The Cameco Corporation transfer pricing decisions of the Tax Court of Canada and the Federal Court of Appeal are seminal, not just for Canadian taxation but internationally. The case wrestles with the interaction of private law constructions that lie at the heart of corporate and business organization, on the one hand, and the international tax world's increasing concentration, led by the Organisation for Economic Development, on notions manifest in "accurate delineation" of transactions then to be judged by their "commercial rationality" in relation to "value creation".
An earlier blog post commented on the Federal Court of Appeal decision from which the Supreme Court of Canada's leave to appeal was sought by the Crown but today denied.
These three OECD expressed notions in the 2017 OECD Transfer Pricing Guidelines are not legal terms of art - at least in Canada, though generally they like other global initiatives attract the rather curious and euphemistic designation "soft law". They are closely identified with the broader but equally unlimited notion of transactional "recharacterization" associated with judging "substance" and "business reality" - usually to address perceptions of unacceptable tax avoidance arising from taxpayers' self-selection among private law possibilities of less tax-costly ways of achieving economically equivalent outcomes. The current OECD-led focus on economic substance and business reality underlying many aspects of its "Base Erosion and Profit Shifting" project including the present two Pillars proposals, by implication or otherwise reinforces "recharacterization" orchestrated by the trio of notions noted above as justifiably excusing the law as a taxpayer, and indeed tax systems, otherwise would be permitted to rely on it as the framework for orderly conduct. The latter assumes, of course, that taxpayers and their advisers adopt legal constructions that suitable evidence of taxpayers' conduct aligned with the underlying expectations of those legal constructions. In other words, the legal constructions are not merely depictions or the appearance of conduct that did not in fact happen.
From 2018 and reportedly as recently as a Canadian Tax Foundation seminar earlier this year, the Canada Revenue Agency has endorsed a more expansive view of a seeming authority in Section 247 of the Income Tax Act grounded in OECD transfer pricing guidance to "recharacterize", even though both the Tax Court and the Federal Court of Appeal thought otherwise.
Today, the Supreme Court of Canada declined to hear a further appeal of the Cameco Corporation transfer pricing case.
The lower courts had decided that according to the evidence, the taxpayer's contested arrangements were not a sham and in fact, as those courts saw it, were typical corporate and business planning for which tax cost not improperly was a pertinent consideration - and in the circumstances, one facilitated by the Act considered more broadly than according to its specific transfer pricing aspect. The case directly concerned the meaning of paragraphs 247(2)(b) and (d) of the Act, commonly though evidently incorrectly referred to as the recharacterization permission in section 247 when taxpayers embark on transactions that have no arm's length analogue with a tax avoidance purpose. The Tax Court specifically determined that those provisions do not frame a "recharacterization" rule in the Canadian transfer pricing provision of the Act, but instead offer an analytical expedient by way of a hypothetical transaction consistent with observed actual transactional outcomes to be used, then apply the comparable transaction aspect of section 247 in paragraphs 247(2)(a) and (c) in circumstances where an actual comparator does not exist. The objective remains the same - to test the alignment of a taxpayer's reported income assisted by what market circumstances would actually or by reasonable approximation would consider to be reasonable in the circumstances.
Specifically, the Tax Court said, unchanged by the Federal Court of Appeal, that there is no "recharacterization" rule in the Canadian transfer pricing firmament, and further, as had the Supreme Court of Canada in the well-known GlaxoSmithKline case, that the OECD's Transfer Pricing Guidelines do not have the status of law, no matter how useful they might be as analytical devices to understand a taxpayer's situation sufficiently well to apply the transfer pricing law we do have - the Canadian statement of the "arm's length principle" as it has been legislated not how it might be imagined. In the same vein the Federal Court of Appeal was critical of assertions that a taxpayer's business organization and transactions would be denied even though undertaken according to typical legal constructions for framing business conduct. Implicit is the expectation that the adoption of those legal constructions and their outcome would be "real" as those legal constructions would expect by their terms and demonstrated by salient evidence. In other words, with other well-known Supreme Court decisions in mind, in Shell Canada and Canada Trustco, Canadian tax law does not countenance the application of the Act on the basis of economic perception or reconstruction, and the Act ought not to be extended by what would amount to judicial legislation - something quite separate and distinct from discovering from within the Act ant its provisions what they "mean" in context, a context that includes the larger legal context.
This is an important decision by the Supreme Court, even though it is simply the decision of a leave application which entails no reported reasons.
Possibly the Court is saying something profound about our tax system within the larger legal system, an inference that would be available from appreciating this decision in light of the carefully reasoned decisions of the two lower courts. Possibly, the Court is communicating something about how a transfer pricing case - or what ostensibly may be possible to frame as a transfer pricing case - would need to be prepared to attract the Court's attention if warranted. Possibly, the Court is reflecting the continuing importance of juridical notions in tax law. Possibly, the decision is the convergence in varying degrees of all these factors.
Whatever the explanation - and some care is appropriate in drawing conclusions from decisions on leave applications - the law may be decidedly different today than it was yesterday. The Cameco case, together with the decisions of other courts in other countries, for example in Australia recently in the Glencore decision by the Full Federal Court of Australia, that in tax law, the law part - which includes an evidence-based application of legal principles and constructions - is not to be disregarded in favor of a less tethered approach.
- Professor Scott Wilkie (Distinguished Professor of Practice, Osgoode Hall Law School)