The Cameco Transfer-Pricing Case: What Is at Stake?

The TCC hearing in the Cameco case ended in September 2017, and a decision is expected later this year. Cameco Corporation, a Canadian-based leader in the uranium industry, sold uranium in long-term contracts at a constant price to Cameco Europe Ltd. (CEL). CEL then distributed the uranium to a US subsidiary for resale. Cameco eventually incurred losses, whereas CEL generated profits in Switzerland. Much attention has been given to this case because it addresses important issues—for example, can transfers of risks outside Canada be challenged by the Canadian tax authorities and, if so, pursuant to which legal provisions or judicial doctrines? The Crown's case rests on (1) the sham doctrine, (2) the recharacterization provisions of paragraphs 247(2)(b) and (d) (which have never been tested in court), and (3) the standard transfer-pricing provisions in paragraphs 247(2)(a) and (c).

First, with regard to sham, the Crown said that the intercompany agreements were misleading. It argued that the staff employed by CEL was insufficient to carry on a uranium business, and it pointed out that Cameco assumed a pre-eminent role with respect to CEL's strategic decisions and negotiations. In response, Cameco argued that, as stated in the intercompany agreements, CEL really owned the uranium that it sold and assumed the risks associated with the transactions; therefore, it also owned the profits associated with the uranium sales. Cameco stressed that it had no intention of deceiving the Canadian tax authorities.

Second, the Crown, pursuant to paragraphs 247(2)(b) and (d), argued that the transactions would not have occurred between parties dealing at arm's length because (1) Cameco sold its uranium to CEL at a fixed price when market prices were low, and (2) the transactions were inconsistent with Cameco's guidelines on third-party agreements. Cameco countered with examples of companies that had concluded contracts with the effect of locking in sales at fixed or base-escalated prices with the intention of transferring price-associated risks.

Third, the Crown argued that, under paragraphs 247(2)(a) and (c), the court should allow for an adjustment that reallocates most of the profits to Cameco, given that Cameco carried on most of the essential activities relative to the uranium business. It is important to note that whereas the Crown interpreted the word "amount" found in section 247 to mean profit or income, which would enable it to reallocate profits to Canada, Cameco argued that "amount" means price and that the court need only determine whether or not the prices were arm's-length.

What could be some of the effects of the forthcoming decision? The decision could either (1) consolidate the role of intercompany agreements as elements that provide substantial protection against challenges by the tax authorities or (2) reinforce the tendency of tax authorities to disregard contractual arrangements in favour of economic outcomes that differ from those anticipated in the contract.

Also, the decision may offer further guidance with respect to whether and to what extent functions can be separated from risks in Canadian law. The BEPS final report on transfer pricing and the recently updated OECD transfer-pricing guidelines seem to suggest that in certain circumstances (for example, in the case of cash-box entities), unless a party controls the risk in question and has the financial wherewithal to assume such a risk, it will not be allocated the risk—despite its conduct, and even if a contract clearly assigns the risk to it. However, OECD reports and guidelines, although sometimes referred to by the courts, have not been incorporated into Canadian law and must be read in conjunction with our legislation and judicial doctrines.

Guillaume Lafleur
Barsalou Lawson Rheault, Montreal

Canadian Tax Focus
Volume 8, Number 3, August 2018
©2018, Canadian Tax Foundation