FCA Refuses To Pierce The Corporate Veil In Cameco Transfer Pricing Case

• Published date: 07 July 2020
• Subject Matter: Tax, Income Tax, Transfer Pricing
• Law Firm: Borden Ladner Gervais LLP
• Author: Ms Laurie A. Goldbach, Shannon James, Steve Suarez and Joseph H. Takhmizdjian

On June 26, 2020, the Federal Court of Appeal (FCA) issued a unanimous decision¹ upholding the decision of the Tax Court of Canada in Cameco Corporation v The Queen.² The case provides additional clarity with respect to the application of Canada's transfer pricing rules found in section 247 of the Income Tax Act (Canada) (the Tax Act),³ which govern transactions between Canadian residents and non-arm's length non-residents of Canada.⁴

What you need to know

The FCA unanimously rejected an attempt by the Canada Revenue Agency (CRA) to use the transfer pricing rules to pierce the corporate veil and disregard taxpayers' true legal relationships.

The purpose of Canada's transfer pricing rules is to ensure that transactions between non-arm's length parties are conducted on arm's length terms and conditions.

Whether transactions are carried out under arm's length terms and conditions is a question of fact.

The 'recharacterization' rule at paragraph 247(2)(b) and (d) of the Tax Act imposes an objective test: would hypothetical arm's length parties have entered into the transaction or series of transactions?

Background

Cameco Corporation (Cameco), a Canadian taxpayer, is one of the world's largest producers of uranium. In 1999, Cameco decided to pursue foreign business opportunities to acquire Russian uranium and resell it to third parties. Cameco entered into contracts to sell a substantial portion of its uranium to its Swiss subsidiary and also guaranteed long-term contracts entered into by the Swiss subsidiary to purchase uranium from third parties. In subsequent years, the price of uranium unexpectedly spiked. The result was profits from sales by the Swiss subsidiary to foreign customers were realized largely in Switzerland as opposed to Canada.

Reassessment and appeal to the Tax Court of Canada

The CRA reassessed Cameco to reallocate all of the Swiss subsidiary's profits to Cameco in Canada on the basis that the purchase and sales contracts involving the Swiss subsidiary:

Were a sham and should be disregarded; and

Did not meet the arm's length standard contained in Canada's transfer pricing rules, and accordingly, CRA could ignore the contracts or revise their terms in accordance with the agreement that arm's length parties would have made.

The Tax Court of Canada (TCC) dismissed the Crown's primary argument that Cameco's transactions were a sham.

Further, the TCC concluded the transactions carried out by Cameco were commercially rational and undertaken on...