Taxpayer Loses Canadian Transfer Pricing Case

A recent transfer pricing case from the Tax Court of Canada (McKesson Canada Corporation v The Queen) establishes a broad interpretation of the "regular" (non-recharacterization) transfer pricing rule in the Income Tax Act and offers guidance on the adequacy of contemporaneous documentation.  It is therefore an important case for multinationals doing business in Canada.

In McKesson, the Canadian taxpayer entered into a factoring arrangement with its Luxembourg parent in which it sold $460 million of trade receivables to the parent and entered into a five-year agreement to sell future receivables up to a $900 million cap.  As is typical in factoring arrangements, the taxpayer sold its receivables at a discount to face. At issue was the quantum of the discount: the taxpayer used a formula that yielded a 2.206% discount in the year in question but Canada Revenue Agency (CRA) asserted an arm's length rate would have been 1.013%.  (McKesson's traditional loss rate on