Calgary Tax Executive Institute Resolving Tax Controversies Involving GAAR, Abusive Tax Avoidance...

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

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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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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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Submissions at the Audit and Appeals stages: Is it worth doing?

• 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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Planning a GAAR Appeal: From Pleadings to the Courtroom (cont’d)

• Courtroom process

– visual aids– written opening statements– set out clear definition of the differences between the parties (facts,

issues, law)

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• 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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• Importance of the trial record for the Appellate Courts

• Provincial GAAR Appeals

– location– procedure– burden of proof

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Onus of Proof and the Burden of Persuasion in GAAR Appeals

• Copthorne (paras. 34 and 59); Canada Trustco (para. 28-29, 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

• 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 “results-oriented” approach? Language in Copthorne (para. 70) suggests otherwise

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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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• 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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•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)

– Determination of amounts relevant to computation of income, tax or refunds (e.g. PUC)

– Determination gives rise to objection and appealrights

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• 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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• Competent authority relief and GAAR – CRA has indicated no relief (para. 27 of IC 71-17R5)

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Reasonable Consequences of a GAAR Assessment (Subsection 245(5)) – How Reasonable?

• 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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Pressure Points for Trying to Effect the Settlementof 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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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)

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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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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

– views on objections and admissibility of evidence– views on interrupting/questioning witnesses– views on writing legal submissions– views on questioning counsel

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• Appellate judges require:

– 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

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• 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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• 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)

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GAAR Statistics March 2012

GAAR Statistics as of March 31, 2012Issue Y N Total %Foreign Tax Credit 14 3 17 2%Income Splitting 13 3 16 2%Partnership Issues 26 8 34 3%Kiddie Tax 87 6 93 9%Offshore Trusts 15 1 16 2%Cross-Border Lease 11 0 11 1%Part XIII Tax 3 9 12 1%Kiwi Loan 14 0 14 1%Losses, Stop Loss 10 5 15 1%Charitable Donations 15 10 25 2%Capital Gain 24 10 34 3%Interest Deductibility 19 17 36 4%Debt Parking 17 7 24 2%Indirect Loan 28 3 31 3%Debt Forgiveness 33 10 43 4%Losses, Capital & Non-Capital 41 19 60 6%Loss creation via stock dividend 87 0 87 8%Part I.3 Tax 38 11 49 5%Provincial GAAR 0 3 3 0%Surplus Strips 148 32 180 18%Tower Structure 6 3 9 1%Treaty Exemption Claim 5 2 7 1%Miscellaneous 115 96 211 21%

769 258 1027 100%

Cases referred to GAAR committee: 1027* see note below

GAAR Applied 769 75%GAAR not applied 258 25%

GAAR as primary position 358 47%GAAR as secondary position 411 53%

* Note: Statistics do not take into account the following: - RRSP Project 1363 files Legend - Barbados Spousal Trust project 78 files Y GAAR applicableIn these cases GAAR was applied as a secondary position N GAAR not applicable

- More than 300 files to which the Provincial GAAR was applied

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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 APPLIESKaulius (SCC)

Loss TransferDesmarais

Surplus StripLipson (SCC)

Reverse Attribution/Interest CECO (TCC)

Ptshp/Disguised ProceedsOGT Holdings (QCA)

Quebec ShuffleCopthorne (SCC under reserve)

Duplication of PUCMacKay (FCA)

Withholding Tax

GAAR DOES NOT APPLY/NOT NEEDEDCanada 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

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The GAAR Scorecard (Post-Canada Trustco) to May 2012 (cont’d)

GAAR APPLIESAntle (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 NEEDEDLandrus (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)

Finco Interest Shift

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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) Surplus Stripping

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Some GAAR Cases in Court Process

• 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

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GAAR Cases in Court Process (cont’d)

• 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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• 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

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• 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

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• 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

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Cases in Tax Court Process Under Reserve

• 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

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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

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Predictions About GAAR in Practice (cont’d)

• 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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• 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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• 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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Transfer Pricing Presentation Overview

• Dispute Resolution Process• Field Audit Issues• Notice of Objection Issues• Competent Authority Issues• APA Issues• Transfer Pricing Litigation• Future of Transfer Pricing Disputes

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Transfer Pricing Dispute Process – Audit Through Reassessment

Audit

Proposal Letter

Taxpayer Response

Reassessment(Tax/Penalty/Interest)

File Tax Appeal with CRA

Transfer Pricing Review Committee

Penalty/Recharacterization Proposal

Penalty/Recharacterization Decision

Payment of Tax/Penalty/Interest

90 Days

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Transfer Pricing Dispute Process – Post Reassessment

CRA Appeals

Tax Court of Canada

CRA Audit

Federal Court of Appeals

Supreme Court of Canada

Competent Authority

Fact Finding Panel

No CA Agreement

CAAgreement

Arbitration

Accept

Reject

Accept

CRA: ReassessmentTaxpayer: Objection

Taxpayer: CA RequestAppeal in Abeyance

CRA: ReassessmentTaxpayer: CA Request

CA: Factual DisputeCRA: Objection Denied or No ActionTaxpayer: Appeal

Taxpayer/CRA: Appeal

Taxpayer/CRA: Leave to Appeal

Taxpayer: Appeal Re-activated

Taxpayer: Appeal Re-activated

Taxpayer/CA Arbitration

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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

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Field Audit Issues

• 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

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Field Audit Issues

• 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

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Field Audit Issues

• 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

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Field Audit Issues

• 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

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Field Audit Issues

• Results of Audits– Transfer Pricing Penalties

• Penalties recommended 152 cases (50.7%)• Penalties not recommended 148 cases (49.3%)

– 247(2)(b) Recharacterization• Approved 11 cases (20.0%)• Ongoing 10 cases (18.2%)• Denied/Abandoned 34 cases (61.8%)

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Field Audit Issues

• 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

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Changes to the ITA Affecting Field Audit

• 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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• 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

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• 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

• 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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• 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

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• 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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Competent Authority Statistics

• Competent Authority – Time frames for completion

of MAP cases

YearsCanadian 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

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• Relief Statistics – Negotiable Case

Years ReliefPartial 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%)

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• TP Methodologies*TP Method – Completed Cases

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%)

* Excluding Resale Price Method

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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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• 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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• 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

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APA Statistics

• APA– Time frames for completing

a bilateral or multi-lateral APA have increased significantly over past 4 years

Years Average Median

2010-2011

50.3 months 49.6 months

2009-2010


2008-2009


2007-2008


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APA Statistics

• TP Methodologies*

TP Method All Completed Cases

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%)

* Excluding Resale Price Method

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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

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APA Issues

• 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

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APA Issues

• 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

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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

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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

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• 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, 2010-

3494(IT)G– Cameco Corp. v. The Queen, 2009-2430(IT)G– Dow Chemical Finance Canada Inc. v. The Queen, 2007-

4580(IT)G

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• 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

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• 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

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• On-going cases in the Tax Court – General Electric Canada Capital Company v. The Queen, 2010-

3494(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

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• 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)

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• On-going cases in the Tax Court– Dow Chemical Finance Canada Inc. v. The Queen, 2007-

4580(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

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• 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

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• 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

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• 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)

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Future of Transfer Pricing Disputes

• 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

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Future of Transfer Pricing Disputes

• 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

Calgary Tax Executive Institute Resolving Tax Controversies Involving GAAR, Abusive Tax Avoidance...

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