written on behalf of Feigenbaum Law
Earlier this year, the Tax Court of Canada released reasons in the case of Sifto Canada Corp. v The Queen. This decision addresses the legal impact of a transfer pricing settlement under the Mutual Agreement Procedure (“MAP”) article of the Canada-U.S. Tax Convention (“Treaty”), and determined that the Canada Revenue Agency (“CRA”) is bound by an earlier MAP settlement that set the transfer price for the transaction.
Sifto Canada Corp. v The Queen
The circumstances giving rise to the case began with a voluntary disclosure submitted by Sifto for the years 2002-2006, correcting an underreported income of approximately $16 million. The majority of this amount was related to transfer pricing, arising from a sale of rock salt to the North American Salt Company (“NA Salt”). Both Sifto and NA Salt were indirect subsidiaries of Compass Minerals International Inc., a US corporation.
The Minister of National Revenue accepted the voluntary disclosure application, and revised transfer prices therein. Reassessments were subsequently issued for the reported increases in Sifto’s income for those years. This created a situation where Sifto and NA Salt were faced with double taxation, and accordingly applied for relief under the MAP article to the US and Canadian competent authorities (“USCA” and “CCA”). At the end of this process, Sifto signed an agreement with the CCA which resolved the double taxation, and also settled the arm’s length transfer price for the rock salt.
The CRA then issued further reassessments which audited the same transactions again at a higher transfer price, along with heavy penalties. Sifto began judicial review proceedings in respect of the reassessments, arguing that the CCA agreement represented their acceptance of the transfer pricing adjustments, and the CRA was bound by that agreement.
The Tax Court of Canada agreed with Sifto, finding that the USCA and CCA had used recognized transfer pricing methods to reach an agreement on the revised transfer price. Accordingly the CRA is bound by this determination.
Cross-border tax advice regarding transfer pricing
This decision creates a degree of certainty for companies that have negotiated good faith MAP settlements. Although upcoming changes to the voluntary disclosure program may impact the availability of this relief for transfer pricing matters. For now, and in light of this decision, there may be additional requests for information or greater levels of scrutiny by the CRA regarding voluntary disclosures, especially with transfer pricing issues.
Before making a voluntary disclosure, or taking any steps with respect to transfer pricing agreements, companies should consult with counsel that specialize in cross-border tax matters. At Feigenbaum Tax Law, we assist clients with tax disputes in both Canada and the United States, including competent authority matters, notices of objection and appeals.
If you have questions about a potential dispute, contact us online, or call our office toll free at (877) 275-4792 to make an appointment.