CRA Is Denied Access to Working Papers

In BP Canada Energy Company v. Canada (National Revenue) (2017 FCA 61), in which CPA Canada was granted intervenor status, the FCA overturned the compliance order issued in 2015 by the FC under subsection 231.7(1) requiring BP to hand over unredacted copies of its tax accrual working papers (TAWPs), including a list of uncertain tax positions (UTPs).

The FCA ruled that the documents ordered to be produced by the FC are beyond the reach of the minister and are not within the scope of subsection 231.1(1). The FCA noted that Parliament intended the broad provisions of this subsection to be used with restraint. The FCA also noted that Parliament could not have intended the minister to have powers that undermine financial reporting obligations that exist under provincial securities legislation. The FCA held that taxpayers are entitled to file their tax returns on the basis most favourable to them and to self-assess tax on that basis, but that the obligation of the taxpayer is not one of self-audit. Subsection 231.1(1) says that CRA auditors are entitled to be provided with "all reasonable assistance" in performing their audits. However, the FCA held that auditors cannot compel taxpayers to reveal their "soft spots" and, effectively, provide the CRA with an audit "roadmap," which would amount to BP performing self-audits and subjecting itself to tax on UTPs.

In the CRA's own technical publication, Acquiring Information from Taxpayers, Registrants and Third Parties, the stated policy is that an auditor has the authority to request TAWPs, although they will not be routinely required, which recognizes the very constraints imposed on the minister. The FCA held that the minister acted in defiance of its own published policy by seeking routine access to BP's UTPs and that the minister cannot invoke subsection 231.1(1) to obtain unrestricted access to a taxpayer's TAWPs.

The FCA's decision is significant because it can be interpreted as a setback for the government. The CRA is becoming increasingly aggressive in its audit practices, and the legislation gives the CRA extremely broad powers to obtain information from taxpayers. In light of this decision, however, the CRA will likely proceed with more caution in requiring TAWPs during its audits. On the other hand, taxpayers should not take this decision to mean that the CRA has no power to request TAWPs during its audits; rather, it must exercise restraint when requesting access to TAWPs, and its actions must conform to its own published policies.

Jingchan Hu
Crowe Soberman LLP, Toronto

Canadian Tax Focus
Volume 7, Number 2, May 2017
©2017, Canadian Tax Foundation