At the risk of stating the obvious, this year has been one of significant change and disruption – clearly as a consequence of the COVID-19 pandemic, but this is not the only factor at play. Amidst the current environment, it is hard to imagine a meaningful conversation on tax and tax controversy while, at least in Canada, many of us are at home practicing social distancing and adjusting to the ‘new normal’. However, preparedness is key. Alongside the advent of the pandemic a number of other developments will come to play, and these together will shape the tax controversy landscape in the coming years. Now is the time to identify emerging trends and consider what tax controversy will hold in the future.

It will be years before we understand the full effect of the pandemic on business and society, but certainly in the immediate term, interventions and public health measures to reduce the spread of COVID-19 and save lives have caused a massive disruption to business, financial and public infrastructure, and precipitated a focus on preserving livelihoods, as governments and businesses struggle to adapt to the rapidly changing environment. Government efforts are more overt and marked by unprecedented expenditures on measures such as wage subsidies to assist businesses in retaining their employees, changes to regulations to facilitate the delivery of essential goods and services, and support payments to assist those who would have otherwise been at risk. Business response is not as easily discernible, but no less significant.


Marc Levstein, PwC Canada’s National Value Chain Transformation (VCT) leader, observed that the status quo is hardly the norm. For some, the early adapters, business models are evolving rapidly. MNEs in Canada are dealing with changes in the organization of their supply chains, finding new ways to engage consumers and rationalizing to deal with cash constraints. For these companies, intercompany arrangements are transforming in real time and placing tremendous pressure on tax departments to ensure their transfer pricing models remain relevant and documentation reflects the intent of the parties at the time. Others may be faced with the very real circumstance that they are unable to respond and unable to perform their normal business activities. Here tax departments will have to grapple with whether the terms of intercompany arrangements have even been met and determine the proper transfer pricing result in terms of allocation of profits, losses and extraordinary costs. Some have not been affected, or have even flourished, and here the question will be whether the local entity has undertaken activities and borne risk and should be entitled to a portion of any additional profits

The tax authorities operate primarily on an ex-post basis, examining transactions and transfer pricing results after tax returns have been filed and so, not surprisingly, have not provided much guidance. Some, including the CRA, have declared that where a taxpayer has received government support payments, transfer pricing policies should consider a recovery of, and even a return to, those payments. A tax controversy professional may foresee a real divergence in expectations and consequently disputes and ultimately double taxation – particularly if multiple tax authorities approach the issue from different perspectives. It may simply be that some tax authorities consider this a period of aberration, with business ‘back to normal’ in the future, and approach it with a view to recovering the current extensive government expenditures. However, transfer pricing is a fact-based exercise that considers the functions performed, assets employed and risks borne. Where these factors change, ‘back to normal’ may not be appropriate. What if activities were not performed because employees could not access their offices, could not enter manufacturing facilities or could not interact with consumers? What if business models have changed and the local entity’s profile (in terms of risk) has changed?

Tax authorities' views may be a bit myopic - at least in Canada, it would not be unreasonable to expect that government support in the form of wage subsidies contemplated the notion that businesses were not fully operational and would not be able to retain employees without financial support. There is a broader policy question here: who should ultimately bear the cost of the pandemic, and how? In the absence of clear and comprehensive guidance, this may simply unfold in the transfer pricing fora between governments attempting to resolve double taxation. Bear in mind that, even in the best of circumstances, audit examinations are undertaken after-the-fact and controversy can take years to resolve. The best advice to tax departments is to be proactive, remain in touch with the operations and make every effort to document the business circumstances, the intent of the parties and their expectations, in order to mitigate against the use of hindsight years later, when today’s sentiments and sense of uncertainty have faded.


In response to COVID-19, the CRA initially halted all audit activities, suspended collections and extended filing and payment deadlines directing all resources to essential services and supporting those in need. CRA officials should be commended for their laser focus on the wellbeing of Canadians. With the resumption of normal business activities, CRA auditors have been unable to attend their own offices or the premises of taxpayers, issue paper-based queries or examine records – essentially, they have been unable to conduct audits in a conventional fashion. The CRA was already on a path to modernization, for example in its use of risk assessment and algorithms in the selection of taxpayers for audit and electronic portals for the issuance of queries and communication. However, the pandemic has launched the CRA even further into the digital age and forced it to embrace technology at an unprecedented pace.

Today, auditors and other CRA personnel are readily communicating with taxpayers by cell phone and email, something that was previously unheard of. Globally, for matters such as competent authority discussions involving Mutual Agreement Procedures and Advance Pricing Arrangements and participation in the OECD’s plan of work, the CRA has also transitioned away from in-person meetings to teleconferencing and a video-conferencing solution is expected in the fall. This is allowing them to ‘meet’ more frequently and advance issues at a steadier pace. As technology percolates into CRA practices and procedures, we can expect it to extend to audit methodologies and techniques. As a first step in the audit processes, CRA auditors already extract the electronic records of taxpayers and in the transfer pricing context we see an increasing number of audit queries focusing on transactional data, segmented financial statements and system profits. With less in-person and on-site interaction, it would not be unreasonable to expect auditors to rely more heavily on available electronic data.

Junaid Mirza, PwC Canada’s Transfer Pricing Technology leader, observed that the tax function is often one of the biggest consumers of an MNE’s financial data, but is typically not involved in the design, structure and storage of this data. As a result, the tax department can spend an inordinate amount of time manually collecting and preparing data; or reconciling data after the fact during a CRA audit. More recently, MNEs have been working with him to ensure that their chart of accounts and ERP systems are ‘tax smart’ and tax data is linked directly to source data.

Looking to the future, considering the dual trends of greater reliance on electronic tools and source data and more dispersed teams in the case of both taxpayer and tax auditor, the integration of technology and the ability to link tax reporting to source data could be a powerful factor in managing tax disputes.


While COVID-19 has slowed down government processes and disrupted the ordinary course of business, the Federal Court of Appeal (FCA) nonetheless recently issued a decision in Her Majesty the Queen v. Cameco Corporation (2020 FCA 112). In short, Cameco is one of the world’s largest uranium producers and reorganized its operations into three areas: the operation of the mines; the purchase and sale of uranium; and, marketing to consumers. As a result of the reorganization and an unexpected increase in prices, the purchasing and selling entity earned substantial profits. The Minister argued that the Canadian entity (responsible for the operations of the mines) undertook much of the value-added functions and sought to apply the transfer pricing rules such that the Canadian entity would realize the (excess) profit. In addition, they argued that arm’s-length parties would not have entered into the arrangement and sought to apply the recharacterization provisions to disregard the transaction. The FCA decided in favor of Cameco.

The decisions (the FCA and the Tax Court of Canada) provide important guidance on the application of the transfer pricing rules in Canada, they also create some unique considerations regarding the application of the OECD’s transfer pricing guidance in the context of the Base Erosion and Profit Shifting initiative.

  • Canadian tax law does not distinguish between activities carried on (by a company) using its employees and activities carried on using independent contractors. As such, the provision of services for a principal cannot be viewed as functions performed by the service provider for its own account;
  • contractual arrangements cannot be disregarded and must consider the risks taken by the parties to the contract, whether the parties themselves manage that risk;
  • transfer pricing analyses should not be based on hindsight, assumptions regarding subjective views of the parties or the outcome, but instead should consider the transaction as it was designed at the time it was arranged;
  • recharacterization will not apply where the taxpayer’s arrangements are commercially rational even if a tax benefit arises from the structure or on the basis of whether the parties would have entered into the transactions under a given set of terms and conditions. It will only apply where no arm’s length persons would have entered into the transaction under any terms and conditions; and,
  • recharacterization does not contemplate replacing an existing transaction with nothing, thereby ignoring the separate existence of the related party.

The FCA’s decision may not be the last word on the issue – the Crown has until September 25, 2020 to seek leave to appeal the decision to the Supreme Court of Canada and, in the interim, CRA officials have emphasized the need for a broader societal conversation regarding the manner in which companies conduct their tax affairs, especially in light of the government’s COVID-19 relief efforts. This is a sentiment one might expect from many tax authorities as they grapple with financing the extraordinary spending that has supported the pandemic relief efforts.


Absent clear legislative or policy measures, which are not likely to be immediate or involve global consensus, disputes may be left in the hands of competent authorities attempting to resolve double taxation in the face of aggressive transfer pricing reassessments. While Canada did adopt Mandatory Binding Arbitration (MBA) under the Multilateral Instrument (MLI), a number of Canada’s treaties were not modified to include MBA and others await procedures for arbitration to come into effect. Of particular note are Canada’s treaties with China, Germany, Switzerland, Japan and the United Kingdom. The MLI will not provide the panacea in terms of resolution of double taxation.

The key takeaway is the importance of preparedness in dealing with uncertainty in these uncertain times.

  • Governments worldwide have taken unprecedented measures to mitigate the impact of the pandemic and will have to fund those measures in the coming years. This could lead to increased disputes and risk of double taxation.
  • Robust contemporaneous documentation that elaborates the contributions, intent and expectations of the parties when responding to business challenges will prevent the use of hindsight and inaccurate assumptions after the fact.
  • Sound intercompany arrangements that are commercially rational and properly reflect the roles and responsibilities of the parties will help mitigate an inappropriate reallocation of profits.
  • Increased automation and integration of electronic tools, even small improvements, will well-situate your tax department for the modern era of tax audits and tax controversy.