Global Tax 50 2014: McKesson

McKesson is a new entry this year

One of the most talked about transfer pricing cases this year has undoubtedly been McKesson Canada Corp. versus The Queen. A judgement, a damning appeal and a controversial recusal have brought the case to the forefront of the tax world. The case concerns a receivable sales agreement between McKesson Canada and its parent company (MIH) in Luxembourg.

MIH agreed to buy receivables from McKesson in 2002 for $460 million and purchase all eligible receivables daily for the next five years, subject to a $900 million cap. McKesson used a discount rate of 2.206%.

In a ruling in December 2013, Justice Patrick J Boyle, of the Tax Court of Canada, said an arm's-length rate in the range of 0.959% to 1.17% would have been acceptable and dismissed the taxpayer's appeal.

Justice Boyle found that the "primary purpose" of the transaction was to save taxes and expressed his concern that neither party had provided the level of evidence he had expected.

The decision was based on fact finding and issue evaluation, rather than the application of an OECD methodology. "For the first time, a Canadian court questioned the value and weight of the OECD's guidelines," says Shaun MacIsaac QC.

On June 11 2014, McKesson filed a memorandum of fact and law claiming Justice Boyle "erred" in his findings. The memorandum alleged he had ignored the assumption of risk by MIH, misconstrued the arm's-length principle and relied on propositions that were never put to McKesson.

On September 4 2014, Justice Boyle filed a 47 page recusal, which stated that McKesson's appeal contained "clear untruths" and made "allegations of impartiality". The judge added: "the Appellant and Appellant’s counsel, together with its co-counsel in the Federal Court of Appeal in respect of the appeal of the trial decision, had made certain public written statements about me in its factum in the Federal Court of Appeal (the “Factum”) which, upon reflection, appear to me to clearly include: (i) allegations that I was untruthful and deceitful in my Reasons".

Justice Boyle acknowledged that his recusal was unusual: "Canadians should rightly expect their trial judges to have broad shoulders and thick skins when a losing party appeals their decision, but I do not believe Canadians think that should extend to accusations of dishonesty by the judge, nor to untruths about the judge."

While the outcome is still unclear, this case is sure to be talked about for years to come.