McKesson agreed to buy receivables from McKesson Canada 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% but in the ruling last December, Justice Boyle of the Tax Court of Canada dismissed the taxpayer’s appeal and said an arm’s-length rate in the range of 0.959% to 1.17% would have been acceptable.
Since the hearing in December, McKesson has filed an appeal with the Federal Court of Appeal.
Matthew Wall, of MDW Consulting, described the December ruling as a “really big win for the CRA”.
“It appears McKesson Canada lost this based on the facts, and the expert testimony could not change the impression that McKesson Canada lacked a business purpose for factoring receivables, this transaction reduced profits and created losses and the primary purpose was to obtain a tax benefit,” said Wall.
Wall said there were differences between the legal and economic form of the transaction, which helped form the judge’s opinion. Included in the decision was the factoring of receivables, which was part of a larger structure involving low tax jurisdictions. In addition Wall said it is “troubling” to learn the parent company buying the receivables did not bear any risk.
The appeal
McKesson’s notice of appeal to the Federal Court of Appeal, filed on January 14, claims Justice Boyle “erred in finding” that:
· The terms and conditions between McKesson Canada and MIH differed from the terms and conditions that would have been agreed to between persons dealing at arm’s-length.
The discount rate agreed to by arm’s-length parties would not have been more than 1.0127%.
McKesson Canada failed to “demolish” the Crown’s “assumption” that the discount rate agreed to by arm’s-length parties would not have been more than 1.0127%.
This resulted in a conferral of a benefit on MIH for subsection 15(1) and 214(3) of the Act.
The five year limitation period did not apply to prohibit the assessment of Part XIII withholding tax.
The company’s appeal also said Justice Boyle “erred in law” by failing to:
Properly apply the arm’s-length standard in paragraphs 247(2)(a) and (c) of the Act.
Review and weight competing evidence and instead assumed the role of subject matter expert in reaching conclusions that were unsupported by and inconsistent with the evidence.
“Respectfully, in the absence of specific references, details and analysis which are missing altogether from the notice of appeal, it appears counsel for McKesson Canada is crying over spilt milk, which invites others to suggest this might be a frivolous claim lacking evidentiary support,” said Wall.
