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April 25, 2007 No. 2007-04
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Transfer Pricing Dispute on Guarantee Fee Going to Court A case recently appealed to the Tax Court of Canada (TCC) represents the largest transfer pricing adjustments ever before the TCC at about $136.4 million. The taxpayer in this case is appealing the Canada Revenue Agency’s (CRA) denial of deductions for guarantee fees the Canadian taxpayer paid to its non-resident parent company. This case confirms that the CRA is actively examining financial transactions, and guarantee fees charged by foreign entities in particular. Background This Transfer Pricing 60 Seconds is based on pleadings that are publicly available from the Tax Court of Canada: · Notice of Appeal, providing the facts of the case and the taxpayer's arguments · Reply to the Notice of Appeal, providing the CRA's response to the facts and its arguments in support of the reassessment. Facts Like many companies in the financial services industry, Cansub financed a substantial portion of its business with debt in the form of commercial paper and unsecured debentures (collectively "debt securities"). Parentco unconditionally guaranteed all payment due under all debt securities issued by Cansub after 1988 (the financial guarantees). In 1995, Parentco began charging Cansub a fee for the financial guarantees equal to 1% per annum of the principal amount of the debt securities outstanding during a year. In computing its income for each of the 1996 to 2000 taxation years, Cansub deducted the guarantee fees that became payable to Parentco for each year. The CRA disallowed the deductions, which totalled about $136.4 million. Issue Taxpayer's position CRA's position As well, the CRA argues that Cansub has not established a comparable uncontrolled price for the guarantee fees despite supplying six comparables. The CRA says there are unquantifiable differences between Cansub's transactions with Parentco and those involving the six proposed comparables. Further, the CRA argues that it was unreasonable for Cansub in the circumstances to pay any amount of guarantee fees to Parentco because Cansub would have been fully supported by Parentco even in the absence of a guarantee. As such, the guarantees provided by Parentco were of nil value to Cansub. The CRA concludes that the terms and conditions of the guarantee arrangement between Parentco and Cansub differ from those that would have been made between persons dealing at arm's length. The CRA adds that it can reasonably be considered that the guarantee fee arrangements at issue were not entered into primarily for bona fide purposes other than to obtain tax benefits. KPMG observations This seems to be the first time the CRA has argued for recharacterization of a transaction under certain transfer pricing provisions, although only the criteria for recharacterization are mentioned without recharacterization being actively pleaded. In particular, the CRA does not indicate the effect of recharacterization, i.e., how is the guarantee transaction to be recharacterized? Further, the CRA's position appears to be unusual in that the CRA is essentially arguing that Parentco failed to consider that Cansub is part of the multinational enterprise in determining Cansub's credit rating. This seems to contradict the arm's length principle (the standard applicable in transfer pricing matters), which requires that parties be treated as if they were dealing at arm's length, i.e., the subsidiary must be treated as if it were not part of the larger group. We can help
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Information is current to April 16, 2007. The information contained in this Transfer Pricing 60 Seconds is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500. KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG, a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 144 countries and have more than 104,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services. KPMG's Canadian Web site is located at www.kpmg.ca © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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