TCC upholds transfer pricing adjustment to sale price of trade receivables

In Mckesson Canada Corporation v. The Queen, 2013 TCC 404, the Canadian company in the group (Canco) sold its trade receivables to a Luxembourg company in the group (Luxco) at a discount of 2.206% (from their face amount).  In an 87-page judgment, the Tax Court of Canada (TCC) held that an arm’s length range for a discount rate in the circumstances was between 0.959% and 1.17%.  The CRA had reassessed Canco using a discount rate of 1.013%, which was upheld as being within this arm’s length range.  The decision is highly fact-based, but some interesting points may be observed.

1. It seems the case landed in the TCC – and had not been resolved at the inter-governmental competent authority level (as is often the case in transfer pricing) – because Luxco did not pay significant taxes in Luxembourg (paragraph 365).  Accordingly, the only substantive tax in issue was Canadian tax.
2.  The Tax Court judge (Judge) clearly took the Supreme Court of Canada’s direction Canada v. GlaxoSmithKline Inc., 2012 SCC 52 at paragraph 61 to heart: namely, “As long as a transfer price is within what the court determines is a reasonable range, the requirements of the section should be satisfied…and the Tax Court judge will be required to exercise his best informed judgment in establishing a satisfactory arm’s length price” (paragraph 120).
3.  Naturally, opinions may differ as to whether the Judge’s factual conclusions in this case were right or wrong.  One thing seems clear however.  A Tax Court judge will apply a healthy dose of common sense in these cases.  For instance, the Judge could not understand how, from “a common sense point of view”, the parties could assign a forward-looking credit risk to the trade receivables that was “many, many, many times higher” than the multi-year historic performance of those receivables (paragraph 299).  Similarly, the Judge found it “completely unacceptable, unreasonable, [and] unsupported on the evidence” that Canco, as an arm’s length seller, would agree to essentially compensate Luxco, as an arm’s length buyer, for Luxco’s own financing costs (paragraph 346).  To paraphrase an old line: If the transfer price looks too good to be true, it probably is.
4.  Finally, the TCC examined an interesting procedural point concerning the secondary withholding tax (WHT) assessment of Canco.  The WHT applied to the value of the benefit that Canco conferred on Luxco, which had arisen because Canco accepted too high of a discount on its trade receivables.  The TCC held that this WHT was not the kind of income tax to which the 5-year time limitation in Article 9 of the Canada-Luxembourg treaty applied for transfer pricing reassessments (paragraphs 391-392).  Accordingly, the CRA was not time-barred when it issued the WHT assessment outside the 5-year period.