Cameco and Oxford cases front and centre in 2018

The second case, Oxford Properties Group Inc. v. The Queen 2016 TCC 204 (CanLII), is in the Federal Court of Appeal and involves the contentious General Anti-Avoidance Rule of the Income Tax Act, known as GAAR. It centres on a number of transactions undertaken by Oxford Properties Group Inc., which the Minister of National Revenue challenged and lost.

“These are decisions that all tax lawyers have their eyes on,” says Margaret Nixon, a tax lawyer at Stikeman Elliott LLP in Toronto.

The rulings are expected to provide some clarity in two of the most important areas of corporate tax law, transfer pricing and GAAR, and there are a number of cases in the system that could be impacted as a result of the rulings.

Claire Kennedy, a tax partner at Bennett Jones LLP in Toronto, added that, as 2018 proceeds, there will be a “big focus” on GAAR.

“I think what will be important for the Federal Court of Appeal to do is to impose some discipline in the utilization of GAAR,” she says.

“We are now getting into the more difficult questions,” Al Meghji, a tax partner at Osler Hoskin & Harcourt LLP, who is acting for the taxpayers in both cases, says regarding GAAR and transfer pricing.

He says one of the challenges is that, over the last two to three years in Canada, tax law has been “injected” with morality.

“We have moved away from taxes simply being a technical subject matter and injected it with moral questions. That creates uncertainty,” he says. 

“I hope that courts will adopt the view that Parliament is charged with the business of reflecting policy and morality in our tax laws and judges ought not to indulge their personal views of fiscal morality in the interpretation and application of our tax laws.”

Meghji says the ideal is a “rules-based system where everybody knows the rules.”

The Cameco case

Transfer pricing is one of the more controversial tax issues facing corporations that operate globally and deals with methods and rules for pricing transactions between enterprises that have common ownership or control and are not arm’s length.

The Cameco dispute reaches back to 2008, when the Canada Revenue Agency took issue with Cameco’s corporate structure and the pricing methodology the company used in uranium sale and purchase agreements with its Swiss-based subsidiary.

Cameco set up the subsidiary, Cameco Europe Limited, in 1999 to buy uranium from the Canadian parent and other arm’s-length sellers, which it sold to Cameco’s U.S. subsidiary.

The parent company entered into a 17-year uranium deal with its European counterpart, agreeing to sell uranium at $US10 a pound, which was the then-trading price.

Since then, Uranium has spiked and receded. Cameco booked massive profits on the deal in the lower-taxed Swiss jurisdiction, while claiming its Canadian operation lost money.

The CRA challenged that, arguing the Canadian operation substantially understated its taxable income and should be reassessed under the sham doctrine because the Swiss company wasn’t engaged in the uranium business.

The CRA was to shift more than $7 billion in earnings back to Canada for tax years 2003 to 2015.

The tax authorities maintain that the intercompany transactions were commercially unreasonable and undertaken only to achieve a tax benefit and were abusive.

Cameco, however, argued that it acted properly and that its agreements reflected commercial reality at that time.

The company noted in its corporate statements that “transfer pricing is a complex area of tax law, and it is difficult to predict the outcome of cases like ours.”

It pointed out that tax authorities test two things, such as the “governance (structure) of the corporate entities involved in the transactions” and “the price at which goods and services are sold by one member of a corporate group to another.”

“We have a global customer base and we established a marketing and trading structure involving foreign subsidiaries, including Cameco Europe Limited (CEL), which entered into various intercompany arrangements, including purchase and sale agreements, as well as uranium purchase and sale agreements with third parties,” according to the company’s annual report in 2015.

“Cameco and its subsidiaries made reasonable efforts to put arm’s-length transfer pricing arrangements in place, and these arrangements expose the parties to the risks and rewards accruing to them under these contracts. The intercompany contract prices are generally comparable to those established in comparable contracts between arm’s-length parties entered into at that time.”

Writing in the Tax Management Transfer Pricing Report Vol. 25, David Hogan and Andre Oliveira of Richter LLP, noted that the Cameco case will “test the sham doctrine and the re-characterization rule to a degree never seen before in Canada.”

They added that “it’s the first time that the government’s ability to re-characterize a transaction is being tested in court.”

Nixon says that the case “has far-reaching implications for future transfer pricing cases” and that there is a “significant amount of money at stake.”

The transfer pricing provisions are not that complex on their face, she says.

However, she notes that “applying them can be incredibly complex because it involves hypotheticals.

“The court has to look at what arm’s-length parties would have done in the particular situation,” she says.

She also says it’s the first tax case to consider the second branch of the Canadian transfer pricing rules, under s. 247(2)(b) of the Income Tax Act transfer pricing rules.

The question is if these two branches are mutually exclusive or if the CRA raises both for the basis of an assessment, she says.

“I hope that the court gives some guidance and clarity on the circumstances in which the two branches of the transfer pricing rules apply,” she says.

“Can the CRA argue both on the same set of facts or are they mutually exclusive?”

With a decision expected later this year, lawyers predict the case will be appealed regardless of what Tax Court rules.

Oxford Property

One of the thornier issues for taxpayers is the general anti-avoidance rule, set out in s. 245 of the Income Tax Act.

The section provides that a transaction or series of transactions that are attempted purely for tax benefits can be invalidated because they are abusive.

Oxford undertook a series of transactions to package real estate holdings into a number of limited partnerships using s. 97 of the Income Tax Act, and it paid no tax on those transactions.

It also used provisions in the ITA to bump up its cost base and later sold the properties to tax-exempt entities.

When calculating its taxable capital gains on those sales, it relied on the bumped-up adjusted cost base, thereby lowering the amount of tax owed.

The CRA concluded the rollover and bumps were abusive and applied the GAAR to deny the bumps and increase the amount of the taxable capital gain on the sale.

Oxford appealed and the judge, analyzing the purpose of various ITA sections, concluded they did not amount to abusive tax avoidance and the GAAR did not apply. That is now under appeal.

The Tax Court noted there are three stages to a GAAR analysis.

First, there must be a tax benefit.

Second, there must be an element of avoidance.

Third, there must be an abuse of the act.

Kennedy notes that it’s the third stage on which cases usually turn. There, the onus falls on the government to show abuse.

“It should be a fairly high threshold that the minister has to meet. I think what’s happening is that the GAAR is being used by some judges essentially as legislative gap filling,” she says.

However, she says, that “is not what the Supreme Court has said its function is.

“I think GAAR is an important tool and a legitimate tool, but I think it is one that has to be applied rigorously, particularly if we want certainty in tax planning,” she says.