Tax Court of Canada

Public Law

Income tax

Foreign income

Mutual agreement procedure pursuant to Tax Convention binding on Minister of National Revenue
Company sold approximately 50 percent of its annual rock salt production to related corporation resident in United States. Company determined it understated its income from sale of rock salt to US corporation, and made voluntary disclosure to Canada Revenue Agency (CRA) that adjusted its income upward for those years. Company was reassessed for its 2002 through 2006 taxation years. Company and related US corporation applied to relevant competent authorities, requesting commensurate reduction in income recognized in United States. Competent authorities reached two agreements which were memorialized in two separate letters, and Canadian Competent Authority (CCA) asked company to accept terms of letters, which it did. Letters each set out terms of settlement reached by CCA and US Competent Authority (USCA) regarding adjustments to be made under art. IX of Canada-United States Tax Convention (Convention). CRA audited company and reassessed to further increase company’s income from sale of rock salt to related US corporation. Company appealed. Appeal allowed. Reassessments were inconsistent with settlement agreements, which were binding on Minister, and were referred back for reconsideration on basis that company’s income from sale of rock salt was to be determined so as to be consistent with agreements. Language used in letters clearly described terms of mutual agreement procedure (MAP) reached by CCA and USCA. There was no doubt reasonable person reading CCA letters would conclude CCA made offer to company to accept terms of CCA’s MAP agreement with USCA and that company accepted that offer. Fact that adjustments to company’s income in reassessments resulted from voluntary disclosure and fact that CRA chose not to audit those adjustments before issuing first reassessments did not alter fact that MAP agreement between CCA and USCA necessarily determined transfer price of relevant transactions reflected in adjustments to company’s income. MAP agreements were binding on Minister as mutual agreements reached under Convention and Minister was not permitted to assess in manner inconsistent with agreements. By reassessing company to increase income attributed to Canada from relevant transactions, Minister breached Canada’s obligations under Convention by failing to give continuing effect to MAP agreements reached with United States under Convention. Effect of provisions of Convention were to be given paramountcy over effect of provisions of Income Tax Act. Subjective intention of Minister was not relevant to whether agreement was entered into by Minister and company.
Sifto Canada Corp. v. R. (2017), 2017 CarswellNat 758, 2017 TCC 37, John R. Owen J. (T.C.C. [General Procedure]).

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