Amendment made after deadline for competent authority relief under treat had expired
The Tax Court allowed the tax authority to amend its reply in a transfer pricing appeal to add an additional argument in support of the amount reassessed, after expiration of the normal income tax reassessment period for the tax years in issue, as well as after both the three-year deadline to apply for competent authority relief under the Canada-UK income tax treaty and the six- or eight-year deadline for adjusting income under the treaty to relieve against double taxation.
The case is: Lehigh Hanson Materials Limited v. His Majesty the King, File No. 2022-1895(IT)G (December 20, 2024)
Summary
As part of a corporate reorganization of a multinational group of which the taxpayer was a member, the taxpayer purchased an interest in a related cooperative entity resident in the Netherlands from the taxpayer’s UK-resident parent company. Part of the consideration paid by the taxpayer included a $1.521 billion* promissory note on which the taxpayer paid and deducted interest.
The Canada Revenue Agency (CRA) reassessed the taxpayer under the transfer pricing rules on the grounds that the value of the cooperative entity interest was less than the purchase price and reduced the principal amount of the promissory note and related interest deductions accordingly. The taxpayer sought Competent Authority (CA) relief under the Canada-UK income tax treaty but ultimately rejected the settlement proposal of the CAs and commenced an appeal.
During the course of the litigation before the Tax Court that followed and after the expiration of all the relevant tax assessment periods, the CRA sought to amend its reply to the taxpayer’s appeal to add an argument that the interest rate on the promissory note was not arm’s length. The taxpayer argued that it would suffer non-compensable prejudice from the amendment because the interest rate issue was being introduced after the deadline for obtaining relief from double taxation under the treaty. The court rejected this argument, however, on the grounds that the CRA’s new argument did not introduce any new double taxation.
The taxpayer has appealed the court’s order allowing the reply to be amended to the Federal Court of Appeal.
KPMG observation
The Tax Court’s conclusion is surprising because the taxpayer’s previous dealings with the CAs were premised on CRA’s sole original basis of reassessment (i.e., the valuation issue), and it is entirely possible that the dealings and outcome with the CAs would have been different if discussions involved both the valuation and the interest rate issues. It is difficult to see how a costs award can compensate for this deprivation.
Read a March 2025 report prepared by the KPMG member firm in Canada
*$=Canadian dollar