Author: Jenny P. Mboutsiadis

Cameco Corporation Wins Monumental Sham / Transfer Pricing Tax Case

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The Tax Court of Canada has ruled in favour of Cameco in its massive tax dispute with the Minister of National Revenue.  The Court held that the Minister was wrong to include $483.4 million earned by Cameco’s Swiss subsidiary in the mining giant’s income for its 2003, 2005, and 2006 taxation years and ordered the amounts be reversed out.  Also, approximately $98 million and $183.9 million were added back in computing Cameco’s resource profits for its 2005 and 2006 taxation years, respectively.

Had the Court upheld the reassessments, Cameco would have been liable for $11 million in taxes, plus interest and penalties, for those years.  Further, subsequent taxation years with the same issues would have resulted in Cameco being liable for a staggering $2 billion in taxes, plus interest and penalties.

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Search warrant’s validity does not need to be confirmed for CRA to examine items seized as part of criminal investigation

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Originally published on Fasken’s White Collar Post blog, under the title “CRA Can Examine Items Seized During Criminal Investigation Before Validity of Search Warrant Confirmed“.

By Jenny P. Mboutsiadis and Anastasia Reklitis

The Canada Revenue Agency (“CRA”) can examine and make copies of items seized by the Royal Canadian Mounted Police (“RCMP”) pursuant to search warrants issued during a criminal investigation without having to wait for a determination of whether the warrants were valid.  This was confirmed by the British Columbia Supreme Court in Canada Revenue Agency v. Royal Canadian Mounted Police, 2016 BCSC 2275.  The CRA has not appealed the decision.

In this case, the CRA applied to the court under subsection 490(15) of the Criminal Code, RSC, 1985, c. C-46, for access to items obtained by search warrants.  The search warrants had been issued based on the belief that those named in the warrants (“Named Persons”) had committed criminal offences, such as laundering proceeds of crime, possession of property obtained by crime, and importing and trafficking in a controlled substance.  The items seized included large amounts of cash, numerous documents and computers, and other electronic devices and media containing business, accounting, and tax records.

The CRA argued that it was permitted access because it is a person “who has an interest in what is detained”, thereby satisfying the applicable Criminal Code provision.  The Named Persons opposed the CRA’s application on numerous grounds.  The RCMP took no position.

The Named Persons’ first argument was that a determination that the seizure is lawful is a pre-condition to the CRA’s entitlement to access any materials.  The Named Persons had already commenced the process in the Provincial Court that could possibly lead to the quashing of some or all of the search warrants and argued that, therefore, the CRA’s application should be adjourned until the validity of the warrants is determined from that process.  The court rejected this argument and explained that the warrants were presumptively valid and the Named Persons have the burden to establish otherwise.  A mere challenge with vague possibilities was not enough to satisfy the court that the warrants were invalid.

The Named Persons’ second argument was that the CRA’s application should fail because it did not have an interest in the seized items.  The court found to the contrary:  the CRA did have an interest because the items could be relevant to various tax investigations in which it was involved, which were independent of the RCMP investigations.  In particular, the items were relevant to determining potential tax offences involving some or all of the Named Persons, including tax evasion and the filing of false tax returns.

The Named Persons’ third argument was that any order allowing the CRA access should contain specific restrictions relating to privacy, privileged material, and relevance.  The court refused to place any restrictions as it did not find it appropriate to limit the examination of the evidence.

The CRA’s application was allowed and access to the seized items was granted.  In doing so, the court stated that there is nothing inherently wrong with law enforcement officials cooperating and sharing legally-obtained information.  Preventing the CRA from accessing the RCMP gathered information would delay the CRA’s investigation, thereby prejudicing its effectiveness and the likelihood of charges arising from it.  The court’s view was that it is in the public interest that the RCMP and CRA investigations proceed concurrently as they concern offences arising from the same search warrants.

 

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Panama Papers: Canada Revenue Agency moves into full gear

panama-1675062_1920This posts was originally published on White Collar Post under “Panama Papers: CRA getting tougher on tax evasion” – a Fasken Martineau blog.

We are beginning to see the legal enforcement fallout from the now infamous Panama Papers.  Canada Revenue Agency’s (CRA) concerted efforts to find undeclared offshore money and assets is moving into full gear. In addition to pursuing typical civil audits, the CRA is now executing search warrants and launching criminal investigations for tax evasion.

The CRA is actively gathering information from domestic and international sources to identify and charge offenders criminally. Since 2015, the Canadian government has required domestic financial institutions to report to the CRA all international electronic fund transfers of $10,000 or more.  In addition, as of March 2016 the CRA has analyzed over 41,000 transactions worth over $12 billion dollars, involving four jurisdictions and particular financial institutions of concern, and has initiated risk assessments on 1,300 individuals named in the Panama Papers. This has resulted in approximately 122 CRA audits to date and counting. However, it is not just taxpayers who are subject to the CRA’s scrutiny and who may be criminally charged. The CRA is also investigating the enablers and advisors, including the lawyers and accountants, who facilitated the hiding of taxpayer money and assets offshore.

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Tax Court: arrears interest after GAAR assessment accrue from the taxpayer’s balance-due day

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Tax Court confirms that arrears interest on taxes resulting from GAAR assessment accrue from the taxpayer’s balance-due day

In Quinco Financial Inc. v. R. (2016 TCC 190), the Minister of National Revenue had assessed Quinco under section 245 (the “GAAR”) of the Income Tax Act (Canada) (“ITA”) to deny certain claimed capital losses.  Arrears interest on the resulting tax due was also assessed, which the Minister computed from Quinco’s “balance-due day”.  The “balance-due day” is the deadline by which a taxpayer is required to pay to the Receiver General certain amounts payable under the ITA for a particular taxation year.  For a corporate taxpayer, it is either two or three months after the end of the particular taxation year, depending on the circumstances.

Quinco took the position that it should not be liable for arrears interest on the assessed tax debt for the period prior to the assessment date.  It proffered numerous arguments to support its position. The most interesting argument was that, although a GAAR assessment requires a determination of the tax consequences reasonably necessary to deny the tax benefit, it does not permit or extend to the recharacterization of the transaction for any other tax purposes; therefore, a taxpayer’s liability for interest does not arise until the date of the reassessment.

Justice Bocock rejected this argument and explained that an assessment under the GAAR,

“whether alone or in conjunction with another technical omission or non-compliant act, is not an assessment divorced from the other provisions of the Act.”

Here, the assessment was raised utilizing the GAAR, but the assessment “insinuated itself into Part I of the Act to reassess the taxpayer otherwise in the normal course.”  Justice Bocock held that subsection 161(1) arrears interest accrues on any tax payable determined under the GAAR from the balance-due day until the GAAR assessment issuance date (and onwards until payment of the tax payable).

 

 

 

 

 

 

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Alberta Court rules on what is a “reasonable amount” of interest under s. 20(1)(c)

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Test for reasonableness of interest amount is whether no business would have contracted to pay that amount:  Alberta Court of Queen’s Bench

This summer saw the first case in which a court articulated the test for determining whether an interest amount is reasonable for purposes of paragraph 20(1)(c) of the Income Tax Act (Canada) (“ITA”).  No other Canadian federal or provincial court has ruled on this question.

In ENMAX PSA Corp. v. Alberta (2016 ABQB 334), the two taxpayers were subsidiaries of ENMAX Corp., which was owned by the City of Calgary.  Government-owned businesses in Alberta are usually exempt from provincial and federal tax statutes, unlike privately-owned and publicly-traded corporations.  To even things out, government-owned businesses are required to make payments in lieu of tax (“PILOT”) to a “balancing pool”.  PILOT payments are calculated in accordance with tax statutes.  A taxpayer may deduct a “reasonable amount” of interest on borrowed money used for the purpose of earning income to the extent permitted under paragraph 20(1)(c).

The taxpayers in this case paid interest to ENMAX Corp. on funds borrowed from it and deducted the interest under paragraph 20(1)(c) in calculating their PILOT payments.  Alberta’s Minister of Finance took the position that the interest rates on the loans were unreasonable and only allowed deductions for amounts computed at about half of the actual interest rates.  The taxpayers appealed to the provincial court.

The issue before the Alberta Court of Queen’s Bench was whether interest paid by each taxpayer was reasonable pursuant to paragraph 20(1)(c).  The Court identified three broad considerations that govern the determination of what is reasonable:

  1. Reasonableness must be measured with reference to the legal transaction to which the borrower was a party, not other contracts it might have made.
  2. The interest that would have been paid in an arm’s length transaction may be a relevant factor, but it does not define what is reasonable.
  3. The standard of reasonableness does not require that a taxpayer’s deduction be ascertainable as a precise, correct amount. Rather, it allows for a range of amounts to be considered reasonable.

Justice Poelman concluded that the question to ask when determining whether the interest deducted by a taxpayer is a reasonable amount is:  Whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred?  Also noteworthy are his statements that the reasonableness standard in paragraph 20(1)(c) is not an arm’s length standard and that an interest rate higher than an arm’s length rate may be reasonable in the circumstances.

After extensively canvassing the evidence tendered by fact and expert witnesses, Justice Poelman found that the interest deducted by the taxpayers (and hence the interest rates) were reasonable.

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