In Canada’s landmark transfer pricing case, the Supreme Court of Canada rejected hearing the Canada Revenue Agency’s Application for Leave to Appeal against Cameco Corporation

On February 18, 2021, Canada’s highest court rejected the Canada Revenue Agency’s (CRA’s) application for Leave in the case of Cameco Corporation. The Supreme Court only hears a select number of cases each year based on it being of significant public importance or if it raises an important issue of law or both law and fact. Furthermore, the Supreme Court does not provide reasons for dismissing or granting a leave application. That said, the Supreme Court of Canada’s decision to reject the CRA’s application is being viewed as that it stands by the previous interpretations and application of the recharacterization provisions in Section 247 of the Income Tax Act, made by the Federal Court of Appeal and the Tax Court of Canada.

One can conclude that the Crown’s arguments did not influence the Supreme Court of Canada’s decisions in considering the appeal of significant pubic importance, partly based on the quantum of transfer pricing assessments issued by the CRA over the past three years. As one of its grounds of appeal, the CRA estimated that the outcome would have made adjustments to Cameco Corporation’s taxable income to the extent of $11.84 billion.

The Federal Court of Appeal previously dealt with the interpretation and application of paragraphs 247(2)(b) and (d) of the Income Tax Act, which pertains explicitly to recharacterization. The recharacterization provision is only applied when the intercompany transactions would not have been entered into by independent third parties (i.e., parties dealing at arm’s length). The premise is that such transactions were not entered into except for good faith and not for tax planning purposes or gaining a tax benefit. The Crown had argued that the recharacterization provisions were applicable considering the taxpayer’s specific circumstances, which the Federal Court of Appeal rejected. The Federal Court of Appeal instead interpreted that the recharacterization provision specifically applied if the transactions were not entered into by independent third parties (i.e., parties dealing at arm’s length), which could not be validated based on the Crown’s arguments.

In rejecting the CRA’s Application for Leave Appeal, the Supreme Court of Canada has provided certainty and relief to taxpayers on interpreting and applying the recharacterization provisions in the Income Tax Act.

Based on recent trends in the Government’s approach to assessing intercompany arrangements, corporate taxpayers must prepare themselves to defend their transfer pricing positions. Contact our Principal & Transfer Pricing Leader Avinash S. Tukrel for more information on how our team can help you develop a framework suited to your Multinational Group’s unique needs in an ever-evolving international tax and transfer pricing environment.