Companies required to prepare financial statements are typically obligated to estimate and take reserves for potential exposures, including any uncertain tax position ("UTP") that might successfully be challenged by tax authorities. While the Canada Revenue Agency ("CRA") has always reserved the right to demand UTP analysis (unless protected from disclosure under lawyer-client privilege), as a practical matter it has very rarely done so in the absence of very serious concerns.
In a recent Federal Court case (MNR v. BP Canada Energy Co.), the CRA obtained an order forcing the taxpayer to turn over a list of UTPs created as part of the financial statement preparation process, on the mere pretext that the list would be useful as a tax audit "roadmap", to make sure the CRA hadn't "missed anything". This provocative and aggressive action on the CRA's part signals a major change in what constitutes "fair game" in the use of the CRA's extensive information gathering powers. Unless overturned on appeal, this decision will leave a taxpayer's subjective assessment of its UTPs (and any other subjective tax analysis) completely exposed to demands for disclosure from Canadian tax authorities, except where protected by lawyer-client privilege.
The CRA can generally require taxpayers to disclose not only unprivileged documents and emails, but even the content of oral discussions with their accountants and other non-lawyers. The BP Canada case illustrates that lawyer-client privilege is typically the only defence to tax-related CRA demands and queries. Properly structured, UTP and other highly-sensitive tax analysis can be created within the protective scope of lawyer-client privilege, which under Canadian law is not waived when shared with the taxpayer's external auditors for the limited purpose of completing its financial statements.