Law Times

Page 10 January 14, 2019 • Law Times www.lawtimesnews.com CRA rebuked for 'fundamental misunderstanding' BY JULIUS MELNITZER Law Times S hould it hold up on ap- peal, the Tax Court of Canada's Septem- ber 2018 decision in Cameco Corporation v. The Queen may stand as one of the most resounding successes tax- payers have experienced to date in transfer pricing disputes with the Canada Revenue Agency. "Cameco is nothing less than a clear-cut winner for old school tax planning," says Ottawa-based Dale Hill, national leader of the Gowling WLG transfer pricing and competent authority team. In one fell swoop, Justice John Owen rebuked the CRA for its "fundamental misunderstand- ing of the concept of sham," restricted the scope of the CRA's power under the Income Tax Act to recharacterize transfer pricing arrangements that are commercially rational, and re- fused to read the Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting Project into Canadian tax law absent the ap- propriate legislative action. "This is a decision that respects contracts, respects transactions and recognizes that parents and their subsidiaries are separate legal entities for tax purposes," says Al Meghji, a partner in taxa- tion at Osler, Hoskin & Harcourt LLP's Toronto office, who worked with Joseph Steiner, a partner in litigation at Osler, in representing Cameco Corporation. "The court has affirmed that principles that have informed Canadian tax law for decades are still a fundamental part of our system," says Meghji. Saskatoon-based Cameco Corporation is the world's larg- est uranium producer. Cameco entered into long-term contracts to sell uranium to its Swiss sub- sidiary (Swiss Cameco) and also guaranteed the subsidiary's pur- chases from third parties. Swiss Cameco then bought the urani- um from Cameco Corporation and third parties at the contract prices and sold it at market levels, which had risen significantly in a short period of time. Swiss Cameco kept all the revenue from the sales, meaning that the sales by the subsidiary to customers outside Canada were realized in Switzerland, a low-tax jurisdiction. Swiss Cameco, how- ever, compensated its parent for administrative services rendered under a services agreement and for the third-party guarantees. The CRA asserted that the arrangements were a sham; did not constitute arm's length transactions and were therefore open to recharacterization by the Agency; and offended por- tions of the BEPS initiative. Justice Owen showed little taste for the sham argument. "I have heard no evidence to suggest that the written terms and conditions of the many con- tracts entered into by the Ap- pellant, Cameco US and CESA/ CEL between 1999 and the end of 2006 do not ref lect the true intentions of the parties to those contracts, or that the contracts presented the resulting transac- tions in a manner different from what the parties knew the trans- actions to be," said the ruling. "Quite the contrary, I find as a fact that the Appellant, Cameco US and CESA/CEL entered into numerous con- tracts to create the very legal relationships described by those contracts. The arrangements created by the contracts were not a façade but were the legal foundation of the implementa- tion of the Appellant's tax plan." Steve Suarez, a partner at Borden Ladner Gervais LLP in Toronto, says the court "rejected what the CRA was proposing as not being even nearly close to a sham." "A sham requires intentional deceit, and what we had here, at most, was sloppy documenta- tion that constituted the excep- tion and not the rule," he says. As Suarez points out, Cameco was a very large Canadian pub- lic company that had retained a "Big Four" audit firm. "The message from the court was that if the CRA was going to assert a sham, it better have a whole lot more than what it had here," he says. "And that's a real victory for taxpayers, because the agency tends to throw stuff at the wall and see what sticks." Hill says, "Cameco only did what taxpayers do to minimize their global tax position, but CRA just didn't like the end re- sult, which they obviously found offensive." "Consequently, they weren't focused on the transfer pricing issue and may have made a mis- take by throwing everything but the kitchen sink at the case," he adds. Christopher Steeves, in Fasken Martineau Dumoulin LLP's Toronto office, says the CRA's "stance grabbed a lot of headlines, forcing Cameco to defend itself to the public, to the markets, and to its shareholders." "It's a means of applying pub- lic pressure, and in this case, that's exactly what the sham allegations did," says Steeves. A sham allegation, Suarez says, also has personal consequences. "Maybe CRA and Justice Canada genuinely don't under- stand how really serious it is for an officer or director to have a sham allegation thrown at them," says Suarez. "The CRA's pending appeal to the Federal Court of Appeal drops the sham issue entirely," says Suarez. But the recharacter- ization issue — in what Meghji calls the "first case to address and speak directly to these pro- visions in the Income Tax Act" — remains very much alive. At first instance, Owen af- firmed the significance of mul- tinationals' normal commercial practices in interpreting transfer pricing rules, including the re- characterization provisions. "The court refused to read anything nefarious into a par- ent company taking the oppor- tunity to set up a foreign entity instead of doing certain things themselves," says Suarez. "It is not a violation of trans- fer pricing when a Canadian en- tity doesn't run each foreign sub- sidiary as if were a standalone, and outsourcing is perfectly OK if the pricing is right." As Owen saw it, Cameco was only doing what the ITA permitted it to do. "The purpose of the foreign affiliate regime is to allow Ca- nadian multinationals to com- pete in international markets through foreign subsidiaries without attracting Canadian in- come tax," he says. "The tax plan conceived and implemented by the Appellant sought to take advantage of the foreign affiliate regime by hav- ing a contract with an arm's length non-resident person (Tenex) executed by a controlled foreign affiliate of the Appel- lant." There was, therefore, "noth- ing exceptional, unusual or in- appropriate" about Cameco's ar- rangements. "What the decision on this issue amounts to is a declara- tion that recharacterization will not apply where transactions FOCUS TheCannabisChannel.ca THE CANNABIS CHANNEL.ca C C What are the implications of the Cannabis Act? 7JTJUUIFXFCTJUFUIBUQSPWJEFTSFMJBCMF OFXTBOBMZTJTFYQFSUTBOESFTPVSDFTGPS QSPGFTTJPOBMTMPPLJOHGPSBOTXFSTȋXIFUIFS UIFZȎSFEFBMJOHXJUIDBOOBCJTJOUIF XPSLQMBDFJOUFSQSFUJOHMFHJTMBUJPO NBOBHJOH."USBOTBDUJPOTPSOBJMJOHEPXO JOUFMMFDUVBMQSPQFSUZSJHIUT Untitled-3 1 2019-01-02 10:45 AM Dale Hill says a recent Tax Court of Canada ruling is 'a clear-cut winner for old school tax planning.' See Stakes, page 12 The court rejected what the CRA was proposing as not being even nearly close to a sham. Steve Suarez CanadianLawyerMag.com Fresh Canadian legal news and analysis available on any device. Get More Online

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