Company Alerts Court to Recent Canadian Tax Decision in Securities Case

In re
Silver Wheaton Corp. Securities Litigation

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

CLASS ACTION

NOTICE OF SUPPLEMENTAL AUTHORITY IN SUPPORT OF
SILVER WHEATON DEFENDANTS’ MOTION TO 
DISMISS SECOND AMENDED COMPLAINT

JUDGE: Hon. Christina A. Snyder

Date: December 17, 2018
Time: 10:00 a.m.
Dept.: 8D
Complaint Filed: July 8, 2015

BARRY M. KAPLAN, admitted pro hac vice
Email: bkaplan@wsgr.com
GREGORY L. WATTS, State Bar No. 197126
Email: gwatts@wsgr.com
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
701 Fifth Avenue, Suite 5100
Seattle, WA 98104
Telephone: (206) 883-2500
Facsimile: (206) 883-2699

JEROME F. BIRN, JR., State Bar No. 128561
Email: jbirn@wsgr.com
DIANE M. WALTERS, State Bar No. 148136
Email: dwalters@wsgr.com
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100

Attorneys for Defendants
SILVER WHEATON CORP.,
RANDY V. J. SMALLWOOD,
PETER BARNES, AND GARY BROWN

Defendants Silver Wheaton Corp. (“Silver Wheaton” or the “Company”), 2 and Randy V. J. Smallwood, Peter Barnes, and Gary Brown (the “Individual Defendants,” collectively with Silver Wheaton, the “Silver Wheaton Defendants”) 4 respectfully submit this Notice of Supplemental Authority to inform the court of a 5 recent decision issued by the Tax Court of Canada. The judgment in Cameco Corp. v. R, 2018 TCC 195 (Sept. 26, 2018), attached hereto as Exhibit A (“Judgment” ), bears on important issues briefed in connection with the Silver Wheaton Defendants’ pending Motion To Dismiss Second Amended Complaint.

* * *

Plaintiffs allege in their Second Amended Complaint that the “basic facts” of the Canada Revenue Agency's (“CRA”) reassessment of Cameco Corporation “mirror[ ] those alleged here.” Dkt. 256 at ¶ 203 (emphasis added). More particularly, Plaintiffs allege that “in each case” (Cameco and this case) a “Canadian corporate parent” i) provided property to a “Related Non-Resident subsidiary” at “prices that were materially less than the transfer prices that would have been mutually agreeable to parties dealing with one another at arm's length,” ii) “divert[ed] business opportunities and expected future profits to an entity situated outside of Canada that would not be directly subject to Canadian income tax filing and payment obligations,” and iii) engaged in “substantive commercial functions of value” for the “subsidiary without material compensation.” Id. at ¶ 205. Plaintiffs therefore allege that the CRA's reassessment of Cameco was a “red flag” that made it “obvious” to the Silver Wheaton Defendants that their tax position was “indefensible and without any reasonable basis” and that “it was probable, possible, and indeed highly likely to result in a future tax assessment for past due income taxes, penalties and interest in material amounts.” Id. at ¶¶ 203
(emphasis added), 207.¹

This Court relied upon similar allegations in Plaintiffs’ Consolidated Amended Complaint. In its order denying the Silver Wheaton Defendants’ motion to dismiss, the Court stated, “[i]n light of the stark similarities between this case and the Cameco case, defendants were arguably on notice that they too could be subject to significant reassessment based on their transactions with Silver Wheaton’s foreign subsidiary, SW Caymans.” Dkt. 79 at 19–20.

Cameco sells uranium mined in Canada to a subsidiary in Switzerland, which then sells the uranium to third-party customers through a U.S. subsidiary. Judgment at ¶¶ 227, 234, 301, 827. The CRA asserted that the transactions between Cameco’s Swiss subsidiary and other Cameco entities were a “sham,” because the Canadian parent in fact ran the business. Id. at ¶ 578. The CRA also asserted, under paragraphs 247(2)(b) and (d) of Canada’s Income Tax Act (the “ITA”), the transactions between Cameco and its Swiss subsidiary should be recharacterized because arms’-length parties acting in a commercially rational manner would not have entered into them at all; and, under paragraphs 247(2)(a) and (c), the transactions should be repriced because arms’-length parties would not have entered into them on the same terms. Id. at ¶¶ 579–80. The CRA contended that all of the Swiss subsidiary’s income should be taxed in Canada.

In the Judgment attached as Exhibit A, rejecting what Plaintiffs claim is “obvious” illegal tax avoidance, the Tax Court of Canada noted that the ITA actually contemplated a regime whereby Canadian corporations would establish foreign subsidiaries to carry on active business “without attracting Canadian income tax” (id. at ¶723), that Cameco “was simply utilizing a tax planning tool provided by Parliament” (id. at ¶ 742), and that no prior decision had interpreted the recharacterization provisions of the ITA (id. at ¶674). The Tax Court of Canada then rejected each and every one of the CRA’s contentions and reversed
the CRA’s tax reassessments of Cameco. Id. at ¶ 888.

First, the tax court found that the contracts were not a “sham” because there was “no evidence” that the contracts among the various Cameco entities “do not reflect the true intentions of the parties.” Id. at ¶¶ 603–05. Indeed, the tax court held that Cameco’s “motivation” to reduce its overall tax obligations did not
“transform the arrangements” into a “sham” because “[t]ax consequences do not flow from contracting parties’ motivations or tax objectives.” Id. at ¶¶ 606, 862.

Second, the tax court rejected the CRA’s recharacterization theory, finding “nothing exceptional, unusual or inappropriate” about the Cameco Group’s international structure. Id. at ¶¶ 726, 737–38; see id. at ¶ 722 (“[T]he behaviour of the parent corporation in establishing subsidiaries and placing business opportunities in those subsidiaries is not commercially irrational. I would go so far as to suggest that such behaviour is a core function of the parent of a multinational enterprise.”).

Third, the tax court refused to reprice the transactions, finding that the transfer prices agreed upon among the Cameco entities were within the range that arms’-length parties would be willing to pay. Id. at ¶ 856. Because the Swiss subsidiary assumed the “price risk associated with” the uranium it purchased from Cameco, the court held, the Swiss subsidiary earned the profit resulting from that uranium’s sale. Id. at ¶ 839.

These holdings eviscerate Plaintiffs’ argument that the mere existence of the Cameco reassessment put the Silver Wheaton Defendants on notice that “Silver Wheaton Canada’s tax position vis-à-vis Silver Wheaton Caymans was indefensible,” Dkt. 256 at 207, and underscore the reasonableness of the Defendants’ determination during the relevant time period that there was only a “remote” possibility that it would ultimately incur additional tax liability. 

Dated: December 3, 2018

WILSON SONSINI GOODRICH & ROSATI
Professional Corporation

Barry M. Kaplan
Email: bkaplan@wsgr.com
Attorneys for the Silver Wheaton Defendants