In a unanimous decision, the
The overarching theme of the Court's decision is that the goal of
The Court also emphasized that the government was not challenging any of the findings of fact made by the trial judge in allowing
Key Takeaways
Our key takeaways from the decision respecting the appropriate interpretation of section 247 are:
- Transfer pricing is fundamentally a factual exercise. The Court characterized many of the Crown's arguments as indirect attacks on the trial judge's factual findings, for which no palpable and overriding error was present.
- The "recharacterization" branch of the transfer pricing rules contains an objective test: would any hypothetical arm's length persons have entered into the relevant transactions? The Court rejected the Crown's subjective test based on the idiosyncrasies of the parties to the transactions.
Background
In 1999,
At trial, the Crown's primary argument was that
For our analysis of the Tax Court's
"Recharacterization" is only available if arm's length parties would not enter the transactions under any terms or conditions
The Court began with a textual analysis of subparagraph 247(2)(b)(i), which asks whether "the transaction or series .would not have been entered into between persons dealing at arm's length". Had
The Court held that the test is satisfied only when no arm's length persons would have entered into the transaction (or series) in question, under any terms and conditions. In other words, if the transaction (or series) can be priced (e.g. market pricing exists), it should be analyzed under paragraphs 247(2)(a) and (c), not paragraphs 247(2)(b) and (d).
The Crown's proposed interpretation of the recharacterization rule was too broad according to the Court as it could lead to the section inappropriately applying whenever a corporation in
The Court also held that the Crown's requested relief under paragraphs 247(2)(d), effectively ignoring the separate existence of the subsidiary and instead treating
The Court relied on several contextual factors to support its interpretation of section 247, including the Transfer Pricing Guidelines published by the OECD. The Guidelines advocate ignoring the actual transactions and substituting other transactions only in exceptional cases, such as where the transactions practically impede the tax administration from determining an appropriate transfer price. The Court held that no such exceptional circumstances existed, finding there was nothing to suggest
Similarly, the Court held that the "Transfer Pricing" and "Transfer Pricing Adjustment" headings in the Act and the
The Court confirmed prices should be tested based on the circumstances existing when the agreements were entered into, without the benefit of hindsight to take into account, for example, the spike in uranium prices which occurred several years later.
The Court concluded by noting that "[e]ssentially, the profits in question in this case arose from buying and selling uranium" and there was no basis to find that parties dealing with each other at arm's length would not have entered into the transactions.
Traditional pricing rule - No reason to interfere with trial judge's factual findings
The Court's decision with respect to the traditional transfer pricing rule in paragraphs 247(2)(a) and (c) demonstrates the importance of effectively marshaling evidence, including expert evidence at the trial level.
The Court characterized the Crown's submissions with respect to paragraphs 247(2)(a) and (c) as relitigating which party's experts should be preferred and indirectly challenging the trial judge's findings of fact. The Court reaffirmed this was the trial judge's role: weighing the expert evidence and determining which expert to prefer, and making findings of fact. Absent a palpable and overriding error (which the Crown did not allege), a trial judge is entitled to deference.
Consequently, the Court held there was no reason to interfere with the Tax Court's decision.
Conclusion
The Minister sought to disregard
Originally published
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