On February 18, 2021, the Supreme Court of Canada (SCC) declined to hear the Canada Revenue Agency (CRA) appeal of its loss in the Federal Court of Appeals (FCA) in Canada against Cameco Corporation (2020 FCA 112). (Cameco) .1 This exhausts the rating agency’s ability to continue the 2003, 2005 and 2006 fiscal year revaluation of Cameco Corporation, a Canadian publicly traded uranium mining company. Logically, the same result should apply to Cameco’s fiscal years 2007-2014, which have also been re-rated by the rating agency on the same subject, but have not yet been tried in court.
Cameco was the first Canadian court case to apply the Transfer Pricing Recalibration Rule (TPRR) in s. 247 of the Income Tax Act (Canada) (ITA). Cameco had set up a European sales subsidiary (Salesco) that took advantage of certain commercial opportunities to purchase uranium from independent third parties. Cameco also entered into long-term contracts to sell produced uranium to Salesco, as a result of which the uranium price rose significantly. As a result, profits from Salesco’s uranium sales indirectly to buyers outside Canada were largely made in Switzerland by Salesco and not in Canada by Cameco.
The rating agency re-rated Cameco and attributed all of Salesco’s profits to it. The bases for this re-evaluation were:
- Salesco was a sham that should simply be ignored; and
- Canada’s transfer pricing rules in ITA p. 247 allowed the rating agency to ignore the transactions actually made and instead determine Canada’s tax results based on what the parties would have agreed on market terms.
The Canadian Finance Court firmly rejected both arguments, ruling that the taxpayer’s transactions were exactly as they were presented (against the “bogus” argument) and that Canada’s transfer pricing rules in p based) were fully complied with.2 The rating agency appealed to the FCA, dropped the “sham” statement, but pursued the transfer pricing argument. In particular, the rating agency tried to apply the TPRR in s. 247 (2) (b) ITA, applicable when a Canadian Taxpayer (Cameco) and a Non-Commercial Resident (Salesco) are engaged in a transaction or series of transactions that:
- Would not have been entered into between persons who trade on market terms; and
- May not reasonably be considered to have been concluded for the first time in good faith except for the purpose of obtaining a tax advantage.
The rating agency contended that the TPRR would apply if Cameco (i.e. the taxpayer concerned) had not entered into the same transaction with an independent party that it had entered into with its subsidiary Salesco, effectively requiring every member of a multinational corporation (MNE) to work as if it were a completely independent entity. Cameco’s interpretation of this rule was different – that the TPRR only applies if no independent persons have entered into the same transactions between Cameco and Salesco. According to Cameco’s interpretation, the TPRR accepts that some transactions take place within multinational corporations that are not between independent parties simply because the multinational corporations are commercially active (these are acceptable if the price is paid in accordance with the customary parties) , but allows the credit rating agency to re-determine the tax consequences of only transactions that are “economically irrational” (ie, normal market conditions would never agree to them) based on the tax consequences that would arise from alternative transactions Parties would have agreed on market terms.
The FCA categorically rejected the rating agency’s interpretation because it was simply not supported by the text of the TPRR and the results it achieved made no sense:
 If Parliament had intended subparagraph 247 (2) (b) (i) of the Law to apply when the particular taxpayer had not entered into the particular transaction with an independent person, that subparagraph could have provided:
(b) the transaction or series
(i) would not have been entered between the participants if they had traded on market terms
 If the interpretation of the crown is correct, the condition in sub-paragraph 247 (2) (b) (i) of the Act would be met for a company in Canada to do business overseas through a foreign subsidiary. Since the company wants to do business in its own country or through its own subsidiary, it would not sell its rights to conduct such business to an independent party.
Basically, the rating agency’s interpretation has failed because it assumes an incorrect understanding of what is. 247 tried to reach. Canada’s transfer pricing rules should never force multinational companies to behave as a series of separate companies with no common strategy or synergies. On the contrary, the ITA accepts that parent companies give strategic direction to subsidiaries in other countries and often use overseas subsidiaries to do business outside of Canada rather than doing so directly. This is evidenced by provisions in Canada’s Controlled Foreign Corporation (CFC) rules that provide:
- Explicitly facilitate the use of overseas sales offices for the sale of goods or services to non-Canadians that would otherwise be sold by the Canadian parent company itself; and
- Reduce or eliminate Canadian taxes on foreign business income from overseas subsidiaries compared to the Canadian tax that would apply to the same income if earned directly from the Canadian parent company doing business in the same foreign country.
The rating agency has never been able to explain to the courts why the TPRR should be construed as completely contradicting elements of Canada’s CFC regulations, and so it is not surprising that the taxpayer got his way.
The key takeaways from the Cameco saga are as follows:
- The TPRR applies only in the very limited circumstances of “commercial irrationality” where no independent parties would have consented to the actual between the Canadian taxpayer and his non-customary counterparty.
- P. 247 does not prevent multinational companies from (and should not) organize their activities differently than would be the case in completely independent circumstances (e.g. centralization of services in a group service provider, allocation of business opportunities to certain multinational companies Group members, where this is logical, etc.), provided that the prices for these situations correspond to the market standard. In other words, the goal of p.247 is limited to ensuring that members of the Canadian MNE group do not pay too much for goods and services they receive or receive from the goods and services they sell for to non-residents who are not based on customary market conditions.
- The currently enacted Canadian tax law simply does not support the continued application of the TPRR by the rating agency in non-exceptional cases
- In particular, the repeal of the rating agency’s primary management declaration5 on Canada’s transfer pricing rules (Information Circular IC 87-2R), allegedly on the basis that their description of when the TPRR can be applied is too limited, appears incorrect.
- Canada’s courts will continue to apply the ITA based on the actual legal rights and obligations that taxpayers create through their records and actions 6, except in certain exceptional situations prescribed in the ITA (such as the General Anti-Avoidance Rule (GAAR) in s 245 ITA ) or stipulated in case law (e.g. “Schein”); and
- As a result, the gap between Canadian tax law and the doctrines on economic-supra-legal substances (e.g. “precise delimitation”) contained in OECD initiatives such as the 2017 OECD Transfer Pricing Guidelines will continue to widen, with the latter being the status a have mere interpretation aid that cannot prevail against statutory ordinances such as the ITA.
1 In tax cases there is no automatic legal remedy at the SCC: The SCC decides whether an appeal should be lodged or not.
2 For a detailed discussion of this decision, see Suarez, “The Cameco Transfer Pricing Decision: A Victory for the Rule of Law and the Canadian Taxpayer,” Tax Notes International, Nov. 26, 2018, p. 2,877, available on Business Tax Canada’s website .
3 See statements made by the rating agency on February 3, 2021 at a transfer pricing conference of the Canadian Tax Foundation.
4 See Suarez, “Transfer Pricing in Canada,” Tax Notes International, December 2, 2019, p. 4,781 at p. 789, available from Business Tax Canada.
5 See CRA Notice to Tax Professionals dated February 26, 2020.
6 This was described by the SCC in Jean Coutu Group Inc. v. Canada, 2016 DTC 5134, para. 1. 41, as “one of the basic principles of [the Canadian] Tax system: The tax consequences result from the legal relationships or transactions of the taxpayers. “
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.