Cameco Ruling & Appeal

Cameco Ruling & Appeal

On September 26, 2018, the Tax Court of Canada ruled in favour of Cameco Corporation (Cameco Corp. v. HM The Queen) in a long-standing dispute with the Canada Revenue Agency.  On October 26, 2018, the CRA filed to appeal that decision.  The appeal means that this long-running dispute that covers Cameco’s 2003, 2005, and 2006 taxation years, will remain an unresolved matter for at least a few more years.  However, the Tax Court’s decision was interesting on a number of fronts, which are worth expounding upon.

The Cameco case dealt with two main tax issues:

  1. Did the structure employed by Cameco constitute a sham?
  2. Was the transfer pricing employed by Cameco Corp and its related parties consistent with principles outlined in Section 247 of the Income Tax Act?

The Facts Surrounding the Case

In the tax years under question, Cameco Corp used two subsidiaries (one based in Luxembourg with a Swiss branch, with the other domiciled in Switzerland) to purchase Uranium from Russia.  In addition, a US-based subsidiary was used to sell the uranium to US-based customers.  Cameco argued that its transfer prices for purchasing the uranium were supported by the Comparable Uncontrolled Price (“CUP”) method.  The CRA’s arguments, on the other hand, consisted of a two-pronged approach arguing that primarily Cameco’s arrangements constituted a sham for tax purposes, and secondarily, ignoring the sham argument, the Transactional Net Margin Method (“TNMM”) should be applied to Cameco’s related parties, leaving only a routine profit with the bulk of profits being attributed back towards Cameco Corp. in Canada.[1]

In the September 26 judgement, the Tax Court found that:

  1. Cameco’s structure did not constitute a sham;
  2. Cameco’s related party pricing was consistent with the transfer pricing rules established in Section 247.[2]

Of interest were the following notes:

  • The Tax Court ruled the “motivation for these arrangements may have been tax-related, but a tax motivation does not transform the arrangements…into a sham.” Essentially, the judge determined the arrangements were bone fide from a business perspective and that Cameco was in its right to use its subsidiaries to conduct business in the manner it did.[3]
  • The CRA’s argument that, absent a sham, the transactions should be recharacterized (under Section 247(2)(b)) were also rejected. Noteworthy here was the judge ruled that CRA’s powers to recharacterize under this section were limited and not necessarily consistent with the prescriptions of the OECD Guidelines.
  • Despite Canadian personnel providing a role in assisting with the negotiation of the uranium agreements with Russian third-parties, the Court ruled that multinational groups have the right to collectively assist each other and share information. The Court ultimately rejected CRA’s argument that Cameco Corp. was providing value to its’ related parties without arm’s length compensation.
  • The Court also rejected the CRA’s argument that the related parties should only earn a routine return. In contrast, the judge argued that the contracts were legally binding with third parties and despite the fact the entities made a substantial amount of profits due to the increase in uranium prices during this time, CRA’s arguments were primarily based on the use of hindsight.
  • The judge also made numerous comments about back-dated and late signed related party agreements.

With the CRA now having filed an appeal, assuming a new trial is set, some very important transfer pricing issues will be explored.

[1] Cameco vs. HM The Queen 2018 TCC 195.

[2] Ibid.

[3] Canadian Court Rejects Transfer Pricing Adjustments In Cameco, Tax Notes, September 27, 2018, Ryan Finlay