Calgary Tax Executive Institute
Resolving Tax Controversies
Involving GAAR, Abusive
Tax Avoidance and Transfer
Pricing Issues
Ed Kroft, Q.C.
June 5, 2012
Document No. 50808191.1
Thinking Ahead: What can you do at the planning stage
in anticipation of a challenge on audit?
• Assumptions in opinions are useless unless they can be
proved
• Preserve documents and determine availability of
witnesses and willingness to testify (e.g. document
retention policies, consultancy)
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2
Submissions at the Audit and Appeals stages:
Is it worth doing?
• Appeals submissions on GAAR will end up as HO
referrals
• Audit submissions on GAAR will end up in referral
package to the GAAR Committee
• Benefits of submissions
– may demonstrate why transaction or series should not to be regarded as
“avoidance transaction”
– may facilitate agreement on some facts or authenticity of evidence pertaining to
disputed facts to shorten length of dispute at time
– may facilitate agreement that no abusive transaction exists
– procedural defences (e.g. limitation periods) may be relevant
– causes parties to focus at an earlier stage
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3
Submissions at the Audit and Appeals stages:
Is it worth doing?
4
• Disadvantages of submissions
– accelerated/unnecessary (?) costs
– in some cases, i.e. “group” audits/appeals and “retail” transactions,
there is virtually no ability to sway
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Planning a GAAR Appeal: From Pleadings to
the Courtroom
• Overview of Tax Court proceedings
–
–
–
–
Pleadings (Notice of Appeal, Reply, Answer, amendments)
Discovery (lists, examinations, undertakings)
Motions
Pre-trial activity (litigation conferences, agreements, requests to
admit)
– Appeal
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5
Planning a GAAR Appeal: From Pleadings to the
Courtroom (cont’d)
6
• Courtroom process
– visual aids
– written opening statements
– set out clear definition of the differences between the parties (facts,
issues, law)
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Planning a GAAR Appeal: From Pleadings to the
Courtroom (cont’d)
7
• Dealing with Crown assumptions (what is the factual basis
of the Crown’s case? Why were these facts assumed?)
–
–
–
–
review of T20 Report
review of T401 Report
review of CRA proposal letter
review of CRA position letter
• Group appeals and taxpayers with comparable/same issue
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Planning a GAAR Appeal: From Pleadings to the
Courtroom (cont’d)
• Importance of the trial record for the Appellate Courts
• Provincial GAAR Appeals
– location
– procedure
– burden of proof
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8
Onus of Proof and the Burden of Persuasion in
GAAR Appeals
9
• Copthorne (paras. 34 and 59); Canada Trustco (para. 2829, 63)
• Judges weigh evidence and hear arguments
• Taxpayer must prove no tax benefit and no avoidance
transaction
• Crown must clearly persuade that abusive transaction
exists
• Burden for taxpayers on a balance of probabilities
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Onus of Proof and the Burden of Persuasion in
GAAR Appeals
10
• Burden for Crown is higher (Copthorne, para. 72)
• Some have suggested that Lipson lowered bar for Crown
• Some have suggested that Copthorne eliminated burden
for Crown if Judges decide that transaction is abusive
based on a textual, contextual and purposive analysis
• Is “burden” or “onus” just a tool to justify a “resultsoriented” approach? Language in Copthorne (para. 70)
suggests otherwise
Kroft
The Importance of Procedure in Conducting GAAR
Appeals (e.g. limitation periods, application of subsections
245(6) – (8))
• Limitation Periods
– Must a taxpayer self-assess under GAAR?
• Subsection 245(7)? – Copthorne (TCC)
– Will paragraph 152(4)(b) automatically apply if taxpayers do not
self-assess under GAAR? (misrepresentation attributable to
carelessness, neglect or wilful default)
• Kebet Holdings
– CRA argues STB Holdings decision 2002 FCA 386 provides
justification and overrides Copthorne 2007 TCC 481 (paras. 75 –
78)
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11
The Importance of Procedure in Conducting GAAR
Appeals (e.g. limitation periods, application of subsections
245(6) – (8))
• Limitation Periods (cont’d)
– Providing waivers for GAAR?
– Is no limitation period applicable if CRA applies GAAR to impose
Part XIII withholding tax?
• subsections 227(10) and 152(4) – mutatis mutandis provisions
• treaty-based limitation periods
– Impact of subsection 152(4.3)? Will a GAAR finding affect
“balances” for future years?
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12
The Importance of Procedure in Conducting GAAR
Appeals (e.g. limitation periods, application of subsections
245(6) – (8))
13
• Assumptions in opinions are useless unless they can be
proved
• Penalties and GAAR
–
–
–
–
Sections 162, 163
Subsection 215(1)
Subsection 227(8)
Copthorne and self-assessment
• Notice of GAAR Determination under subsection 152(1.11)
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– Determination of amounts relevant to computation of income, tax
or refunds (e.g. PUC)
– Determination gives rise to objection and appeal
rights
The Importance of Procedure in Conducting GAAR
Appeals (e.g. limitation periods, application of subsections
245(6) – (8))
14
• Subsection 245(6): Collateral Adjustments
– 180 days for affected party to request written assessment applying
GAAR or a GAAR determination
• Subsection 245(7)
– GAAR can only be applied through assessment, reassessment or
determination
• Subsection 245(8)
– CRA shall consider subsection 245(6) request (no limitations
period) and shall assess, reassess or determine
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The Importance of Procedure in Conducting GAAR
Appeals (e.g. limitation periods, application of subsections
245(6) – (8))
• Competent authority relief and GAAR
– CRA has indicated no relief (para. 27 of IC 71-17R5)
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15
Reasonable Consequences of a GAAR Assessment
(Subsection 245(5)) – How Reasonable?
16
• How does one determine “reasonable consequences”? At
least 4 scenarios listed in 245(5)
• Starting point is the Crown assessing position
• Normally Crown position is accepted if GAAR determined
to apply
• Limited judicial guidance (Lipson, paras. 49-51) for
adopting a different position
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Reasonable Consequences of a GAAR Assessment
(Subsection 245(5)) – How Reasonable?
• What is “reasonable”?
– The tax results absent the avoidance transaction?
– The tax results if no tax planning done at all?
• Can parties determine “reasonable” results to effect a
“principled” settlement? (e.g. sale of shares vs. sale of
underlying property; sale of depreciable property or
resource property vs. sale of capital property)
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17
Pressure Points for Trying to Effect the Settlement
of a GAAR Appeal
• Times for settlement?
• Ways to settle (facts, law, process)
• Impact of taxpayer relief provisions
• Consent to judgment? Withdrawal of appeal? Minutes of
settlement?
• Drafting settlement offers
• Costs and settlement offers
• Effect on subsequent tax years – subsection 169(3)
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18
Pressure Points for Trying to Effect the Settlement of a
GAAR Appeal
• Possible areas for common ground:
– facts
– “reasonable consequences”
– procedural issues (e.g. limitation periods)
• Role and possible impact of Tax Court settlement
conferences
• Pro tanto judgments if GAAR only one issue
• Collection issues for related parties (e.g. section 160)
Kroft
19
Evidentiary Issues in GAAR Appeals
• Gathering information
– CRA auditors may gather under various powers
– Documents/information may be gathered through TCC discover
process
– May serve as evidence = proof of facts
– Evidence may be inadmissible in Court
– Hearsay in GAAR audits
– Need for witnesses: legal opinions or affidavits don’t work
– Need to subpoena witnesses
– Need to prepare witnesses
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20
Perspectives of Judges in GAAR Appeals
• All over the map
• Guidance from SCC (Copthorne) on role of judges in
deciding GAAR cases (para. 70)
• Trial Judges may run GAAR trials differently
–
–
–
–
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views on objections and admissibility of evidence
views on interrupting/questioning witnesses
views on writing legal submissions
views on questioning counsel
21
Perspectives of Judges in GAAR Appeals
• Appellate judges require:
–
–
–
–
–
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well written memorandum of fact and law
point first presentation
outline of the applicable standard of review
brief summary of facts
direction of what the appellate court is to do with the GAAR
argument and why
22
Perspectives of Judges in GAAR Appeals
23
• Only two GAAR cases have been overturned on appeal
(Mackay, Lehigh)
• Stresses importance of TCC process and being prepared
for trial
• Expectation should be that GAAR result will be appealed
unless factually driven (e.g. Univar, Evans)
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Perspectives of Judges in GAAR Appeals
24
• Recent GAAR cases going to FCA after TCC (Collins and
Aikman, Copthorne, Triad Gestco, 1207192 Ontario,
Global Equity, Garron/St. Michael Trust, Antle, Marechaux,
Envision, Husky, Canada Safeway)
Kroft
25
GAAR Statistics March 2012
GAAR Statistics as of March 31, 2012
Issue
Foreign Tax Credit
Income Splitting
Partnership Issues
Kiddie Tax
Offshore Trusts
Cross-Border Lease
Part XIII Tax
Kiwi Loan
Losses, Stop Loss
Charitable Donations
Capital Gain
Interest Deductibility
Debt Parking
Indirect Loan
Debt Forgiveness
Losses, Capital & Non-Capital
Loss creation via stock dividend
Part I.3 Tax
Provincial GAAR
Surplus Strips
Tower Structure
Treaty Exemption Claim
Miscellaneous
Y
14
13
26
87
15
11
3
14
10
15
24
19
17
28
33
41
87
38
0
148
6
5
115
769
Cases referred to GAAR committee:
* see note below
GAAR Applied
GAAR not applied
GAAR as primary position
GAAR as secondary position
N
3
3
8
6
1
0
9
0
5
10
10
17
7
3
10
19
0
11
3
32
3
2
96
258
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%
2%
2%
3%
9%
2%
1%
1%
1%
1%
2%
3%
4%
2%
3%
4%
6%
8%
5%
0%
18%
1%
1%
21%
100%
1027
769
258
75%
25%
358
411
47%
53%
* N ote: Statistics do not take into account the following:
- RRSP Project
1363 files
- Barbados Spousal Trust project
78 files
In these cases GAAR was applied as a secondary position
- More than 300 files to which the Provincial GAAR
was applied
Total
17
16
34
93
16
11
12
14
15
25
34
36
24
31
43
60
87
49
3
180
9
7
211
1027
Legend
Y
GAAR applicable
N
GAAR not applicable
26
GAAR Statistics as of March 30, 2012
GAAR applied
- Primary position
358 (47%)
- Secondary Position
411 (53%)
Total – GAAR applied:
769 (75%)
GAAR not applied
258 (25%)
Total referrals
1,027*
The total does not include:
- the project files: 1,363 RRSP strip cases and 78 Barbados Spousal Trust cases.
- more than 300 cases to which the Provincial GAAR was applied.
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The GAAR Scorecard (Post-Canada Trustco) to
May 2012
GAAR APPLIES
Kaulius (SCC)

Loss Transfer
Desmarais

Surplus Strip
Lipson (SCC)

Reverse Attribution/Interest
CECO (TCC)

Ptshp/Disguised Proceeds
OGT Holdings (QCA)

Quebec Shuffle
Copthorne (SCC under reserve)

Duplication of PUC
MacKay (FCA)

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Withholding Tax
GAAR DOES NOT APPLY/NOT NEEDED
Canada Trustco (SCC)

Cost & “Economic Substance”
Evans (TCC)

Surplus Strip/Income Splitting
Overs (TCC)

Reverse Attribution/Interest
MIL (FCA)

Treaty Shopping
Univar (TCC)

Tiered Financing
McMullan (TCC)

Capital Gains Strip
Remai (FCA)

Charitable Donations
27
28
The GAAR Scorecard (Post-Canada Trustco) to May
2012 (cont’d)
GAAR APPLIES
Antle (FCA) (leave to SCC denied)

Capital Gains, Step-Up
Strategy Using Barbados
Trust (finding of TCC only)
Triad Gestco (TCC) (under appeal)

Value Shift
1207192 Ontario (TCC) (under
appeal)

Value Shift
GAAR DOES NOT APPLY/NOT NEEDED
Landrus (FCA)

Terminal Loss Recognition
Collins & Aikman (FCA)

Surplus Stripping
Garron (SCC)

Barbados Trust Plan
Maréchaux [GAAR argued – not needed] (Leave to
SCC denied)

Leveraged Donation
Envision [GAAR argued – not needed] (FCA)
(Leave to SCC sought)

Broken Amalgamation
Husky (Alta QB)/Canada Safeway (Alta QB) (Under
appeal)

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Finco Interest Shift
29
The GAAR Scorecard (Post-Canada Trustco) to May
2012 (cont’d)
GAAR APPLIES
GAAR DOES NOT APPLY/NOT NEEDED
Lehigh (FCA)

Withholding Tax
Global Equities (TCC) (Under appeal)

Value Shift
McClarty Family Trust (TCC) (Under appeal)

Avoidance of Kiddie Tax
Macdonald (TCC)

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Surplus Stripping
Some GAAR Cases in Court Process
30
• Edwards – leveraged donations – discovery process
• GTE Venezuela – alleged surplus PUC stripping following
sale of foreign holding company to Canadian OPCO –
discovery process – Nov 5 hearing
Kroft
GAAR Cases in Court Process (cont’d)
31
• SSI Investments – alleged abuse of 97(2) rollover on sale
of assets to income trust structure – discovery process
• Pieces Automobile Lecavalier – section 80 – discovery
process
• Jobin, Gendron – section 47 ACB averaging – discovery
process – August
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GAAR Cases in Court Process (cont’d)
• Schiesser – RRSP Strips – discovery process
• Metrus Properties – sham/56(2)/103 – use of a “mutual
fund trust” and partnership to shift income – discovery
process
• 6024530 Canada Inc. – Brazilian tax sparing – discovery
process / motion heard
Kroft
32
GAAR Cases in Court Process (cont’d)
33
• Oxford Properties Group Inc. – package and bump –
pleadings
• Kern Family Trust – subsection 75(2) – trial scheduled
June 19, 2012
• Placements Rimalou – value shifts
– hearing
scheduled for April 23, 2012, but settled on April 20, 2012
Kroft
GAAR Cases in Court Process (cont’d)
•
•
•
•
•
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34
Swirsky- attribution rules – trial continuing
Cameron – value shifts – May 30, 2012 hearing
Kyall Investments – BC GAAR – Québec Truffles
Pip Peri Pembo Ventures – BC GAAR – Québec Truffles
Belkin Enterprises – BC GAAR – Ontario Finco
Cases in Tax Court Process Under Reserve
35
• Lehigh Cement – second tier financing – GAAR dropped
– 95(6) issue
• Spruce Credit Union – alleged abuse of intercorporate
dividend deduction and “double” deduction of deposit
insurance premiums
Kroft
36
GAAR Issues at Litigation
• International tax arbitrage
• Insurance products
• Multiplying/trading/creating tax attributes
• Surplus stripping
• Provincial tax avoidance
• Kiddie tax
• Value shifts-triad
• Attribution rules-s.75(2)
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The Future – Predictions About GAAR in Practice
•
•
•
•
Harder to give opinions and advice?
Harder to predict results?
More or less GAAR litigation?
Prospect of legislative overrides (e.g. March/11 and
Federal Budgets of 2011 and 2012)
– Amendments to/creation of specific anti-avoidance rules
Kroft
37
Predictions About GAAR in Practice (cont’d)
38
• Pursuit of retail strategies (RRSP strips, Barbados trusts,
leveraged donations)
• More litigation on specific anti-avoidance rules
• GAAR just one tool
• GAAR has two defences – why use it?
– Other specific rules have fewer defences (e.g. 247(2)(b), 95(6))
• The cases will turn on the facts as well as the law
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Predictions About GAAR in Practice (cont’d)
• Documenting why transactions are done is important
• Important to have available personnel to talk about why
a transaction was done
• Concessions on “avoidance transactions” may not
always be appropriate
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39
Predictions About GAAR in Practice (cont’d)
• How will the changing judicial landscape and the
composition of the Courts (TCC, FCA, SCC) affect the
interpretation of GAAR?
• What you do now will be litigated years from now when
judicial attitudes may have shifted!!
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40
Transfer Pricing Presentation Overview
•
•
•
•
•
•
•
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Dispute Resolution Process
Field Audit Issues
Notice of Objection Issues
Competent Authority Issues
APA Issues
Transfer Pricing Litigation
Future of Transfer Pricing Disputes
41
Transfer Pricing Dispute Process – Audit Through
Reassessment
Penalty/Recharacterization Proposal
Audit
Proposal Letter
Penalty/Recharacterization Decision
Transfer Pricing
Review Committee
Taxpayer Response
Reassessment
(Tax/Penalty/Interest)
90 Days
File Tax Appeal with CRA
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Payment of Tax/
Penalty/Interest
42
43
Transfer Pricing Dispute Process – Post
Reassessment
CRA Audit
CRA: Reassessment
Taxpayer: Objection
CRA: Reassessment
Taxpayer: CA Request
CRA Appeals
Taxpayer: CA Request
Appeal in Abeyance
Competent Authority
CA: Factual Dispute
CRA: Objection Denied or No Action
Taxpayer: Appeal
Tax Court of
Canada
Fact Finding
Panel
Taxpayer: Appeal Re-activated
Taxpayer/CRA: Appeal
Federal Court
of Appeals
Taxpayer/CRA: Leave
to Appeal
CA
Agreement
No CA
Agreement
Arbitration
Taxpayer: Appeal Re-activated
Accept
Taxpayer/CA Arbitration
Supreme Court
of Canada
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Accept
Reject
Field Audit Issues
• Current Audit Environment
– Some areas of focus
• Purchases and sales of goods
• Royalties for intangibles including brand names
• Guarantee fees
• Transactions with related parties resident in countries with
which Canada has no tax treaty
• Cost allocations and QCCAs
Kroft
44
Field Audit Issues
45
• Current Audit Environment
– Gap between approach of field auditors and approach of senior
CRA Headquarters representatives
• Auditors often do not understand the taxpayer’s business
• Audits designed to support preconceived result
Kroft
Field Audit Issues
46
• Some Specific Audit Issues
– Increasing use of multiple part queries
– Requests for functional interviews of employees without regard
to whether the employee has knowledge of issues under audit
– Insistence on foreign site visits paid for by taxpayer
• Government budget cuts have not affected demands for site
visits because taxpayer pays
– Often, no weight given to taxpayer evidence that transactions are
based on arm’s length terms and conditions for regulatory
purposes
Kroft
Field Audit Issues
47
• Some Specific Audit Issues
– Increasing use of audit powers (section 231.1 of the ITA) and
requirements (sections 231.2 and 231.6 of the ITA) coupled with
threats of compliance orders (section 231.7 of the ITA)
• More extensive information gathering leads to longer time
frames to complete audits
– Taxpayer then requests for interest relief under subsection
220(3.1) of the ITA
• Interest relief may be granted at audit stage, CRA Appeals
stage or prior to hearing of an appeal by the Tax Court
Kroft
Field Audit Issues
48
• Results of Audits
– More consideration of use of paragraphs 247(2)(b) and (d) of the
ITA and use concurrently with paragraphs 247(2)(a) and (c)
– Use of other provisions of the ITA or theories as basis of a
reassessment including subsection 95(2) of the ITA, FAPI rules,
Canadian residence (mind & management) and sham
Kroft
49
Field Audit Issues
• Results of Audits
– Transfer Pricing Penalties
• Penalties recommended
• Penalties not recommended
– 247(2)(b) Recharacterization
• Approved
• Ongoing
• Denied/Abandoned
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152 cases (50.7%)
148 cases (49.3%)
11 cases (20.0%)
10 cases (18.2%)
34 cases (61.8%)
Field Audit Issues
50
• Reassessments and Collections
– Part I and Part XIII assessments/reassessments may be issued
by different offices
– CRA willing to negotiate security for Part I and Part XIII tax,
interest and penalty
– CRA does not support any changes to the ITA which would
permit payment of less than 100% of Part XIII tax assessed
Kroft
Changes to the ITA Affecting Field Audit
51
• Proposed changes in 2012 Budget to section 247 of the
ITA
– Provides statutory basis for secondary adjustments for benefits
conferred on non-arm’s length parties
• Amount of transfer pricing adjustment will be deemed to be a
dividend paid by the Canadian taxpayer to the non-resident
• Provision not to apply where the non-resident is a foreign
affiliate of the Canadian taxpayer
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Changes to the ITA Affecting Field Audit
52
• Proposed changes in 2012 Budget to ITA to give
statutory basis for repatriation and refund of Part XIII tax
– Previously, repatriation discretionary and governed by CRA
administrative policy
(TPM-02)
– Appears that repatriation will remain at CRA discretion
Kroft
Changes to the ITA Affecting Field Audit
53
• Proposed changes to ITA to give statutory basis for
repatriation and refund of Part XIII tax
– Taxpayer must agree to transfer pricing adjustment prior to
repatriation
– Repatriation is without prejudice to taxpayer’s right to seek relief
from Competent Authority
– Taxpayer may end up in a quandary regarding when is the “right”
time to agree to repatriation
• If taxpayer agrees to the transfer pricing adjustment to
access relief from Part XIII tax, do the Competent Authorities
really have anything to negotiate?
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Notice of Objection Issues
54
• General advice once reassessed in respect of transfer
pricing issues
– File Notice of Objection and request that CRA Appeals hold the
objection in abeyance while taxpayer accesses MAP process
• No change to the advice
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Notice of Objection Issues
55
• However, an increasing number of transfer pricing cases
involve non-arm’s length parties in jurisdictions with no
tax treaty with Canada
– CRA may be able to access information exchange provisions of
a Tax Exchange Information Agreement (TIEA)
BUT
– Taxpayer cannot access the MAP or
bi-lateral APA processes through a TIEA as TIEAs do not have
MAP provisions
Kroft
Notice of Objection Issues
56
• Serious backlog at CRA Appeals in dealing with Notices
of Objection
– More taxpayers attempting to move the dispute resolution
process forward by filing Notices of Appeal in Tax Court
– Notice of Appeal may be filed 91 days after Notice of Objection
filed with CRA Appeals
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57
Competent Authority Statistics
• Competent Authority
– Time frames for completion
of MAP cases
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Years
Canadian
Initiated
Foreign
Initiated
2010-2011
32.16
months
20.39
months
2009-2010
22.73
months
30.53
months
2009-2008
28.14
months
37.71
months
2007-2008
20.69
months
37.70
months
58
Competent Authority Statistics
• Relief Statistics –
Negotiable Case
Partial Relief
Years
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Relief
No Relief
2010-2011
81 (85%)
1 (1%)
13 (14%)
2009-2010
74 (95%)
1 (1%)
3 (4%)
2008-2009
74 (89%)
0
9 (11%)
2007-2008
45 (92%)
1 (2%)
3 (6%)
59
Competent Authority Statistics
• TP Methodologies*
TP Method –
Completed Cases
* Excluding Resale Price Method
2007-2008
2008-2009
2009-2010
2010-2011
CUP
4 (21%)
8 (18%)
4 (8%)
10 (14%)
Cost Plus
1 (5%)
14 (32%)
10 (20%)
19 (26%)
Profit Split
3 (16%)
5 (11%)
1 (1%)
0
TMNN
11 (58%)
17 (39%)
36 (71%)
43 (60%)
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Competent Authority Issues
• Canadian Competent Authority support for field audit positions
requires extensive submissions and need for dialogue with the
Competent Authority of the treaty partner
• Reliance on the other Competent Authority to move Canadian
Competent Authority
• Importance of arbitration as a “tool” for resolution of Canada-US
transfer pricing disputes
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60
Competent Authority Issues
61
• Principles of negotiated Competent Authority agreement
with one country will not necessarily be applied in
respect of similar transactions with related parties in
other countries
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Competent Authority Issues
• Concurrent MAP and APA Requests
– Need to manage the MAP and the APA proceedings when
taxpayer has concurrent requests relating to the same issue
– Commencement dates for arbitration for MAP and APA under
Canada-US Tax Treaty may not coincide
– In MAP process, Competent Authorities need only agree on a
number and not on methodology BUT in APA process
Competent Authorities must agree on TP methodology
Kroft
62
63
APA Statistics
• APA
– Time frames for completing
a bilateral or multi-lateral
APA have increased
significantly over past 4
years
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Years
Average
Median
20102011
50.3 months 49.6 months
20092010
48.4 months 45.8 months
20082009
42.2 months 35.6 months
20072008
32.8 months 25.9 months
64
APA Statistics
• TP Methodologies*
TP Method All
Completed Cases
* Excluding Resale Price Method
2007-2008
2008-2009
2009-2010
2010-2011
CUP
19 (18%)
21 (18%)
22 (17%)
23 (16%)
Cost Plus
14 (13%)
16 (14%)
19 (14%)
24 (16%)
Profit Split
29 (28%)
32 (28%)
34 (26%)
35 (24%)
TMNN
43 (41%)
46 (40%)
56 (43%)
64 (44%)
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65
APA Statistics
• APA by TP Transaction Type
Completed APAs Issues
2007-2008
2008-2009
2009-2010
2010-2011
Tangibles
64
70
77
85
Intangibles
23
26
29
33
Services
23
24
30
34
Financing
6
6
6
6
Kroft
APA Issues
66
• Average time to complete an APA now in excess of 4
years
– As soon a APA completed, it’s almost time to renew
– Renewal process frustrating because of turnover of field auditors
and Competent Authority teams
• Taxpayers effectively have to go through a “green
lighting” process with lots of queries before being
accepted into the APA program
Kroft
APA Issues
•
67
Arbitration deadline may differ for APA as opposed to a
MAP case
– Therefore, taxpayer with both must consider strategically
including years for rollback
• ACAP Rules
– Rigorous adherence to TP Memorandum
BUT
– Different CRA officials have different views on the administration
of ACAP
Kroft
APA Issues
• Drafting of APA has become very important
– Instances where CRA auditors have tried to interpret the APA
agreement in a manner adverse to the taxpayer
Kroft
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Transfer Pricing Litigation
• Trends in transfer pricing litigation
– Lots of procedural disputes
– Highly acrimonious
– Numerous Department of Justice counsel assigned to most
cases
– To date, most cases have settled prior to Tax Court hearing of
the appeal
– Lengthy trials for those cases which reach Tax Court
Kroft
69
Transfer Pricing Litigation
70
• Some Transfer Pricing Cases in the Tax Court
– McKesson Canada Corporation v. The Queen, 2008-3471(IT)G
– General Electric Canada Capital Company v. The Queen, 20103494(IT)G
– Cameco Corp. v. The Queen, 2009-2430(IT)G
– Dow Chemical Finance Canada Inc. v. The Queen, 20074580(IT)G
Kroft
Transfer Pricing Litigation
• Some Transfer Pricing Cases in the Tax Court
– Schering-Plough Canada Inc. v. The Queen, 2008-3087(IT)G
– Corrpro Canada Inc. v. The Queen, 2007-3537 (IT)G
– Areva Resources Canada Inc. v. The Queen, 2010-205(IT)G
Kroft
71
Transfer Pricing Litigation
72
• On-going cases in the Tax Court
– McKesson Canada Corporation v. The Queen, 2008-3471(IT)G
• Issues
– Whether accounts receivable discount arm’s length
– Application of tax treaty limitations period to issuance of
Part XIII assessments
• Decision reserved
Kroft
Transfer Pricing Litigation
73
• On-going cases in the Tax Court
– General Electric Canada Capital Company v. The Queen, 20103494(IT)G
• Issue
– Whether guarantee fee an arm’s length fee
• Motion regarding “re-litigation” of GE Capital Canada decided
in favour of Crown
• Case being held in abeyance pending outcome of taxpayer
appeal of motion decision to Federal Court of Appeal
Kroft
Transfer Pricing Litigation
74
• On-going cases in the Tax Court
– Cameco Corp. v. The Queen, 2009-2430(IT)G
• Issue
– Whether prices for purchases and sales of uranium were
arm’s length prices
– Whether paragraphs 247(2)(b) and (d) apply to
recharactize the transactions
» Appears CRA raised paragraph 247(2)(b) at the
Notice of Appeal stage
• Two motions to date
– Striking of portions of Reply (2010)
– Striking of portions of Amended Reply (2010)
Kroft
Transfer Pricing Litigation
75
• On-going cases in the Tax Court
– Dow Chemical Finance Canada Inc. v. The Queen, 20074580(IT)G
• Issue
– Whether allocation of purchase price to sale of Canadian
assets, including trademarks, in conjunction with sale of
world-wide business of Dow Chemicals reflected arm’s
length allocation
• Case on hold
Kroft
Transfer Pricing Litigation
76
• On-going cases in the Tax Court
– Schering-Plough Canada Inc. v. The Queen, 2008-3087(IT)G
• Issue
– Whether purchases of pharmaceuticals made for arm’s
length prices
• Case on hold
– Corrpro Canada Inc. v. The Queen, 2007-3537 (IT)G
• Issue
– Whether price of goods sold to US related party reflected
arm’s length price
• Case on hold
Kroft
Transfer Pricing Litigation
• On-going cases in the Tax Court
– Areva Resources Canada Inc. v. The Queen, 2010-205(IT)G
• Issue
– Whether transfer pricing penalty should have been
assessed
– If parties settle on the amount of a transfer pricing
adjustment, is the penalty still to be applied if the
taxpayer can subsequently establish that the transfer
pricing adjustment is not an arm’s length amount
Kroft
77
Transfer Pricing Litigation
78
• Recently settled in the Tax Court
– HSBC Bank Canada v. The Queen. 2006-3579(IT)G (March
2012) (guarantee fee)
– Commonwealth Plywood Company Limited v. The Queen,
2011-599 (IT)G (March 2012) (sales commissions paid to US
subsidiary)
– Smith International Canada Ltd. v. The Queen, 2007-4644(IT)G
(March 2012) (purchases of goods)
Kroft
Future of Transfer Pricing Disputes
79
• Unlikely transfer pricing rules will become less complex
in the near future notwithstanding OECD recognition of
need for simplification
• More divergence between CRA Head Office positions
and CRA field auditors actions
• More Competent Authority applications
• More Notices of Appeal will be filed in Tax Court 91 days
after Notice of Objection filed
Kroft
Future of Transfer Pricing Disputes
80
• Many transfer pricing appeals to the Tax Court will settle
prior to a Tax Court hearing
• Trial time for transfer pricing cases will exceed trial time
for most other appeals due to complexity of issues and
need for both fact and expert evidence
Kroft