The Canada Revenue Agency (CRA) continues to employ a risk-based approach when auditing large corporate taxpayers, focusing on high-risk areas such as aggressive tax avoidance and international tax planning. Information-gathering involves the use of written requests and requirement letters to routinely attempt to compel delivery of taxpayer information. However, the CRA has had mixed success recently when requesting that the Federal Court compel taxpayer compliance under section 231.7 of the Canadian Income Tax Act (Act). In Minister of National Revenue v. BP Canada Energy Company, 2015 FC 714 (under appeal), the CRA was permitted to obtain the disclosure of uncertain tax position analysis prepared for financial statement purposes. However, in Minister of National Revenue v. Amdocs Canadian Managed Services Inc., 2015 FC 1234 (Amdocs), the court did not order production of a corporate chart and financial information pertaining to the calculation of fees charged by nonresidents affiliated with Amdocs on the basis that, because the information was not in the possession, power, or control of Amdocs, there was no reason to believe the information even existed in the form requested by the CRA, and Amdocs made reasonable efforts to secure the information for the CRA.
Transfer Pricing Dispute Resolution
Transfer pricing continues to present challenges to both taxpayers and the CRA, not only in determining appropriate transfer prices but also in understanding and applying section 247 of the Act in real-world circumstances. Notwithstanding that section 247 of the Act has been in place for more than fifteen years, questions regarding the meaning of the terms "reasonable efforts" and "recharacterization" have yet to be definitively determined by the courts.
Recent statistics from the CRA's Transfer Pricing Review Committee (TPRC) with respect to penalty and recharacterization provide some insights into the CRA's approach to the assessment of transfer pricing penalties and the issuance of recharacterization reassessments. Neither the imposition of transfer pricing penalties nor approval of recharacterization reassessments is automatic. Based on the statistics, the TPRC appears to take a somewhat measured approach to both issues (see chart, page 34).
Some recent court cases, however, provide interesting insights into the direction both the CRA and the courts are headed with respect to transfer pricing issues overall.
At this point, the CRA can raise different assessing positions under both paragraphs 247(2)(a) and (c) and paragraphs 247(2)(b) and (d) of the Act with respect to the same transaction or series of transactions (Agra City Ltd. v. The Queen, 2015 FCA 288). The Crown may file inconsistent pleadings with respect to transfer pricing assessments issued to members of a corporate group, because each corporate group member is a separate and distinct taxpayer (Agra City Ltd. v. The Queen, 2015 FCA 288). The filing of inconsistent pleadings may increase the chances of the CRA winning at least one of the cases.
In January 2016, the Federal Court of Appeal affirmed the decision of the Tax Court of Canada in Marzen Artistic Aluminum Ltd. v. The Queen, 2016 FCA 34, upholding most of the CRA's transfer pricing adjustments and the imposition of transfer pricing penalties. The case, however, provided little insight into the meaning of "reasonable efforts" in the context of transfer pricing documentation, given that the taxpayer did not prepare contemporaneous documentation.
The Tax Court is scheduled to hear its first recharacterization case later in 2016 (Cameco v. The Queen). This case will also consider whether a nil transfer price can give rise to the application of paragraphs 247(2)(a) and (c) of the Act and of the specific circumstances, if any, in which both paragraphs 247(2)(a) and (c) and paragraphs 247(2)(b) and (d) of the Act may apply.
Other cases before the Tax Court include Canadian Imperial Bank of Commerce (payment to settle litigation), Burlington Resources Finance Co. (deduction of guarantee payments and transfer pricing penalties), Conoco Funding Co. (deduction of guarantee fees and sale of financial instruments), and Silver Wheaton Corp. (service fees, penalties, and recharacterization).
With all of the uncertainty that exists with respect to transfer pricing issues, taxpayers may wish to consider entering into an advance pricing agreement (APA) to proactively deal with potential transfer pricing disputes. Where the CRA has issued a transfer pricing reassessment, the taxpayer may request assistance of Canadian Competent Authority using the mutual assistance procedures (MAP) to resolve any resulting double taxation issues...