The federal government claims billions in taxable income could be wrested from its grasp if the Supreme Court of Canada does not intervene in Ottawa’s thus-far unsuccessful dispute with uranium producer Cameco Corp.
Saskatoon-based Cameco and the federal government have been fighting for years over whether or not around $480 million in profit earned by a Switzerland-based subsidiary of the company should instead be assigned to its Canadian parent for tax purposes.
Rulings issued by the Tax Court of Canada and the Federal Court of Appeal sided with Cameco regarding its 2003, 2005 and 2006 tax years, with the company noting that four judges (one from tax court, and three from the appeal court) have now found it followed the rules.
But the appeal-court decision in June prompted Department of Justice lawyers to file at the end of October an application to appeal the ruling to the Supreme Court.
According to the government’s lawyers, the Cameco decision comes with a “significant” cost, namely that the Canada Revenue Agency has estimated $11.84 billion of taxable-income adjustments over the past three years would be jeopardized.
Those adjustments were related to so-called “transfer pricing” — which involves the terms and conditions for cross-border transactions by related parties, such as two subsidiaries of one global company — and were made in ongoing tax matters involving 445 Canadian multinational corporate groups.
“The objective of the (transfer-pricing) regime is to ensure that a taxpayer who is a member of a multinational group cannot inappropriately shift profit outside of Canada,” the federal government said in its application for leave to appeal to the Supreme Court of Canada. “The outcome in the courts below in this case has resulted in a distortion of Cameco Canada’s income for Canadian tax purposes.”
Ottawa’s issue with Cameco has to do with certain transactions the company conducted in the wake of a 1993 agreement that allowed newly-capitalist Russia to sell uranium it had used in nuclear weapons.
Cameco was interested in buying, according to June’s appeal-court decision. The company set up a subsidiary in Switzerland that, in 2002, had transferred to it the rights to buy uranium from a state-owned Russian company. The subsidiary also bought the radioactive metal from Cameco itself.
An increase in prices created “substantial” profits for Cameco’s Swiss subsidiary from selling uranium, the decision said. Meanwhile, the federal government has pointed out Cameco Canada reported losses of $154 million and $166 million in 2005 and 2006.
Ottawa is alleging that Cameco expected uranium prices to rise and aimed to lower its taxes by shifting profits to a one-man company in low-tax Switzerland. The federal government wants those Swiss profits reallocated to Cameco in Canada, and the CRA has issued reassessments that would add approximately $483.4 million to Cameco’s income for those three tax years.
To do so, the CRA relied on rules around transfer pricing for its reassessments, which require cross-border transactions between related parties to have similar terms and conditions as those involving “arm’s length” companies. If they do not, the CRA can make adjustments and penalize the taxpayer.
Cameco appealed the reassessments to the Tax Court, which sided with Cameco on the transfer-pricing issues and found, contrary to the government’s opinion, that the transactions were not a “sham.”
The federal government appealed only the transfer-pricing matter, arguing Cameco would not have entered into any of the transactions it did with its Swiss subsidiary with an “arm’s length” company. However, the Federal Court of Appeal also sided with Cameco and dismissed the government’s appeal.
“As all the transactions between Cameco and its subsidiary were done on market terms, the government’s allegation that there was ‘profit shifting’ was unfounded,” wrote lawyers from Osler, Hoskin & Harcourt LLP, which represented the company. www.osler.com/en/resources/regulations/2020/federal-court-of-appeal-dismisses-crown-s-appeal-in-cameco
The federal government is now saying the appeal court made mistakes and that guidance from the Supreme Court is needed on the transfer-pricing rules. A failure to do so could be costly, and render Canada’s transfer-pricing rules “ineffective” and out of step with international norms, Ottawa claims.
“The economic impact of this decision to Canadians is significant,” the government’s argument to the Supreme Court says. “The Canada Revenue Agency estimates that $11.84 billion of adjustments in taxable income over the past three years involving the transfer pricing provisions will be put at risk because of the FCA’s disregard of the text of these provisions.”
A spokesperson for Cameco said they will file a response to the Supreme Court application on or before Dec. 3, and that they had no further comment at this time. Even so, the company has voiced frustration with the government at times.
“You’ve heard me say this before: if the CRA feels the laws aren’t accomplishing what they want, then the government should change the laws moving forward, not pursue the same arguments over and over again before a different court and expect a different outcome,” Cameco CEO Tim Gitzel said during a Nov. 4 conference call, according to a transcript.
Cameco says it has been reassessed for $11 million in tax for the three years being litigated, and that it has already paid 50 per cent, as per Canadian income tax rules for big companies. The company anticipates getting that money back, plus interest and costs.
However, the CRA is also aiming to reassess Cameco’s for tax years from 2003 to 2013. Cameco disclosed earlier this year that, if reassessments were to keep rolling in, it could face tax expenses of around $2.6 billion for 2003 to 2019.
Moreover, based on its reassessments thus far, Cameco has already paid the government $303 million in cash and handed over $482 million in letters of credit, all of which it expects to recover. In addition, Cameco has said it paid taxes of around $326 million for 2003 to 2019 outside of Canada, which, even if the CRA wins its tax fight, could lead the company to “consider our options under bilateral international tax treaties to limit double taxation of this income.”
Most attempts to get the Supreme Court to hear a case are rejected, and Cameco has estimated that even if the appeal proceeds, it could take until the second half of 2022 for a decision. However, the government says its application raises issues of public importance.
“The Canada Revenue Agency considers this an important matter as it relates to international profit shifting and erosion of Canada’s tax base which undermines the government’s ability to provide benefits and services to Canadians,” a CRA spokesperson said in an email.
At any rate, a decision by the Supreme Court on whether or not to hear the Cameco case could finally lead to a resolution and certainty around the transfer-pricing regime.
“It’s important that it be settled,” said Toby Sanger, an economist and director of Canadians for Tax Fairness. “And if there are problems with it, they need to go and look at changing legislation.”
Source: Financial Post