Sifto Canada Corp. v. The Queen

Sifto Canada Corp. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-03-10
Neutral citation
2017 TCC 37
File numbers
2014-895(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Dockets: 2014-895(IT)G
2014-896(IT)G
BETWEEN:
SIFTO CANADA CORP. and
SIFTO CANADA CORP.
(AS SUCCESSOR TO SIFTO CANADA INC.),
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 11, 12, 13 and 14, 2016, at Toronto, Ontario
Written Submissions received on August 8, 2016 and September 9, 2016
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Ian MacGregor,
Al-Nawaz Nanji and Ilana Ludwin
Counsel for the Respondent:
Naomi Goldstein,
Alexandra Humphrey, Rishma Bhimji and Alisa Apostle
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals in respect of the issue described in paragraph 3 of the attached Reasons for Judgment are allowed and the reassessments made under the Income Tax Act for the taxation years ending December 31, 2004, November 23, 2005, December 31, 2005 and December 31, 2006 (“taxation years”), notices of which are dated August 1, 2012, are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the income of the Appellants from the sale of rock salt to the North American Salt Company during the taxation years is to be determined so as to be consistent with the Agreements (as defined in paragraph 166 of the attached Reasons for Judgment). The parties have 30 days from the date of the Judgment in these appeals to make submissions of no more than ten pages as to costs.
Signed at Ottawa, Canada, this 10th day of March 2017.
“J.R. Owen”
Owen J.
Citation: 2017 TCC 37
Date: 20170310
Dockets: 2014-895(IT)G
2014-896(IT)G
BETWEEN:
SIFTO CANADA CORP. and
SIFTO CANADA CORP.
(AS SUCCESSOR TO SIFTO CANADA INC.),
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Introduction
[1] These reasons address one issue raised in the appeals by Sifto Canada Corp. [1] (the “Appellant”) from reassessments dated August 1, 2012 (collectively, the “Reassessments”) of its taxation years ending December 31, 2004, November 23, 2005, December 31, 2005 and December 31, 2006 (collectively, the “Taxation Years”). The appeals in respect of this single issue were heard on common evidence. The nature of the issue is such that if I find in favour of the Appellants on the issue, the appeals from the Reassessments must be allowed.
II. The Issue
[2] The appeals raise three issues in respect of the Taxation Years: (1) whether the Minister of National Revenue (the “Minister”) was entitled to issue the Reassessments; if she was, (2) whether the transfer price reflected in the Reassessments was correct and (3) whether the Minister was entitled to assess penalties under subsection 247(3) of the Income Tax Act (the “ITA”).
[3] At the written request of the parties, the Court ordered that these issues be bifurcated pursuant to subsection 171(2) of the ITA and that the first issue be addressed in a separate hearing. The first issue is framed by the parties as follows:
[W]hether the Minister was precluded from issuing the August 1, 2012 reassessments by virtue of any agreement (the existence of which is in dispute), the Canada-United States Tax Convention or the Income Tax Act? [2]
[4] The circumstances giving rise to this issue can be briefly summarized as follows. The Appellant determined that for 2002 to 2006, it had understated its income from the sale of rock salt to a related corporation resident in the United States. To correct the situation, the Appellant made a voluntary disclosure to the Canada Revenue Agency (the “CRA”) that adjusted its income upward for those years. The upward adjustment of income requested in the voluntary disclosure was accepted by the CRA and the Appellant was reassessed accordingly for its 2002 through 2006 taxation years. The Appellant and a related US corporation then applied to their respective competent authorities to request a commensurate reduction in the income recognized in the United States. The competent authorities reached two agreements which were memorialized in two separate letters and the Canadian Competent Authority asked the Appellant to accept the terms of these letters, which it did. The CRA subsequently audited the Appellant and reassessed the Taxation Years to further increase the income of the Appellant from the sale of rock salt to the related United States corporation.
III. The Facts
A. The Statement of Agreed Facts (Partial)
[5] At the commencement of the hearing, the parties tendered a Statement of Agreed Facts (Partial) (the “SAF”) and a Joint Book of Documents consisting of two spiral-bound volumes (collectively, the “JBD”). The facts recited in the SAF are set out in Appendix A to these reasons.
[6] The JBD included only the documents cited in the SAF. The SAF states:
The parties to this proceeding admit, for the purposes of this proceeding only, the truth of the following facts and to [sic] the authenticity of the documents referred to in the Statement of Agreed Facts (Partial) as that term is defined in the Tax Court of Canada Rules (General Procedure).
The parties do not admit the truth of the contents of the documents referred to in the Statement of Agreed Facts (Partial) and may challenge the accuracy of any statements contained in those documents.
B. The Witnesses
[7] At the commencement of the hearing, the Appellant tendered an expert report addressing two questions. I rejected the expert report on the grounds that the content of the report was neither relevant nor necessary. [3] The Appellant did not call any witnesses.
[8] The Respondent called four witnesses. The first witness was Mr. Timothy R. Mertz, who is the vice-president of tax at Compass Minerals International Inc. (“Compass”), the indirect parent of the Appellant and a publicly traded U.S. corporation. [4]
[9] The other three witnesses were Mr. Daniel Quinn, who is a manager in a Mutual Agreement Procedure – Advance Pricing Arrangements Section of the Competent Authority Services Division (the “CASD”) of the CRA; Mr. Shaun Harkin, who is a senior international auditor in a Mutual Agreement Procedure – Advance Pricing Arrangements Section of the CASD; and, Mr. Darryl Boychuk, who is the manager of the Mutual Agreement Procedure – Technical Cases Section of the CASD. I will sometimes refer to these three witnesses as the “CRA witnesses”.
[10] Mr. Quinn and Mr. Harkin had direct knowledge of the Appellant’s file with the CASD and testified accordingly. Mr. Boychuk had no such knowledge and only testified as to the practices and procedures of his group within the CASD.
[11] Shortly after Mr. Quinn started to testify, the Appellant’s counsel objected to the testimony of the CRA witnesses on the basis that any evidence of the subjective intent of the CASD/CRA or its employees in respect of its dealings with the United States Internal Revenue Service (the “IRS”) and with the Appellant was not relevant to the determination of whether agreements existed and, if so, to the interpretation of those agreements. Counsel suggested that for this reason the CRA witnesses should not be allowed to testify.
[12] I allowed the CRA witnesses to testify on the basis that I could not determine materiality and relevance before hearing the evidence of the CRA witnesses and that I would address in the context of my analysis of the applicable law any issue with respect to the materiality and relevance of any permitted testimony describing subjective intent. I also advised the Appellant’s counsel that he was free to object to specific testimony as he saw fit.
[13] The Appellant’s counsel objected to Mr. Boychuk testifying on the grounds that he had no personal knowledge of the Appellant’s file with the CASD and that the practices and procedures of the Mutual Agreement Procedure – Technical Cases Section of the CASD were not material or relevant to the issue as that group had no involvement in the Appellant’s file.
[14] I allowed Mr. Boychuk to testify because the issue defined by the parties involves, among other things, whether the Minister and the Appellant entered into agreements, and Mr. Boychuk’s testimony could conceivably provide further context to the circumstances described by the first two CRA witnesses. The Appellant’s counsel renewed his objection on several occasions during Mr. Boychuk’s testimony. I address the import of Mr. Boychuk’s testimony in Section: IV. Analysis.
C. Summary of the Facts
(1) Background
[15] The Appellant is a Canadian corporation resident in Canada and is an indirect subsidiary of Compass. The Appellant owns and operates a salt mine in Goderich, Ontario.
[16] During the Taxation Years, the Appellant sold approximately 50% of its annual rock salt production to North American Salt Company (“NASC”), a United States corporation resident in the United States for the purposes of the Canada-United States Tax Convention (the “Convention”). At the time of the rock salt sales, NASC was an indirect subsidiary of Compass with the result that, for the purposes of Article IX of the Convention, the Appellant and Compass were related under paragraph (2) of Article IX of the Convention.
[17] The sales of rock salt by the Appellant to NASC were reported by the Appellant in its T2 income tax returns filed for the Taxation Years. Compass reported the purchases of the salt by NASC in its consolidated U.S. income tax returns filed for the period covered by the Taxation Years.
(2) The Voluntary Disclosure
[18] In 2006, Mr. Gary Gose was hired by Compass as Director, International Tax, a position subordinate to that of Mr. Mertz. [5] Mr. Gose and others raised concerns regarding the transfer price of the rock salt sold by the Appellant to NASC. It appears this price was based on a transfer pricing report and that the methodologies used in that report were called into question. [6] At some point after 2006, KPMG prepared a new transfer pricing report (the “2002-2006 TPR”) that addressed the Appellant’s sales of rock salt to NASC for 2002 through 2006. Mr. Mertz referred to the 2002-2006 TPR as the 2002 to 2006 report. [7]
[19] Because of the 2002-2006 TPR, the Appellant and NASC reached the conclusion that the transfer price used to determine the Appellant’s income from its sales of rock salt to NASC during its taxation years ending in 2002 through 2006 was less than an arm’s length price.
[20] By letter dated April 11 2007, the Appellant made a no-names application to the CRA’s voluntary disclosure program (the “VDP”). The CRA acknowledged this application in a letter dated April 19, 2007. The Appellant subsequently made a named application to the VDP by letter dated August 13, 2007 with an enclosure (the “VDP Application”). [8]
[21] In the VDP Application, the Appellant disclosed an accounting error of $2,470,272 for its 2006 taxation year and the following additional amounts of income in respect of its sales of rock salt to NASC for its taxation years ending in 2002 through 2006 (the “VDP Period”):
Taxation year ended
Additional income disclosed
December 31, 2002
$1,899,577
December 31, 2003
$4,206,408
December 31, 2004
$4,306,553
November 23, 2005 and December 31, 2005 combined
$841,745
December 31, 2006
$2,082,036
[22] The enclosure with the VDP Application letter is a 51-page document with the following on the cover page: “Transfer Pricing Sifto Canada Inc. Voluntary Disclosure Program Submission Fiscal Years 2002 to 2006” (the “VDP Document”). Section 2.3 of the VDP Document states:
There is essentially only one transaction to be included under the VDP: during the VDP period, Sifto acted as a simple extractor of raw material (i.e. salt) from its Goderich salt mine and sold that salt to NASC. The issue is whether Sifto sold that salt to NASC at an arm’s length price, and if not, how much the price of the salt must be adjusted in order to reflect arm’s length pricing.
[23] Sections 3 to 9 of the VDP Document and its three appendices (approximately 39 pages in total) address the arm’s length price, section 10 addresses penalties, section 11 addresses the accounting error for 2006, section 12 describes the requirements for a voluntary disclosure, and section 14 is titled “Conclusion”. Section 13 describes the relief requested as follows:
Sifto requests the following:
1 The CRA accept the proposed adjustments to its income in each of the years under the VDP period.
2 The CRA waive or eliminate all applicable penalties in respect of the transactions discussed above.
[24] As part of the VDP process, the Appellant filed amended T2 income tax returns for its taxation years ending in the VDP Period (the “VDP Taxation Years”) to reflect the adjustments to income set out in the VDP Application.
[25] By letter dated March 13, 2008, the Minister advised the Appellant that the VDP Application had been accepted and that reassessments would be issued for the VDP Taxation Years to reflect the additional income disclosed in the VDP Application.
[26] On April 21 and 22, 2008, the Minister issued notices of reassessment to the Appellant for the VDP Taxation Years (the “2008 Reassessments”). The 2008 Reassessments reflected the additional income disclosed by the Appellant in the VDP Application and reported by the Appellant in the amended T2 income tax returns filed for the VDP Taxation Years. The CRA did not audit the Appellant prior to issuing the 2008 Reassessments.
(3) The Application to the Canadian Competent Authority
[27] Because of the 2008 Reassessments, the income resulting from the adjustment to the transfer price of the rock salt sold by the Appellant to NASC during the VDP Period was taxed twice: once in Canada and once in the United States. This incidence of economic double taxation could only be eliminated by a commensurate increase in the cost to NASC for U.S. tax purposes of the salt sold by the Appellant to NASC during the VDP Period. Because NASC was part of a consolidated group for U.S. income tax purposes, the resulting downward adjustment to income would be reflected in the consolidated income tax return of Compass. As a result, Compass was the relevant U.S. taxpayer.
[28] The Appellant applied to the Canadian Competent Authority (the “CCA”) and Compass applied to the United States Competent Authority (the “USCA”) for relief from double taxation under Articles IX and XXVI of the Convention. The IRS is the USCA [9] and the Minister is the CCA. At the time of the applications, Ms. Patricia Spice was the Minister’s authorized representative. [10]
[29] The Appellant’s application to the CCA (the “CCA Application”) [11] was made by letter dated April 30, 2008. A copy of the VDP Document was enclosed with the CCA Application. The CCA Application stated, in part:
We are writing to request Competent Authority assistance on behalf of our client, Sifto Canada Inc. (“Sifto”), regarding Notices of Reassessment mailed April 21, 2008 for Sifto’s taxation year ended December 31, 2006, and April 22, 2008 for Sifto’s taxation years ended December 31, 2002, 2003, and 2004, and November 23, 2005. In accordance with paragraph 19 of Information Circular IC71-17R5 (“the IC”), we have provided the relevant information of Sifto in italics below:
. . .
q) the taxpayer’s views on any possible bases on which to resolve the issues.
As a result of the Notices of Reassessment mentioned above, Sifto is requesting the Canadian Competent Authority to request the US Competent Authority to allow a corresponding deduction in the taxable income of NASC in order to prevent double taxation. [12]
[Italics in original.]
[30] At the time of the application, Mr. Quinn was a manager in the CASD. He assigned the file to Mr. David Dougherty, who was an analyst in the CASD. After Mr. Dougherty left the CASD around February 16, 2009, [13] the file was assigned to Mr. Harkin, who was also an analyst in the CASD.
[31] Mr. Quinn described his role with respect to the Appellant’s CCA file and the role of the CCA in general as follows:
My role was to oversee the decision–making, to sign letters, to sit in on conversations with the taxpayer and with the IRS, and just to be involved on a regular basis as to the progress of the file. [14]
. . .
Competent Authority endeavours to resolve issues of tax contrary to our Tax Treaties, so, for example, double taxation. We engage with other tax authorities under the Mutual Agreement Procedure Article and endeavour to resolve double tax with other tax authorities on behalf of taxpayers. [15]
[32] Mr. Quinn explained that the CCA would become involved with a taxpayer’s file once the taxpayer initiated a mutual agreement procedure (“MAP”) request under one of Canada’s bilateral income tax conventions. Mr. Quinn confirmed that the CCA Application was made under Article XXVI of the Convention. He described in general terms the steps taken by the CASD in response to a MAP request from a taxpayer:
When we receive a MAP request, we log it in our inventory system, and it gets assigned to a group, and then it gets assigned to an analyst. And that analyst then determines if there’s tax contrary to the Convention and initiates work to acknowledge the request to the taxpayer and engage the other tax authority and work towards resolving the issue. [16]
[33] Mr. Quinn described the process with the competent authority of the other country in the following exchange with Respondent’s counsel:
Q. Mr. Quinn, continuing on, can you tell us how Competent Authority cases are discussed between countries?
A. Yes. They’re discussed by telephone, by letter, and in-person meetings. Regular meetings are held with tax authorities that we have a lot of work with. So, with the U.S., we would meet the IRS on a regular basis, two to three times a year. And, besides that, we would converse with them via telephone on a regular basis.
Q. And who is involved in these discussions?
A. For Sifto or in general?
Q. Generally, and then for Sifto.
A. Well, generally, the analyst that has the case would be involved via telephone. If there’s a meeting, then both the analyst and myself, as manager, would normally be present at the meeting. Sometimes I would be involved in conference calls. And, on the U.S. side, it would be the same. It would be the analyst and manager involved in meetings, and telephone conversations would normally just be between the analysts.
Q. And are taxpayers involved in these discussions?
A. Taxpayers are not directly involved. They are involved to the extent that they are to provide information, as they would in their initial request. And if the tax authorities have any additional requests for information, then, again, they’re obligated to provide that to both tax authorities. And they are kept informed as to the progress of the discussions.
Q. What happens if the Competent Authorities come to an agreement?
A. If we come to an agreement, then we would generally memorialize that agreement in a letter or an exchange of letters. We would advise the taxpayer of the agreement, the terms of the agreement. Normally we would do that verbally, and we would also normally follow that up with a letter outlining what the agreement is. And then we would notify our local offices. If there’s an objection in play, then we would notify our appeals office, and we would also notify our Tax Services Office, our Audit division normally.
[34] Compass’s application to the USCA (the “USCA Application”) [17] was made by letter dated May 13, 2008. Various documents were enclosed with the USCA Application, including copies of the 2008 Reassessments and a copy of the VDP Document.
[35] By letter dated August 12, 2008 received by the CASD on August 29, 2008, [18] Mr. Barry Shott asked Ms. Spice to provide “us with the details of your position concerning the adjustments so that we can evaluate the issue for purposes of considering relief from economic double taxation”. At the time, Mr. Shott was the United States Competent Authority, Deputy Commissioner (International), Large and Mid-size Business. The letter was on the letterhead of the Department of the Treasury, IRS.
[36] In cross-examination, Mr. Quinn conceded that the CCA knew that the IRS would conduct an evaluation. However, he avoided the suggestion that the evaluation was of Canada’s position on the transfer price of the rock salt sold by the Appellant to NASC during the VDP Period. He instead suggested that the USCA needed to confirm that the Appellant had been reassessed by the CRA as indicated in Compass’s application to the USCA. [19]
[37] In two letters from Ms. Spice to Mr. Shott dated November 20, 2008 and February 16, 2009 [20] respectively, Ms. Spice describes in general terms the circumstances giving rise to the Appellant’s request for competent authority relief under the MAP provision of the Convention:
The request arose as a result of Sifto’s acceptance into Canada’s voluntary disclosure program. The adjustment relates to Sifto’s intercompany transactions with a related party, the North American Salt Company, located in Overland Park, Kansas, for the taxation years ending 2002 through to 2006.
[38] Ms. Spice then states:
[November 20, 2008 letter]
We will provide you with details of our position concerning these adjustments in the near future, for purposes of providing correlative relief from economic double taxation.
[February 16, 2009 letter]
. . . Please find attached our position paper regarding the CRA reassessments resulting from the voluntary disclosure.
Once you have had the opportunity to review this position paper, please contact Dan Quinn, who may be reached at . . . .
[39] Mr. Dougherty wrote the letter dated November 20, 2008 and Mr. Quinn reviewed that letter. [21] Mr. Quinn wrote the letter dated February 16, 2009 and Mr. Dougherty wrote the enclosed position paper, [22] which described the position taken by the Appellant in the VDP Document.
[40] Mr. Quinn testified that the CRA did not audit the Appellant regarding the transfer price and that the position paper was “basically a summary of the taxpayer’s voluntary disclosure” and was “based on the taxpayer’s voluntary disclosure”. [23] Mr. Harkin testified that the position paper was not “typical” and that it “puts forth the taxpayer’s position for consideration to the IRS”. [24] Mr. Harkin explained:
A typical Competent Authority position would have normally come through the audit background and have extensive analysis done by its CRA audit. And the position paper would be more, “This is our view,” meaning in our view, in Competent Authority’s view. “This is what the adjustment should be.” [25]
[41] Mr. Harkin met with the USCA on October 22, 2009 and was prepared to present and explain the position paper at that meeting. [26] However, the USCA initiated a discussion on the nature of voluntary disclosures and taxpayer-initiated adjustments, and as a result the CCA “never really discussed the details of the position paper” with the USCA. [27] The CCA did not express an opinion on taxpayer-initiated adjustments at the meeting. [28] The meeting concluded with an indication that the USCA would get back to the CCA regarding how taxpayer‑initiated adjustments should be handled. [29]
[42] The USCA did get back to the CCA on May 11, 2010 when Ms. Indu Subbiah, an analyst with the USCA [30] , called Mr. Harkin to advise that the USCA would provide relief from double taxation, subject to further evaluation of the comparable set. [31] Mr. Harkin was asked about the extent of the negotiations with the USCA:
Q. What was the extent of the negotiations that you had with the IRS regarding Sifto’s MAP request?
A. There were no negotiations. I did use the word “negotiated” in that entry, in the CATS entry, but it is -- in Competent Authority, typically any time we meet with another Competent Authority, we consider it a negotiation. We just use that term, “negotiation,” but a better word -- often we meet with them and don’t negotiate, and we might just be talking about status of the files. Or in some situations, like this situation, we’re just presenting a position. So, in this file, there was no real negotiation at all. [32]
[43] The USCA subsequently agreed with Canada’s adjustments to the Appellant’s income for all but the 2002 taxation year. On November 10, 2010, Ms. Spice wrote to Mr. Shott’s successor, Mr. Michael Danilack, describing the terms of the settlement. [33] The letter states, in part:
This letter is to confirm the settlement recently negotiated by our representatives on the above-mentioned case.
The double taxation arose from the Canada Revenue Agency (“CRA”) initiated adjustments relating to the sale of tangible goods by Sifto to its U.S. parent company, North American Salt Company (“NASC”) for the taxation years 2002 through 2006.
The adjustments made by the CRA were as follows:
1) Adjustment to Sifto’s operating income to obtain a return on total cost equal to the low point of the weighted average observations obtained from the comparable company data:
. . .
Under the terms of the competent authority settlement:
The Internal Revenue Service (“IRS”) will grant correlative relief by allowing NASC to decrease its income for the taxation years 2003 through 2006 as follows:
. . .
2. The IRS has allowed NASC to repay US$11,090,756 to Sifto free of any U.S. withholding taxes . . . .
3. It is understood that this settlement is not intended to create a precedent for any subsequent years involving these taxpayers or for any other case.
We now consider this case closed and will advise Sifto of the terms of this settlement. . . .
[44] By letter dated January 25, 2011 received by the CASD on February 11, 2011, Mr. Danilack responded to Ms. Spice as follows: [34]
We are writing in furtherance of the mutual agreement procedure concerning Compass Minerals International, Inc. and its Canadian subsidiary, Sifto Canada Inc. As U.S. Competent Authority, I hereby confirm, on behalf of the U.S. Internal Revenue Service, the terms of the agreement memorialized by your letter of November 23 [sic], 2010. [35] This exchange of letters constitutes a mutual agreement under Article 26 of the U.S.-Canada Income Tax Treaty.
We are notifying Compass Minerals International, Inc. of our determination and are providing our Natural Resources and Construction Industry Director instructions for implementing our agreement. We now consider this case closed.
[45] On the same day, Mr. Danilack wrote a letter to Compass stating in the second paragraph:
A mutual agreement has been reached regarding the transfer price of the transaction between Compass and Sifto Canada Inc. (“Sifto”). As a result of our discussions, the US Competent Authority has agreed to provide full correlative relief in the amounts shown in the table below. [36]
[46] Mr. Quinn testified that the CCA viewed the exchange of the November 10, 2010 and January 25, 2011 letters as a mutual agreement under Article XXVI of the Convention. [37]
[47] Ms. Spice advised the Appellant’s counsel of the CCA agreement with the USCA by letter dated November 10, 2010. [38] The letter describes the terms of the competent authority settlement as described in the November 10, 2010 letter to Mr. Danilack and then states:
We would appreciate your advising this office within 30 days of the date of this letter whether Sifto is prepared to accept the terms of the competent authority settlement as outlined above. Once we receive your acceptance, we will instruct our Toronto West Tax Services Office to adjust your tax returns in accordance with this settlement.
[48] Mr. Quinn testified that Mr. Harkin wrote the letter, that this paragraph was “standard wording in our closing letters” and that it was “actually wrong”. [39] He also stated that he reviewed this letter before it was sent to the Appellant’s counsel. [40]
[49] The Appellant responded to this letter by a letter dated December 1, 2010, [41] with which was enclosed a “signed acceptance of the terms contained in the letter from your office dated November 10, 2010 for Sifto Canada Corp. (formerly, Sifto Canada Inc.)”. The enclosure is a copy of Ms. Spice’s November 10, 2010 letter to the Appellant’s counsel with “agreed & accepted by” written in capitals below Ms. Spice’s title at the end of letter. Below that statement is the signature of Mr. Rodney L. Underdown and the title “vice president & chief financial officer”.
[50] On December 2, 2010 at 1:56 p.m., Mr. Craig Reeder of KPMG sent an e-mail to Mr. Quinn which reads:
We understand that Shaun is out of the office this week and thought we would also provide you with a copy of the acceptance of the Competent Authority settlement by Sifto Canada Corp. Please confirm that you have received this document and are satisfied with its contents as acceptance of the Competent Authority settlement by Sifto Canada Corp. [42]
[51] On the same day at 1:59 p.m., Mr. Quinn responded to this email as follows:
Received in good order Craig, and it is exactly what we need. Thank you. [43]
[52] In cross-examination, Mr. Quinn acknowledged that he did not advise the Appellant that there was no agreement between the Appellant and the CCA. [44]
[53] The CASD advised Mr. Kamlesh Kumar, the Assistant Director, Audit at the Toronto West Tax Services Office, and Mr. Arun Khanna, Chief of Appeals at the Toronto West Tax Services Office, of the agreement with the IRS by memoranda dated December 17, 2010 from Mr. Harkin. [45] The memoranda were each signed by Mr. Quinn.
[54] Enclosed with the memorandum to Mr. Kumar was a copy of an “internal decision summary” and of Ms. Spice’s November 10, 2010 letter to the Appellant’s counsel with Mr. Underdown’s acceptance at the end. The last paragraph of the internal decision summary states under the heading “RATIONALE”:
After numerous negotiations, the IRS agreed to the adjustments presented in the voluntary disclosure. The IRS agreed the adjustments conform to the arm’s length principle. The adjustments adjust Sifto’s operating income to obtain a return on total cost equal to the low point of the weighted average observations obtained from the comparable company data.
[55] The first MAP agreement reached by the CCA and the USCA did not address the 2002 fiscal period of the Appellant because the USCA took the position that NASC’s MAP request was made too late to apply to that year. [46] However, the USCA reconsidered this position and a second MAP agreement that included 2002 was reached in April 2011. [47]
[56] A letter from Ms. Spice’s successor, Mr. André Lamarche, [48] to Mr. Danilack, dated April 7, 2011, [49] states in the introductory paragraph:
This letter is to confirm the settlement recently negotiated by our representatives on the above-mentioned case and is subsequent to our letter of November 10, 2010 as a result of the Internal Revenue Service (“IRS”) now granting correlative relief with respect to the 2002 year.
[57] The letter goes on to describe the details of the settlement and concludes:
We now consider this case closed and will advise Sifto of the terms of this settlement.
[58] Mr. Quinn testified that Mr. Harkin wrote the April 7, 2011 letter to the IRS, that he himself reviewed the letter, and that Mr. Lamarche signed the letter. [50] He described the letter as a “standard closing letter”. [51]
[59] Mr. Lamarche advised the Appellant’s counsel of the second MAP agreement by letter dated April 7, 2011, [52] and the Appellant accepted the terms of the agreement in the same manner as the first settlement, by a letter to the attention of Mr. Lamarche dated April 19, 2011. [53]
[60] The CASD advised Mr. Khanna and Mr. Paul Kohut, International Tax Auditor with the Toronto West Tax Services Office, of the second MAP agreement by memoranda dated April 7, 2011 from Mr. Harkin but signed by Mr. Quinn. The memorandum to Mr. Khanna included a copy of the CASD’s “internal decision summary” and a copy of the letter sent by Mr. Lamarche to the Appellant’s counsel. The internal decision summary included the same last paragraph under the heading “RATIONALE” as that reproduced above.
[61] Mr. Quinn described these memoranda and attachments as follows:
These are final letters, memos from Competent Authority to our Toronto West TSO and to Toronto West Appeals Division, and they summarize the result of our discussions with the IRS. And there are some letters attached. The final letters that we discussed already are attached. [54]
[62] Mr. Quinn described the paragraph following the heading RATIONALE as “[s]tandard wording in our decision summaries”. [55] Mr. Quinn also stated repeatedly that at that time a MAP negotiation following a voluntary disclosure was unique. [56] With respect to the reference in the paragraph to an arm’s length price, the following exchange with the Respondent’s counsel took place:
Q. And the next spot I would like to take you to is the decision summary that we were just speaking about.
Did the Canadian Competent Authority have a view on the arm’s-length transfer price?
A. No, we didn’t. We had no idea whether or not the transfer price was arm’s length, because we're not mandated to audit, and there was no audit in this case that existed. The Mutual Agreement was that the IRS would provide relief for the adjustments that were initiated by the taxpayer and CRA processed under our voluntary disclosure program. But in terms of the transfer price, we didn’t have any view on it. We simply presented the adjustments to the IRS for relief from double taxation. [57]
(4) The Transfer Pricing Audit of the Appellant
[63] A chain of e-mails dated between May 20 and 25, 2010 [58] indicates that as of May 20, 2010, Mr. Quinn and Mr. Harkin were aware of a possible transfer pricing audit of the Appellant’s taxation years ending in 2004 through 2008 (the “Audit Taxation Years”).
[64] In an e-mail from Mr. Quinn to Ms. Tiina Wainman sent May 25, 2010 at 2:50 p.m., [59] Mr. Quinn states:
I just want to clarify that the taxpayer’s request to competent authority was inclusive of the 2002 through 2006 taxation years. The taxpayer has been reassessed by CRA for all of these years, and are [sic] in a double tax situation. We presented the adjustments to the IRS for their consideration to provide relief. If you are proceeding with an audit which includes 2004 through 2006 we will advise the IRS accordingly. We don’t know what the IRS reaction will be (ie. we don’t know if the IRS will terminate discussions for some years or all years and we don’t know if they will accept the same case a second time under the MAP article, should CRA raise more adjustments). We wanted you to be aware of the increased risk to the taxpayer of being subject to double tax for a longer period of time (the time it takes to finalize your audit) and potentially permanently (depending on the IRS reaction).
[65] Mr. Harkin testified that he had a telephone conversation with Ms. Indu Subbiah on May 28, 2010 during which he advised her of the taxation years of the Appellant that would be under audit. [60] Mr. Harkin had a further telephone conversation with Ms. Subbiah on June 7, 2010. He described the content of the conversation as follows:
This is a follow-up phone call with Indu approximately 10 days after the prior one, after we had informed them of the years that would be under audit.
And Indu indicated that we should proceed, basically, with resolving the double tax. She was concerned that the arbitration date was getting close, and she was also concerned with the fact that the audit could be prolonged, and the taxpayer would be facing double tax for a prolonged period of time.
She also indicated that, if another MAP were to come in as a result of the CRA audit, that the IRS would not be receptive to another transfer pricing method. They would more or less -- their transfer pricing method would be what was presented in the taxpayer’s voluntary disclosure. [61]
. . .
Well, in the subsequent phone call with Indu, she indicated that, if a second MAP request were to come in, the transfer pricing method that they would put forth would be the method that’s described in the voluntary disclosure. I guess they didn’t comment directly on whether they would accept a second case, but they said that, if it were to come in, that would be their position, their transfer pricing method. [62]
[66] In cross-examination, Mr. Quinn acknowledged that further adjustments to the transfer price because of an audit could have placed the Appellant at risk for permanent double taxation if the USCA did not agree to a second MAP agreement. [63] Mr. Quinn was asked about the CCA’s specific actions regarding the pending audit:
Q. . . . What do you do at that point? Did you consider a number of options to put your current review in abeyance?
A. What we did is we consulted the IRS first and advised them of the situation. Putting the request in abeyance wasn’t a viable option because this file was becoming eligible for arbitration as of December 2010, and they could have invoked arbitration at that time. And there was no guarantee that the audit would be finished at that time. So that’s the problem with involving Audit when we have a current case in Competent Authority. [64]
. . .
Q. I appreciate the file was resolved. But did you ever advise the IRS that you wanted to hold off further discussions?
A. We didn’t advise them that we wanted to. What we advised them was our auditors were auditing those years, and we wanted to know what they felt was the best way to proceed, given that fact, given the fact that there would potentially be further reassessments. And their view was they wanted to close the case as it was. [65]
. . .
Q. Did anyone from Canada ever pick up the phone and say to the IRS, “We have to hold off this file. That’s what Canada wants to do. We have to hold it off”?
A. No. [66]
. . .
Q. All right. 2011. So let’s go back to 2010. Did you ever get confirmation from the IRS that they would accept another MAP at this stage?
A. No. [67]
[67] In an e-mail from Ms. Wainman to Mr. Quinn sent on December 17, 2010 at 10:39 a.m., Ms. Wainman states:
We had a bit of a frantic call from the auditor on the file I had discussed with you several months ago. [It’s] the file which involved the voluntary disclosure - my recollection is that, although CA was about to embark on a discussion with the IRS to resolve the double tax issue, you were going to hold off as you became aware of the ongoing audit, which included some of the VD years. I believe CA was going to advise the IRS of that decision. [68]
[68] Mr. Quinn responded at 10:43 a.m. as follows:
Yes, we advised the IRS of the ongoing audit, and the potential for further adjustments. However, I recall that the IRS had already agreed to provide full relief, and they didn’t retract that when we informed them of the audit, and potential additional adjustments. [69]
[69] Mr. Quinn responded again at 10:48 a.m. as follows:
And I just (a second ago) signed the closing memo to the field, directed to Kamlesh Kumar (ADA)… It summarizes situation. [70]
[70] A subsequent chain of e-mails between Ms. Spice and Mr. Harkin dated May 31, 2011 [71] indicates that Ms. Spice was concerned about the audit of the Audit Taxation Years following the MAP agreement. In the first e-mail in the chain, from Mr. Harkin to Ms. Spice, sent on May 31, 2011 at 11:00 a.m., Mr. Harkin states:
It was at the May 28/10 discussions where I advised the IRS of the possible intention of CRA auditing the 2004-08 years. The possibility of a CRA audit had just recently been brought to our attention prior the May 28 phone call. This was late in the negotiation process where an agreement was imminent. The IRS felt that since the t/p is currently facing double tax we should endeavor to resolve the case.