Final Arguments Conclude in Transfer Pricing Case in the Tax Court of Canada – McKesson Canada Corporation v. The Queen


Final Arguments Conclude in Transfer Pricing Case in the Tax Court of Canada – McKesson Canada Corporation v. The Queen


The most recent Canadian transfer pricing trial concluded on February 3, 2012 after four days of argument in the Tax Court of Canada in Toronto. This marked the conclusion of a trial that commenced on October 17, 2011. At issue before Justice Patrick Boyle is whether the agreed-upon discount rate for factoring accounts receivable differed from the discount rate to which the parties would have agreed had they been dealing with one another at arm’s length.

The agreed-upon discount rate was 2.2% while the Minister of National Revenue assumed 1.0127% as the arm’s length rate for factoring the accounts receivable at issue.

Counsel for McKesson Canada Corporation began his submissions by arguing that the reassessment should be vacated as McKesson Canada had met its burden of demonstrating to the Court, on a balance of probabilities, that the agreed-upon discount rate was consistent with the discount rate to which the parties would have agreed had they been dealing with one another at arm’s length. Counsel argued that the absolute lowest discount rate the Court could possibly find, based on all the expert evidence, is not be less than 1.7863% as reflected in the opinion of one of the Crown’s experts. Counsel emphasized that the evidence of the Crown’s experts should be given little or no weight as, among other things, they overlooked cost of capital, prompt payment discount and servicing fees. Furthermore, counsel submitted that the Part XIII assessment should be vacated as it was issued after the 5-year limitation period in Article 9(3) of the Canada-Luxembourg Income Tax Convention (1999) (the “Treaty”).

Counsel for McKesson Canada referred to the OECD guidelines which suggest that restructuring business transactions would be an unusually arbitrary exercise. He emphasized that paragraph 247(2)(a) of the Income Tax Act cannot be used to re-write the transaction or to change what has already happened.

Justice Patrick Boyle sought guidance from counsel on whether paragraph 247(2)(a) could be used to revise the terms or conditions of the transaction.

Crown counsel criticized the methodology used by an experts called by McKesson Canada on the basis that he had never used that methodology to price any other receivables and there was no indication that that methodology was actually followed in the market. Counsel also questioned certain assumptions made by experts called by McKesson Canada (e.g. the Crown argued that capitalization should be assessed based on the capitalization of the entire corporate group, not just the immediate parent, which would result in a significantly lower arm’s length discount rate).

Crown counsel also argued that the “terms and conditions” referred to in paragraph 247(2)(a) extend beyond price and, based on the OECD guidelines, that structural adjustments are permissible as part of the “realistically available option” standard. Counsel submitted that the “realistically available option” standard allows for several significant adjustments to the discount rate.

Justice Boyle sought guidance from Crown counsel on the extent to which structural changes could be made within the scope of paragraph 247(2)(a).

With respect to the Part XIII assessment, Crown counsel contended that the limitation period in Article 9(3) of the Treaty only applies to corresponding adjustments by the other contracting state and, therefore, the Part XIII assessment was timely issued.

In reply, counsel for McKesson Canada urged the Court to look to the words of paragraph 247(2)(a) and emphasized that the discount rates offered by the experts called by McKesson Canada took into account considerations such as the cost of capital and the servicing fee where the discount rates offered by the Crown’s experts did not.

Judgment was reserved.

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Categories: Tax Court of Canada, Transfer Pricing


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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