In Sifto Canada Corp. v. The Queen, 2017 TCC 37, a Canadian company (Canco) mined salt in Canada and sold it to Canco’s US parent at a price that was below an arm’s length range. Canco later filed a voluntary disclosure with the Canada Revenue Agency (CRA), increasing the transfer price to a point at the lower end of an arm’s length range (see paragraph 143). The CRA accepted Canco’s voluntary disclosure and reassessed Canco without an audit of the transfer price. Canco and its US parent then filed for relief from double taxation under Article IX (Related Parties) and Article XXVI (MAP) of the Canada-US tax treaty. Following discussions with the Canadian Competent Authority (the CRA), the US Competent Authority (the IRS) agreed to the transfer price applied by the CRA under the voluntary disclosure. Thereafter the two Competent Authorities exchanged letters to reflect their mutual agreement to eliminate the double taxation. The CRA then asked Canco to confirm its acceptance of this mutual agreement, which it did. In the meantime, a local CRA office had commenced an audit of Canco (for some of the years affected by the mutual agreement). The CRA ultimately issued a second reassessment to Canco increasing the transfer price for the salt – contrary to the mutual agreement. Canco appealed to the Tax Court of Canada (TCC), which was asked to determine under s. 171(2) whether the CRA was precluded from issuing the second reassessment by virtue of the mutual agreement. Not surprisingly, the TCC held in favor of Canco. Here are the key points.
- The CRA chose to initially reassess Canco by accepting the voluntary disclosure without auditing the transfer price (see paragraph 133). This choice did not make the mutual agreement with the IRS any the less an agreement on the transfer price made pursuant to the MAP Article of the treaty (see paragraph 132).
- The CRA contended that its communication with Canco concerning the mutual agreement contained “standard wording” that was “actually wrong” (see paragraph 48). This was a subjective after-the-fact description that was neither relevant nor persuasive (see paragraph 116).
- The mutual agreement accepted by Canco constituted a “settlement agreement” between Canco and the CRA. This settlement agreement was binding on the CRA because it was at least defensible on the facts and law (see paragraphs 141 to 145, and CIBC World Markets Inc. v. The Queen, 2012 FCA 3).
- Alternatively, the mutual agreement alone – made pursuant to the MAP Article of the treaty – was binding on the CRA. This is made clear by the statute that implemented the treaty in Canada, which statute grants paramountcy to the provisions of the treaty (see paragraphs 151, 155, and 159). When reassessing Canco a second time to increase the transfer price, the CRA breached Canada’s obligations under the treaty. It did so by failing to give continuing effect to the mutual agreement reached under the MAP Article of the treaty and by failing to perform Canada’s obligations under the treaty in good faith (see paragraphs 154 and 155).