Yesterday, the Supreme Court of Canada dismissed the Minister of National Revenue's ("the Minister") application for leave to appeal in the matter of Canada v. Cameco Corporation, 2020 FCA 112. This is a case of significant importance as it involved the interpretation of the transfer pricing recharacterization rules in paragraphs 247(2)(b) and (d) of the Income Tax Act (Canada) ("Recharacterization Rules").
Cameco Corporation ("Cameco"), along with its subsidiaries, is one of the world's largest uranium producers and providers of uranium conversion and enrichment services. In 1999, a subsidiary of Cameco that was resident in Luxembourg (the "Lux Subsidiary"), became a party to uranium supply agreements with third parties. In addition, Cameco agreed to sell its uranium inventory and certain future production to the Lux Subsidiary. Later that year, Cameco incorporated a subsidiary that was resident in Switzerland (the "Swiss Subsidiary"). In 2002, the Lux Subsidiary transferred its rights to purchase uranium under the supply agreements to the Swiss Subsidiary. Because the price of uranium increased sharply during the term of the supply agreements, the Swiss Subsidiary realized substantial profits over time from buying the uranium at low prices and then reselling it.
The Minister reassessed Cameco's 2003, 2005 and 2006 taxation years, reallocating approximately $480 million of the Swiss Subsidiary's profits to Cameco pursuant to the Recharacterization Rules.
The Recharacterization Rules provide a mechanism for the Minister to make transfer pricing adjustments where a non-arm's length transaction or series of transactions: (i) would not have been entered into between persons dealing at arm's length, and (ii) it can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit. Where this is the case, the transaction or series is substituted with the transaction or series that would have been entered into between persons dealing at arm's length, under terms and conditions that would have been made between persons dealing at arm's length.
Cameco appealed the reassessments to the Tax Court of Canada. The Court decided in favour of Cameco.
The Minister appealed the Tax Court decision to the Federal Court of Appeal. The Federal Court of Appeal held in favour of the taxpayer. In doing so, the Court noted that the economic benefit of participating in the uranium purchase agreements at the time the contracts were entered into was negligible. The profit that was proposed to be reallocated to the taxpayer resulted from the increase in the price of uranium, which the parties could not forecast. This was an inappropriate use of hindsight and after applying an objective test, the Court held that the Recharacterization Rules did not apply, because there was no evidence that parties dealing with each other at arm's length would not have entered into the contracts in question.
The Minister applied for leave from the Supreme Court of Canada to appeal this decision on October 30, 2020. On February 18, 2021, a majority of the Court dismissed the appeal with costs.
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