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Canada: TP case – Cameco’s Canada Tax Court Victory Brings Relief for Companies

Canada: Cameco’s Canada Tax Court Victory Brings Relief for Companies
• Court rejects government’s arguments of “sham” transactions
• Lawyers divided on whether ruling harms OECD base-erosion reforms
Companies should rest easy knowing that they can arrange their tax affairs as they see fit—as long as the approach is legal—after uranium giant Cameco Corp. won a major court case.
Canada’s tax agency alleged the company’s inter-group pricing structure was a “sham,” but the Tax Court of Canada has rejected its reassessment of C$483 million ($377 million) of Cameco income. The decision shows carefully planned corporate structures can withstand scrutiny.
The Canada Revenue Agency “will have to think long and hard” before using that argument again, Joel Nitikman, a tax partner with Dentons Canada LLP in Vancouver, said Sept. 28. Cameco said in a Sept. 26 statement that it will try to recover its “substantial” costs.
A Victory
The ruling is big win for Cameco, which had faced years of litigation, practitioners said.
The disputed transactions were between Cameco’s foreign subsidiaries and arm’s-length foreign firms, and some only between the foreign subsidiaries, the court said. The tax agency couldn’t disregard the transactions because it believed non-arm’s-length parties wouldn’t have made them, as that circumvents the comparability analysis that is the “heart” of transfer pricing rules, it said.
The arm’s-length principle of transfer pricing says the amount charged by one related party to another for a product must be the same as if the parties weren’t related.
The tax agency reassessed Cameco’s 2003, 2005, and 2006 tax returns to include its Swiss subsidiary’s income. Cameco reorganized in 1999 to create the subsidiary to market uranium purchased from the Canadian parent and arm’s-length foreign companies. The parent provided contract administration, market planning and back-office services.
The tax authority showed a “fundamental misunderstanding” of the sham concept, as it wouldn’t apply even if Cameco’s motivation was only tax-related, the court said in the Sept. 26 ruling. The court gave the parties 60 days to make submissions on costs.
“The element of deceit required to find sham is simply not present,” the court said. “Taxpayers are entitled to arrange their affairs in such a way to minimize their tax burden, even if in doing so they resort to elaborate plans that give rise to results which Parliament did not anticipate.”
Helpful for Companies
The tax agency “went for the throat” on recharacterization, but couldn’t prove Cameco made mistakes, Jonathan Garbutt, of counsel with Moodys Gartner Tax Law LLP in Calgary, said Sept. 28.
“I don’t know why they went after this, unless they saw the dollar figure and freaked out,” he said.
Mining and oil and gas companies will be happy because many have similar structures, he said.
The court’s rejection of disregarding transactions is better guidance than recent publications on the OECD’s base-erosion and profit shifting (BEPS) reforms, which support a power to disregard but don’t offer clear examples of how it would work, Shaun MacIsaac, a principal with PMR Law in Calgary, said Sept. 28.
BEPS Harm?
The ruling “flies in the face” of the OECD reforms, because it focuses on risk, rather than value creation, said Dale Hill, a partner with Gowling WLG in Ottawa and national leader of its transfer pricing group.
“This decision puts a strain on the BEPS movement around the world,” Hill said Sept. 30.
The government will almost certainly appeal, adding years to the dispute, and in the meantime the tax agency won’t support the ruling and will focus on value creation, he said.
A key tenet of the BEPS reforms is the idea that profits are taxed where economic activity and value creation occurs.
Companies should report profit where they face risk and where business functions are located, like Cameco did, Garbutt said.
The CRA said Sept. 27 that it can’t comment on the ruling. It has until Oct. 26 to appeal to the Federal Court of Appeal.
To contact the reporter on this story: Peter Menyasz in Ottawa at
To contact the reporter on this story: Kevin Bell at