The recent decision of the Federal Court in TeleTech Canada, Inc. v. Minister of National Revenue ("TeleTech") 1 reminds all taxpayers dealing with transfer pricing adjustments of the strict procedural requirements for initiating a request for competent authority relief under the Canada-U.S. Tax Convention (the "Treaty"), and of the domestic remedies that may be available to facilitate the process.
Article IX of the Treaty and the Mutual Agreement Procedure ("MAP") under Article XXVI of the Treaty provide relief to taxpayers where the actions of one or both governments have resulted in taxation not in accordance with the Treaty. They allow Canada or the U.S. to make corresponding adjustments, resolve Treaty-based disputes themselves or, where applicable, submit matters to binding arbitration. These Treaty-based and domestic procedures must be carefully and diligently pursued.
TeleTech illustrates the discretion of the Canada Revenue Agency (the "CRA") to deny a request for competent authority assistance. While TeleTech raises several important issues, this article will focus on the Federal Court's consideration of the potential availability of the extraordinary remedy of mandamus to compel the CRA to accept a taxpayer's request for competent authority assistance.
TeleTech Canada Inc., ("TeleTech Canada"), a wholly-owned subsidiary of TeleTech Holdings Inc. ("TeleTech Global U.S.") (collectively "the Companies"), was involved in the call-centre business. The Companies underwent a corporate restructuring in 2000 whereby TeleTech Canada became a subcontractor of TeleTech U.S., with the latter providing administrative services to the former. The pricing of such administrative services was central to the transfer pricing disagreement between TeleTech Canada and the CRA.
According to the taxpayer, certain internal accounting errors were made in the Companies' respective tax filings relating to the pricing of the inter-corporate administrative services and allocation of income between the two countries. The result was an over-reporting of income for Canadian tax purposes and under-reporting of income for U.S. tax purposes for the 2000-2002 taxation years.2 A transfer pricing study was commissioned by TeleTech U.S. in 2003 to confirm the appropriateness of the revised pricing.
The Companies unilaterally took steps to retroactively reallocate income between TeleTech Canada and TeleTech U.S. by filing amended U.S. tax returns to reflect the revised pricing, requesting a downward adjustment to TeleTech Canada's operating profits, and by initiating requests for competent authority assistance for relief from double taxation.
The key events in TeleTech relevant to the mandamus issue are as follows:
Up to March 2006 - TeleTech U.S. filed amended U.S. tax returns resulting in an upward adjustment of income and sent a request to the IRS for relief under the Treaty from double taxation in the amount of USD $38.3 million.
May 11, 2006 - TeleTech Canada filed a request with the CRA for competent authority assistance (the "First Request") seeking relief from double taxation.
November 10, 2006 - The CRA denied the request (the "First Denial Letter") on the basis that an action by the CRA or IRS that resulted in double taxation was not present. Had the request been accepted, it may have resulted in a refund being payable to TeleTech Canada in the range of USD $10-12 million. The CRA advised in the First Denial Letter that it would reconsider its position in the event of future compliance activity by the CRA or the IRS.
December 13, 2006 - The CRA received a letter from the IRS (the "IRS Letter") advising that the IRS had "ultimately assessed" the amended tax returns as filed and therefore actions taken by the CRA and IRS had resulted in double taxation. The IRS invited the CRA to participate in a MAP. The CRA did not respond to the IRS Letter and did not notify the Companies of its receipt.
July 2008 - Following an audit, the IRS adjusted TeleTech U.S.' 2001 and 2002 returns resulting in an increase of gross income for both years by a total of USD $11,239,230. The Companies did not inform the CRA of the results of the audit at this time.
December 17, 2009 - TeleTech Canada submitted a supplemental request to the CRA for competent authority assistance (the "Second Request") and advised of the outcome of the IRS audit.
May 11, 2011 - TeleTech Canada commenced the application for judicial review that was the subject matter of the current case. This application was commenced on the belief that the CRA was refusing to consider the Second Request. The application sought an order for mandamus from the Federal Court which, if granted, would compel the CRA to decide TeleTech Canada's application for competent authority assistance. On consent, the application for judicial review was held in abeyance pending the CRA's determination of the Second Request. The CRA ultimately denied TeleTech Canada's request (the "Second Denial Letter") on the basis that it had not received notification as required by the Treaty within six years from the end of the taxation years in issue and that TeleTech Canada's tax returns were statute barred from reassessment.
The Availability of Mandamus to Compel the Minister to Accept the Request
For taxpayers, the procedures and deadlines for judicial review depend on whether a taxpayer disagrees with a decision that the CRA has made or if the CRA is refusing to make a decision. A mandamus order, which compels performance of a legal duty (i.e. compelling a decision to be made), is an extraordinary remedy not subject to any time limitation. In contrast, to challenge a decision or order that has already been made by judicial review, an application for judicial review seeking certiorari must be filed within thirty days from the date the decision was made. Generally, if a reviewable error has been committed in reaching a decision and certiorari is granted, the decision or order will be quashed or set aside and the parties restored to their original position. As such, the Court should be within its jurisdiction to grant an order of mandamus compelling the CRA to consider a taxpayer's request for competent authority assistance.
At the Federal Court, TeleTech Canada argued that the CRA's actions were a continuing refusal to consider its request. Madam Justice Mactavish disagreed and found that two discrete decisions were made by the First Denial Letter and Second Denial Letter and that each was subject to the thirty-day time limitation. In her reasoning she emphasized two points. Firstly, the timing for bringing the application for judicial review application, which was after the Second Request and before the CRA issued its Second Denial Letter. Secondly, that TeleTech Canada was not seeking a determination by the CRA, but rather a specific outcome (i.e. that the CRA accept its request for competent authority assistance). Jurisprudence has generally established that mandamus will not be granted to compel a specific decision or outcome where decision-making power is discretionary, as it was in this case under Article IX (1) and (3) of the Treaty.3 Consequently, the application was dismissed.
Seeking a mandamus order by framing the CRA's behaviour as "continuing conduct", and therefore a continuing failure to act rather than a decision not to act, was likely an attempt to bring the application for judicial review under the six-year limitation period contained in Article IX (3) of the Treaty. The Federal Court noted that TeleTech U.S. may still seek relief from the IRS through Article IX (4) of the Treaty which provides an exception to the six-year limitation rule provided in paragraph (3). However, the relief granted under paragraph (4), which is not obligatory, would only allow the IRS to grant unilateral relief from double taxation. In other words, to withdraw the U.S. adjustment to the extent that it would give rise to double taxation.
TeleTech Canada's Application for Judicial Review held to be a Collateral Attack
The Federal Court found that TeleTech Canada's arguments amounted to a collateral attack of a prior decision (e.g. challenging the correctness of a decision through subsequent proceedings that do not have as their target the validity of the relevant decision or action). Two discrete decisions in relation to the First Request and Second Request were made; each subject to the thirty-day limitation. TeleTech Canada failed to challenge the First Denial Letter or Second Denial Letter by way of judicial review within the prescribed time limit and, in light of this, the Federal Court did not find in the taxpayer's favour.
Procedural Fairness and Legitimate Expectation
The Federal Court noted that no argument was advanced regarding a breach of procedural fairness or that the First Denial Letter created a legitimate expectation on TeleTech Canada's part that a process would be followed.4
The doctrine of legitimate expectation has been recognized as a means to help the Court determine whether the procedures that were followed by the administrative decision maker respected the common law duty of fairness in the particular circumstances. 5 Legitimate expectations of procedures can arise from assurances or promises of public officials. The statement in the First Denial Letter that the CRA would reconsider its position in the event of future compliance activity arguably could be seen to have created such a legitimate expectation of procedure in this instance.
It is speculative to postulate whether the argument that the CRA contravened its promise to reconsider would have produced a different outcome for the taxpayer, or whether there were other strategic or legal considerations at play. However, the fact that the Federal Court itself raised the possibility of this argument suggests that it may have been persuasive in the present circumstances and that the taxpayer may have had success with such an argument in crafting its judicial review application.
1 2013 FC 572.
2 It should be noted that the 2000 taxation year was not at issue in the application for judicial review.
3 Supra note 1 at para. 61.
4 Supra note 1 at para. 70.
5 See Baker v. Canada (Minister of Citizenship and Immigration),  2 S.C.R. 817 at para. 28.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.