Transfer Pricing News Issue 34 - October 2020

Canada Appeals Court rules in Cameco’s transfer pricing dispute involving Swiss subsidiary

This article was first published in MNE Tax.

Canada’s Federal Court of Appeal published its decision concerning Her Majesty the Queen. v. Cameco Corporation, 2020 FCA 112 on June 26, ruling for Cameco, the taxpayer.

This long-standing transfer pricing dispute in the Canadian courts continues to set precedents for the application of the arm’s length principle.

The Appeals ruling upholds the 2018 Tax Court of Canada decision, also in favour of Cameco. Litigation of this case first commenced in 2009.

The case concerns a transfer pricing challenge by Canada’s tax agency against Cameco in connection with the Canadian parent company’s transactions with a subsidiary located in Switzerland.

At the time the Swiss subsidiary was established in 1999 to trade in uranium, Cameco was one of the world’s largest uranium producers. Cameco’s Swiss subsidiary acquired uranium from third party sources for resale in the open market. The Swiss subsidiary later profited as a result of substantial increases in uranium market prices.

Canada’s tax agency alleged that Cameco’s structure resulted in improper “profit shifting” out of Canada for tax purposes and that transactions between Cameco and its Swiss subsidiary constituted a “sham” arrangement.

Canada’s transfer pricing regime

Canadian transfer pricing regime is governed by Section 247 of the Income Tax Act. This legislation contains two main charging provisions.

Paragraph 247(2)(a) permits Canada’s tax agency to re-price related party transactions to the arm’s length price.  Paragraph 247(2)(b) grants authority to Canada’s tax agency to disregard related party transactions and to substitute a different set of transactions that reflect arm’s length dealings.

This second provision, called the recharacterisation rule, was enacted to prohibit Canadian taxpayers from entering into related party arrangements that are wholly artificial and that have no bona fide purpose other than to avoid Canadian tax. For the rechacterisation rule to apply, the taxpayer must fail both these tests of paragraph 247(2)(b).


In Cameco, Canada’s tax agency appealed the lower Tax Court ruling by pursuing arguments relying on the recharacterisation rule. These arguments require the Appeals court to evaluate whether the uranium trading business of the Swiss subsidiary, including all its legal contracts, constituted a sham arrangement structured by taxpayer.

Cameco, its Swiss subsidiary and other members of the Cameco group entered into contemporaneous, written contracts with terms and conditions to reflect the intended transactions between these members. 

The Tax Court concurred that the numerous contracts did in fact create legal relationships as defined and expected by the members who were party to those contracts. The Tax Court further opined that a sham arrangement does not exist solely because a tax advantage may have been one of the motivations to establish the legal structure and the required contracts.

Sham arrangement?

Through substantial, court documents and testimony of company executives, Cameco was able to evidence that a bona fide arrangement existed with its Swiss subsidiary to the satisfaction of the courts. 

The powers of Canada’s tax agency to recharacterise a related party arrangement only apply when arm’s length parties – in general – would never enter into under any set of terms or conditions.

Canada’s tax agency argued in court documents that Cameco – the particular taxpayer – would not have entered into the same arrangement with an arm’s length person.

The Appeals court concluded this was not the correct application of the legislation and found that arm’s length parties would enter into the same transactions if acceptable terms and conditions to both parties.

The Appeals court thus dismissed the appeal by Canada’s tax agency.

Some thoughts

The case decided concerned a limited set of years in dispute between Cameco and Canada’s tax agency.

While the Appeals ruling addressed the long-running controversy for years 2003, 2005, and 2006, the parties suspended pending litigation for years 2007 through 2012. It is unclear the implications of the Appeals ruling on subsequent years.

Canada’s tax agency has the right to appeal the Appeals ruling to the Supreme Court of Canada.

Warren Novis

Therese Garcia