canadian dollars, as Mr. Flaherty (Canadian Minister of Finance) has often complained we are not. Indeed, the resulting reduction of car prices across the board in Canada would benefit ALL Canadians. The parties who would be most affected would be the foreign car manufacturers, which are presently selling their vehicles into Canada at prices which are much higher than their US prices.

This would be a great way to gain votes across Canada, as well as a majority P.C. Government!!

Conclusion

The federal government must deal with this issue immediately. This should also include the immediate removal of the provisions in the Transport Canada regulations which give the Canadian subsidiaries of foreign car manufacturers (such as BMW Canada, etc.) the right to determine the admissibility of US sourced cars coming into Canada (along with their application of unreasonable fees and unnecessary vehicle modifications which they are now imposing).

I ask the question: Who has the most to gain from restricting the import of US sourced BMWs into Canada? Clearly, the answer is NOT the Canadian buying public!! In fact, it is not even the Canadian dealerships!! The answer is BMW Canada itself and its foreign parent corporation, BMW Germany. Therefore, to give BMW Canada (and indirectly BMW Germany) the right to dictate and control the process of admitting BMWs into Canada (along with unreasonable fees and unnecessary modification) is a direct and flagrant CONFLICT OF INTEREST and a severe financial detriment to Canadian public and to the Canadian inflation rate. “It is the same as putting the fox in charge of protecting the chicken coupe.” (As stated above, this BMW discussion applies to ALL of the foreign car manufacturers.)

All of this is a sad reflection on the vehicle sales process in Canada and how ordinary Canadians are being cheated by the big foreign vehicle manufacturers, with the implicit help of the Canadian government. As the Minister of Industry, you are in a wonderful position to reverse this situation and “get a P.C. Majority government elected”!!

Yours very sincerely,