The uncertainty continues in GE Capital |
Transfer pricing alert, December 2, 2010
Please download the PDF version below.
On November 16, 2010, the Federal Court of Appeal (FCA) heard the Crown’s appeal of the Tax Court of Canada (TCC) decision in General Electric Capital Canada Inc. v. The Queen.[1] As described in our Transfer Pricing Alert of January 8, 2010, the TCC’s judgement was a conceptual victory for the Crown as the trial judge considered implicit support when pricing the guarantee fee. Notwithstanding the conceptual victory, however, the TCC judgment vacated all of the Canada Revenue Agency’s (CRA) reassessments against General Electric Capital Canada Inc. (GECCI). In their appeal, the Crown wanted more consideration to be given to implicit support and requested the reassessment of $135 million originally proposed by the CRA for taxation years 1996 to 2000 to be restored.
Recent news
Before the FCA hearing, the Crown brought a motion to introduce eight new documents on appeal.[2] The documents, according to the Crown, contained new evidence to bolster its arguments that implicit support should be considered in pricing the guarantee fee. The Crown argued that the documents also provided evidence on how Standard & Poor’s would rate GECCI’s unguaranteed debt.[3] The FCA dismissed the motion and, as a result, both parties relied on the facts and arguments presented in their respective Memoranda of Fact and Law during the hearing.
At the FCA, the Crown spent a large portion of its time arguing that there was procedural unfairness during the TCC trial as a result of the trial judge’s behaviour. GECCI and one of the FCA justices noted that the Crown had never objected during the trial and, as a result, it appears the Crown was waiting to see the TCC judgment first.
The Crown also discussed errors of law. In particular, the Crown argued that the TCC erred in considering the withdrawal of the guarantee fee in its pricing analysis. Instead, the Crown stated that the appropriate methodology is a comparison of the cost of borrowing with the explicit guarantee versus without the explicit guarantee.
GECCI disagreed and asserted that the Crown’s methodology logically required the TCC to consider the removal of the guarantee.[4] GECCI also argued that the TCC arrived at the correct decision in vacating all reassessments issued by the CRA, but did so using the wrong methodology. Indeed, the TCC misapplied the arm’s length principle by considering the economic benefit that the explicit guarantee conferred upon GECCI rather than the market price of the guarantee.
GECCI further argued that section 247 of the Income Tax Act and the arm’s length principle require taxpayers to make one hypothetical assumption: that the parties to the transaction are not related. That is, it is necessary to sever all non-commercial relationships when pricing intercompany transactions. In applying this methodology to the present case, GECCI asserted that in similar commercial circumstances a third-party guarantor would not consider the implicit support of any related entity. As a result, only the market price of the guarantee, not the economic benefit to GECCI, should be considered.
Next steps
Until the FCA renders its judgment, the TCC decision stands as the current interpretation of the law.
The FCA’s position regarding implicit support and whether it agrees with the methodology applied by the TCC, will provide important guidance for taxpayers. As GECCI notes in its Memorandum of Fact and Law, these are “novel issues of law that are extremely important to multinational corporate taxpayers and to the proper administration of the transfer pricing laws of Canada … GECCI accordingly urges that [the FCA] address these issues and adopt the correct transfer pricing analysis.”
If the FCA agrees with the Crown, the Case will likely be sent back to the TCC, either for reconsideration or a retrial. Alternatively, if the FCA agrees with GECCI it is likely that it will disagree with the methodology used by the TCC. Thus, whatever the outcome, taxpayers should expect the uncertainty surrounding the appropriate methodology of pricing guarantee fees, and intercompany financial transactions in general, to remain for a long time.
Muris Dujsic – Toronto
Inna Golodniuk – Toronto
Nathalie Perron – Montreal
Adam Cooper – Toronto
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.
The uncertainty continues in GE Capital
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