Provincial securities legislation in Canada requires that financial statements of publicly-traded corporations be certified by independent financial auditors.  For this purpose, “tax accrual working papers” (TAWPs) can be created internally or by external auditors that: (1) identify tax positions capable of being challenged successfully by the Canada Revenue Agency (CRA), (2) express opinions as to the likely outcome in this event, and (3) establish reserves intended to neutralize the financial distortion which could result (see paragraphs 48 and 49).  In BP Canada Energy Company v. MNR, 2017 FCA 61, a local office of the CRA pursued a court order in the course of recurring audits of a Canadian corporation (Canco) to compel production of Canco’s TAWPs “without restriction” (see paragraphs 78 and 103).  The CRA succeeded before the Federal Court, but lost at the Federal Court of Appeal (FCA).  The FCA held that the TAWPs were beyond the reach of the CRA’s audit powers (see paragraph 4).  Here are the key points.

  1. Text: The legislation providing the CRA with audit power (s. 231.1(1)) could not have been drafted in broader terms (see paragraph 58).  This language, read on its own, gives the CRA access to any documented information that can assist in carrying out its tax auditing functions.  Canco’s uncertain tax positions could certainly be viewed as coming within this description (see paragraph 66).
  2. Context and purpose: When, however, one examines the context and purpose of the legislation (summarized in points 3 and 4 below), Parliament intended that the CRA’s broad audit powers must be used with restraint when dealing with TAWPs (see paragraph 80). 
  3. No requirement to self-audit and reveal soft spots: While taxpayers have an obligation to self-assess (i.e., prepare and file their own tax returns), taxpayers do not have an obligation to self-audit.  Faced with an issue that is reasonably open to debate, taxpayers are legally entitled to file their tax return on the basis most favourable to them.  While CRA auditors can require taxpayers to provide “all reasonable assistance” in the course of a subsequent audit, the auditors cannot compel taxpayers to reveal their “soft spots” (see paragraph 82).  Although this principle is an unwritten rule without clearly defined boundaries, it stands against any construction of the legislation that would allow the CRA to compel a taxpayer to self-audit on an ongoing basis.  Compelling routine and uncontrolled production of the TAWPs would provide an audit roadmap for the CRA and would amount to requiring that Canco self-audit (see paragraphs 27, 33, and 85).
  4. Integrity of financial reporting system:  In enacting s. 231.1(1), Parliament could not have intended to vest the CRA with an audit power so sweeping that it would undermine the provincial financial reporting obligations on publicly-traded corporations (paragraph 86).  The CRA’s tax audit power was not intended to ride roughshod over such provincial laws (see paragraph 97).  In other words, Parliament cannot have intended that the CRA’s audit power could be used to imperil the integrity of the provincial financial reporting system, by inducing less disclosure of tax risks to financial auditors (see paragraphs 87 and 98).
  5. Result: In light of the above, the FCA concluded that the CRA could not invoke its audit powers under s. 231.1(1) for the purpose of obtaining general and unrestricted access to Canco’s TAWPs that revealed its uncertain tax positions.  In practical terms, this means that the CRA cannot enlist taxpayers who maintain TAWPs to perform the core aspect of tax audits conducted (see paragraph 99).  
  6. Appeal:  The decision is obviously very significant.  This will be an interesting case to watch if leave to appeal to the Supreme Court of Canada is sought.