The Income Tax Act provides the Canada Revenue Agency (CRA) with broad powers of administration and enforcement. In BP Energy Company v Minister of National Revenue (2017 FCA 61) the Federal Court of Appeal considered the authority to conduct the inspection of books and records given by Section 231.1(1) of the Income Tax Act and, on the basis of a contextual interpretation of this section, imposed significant restrictions on the limits of the minister's authority.
BP Energy is a publicly traded company. To comply with the law, it is required to prepare consolidated financial statements. To this end, the company prepared internal documents that set out uncertain tax positions, as well as the analysis which underlay contingent tax reserves. Often referred to as 'tax accrual working papers', these documents were described by the court as often identifying:
- tax positions that the minister might challenge;
- the likely outcome of such a challenge; and
- the reserve for a successful challenge by the minister.
In the course of an audit, the CRA requested the original working papers for the company's tax reserves. The company refused. The minister applied for a compliance order. In granting the order, the Federal Court judge found that the tax accrual working papers fell within the statutory scope of Section 231.1(1) and that there was no basis on which to exercise his discretion to refuse the order.
On appeal, the Chartered Professional Accountants of Canada intervened and argued that the order could have a chilling effect whereby corporations would "hesitate to voluntarily and fully disclose their tax risks". However, the minister argued that she might well disagree with and challenge an uncertain tax position, and that obtaining such documents and information therefore falls squarely within the administration and enforcement of the Income Tax Act. Further ? and while acknowledging that the Federal Court judge had a discretion not to grant the order ? the minister argued that the auditor had not acted with bad faith, dishonesty or unfairness and the judge therefore had not erred in refusing to exercise that discretion.
In allowing the appeal and dismissing the compliance order, the court observed that Section 231.1(1) "could not have been drafted in broader terms". Section 231.1(1) permits an inspection to be made "for any purpose related to the administration or enforcement of the Act". Based on these words, the court concluded that "the Minister wants to use these [uncertain tax] positions as a roadmap in order to facilitate audits conducted under this Act. Based on a literal reading of the introductory words, this looks like an authorized purpose".
Further, the court concluded that, on a plain reading of the statutory language which permits the inspection of books, records and documents that relate "or may relate to the information that is or should be in the books and records of the taxpayer or to any amount payable by the taxpayer under this Act", the documents sought by the auditor were captured.
However, it is both significant and interesting that the court went on to state that those conclusions have not settled the debate:
"The issue in this case is not whether the information revealed by BP Canada's Tax Reserve Papers could be accessible under the Act… The real issue is whether subsection 231.1(1) allows general and unrestricted access to this information."
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