Global Tax Alert (News from Transfer Pricing) | 29 July 2013

Teletech decision exposes potential pitfalls in obtaining double tax relief

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A 29 May 2013 decision of the Federal Court of Canada exposes a number of potential pitfalls for Canadian companies seeking to resolve double taxation arising from transfer pricing on transactions with non-arm's-length parties. Ultimately, the Federal Court's decision, although decided on largely procedural grounds, substantively left the applicant in the position of being subject to double tax.

This Alert covers the Teletech decision and considers what lessons it may provide for Canadian taxpayers.


TeleTech Canada (TTC) is a wholly owned subsidiary of TeleTech Holdings Inc. (TTHI), a US-resident company involved in the call centre business. In the 2000 to 2002 years in dispute, TTC was characterized as a subcontractor to TTHI, and received administrative services from TTHI.

For the 2000-02 taxation years, TTC alleged that due to internal accounting errors, income and expenses were improperly allocated between the two companies and, as a result of these errors, its profits in its financial statements for those years were overstated while those of TTHI were understated. These alleged errors were incorporated into the companies' respective tax filings with the CRA and the IRS.

A 2003 transfer pricing study determined that the total amount of the alleged errors was approximately $38 million over the three years. The companies took steps to attempt to bring their respective 2000-02 tax filings into compliance with Canadian and US law.

In May 2004, TTC requested that the CRA make downward adjustments to its income for the 2000-02 taxation years. Correspondingly, TTHI filed amended tax returns with the IRS to increase its income for these tax years by the same amounts.

However, in March 2006, TTC withdrew its downward adjustment requests based on the belief that it could not pursue relief under the Canada-US Income Tax Convention for this issue while its request remained outstanding. Also in March 2006, based on the filing of its amended US tax returns, TTHI made a request seeking relief from double taxation for the 2000-02 taxation years under the Convention. According to the Federal Court's decision, it does not appear that the IRS accepted TTHI's request for competent authority assistance at that time.

In May 2006, TTC filed a request with the CRA for competent authority assistance for 2000-02, seeking relief from alleged double taxation under the Convention.

In response to this request, the CRA advised TTC by way of a letter dated 10 November 2006 that it “was unable to accommodate your request for competent authority consideration.” The CRA cited Information Circular 71-17R5, stating that “one of the prerequisites that must exist to request competent authority consideration is an action by one or both governments that will result... in taxation not in accordance with the [Treaty].”

With regard to TTC, the CRA stated that “the tax authorities in Canada and the United States have not taken any action that has resulted in taxation not in accordance with the [Treaty];” rather, “[t]he only actions that [have] been taken have been initiated by TeleTech Canada Inc. and TeleTech Holdings, Inc.”

Consequently, the CRA did not accept TTC's request but stated in conclusion that “We will reconsider our position in the event of future compliance activity that may be initiated by either the Canada Revenue Agency or the Internal Revenue Service.” TTC did not seek judicial review of this decision.

In a letter to the CRA dated 7 November 2006, the IRS advised that it had “ultimately assessed” the amended tax returns filed by TTHI for the 2000-02 taxation years, and concluded that “the actions taken by both [the IRS and the CRA] have resulted in taxation that is not in accordance with... the Treaty.”

The letter invited the CRA to participate in a Mutual Agreement Procedure under Article XXVI of the Convention. However, TTC and TTHI were not aware of this letter at the time and only became aware of it in the context of the judicial review application.

According to the Federal Court decision, it does not appear that there was any further consideration of TTC's request for assistance and it appears that the CRA closed its file.

In July 2008, following an audit of TTHI's amended tax returns, the IRS made adjustments to TTHI's 2001 and 2002 tax returns. Subsequently, in August 2009, TTHI submitted another request for competent authority assistance to the IRS. However, TTC only informed the CRA of the results of the IRS audit by a letter dated 17 December 2009, requesting relief from the double taxation resulting from the adjustments that had been made to TTHI's income by the IRS for the 2001 and 2002 taxation years.

As a result of receiving this second request from TTC, the CRA opened a new file and assigned a new analyst to the case.

In May 2011, having received no reply from the CRA to its December 2009 request, TTC commenced an application for judicial review in the Federal Court based on its belief that the CRA was refusing to consider its request. TTC sought an order of mandamus to compel the CRA to accept its application for competent authority consideration pursuant to Article IX of the Treaty. However, by mutual consent, the application was held in abeyance pending the CRA's determination of the request.

In June 2011, the CRA informed TTC that it would not accept the request made for assistance on the basis that the actions giving rise to double taxation were not the actions of a government. The CRA further cited that it considered that it had not received notification of the double taxation within the six-year time limit specified under the Convention, and further that TTC's tax returns were statute barred from reassessment (i.e., even if the CRA agreed to negotiate the case with the IRS, it was time barred from making any adjustment to the return).

The June 2011 letter advised TTC that the CRA considered the case to be closed. TTC reactivated its earlier application for judicial review.


The Federal Court noted that TTC's Notice of Application did not seek judicial review of the CRA's decision to deny TTC's requests for assistance. Rather, the Notice of Application sought to compel the CRA to make a decision.

In the Court's view, a decision had been made in November 2006, and if TTC wanted to challenge this decision, it should have commenced its application for judicial review at that time. Furthermore, following the CRA's second refusal to consider TTC's request for relief in June 2011 — another decision of the CRA — TTC did not commence a new application for judicial review or amend its previous application to request judicial review of the CRA's decision within the 30 days allowed.

The Court also indicated that courts will not generally make an order of mandamus to compel a decision-maker to make a particular decision when the decision-maker's power is discretionary.

The Federal Court considered the impact of the IRS's 7 November 2006 letter to the CRA, which was not included in the application for judicial review but was raised by TTC in argument. However, TTC did not argue that there was a breach of procedural fairness or that the CRA's November 2006 letter created a legitimate expectation on the part of TTC that a particular process would be followed in relation to its request for competent authority consideration.

Rather, TTC argued that the IRS letter constituted notification to the CRA within the Convention's six-year time limit that there had been double taxation not in accordance with the Convention.

However, the Court concluded that this constituted a collateral attack on a CRA decision that TTC never challenged directly and the Court refused to give effect to this argument. The Court did note that it remained open for the competent authorities to consider relief beyond the six-year time limit under Article IX(4) of the Convention.


The Federal Court made its decision on fairly narrow procedural grounds. It found that the current application for judicial review was limited on its face to requesting that the CRA make a decision to accept TTC's request for assistance rather than seeking judicial review of its decision not to grant such a request. The Court did not consider whether the CRA's decision not to accept the request was reasonable, because TTC's application did not extend to that point. If TTC's application had addressed that point and had been brought within the requisite 30-day period of a decision, the Federal Court could have considered the reasonableness of the CRA's decision on that point under a judicial review.

This case demonstrates the difficulties that may arise from self-correcting unintended errors in a transfer pricing context. Both the CRA and IRS have in particular circumstances taken policy positions that make it more difficult to rectify errors in a transparent and cooperative manner. In light of these positions, taxpayers may perceive they are better off not coming forward to correct such errors.

In the end, this case illustrates that the taxpayers may be left subject to double taxation. Whatever the motivation for the particular transfer pricing position taken — and the Court noted that the CRA does not agree with the conclusions of TTC's transfer pricing study and does not accept that TTC's original filing position was incorrect — it is evident that attempted compliance with the domestic tax laws of both jurisdictions resulted in unresolved double taxation, which the competent authorities have a mandate to resolve.

It is particularly troublesome in this case that the CRA did not recognize the correspondence from the IRS as constituting a valid notification under the Convention. In the past, notification by the IRS to the CRA, and vice versa, was a frequent and accepted practice, and one that is referred to in the 1984 Technical Explanation to the Convention.

While it appears that the decision in this case was the result of problems with the timeliness of and the relief sought in the application for judicial review, there are other lessons that taxpayers can draw from this decision:

  • Fully consider the available options and follow through to completion. In this case, TTC's request for a downward adjustment was abandoned without a decision by the CRA. This was another potential opportunity to challenge the CRA's decision-making on the issue.
  • Be aware of treaty time limits and notify the Competent Authorities in a timely manner.
  • File timely waivers to keep years from going statute barred.
  • Communicate. Know the position of revenue officials in both jurisdictions. Seek to understand their thought processes. Escalate issues before they become final decisions. Don't react without confirmation of decisions.

Taxpayers should re-examine and recalibrate their position at each decision point in light of developments.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Ottawa
  • John Oatway
    +1 613 598 4809
  • Rene Fleming
    +1 613 598 4406
  • Phil Fortier
    +1 613 598 4291
  • Sandy Goldberg
    +1 613 598 4810
  • Paul Mulvihill
    +1 613 598 4339
  • Fred O'Riordan
    +1 613 598 4808
  • Tony Wark
    +1 613 598 4322
  • Gary Zed
    +1 613 598 4301
Ernst & Young LLP (Canada), Toronto
  • Andrew Clarkson
    +1 416 943 2146
  • Sean Kruger
    +1 416 941 1761
  • Ken Kyriacou
    +1 416 943 2703
  • Lori Whitfield
    +1 416 943 7199
Ernst & Young LLP (Canada), Quebec and Atlantic Canada
  • Rachel Spencer
    +1 514 879 8214
  • Alfred Zorzi
    +1 514 874 4365
Ernst & Young LLP (Canada), Prairies
  • Lawrence Greer
    +1 403 206 5031
Ernst & Young LLP (Canada), Vancouver
  • Greg Noble
    +1 604 891 8221
  • Matthew Sambrook
    +1 604 899 3559
Couzin Taylor LLP, Canada
  • David Robertson
    +1 403 206 5474
  • Daniel Sandler
    +1 416 943 4434
  • Louis Tassé
    +1 514 879 8070
  • Roger Taylor
    +1 613 598 4313

EYG no. CM3686