Key Takeaways From Supreme Court's Termination Of Cameco Transfer Pricing Saga

• Published date: 02 March 2021
• Subject Matter: Tax, Income Tax, Transfer Pricing
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Steve Suarez

On February 18, 2021, the Supreme Court of Canada (SCC) declined to hear the appeal of the Canada Revenue Agency (CRA) from its loss before the Federal Court of Appeal (FCA) in Canada v. Cameco Corporation (2020 FCA 112) (Cameco).¹ This exhausts the CRA's options for pursuing the re-assessment of the 2003, 2005 and 2006 taxation years of Cameco Corporation, a publicly-traded Canadian uranium miner. Logically, the same result should apply to Cameco's 2007-2014 taxation years, which were also re-assessed by the CRA on the same issue but have not yet been litigated.

Cameco was the first Canadian court case to consider the "transfer pricing recharacterizaton rule" (TPRR) in s. 247 of the Income Tax Act (Canada) (ITA). Cameco had created a European sales subsidiary (Salesco) which entered into certain commercial opportunities to acquire uranium from arm's length third parties. Cameco also entered into long-term contracts to sell uranium it produced to Salesco, following which the price of uranium rose significantly. As a result, profits from uranium sales by Salesco indirectly to buyers outside of Canada were realized largely in Switzerland by Salesco rather than in Canada by Cameco.

The CRA re-assessed Cameco, attributing to it all of the profits earned by Salesco. The bases for this re-assessment were that:

• Salesco was a sham that should simply be ignored; and
• Canada's transfer pricing rules in s. 247 ITA allowed the CRA to ignore the legal transactions actually entered into and instead determine the Canadian tax results based on what arm's length parties would have agreed to.

The Tax Court of Canada decisively rejected both of these arguments, finding that the taxpayer's legal transactions were exactly as they were presented as being (defeating the "sham" argument), and that Canada's transfer pricing rules in s. 247 (which are based on meeting the arm's-length standard) had been complied with in full.² The CRA appealed to the FCA, dropping the "sham" assertion but pursuing the transfer pricing argument. In particular, the CRA sought to apply the TPRR in s. 247(2)(b) ITA, applicable when a Canadian taxpayer (Cameco) and a non-arm's length non-resident (Salesco) participate in a transaction or a series of transactions that:

• Would not have been entered into between persons dealing at arm's length; and
• Can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit.

The CRA asserted that the...