Michael Ford (post until Oct. 31/19)
Tax

CRA dispute highlights transfer pricing rules, requirements

News that the Canadian Revenue Agency is seeking more than US$200 million in back taxes and penalties from a Vancouver-based "streaming" firm is an important reminder that Canadian companies are required to have transfer pricing documents prepared at the time of entering into an agreement with an offshore affiliate, says Toronto tax litigation lawyer David J. Rotfleisch.

The Financial Post reports shares of Silver Wheaton Corp. — a streaming firm that provides financing to miners for the right to buy a percentage of their future metal production — dropped 12 per cent after the CRA’s proposal became public.

“Investors were alarmed by the possibility the CRA’s back tax demands could grow much bigger in the months ahead, and that Silver Wheaton could have to pay higher taxes on all its future income,” the newspaper reports. “Silver Wheaton, for its part, fiercely denied that it has ever avoided taxes.”

The CRA probe involves the complex issue of transfer pricing and raises concerns about the company’s entire business model.

Silver Wheaton, reports the Financial Post, is the leading company in the precious metals streaming business, essentially providing up-front financing to mining companies looking to build mines.

“In return, it earns the right to buy silver and gold output from those mines at a heavily discounted price, which it sells for a profit,” says the article. “When Silver Wheaton earns money from mines outside Canada, it reports the income through foreign subsidiaries and does not pay tax on it in Canada.”

The CRA, states the article, thinks this is essentially tax avoidance, and the earnings should be taxed according to transfer pricing rules in Canada’s Income Tax Act.

After the CRA went through Silver Wheaton’s records from 2005 to 2010, it determined there is US$715 million of taxable income that wasn’t taxed, which works out to about US$150 million in unpaid tax, the newspaper reports. “Add in US$57 million of transfer pricing penalties, and the government wants Silver Wheaton to pay more than US$200 million,” says the article.

Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, says the Income Tax Act requires that transactions be done at a fair market value. As a result, the CRA targets transfer pricing cases and applies penalties if it can prove that charges were at less than fair market value.

“There are also annual filing requirements for transfer pricing transactions,” he tells AdvocateDaily.com. “If these intercorporate transactions take place at less than fair market value then profits that would otherwise be taxed in Canada are shuffled to offshore jurisdictions with lower or no taxes.”

So far, the CRA is only looking at the 2005 to 2010 tax years, the Financial Post reports, but the probe could be expanded to the present day.

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