Commercial reality alive and well in transfer pricing world

The Federal Court of Appeal (FCA) has snafued the Canada Revenue Agency’s (CRA) attempt to upend transfer pricing arrangements between Cameco Corporation and its Swiss subsidiary – in what amounted to a no-holds barred attack on the commercial realities facing multinational companies.

In the CRA’s view of the world, respect for contracts and the separate legal existence of parents and their subsidiaries appeared to be little more than formalities hindering the Agency’s alleged power under the Income Tax Act to recharacterize commercially rational transfer pricing arrangements.

Then along came Canada v. Cameco Corporation, in which the CRA sought to overturn the company’s resounding victory in the Tax Court of Canada (TCC) in September 2018.

“Cameco is the first court case to consider the portion of Canada’s transfer pricing rules that potentially allows the CRA to go beyond merely repricing the taxpayer’s transactions and instead replacing them with different terms,” says Steve Suarez, a tax partner in Borden Ladner Gervais LLP’s Toronto office.

Steve Suarez, Borden Ladner Gervais

Saskatoon-headquartered Cameco Corporation, the world’s largest uranium producer, entered into long-term contracts to sell uranium to its Swiss subsidiary (Swiss Cameco). Cameco also guaranteed the subsidiary’s purchases from third parties. Swiss Cameco then bought the uranium from Cameco Corporation and third parties at the pre-set prices.

When the market price of uranium rose significantly and rapidly, Swiss Cameco earned substantial profits. For tax purposes, sales by the subsidiary to customers outside Canada were realized in Switzerland, a low-tax jurisdiction. Swiss Cameco, however, compensated its parent for administrative services rendered under a services agreement and for the third-party guarantees.

At the TCC, the CRA argued that Cameco’s transfer pricing arrangements were a sham. The argument went nowhere. Justice John Owen went so far as to rebuke the Agency for its “fundamental misunderstanding of the concept of sham”.

“A sham requires intentional deceit, and what we had here, at most, was sloppy documentation that constituted the exception and not the rule,” Suarez said after the TCC released its decision.

Undaunted, the CRA dropped the sham argument, but appealed anyhow.

All to no avail.

The FCA’s unanimous judgment decisively rejected the expansive interpretation of the recharacterization rule on which CRA based its appeal. The court concluded that the rule applied only where the transfer pricing arrangements were so commercially irrational that no arm’s length parties would have entertained them. The mere fact that the arrangements were different than what might have transpired in an arm’s length transaction did not, as CRA submitted, invite recharacterization.

“This case demonstrates that only in exceptional circumstances can CRA ignore genuine legal relationships,” Suarez says. “In other words, arrangements will pass muster so long as they are commercially rational, in the sense that none of the parties received too little or charged too much.”

Still, William Innes, a Toronto-based tax litigator, says Cameco is problematic.

“We’ve lived through 20 years of fine-tuning, so our transfer pricing regime is pretty good,” he says. “This decision, however, throws a complete wrench in the works.”

Cameco’s actions, he notes, resulted in $500 million transferred to Europe between 2002 and 2006.

“Consider that Cameco is the oldest uranium producer in the world with at least as much experience as anyone in that market,” Innes says. “So who was in a better position to determine the risk associated with this transaction and come to a reasonable transfer price?”

Instead, Innes maintains, the arrangements effectively valued the risk of uranium prices rising as non-existent.

“The fact that the parties didn’t know that the price of uranium would rise cannot be the basis of the test for whether their deal was commercially rational,” he says. “If the risk had been nothing, we wouldn’t have seen a $500 million transfer. So it sure looks to me like an attempt to shift profits to a low-tax jurisdiction.”

CRA may yet take another crack at the can. Although the FCA released the decision on June 26 and the normal period for filing leave to appeal to the Supreme Court of Canada has passed, allowances made for COVID-19 mean that the government has until about November 12 to act.


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Julius Melnitzer is a Toronto-based legal journalist, editor, writing coach and media trainer for law firms and legal departments at

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