From Transfer Pricing To Tax Treaties: Canadian Cross-Border Tax Update

The two most significant Canadian cross-border tax developments in 2018 relate to transfer pricing and tax treaties. On transfer pricing, Osler successfully represented the taxpayer, Cameco Corporation, at the Tax Court of Canada in the first case to address Canada's transfer pricing "recharacterization" rule. On tax treaties, Canada introduced legislation in 2018 (Bill C-82) to enact the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting — also known as the Multilateral Instrument or MLI — into Canadian law. This is the next step in the process for Canada to ratify the MLI - which will make significant amendments to many of Canada's tax treaties.

Taxpayer prevails in landmark transfer-pricing dispute

On September 26, the Tax Court of Canada released its decision in Cameco Corporation v Her Majesty the Queen, 2018 TCC 195.

The Minister of National Revenue reassessed Cameco Corporation (Cameco Canada) to include in its taxable income all of the uranium trading profits reported by its foreign subsidiary (Cameco Europe). Following a corporate reorganization in the late 1990s, Cameco Europe earned profits from market sales of uranium purchased pursuant to contracts with Cameco Canada (the Intercompany Contracts), as well as with arm's length non-residents of Canada (the Third-Party Contracts), after uranium prices rose dramatically. Cameco Canada provided Cameco Europe with a number of services (including contract administration, market planning and back office services) pursuant to an intercompany services agreement.

On transfer pricing, Osler successfully represented the taxpayer, Cameco Corporation, at the Tax Court of Canada in the first case to address Canada's transfer pricing "recharacterization" rule.

At trial, the Crown sought to defend the tax assessments on the basis of three alternative arguments. First, the Crown said that Cameco Europe and its business were a "sham," such that all of its trading profits properly belonged to Cameco Canada. Second, the Crown said that the transfer pricing "recharacterization" rule in paragraphs 247(2)(b) and (d) of the Income Tax Act (the ITA) applied to recharacterize all of Cameco Europe's trading profits as profits of Cameco Canada. Third, the Crown argued that the pricing rule in paragraphs 247(2)(a) and (c) of the ITA applied to move Cameco Europe's income to Cameco Canada.

In his 297-page decision, Justice Owen of the Tax Court...