On February 18, 2021, the Supreme Court of Canada (SCC) refused
the Canada Revenue Agency (CRA) appeal to hear of her loss
before the Federal Court of Appeals (FCA) in Canada against Cameco
Corporation (2020 FCA 112)
(Cameco) .1 This exhausts the CRAs
Options for re-evaluation of the years 2003, 2005 and 2006
Tax years of Cameco Corporation, a publicly traded Canadian
Uranium miner. Logically, the same result should apply to
Cameco's fiscal years 2007-2014, which have also been reassessed
by the rating agency on the same subject, but have not yet been heard in court.
Cameco was the first Canadian court case to be considered
the "transfer pricing re-characterization rule" (TPRR) in
p. 247 of the Income Tax Act (Canada) (ITA). Cameco had
founded a European sales office (Salesco) which died
certain commercial ways to extract uranium from weapons
Third length. Cameco also signed long-term contracts
Selling uranium, it produced it to Salesco, prompting the price
of uranium increased significantly. As a result, benefits from
Salesco's uranium sales indirectly to buyers outside Canada
were mostly realized in Switzerland by Salesco and not in Switzerland
Canada from Cameco.
The rating agency re-evaluated Cameco and attributed all profits to it
earned from Salesco. The bases for this re-evaluation were:
- Salesco was a sham that should simply be ignored; and
- Canada's transfer pricing rules in p. 247 ITA allowed that
CRA to ignore the actual transactions and
Instead, determine Canadian tax results based on the arm
Length parties would have agreed.
The Canadian tax court firmly denied both
Arguments stating that the legal transactions were the taxpayer's
exactly as they were presented (defeating the
"Bogus" argument) and Canada's transfer pricing
Rules in p. 247 (based on meeting arm length
Standard) has been fully complied with. 2 The CRA
appealed to the FCA and dropped the "bogus" statement
Tracking the transfer pricing argument. In particular the CRA
tried to apply the TPRR in s. 247 (2) (b) ITA, applicable if a
Canadian Taxpayer (Cameco) and Non-Resident Non-Residents
(Salesco) participate in a transaction or a series of transactions
The:
- Would not have been entered into between people acting at
Arm length; and - Can reasonably be considered incomplete
primarily for good faith purposes, except for a
Tax advantage.
The CRA claimed that the TPRR applies when Cameco (i.e.
the actual taxpayer) would not have been included
an independent party to the same transaction that it entered into
with its subsidiary Salesco, effectively requiring everyone
Member of a multinational company (MNE) to work as if it were
a completely independent entity. Cameco's interpretation of
This rule was different – that the TPRR only applies where no
People on normal market terms would have entered the same
Transactions between Cameco and Salesco. Under
Cameco's interpretation of the TPRR accepts that there are some
Transactions within multinational companies that do not take place between
Parties on market terms simply because of the way multinationals work
commercial (these are acceptable if the price is in accordance with
which independent parties would pay), but allows the rating agency to do so
Determine the tax consequences of only transactions that are
"commercially irrational" (i.e.
People on market terms would never agree to them
tax consequences that would result from alternative transactions
These independent parties would have agreed.
The FCA categorically rejected the rating agency's interpretation
the basis that it was simply not supported by the text of the TPRR,
and the results it produced made no sense:
(45) If Parliament had intended
this sub-paragraph 247 (2) (b) (i) of the Act would apply if the
certain taxpayers would not have entered the certain
Transaction with an independent person, this sub-paragraph
could have provided:
(b) the transaction or
series
(i) would not have been entered
between the participants if they had traded in arms
length
(46) When the crown
Interpretation is always correct when a company is in Canada
wants to do business abroad through someone else's business
Subsidiary, the condition in sub-paragraph 247 (2) (b) (i) of the Act
would be satisfied. Because the company wants to do business
in this strange land either alone or by yourself
Subsidiary it would not sell its rights to conduct such a business
to a party at customary market conditions.
Basically, the rating agency's interpretation failed because it
started from a flawed understanding of what p. 247 is trying to do
to reach. Canada's transfer pricing rules were never envisaged
Forcing multinational corporations to behave as a series of stand-alone companies
Companies without a common strategy or synergies. On the contrary, they
ITA accepts that parent companies dictate the strategic direction
Subsidiaries in other countries and often use foreign subsidiaries
Doing business outside of Canada instead of doing so
directly. This is evidenced by regulations in Canada
Controlled Foreign Companies (CFC) regulate that:
- Explicitly facilitate the use of foreign sales offices for sales
to non-Canadian goods or services that would otherwise be sold by
the Canadian parent himself; and - Reduce or eliminate Canadian taxes on business with foreign sources
Foreign Subsidiary Income Relative to Canadian Tax
that would apply to the same income if it were directly from the
Canadian parent company that does business in the same foreign country
Countries.
The CRA has never been able to explain to the courts why this is so
The TPRR should be interpreted in a way that completely contradicts these
Elements of the Canadian CFC rules, and as a result it is not
surprising that the taxpayer prevailed.
The key takeaways from the Cameco saga are as follows
follows:
- The TPRR only applies in the very limited circumstances of
"commercial irrationality" where no arm's length
The parties agreed to the transactions that were actually completed
between the Canadian taxpayer and his non-arm length
non-resident counterparty; - P. 247 does not (and should not) prevent multinational corporations
organize their activities differently than they would be
found under completely independent circumstances (e.g.
Centralization of services in a group service provider, assignment
Business opportunities for certain members of the MNE group were logical
on that, etc.) as long as these situations are priced in
according to the arm length standard. In other words, the
The aim of p. 247 is limited to guaranteeing the Canadian MNE group
Members don't pay too much for the goods and services they receive
from or receive too little for the goods and services to which they sell,
Non-residents on market terms; - Current Canadian tax law just doesn't support this
the continued application of the TPRR by the rating agency in non-exceptional cases
Cases.3 For the past few years, the CRA
very aggressive when using the TPRR, also as
as opposed to hybrid funding arrangements it finds
objectionable, 4 - In particular, the cancellation5 by the rating agency5
primary statement of the administrative guidelines on Canada
allegedly transfer pricing rules (Information Circular IC 87-2R)
on the basis that his description of when the TPRR can be applied
is too limited, seems out of place; - Canada's courts will continue to base the ITA on
actual legal rights and obligations that taxpayers enjoy through their
Documentation and measures, 6 except in certain
Exceptional situations prescribed in the ITA (such as the
General Anti-Avoidance Rule (GAAR) in p. 245 ITA) or established in
the case law (e.g. "Schein"); and - As a result, the gap between Canada will continue to grow
Tax law and economic-supra-legal substance doctrines
(e.g. "exact delimitation") found in the OECD
Initiatives such as the 2017 OECD Transfer Pricing Guidelines, the
The latter have the status of a mere interpretation aid that cannot do this
Take precedence over statutory regulations such as the ITA.
Footnotes
1 There is no automatic legal remedy at the SCC
in tax cases: The SCC decides whether to hear or not
Vocation.
2 For a detailed discussion of this decision, see
Suarez, "The Cameco Transfer Pricing Decision: A Victory For
The Rule of Law and Canadian Taxpayers "Tax Notes
International, November 26, 2018, p. 877, available on the Business Tax Canada website.
3 See statements by the rating agency dated February 3, 2021
at a transfer price from the Canadian Tax Foundation
Conference.
4 See Suarez, "Transfer Pricing in
Canada, "Tax Notes International, December 2, 2019,
p. 781 on p. 789, available at trade tax
Canada.
5 See February CRA Notice to Tax Advisors
26, 2020.
6 This was described by the SCC in Jean Coutu
Group Inc. v. Canada, 2016 DTC 5134, para. 41, as "one of
the basic principles of the (Canadian) tax system: this tax
Consequences arise from the legal relationships or transactions
founded by taxpayers. "
About BLG
The content of this article is intended to provide a general overview
Guide to the subject. Expert advice should be sought
about your particular circumstances.