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Canada: Two fairly recent transfer pricing cases


  1. Cameco Corporation v. The Queen

The Tax Court of Canada ruled on Cameco Corporation v. The Queen on 26th September 2018.  The court ruled against Canada Revenue Agency (CRA).

Cameco Corporation (“Cameco”) mines and produces uranium.  The Canadian organisation has a long-term contract to sell uranium to Swiss Sub Cameco Europe (“CEL”) which trades the uranium. The Swiss subsidiary also has long term contracts with third parties to buy uranium. Purchases from Cameco in Canada were priced based on published long-term prices for uranium at the time the contracts were concluded.  This is common in the industry and contracts with third parties were on the same basis.

Subsequent to the creation of the contracts, the price of uranium went up.  The Swiss subsidiary CEL resold the uranium to the rest of world at a significantly higher price to the purchase price from Canada and therefore accrued large profits in Switzerland.

The Canadian Revenue Agency (CRA) re-assessed Cameco to recognise some of CEL’s profits in Cameco to balance the sale and purchase prices arguing:

  • The Transfer Pricing arrangement was a sham. Cameco appeared to transferred management of the uranium trading to CEL, but in reality the management of the trading remained with Cameco
  • There was no commercial rational for Cameco to allow CEL to profit from the contracts that it had negotiated
  • The arrangement did not meet arm’s length standards and therefore the prices should be adjusted.

The case covered 2003, 2005, 2006, but CRA also challenged later years meaning the full scope of the assessment was 2003-2017, approx. $2 billion not including interest and penalties.

However, the Tax Court held that there was no deceit and therefore the arrangement was not a sham.  In addition, it was not commercially irrational for a parent entity to allow a business opportunity for a subsidiary in the same group. Finally, the prices charged by Cameco to CEL for uranium were well within arm’s length price range at the time the contracts were concluded.

Worth noting in this case is the point made by Hugo Vollebregt in one of the early TP course lectures that the tax authority cannot insist on a transfer pricing adjustment via the benefit of hindsight.  The uranium transfer prices within the contracts were agree in good faith when the contracts were concluded based on the market value of uranium at the time.  The fact that the price of uranium subsequently went up does not make the transfer prices wrong that were agreed in the contract.  This situation could just as easily have occurred in an arm’s length arrangement with an unrelated party.

NOTE: In the following Guide there is a deviation proposed when selling intangible property, and the projections forming the basis of the valuation are far better than anticipated:

  1. Canada v. GlaxoSmithKline Inc.

The Supreme Court in Canada ruled on Canada v. GlaxoSmthKline on 12th October 2012.  The court ruled against Canada Revenue Agency (CRA) but left the Tax Court to decide the correct transfer pricing.

The case revolved around Ranitidine, the formula for treating ulcers and the key ingredient in Zantac, one of the world’s bestselling drugs. Under licence from Glaxo Group, Glaxo Canada manufactured, marketed and sold Zantac, paying a 6% royalty on net sales back to Glaxo Group.  Glaxo Canada was required to buy ranitidine from an approved member of the Glaxo Group and prices ranges from $1,512 to $1,651 per kg.  Glaxo Canada made a 60% gross margin on the Zantac sales in Canada.

However, ranitidine was also available for sale in Canada between $194 and $304 per kg and other drug companies purchased this ranitidine to make and sell generic versions of Zantac.

Due to the significant discrepancy between the price paid for ranitidine by Glaxo Canada when compared to the price paid by other drug companies, the CRA reassessed the price set by Glaxo Canada, leading to a significant increase in the Glaxo Canada taxable income for the years under dispute.  In making the judgement, the CRA ignored the licence agreement between Glaxo Group and Glaxo Canada, obliging Glaxo Canada to buy the Ranitidine from an approved supplier, and considered the supply agreement in isolation.

The Tax Court upheld the CRA’s reassessment by viewing the TP for the Glaxo ranitidine under the supply agreement alone, applying the Comparable Uncontrolled Price method as per the OCED guidelines and comparing with the price paid by the generic drug companies.

On appeal, the Federal Court of Appeal disagreed with the CRA and Tax Court and concluded the supply and licence agreements must be considered together; the supply of ranitidine is intrinsically connected to the right to sell Zantac in Canada.  In the circumstances of an arm’s length purchaser, they would be able to sell ranitidine purchased at a lower price from a supplier other than Glaxo Group, however that purchaser would not be able to market and sell the ranitidine as Zantac.  Therefore, the relationship between the supply and licence agreements was a “business reality” rather than a situation crafted purely for transfer pricing purposes.

However, the Federal Court of Appeal did not make a determination on a reasonable price for the ranitidine and sent the appeal back to the Tax Court to reconsider.  If the Tax Court ultimately maintains the high transfer prices for the ranitidine, then the payments to Glaxo Group may be subject to withholding tax.

CRA appealed the decision and Glaxo Canada appealed the decision for the case to return to the Tax Court but the Supreme Court of Canada dismissed both appeals.

Interesting aspects to take from the case:

  • Justice Rothstein of the Supreme Court of Canada held that the OECD Guidelines do not form part of the Canadian Statute and only Canadian law can be used to determine the appropriate transfer pricing.
  • The profits must align with the functions and resources performed.  Glaxo Canada had limited functions as a minor manufacturer and marketer of the drug locally and the CRA’s transfer pricing adjustments would have led to earnings far beyond what would be appropriate.