McKesson – Tax Court of Canada reduces a cross-border receivables financing rate from 27% to 12.5% p.a.

In order to largely eliminate the Canadian taxpayer's taxable income, its ultimate US parent directed it to sell its receivables as they arose to its immediate Luxembourg parent at a discount of 2.206%, which worked out to an annualized rate of 27% given that the receivables on average were collected in 30 days.  Boyle J found, in reviewing CRA’s transfer-pricing adjustment to the taxpayer under ss. 247(2)(a) and (c), that he could adjust the discount rate and, in that connection, tinker with the actual terms of the receivables transfer agreement to change them to the minimum extent necessary to accord with what arm’s length negotiations would have produced.  However, he was inclined to think that it was inappropriate to (and he did not) impute changes to the fundamental terms of the deal – for example, by inquiring what the terms would have been if the receivables had been sold on a recourse rather than a non-recourse basis.

In the end, he found that CRA’s assumption that a discount rate corresponding to an annualized rate of around 12.5% (which was within the range he calculated) was arm’s length, had not been demolished by the taxpayer.  (It didn’t augur well when, respecting one argument, he stated (para. 246), "Overall I can say that never have I seen so much time and effort by an Appellant to put forward such an untenable position so strongly and seriously.")

An assessment for Part XIII tax under s. 214(3)(a) for a correlative benefit to the Luxembourg parent also was confirmed.  As this benefit was distinct from the primary transfer-pricing adjustment to the taxpayer, a five-year assessment limit in the Treaty did not apply.

Neal Armstrong.  Summaries of McKesson Canada Corp. v. The Queen, 2013 TCC 404 under s. 247(2), s. 247(4), Treaties – Art. 9, General Concepts – Intention and General Concepts – Evidence.