Massive filing in Cameco case could signal ‘trench warfare’

$2.1B transfer pricing dispute with CRA

The 700 pages of concluding arguments filed with the Tax Court of Canada (TCC) in Cameco Corporation’s $2.1-billion transfer pricing dispute with the Canada Revenue Agency (CRA) marks a new era of complexity for corporate tax litigation in Canada.

“That type of filing is unheard of and may signal the evolution of a kind of trench warfare in the Tax Court,” said a veteran tax litigator who spoke on condition of anonymity because of the lawyer’s connection to the ongoing case.

After 65 days of trial, the parties made their closing arguments in September 2017. Justice John Owen reserved his decision, which, by some accounts, may not be issued until 2019 owing to its legal and factual intricacies and the implications for business.

The heart of the dispute with the CRA is the company’s practice of selling uranium to a subsidiary in Switzerland, which it then sells on the market, incurring fewer taxes. The company settled a similar claim with the U.S. Internal Revenue Service last year.

Jacques Bernier, a tax litigator in Baker McKenzie’s Montreal office, believes that both the personal and professional attitudes of lawyers on both sides of tax cases have changed over the last 15 years.

“There’s more positioning by lawyers on both sides,” he said. “But that may be inevitable given the increasing stakes involved.”

Some fifteen years ago, Canada’s largest tax disputes were in the $200-million range. “Now we’re seeing billion-dollar cases docketed or in the works.” Bernier said. “Cases involving at least $100 million are becoming routine enough so that four weeks of trial is not uncommon.”

The largest stakes tend to be at play in transfer pricing and anti-abuse cases.

“With multinational groups having to disclose more and more information to more and more authorities, transfer pricing is an ideal area for litigation,” Bernier said. “And because the issues usually turn on valuation and economic theories, they tend to be grey in nature.”

The CRA is also much better armed than it has ever been.

In June 2016, the Liberal government announced increased the budget for the historically underfunded CRA by about $90 million annually over the next five years. The CRA promptly claimed that its half-billiondollar bonanza would yield $2.6 billion in recovered taxes through increased targeting of tax havens, stepped-up audits of large foreign transfers of money, and more intense investigation of consultants selling shelters.

In pursuit of that objective, the agency hired 100 new auditors, increased its audits of high-risk taxpayers fivefold to 3,000 annually from 600, and ramped up its review of tax shelters tenfold to include 200 promoters a year.

But with more resources and higher stakes, litigation has also become an enhanced strategic tool for the government. For example, even as the Cameco trial was ongoing, CRA — in an unprecedented move — went to court in an attempt to compel oral examinations of 25 personnel from six wholly-owned subsidiaries in connection with a transfer pricing audit for taxation years other than those involved in the trial.

Justice Glenny McVeigh turned down the CRA’s request, ruling that the agency’s auditing powers were broad, but not unlimited. She specifically noted that oral interviews at the audit stage could undermine procedural safeguards for taxpayers at the appeal stage.