Recently the Canada Revenue Agency released its long awaited policy “Acquiring Information from Taxpayers, Registrants and Third Parties”. This policy serves to enunciate the CRA’s views on its right to acquire taxpayer information and documentation under the various acts it administers, mostly notably the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”).

The policy statement reads as follows:

CRA officials are authorized to inspect, audit, review or examine:

  1. the books and records of a taxpayer;
  2. any document of the taxpayer that relates or may relate to the information in the taxpayer’s books and records; and
  3. any document of any other person that relates or may relate to the information in a taxpayer’s books and records that may be relevant to the administration or enforcement of the ITA, ETA, and other relevant legislation.

Given that the CRA has wide and extensive investigation powers under most of the legislation it administers, this statement was expected and not in controversy. What makes this policy controversial is that the CRA has included third party working papers related to the taxpayer within item #3. It is this inclusion that makes this new policy important for every taxpayer and their advisor to review and consider the far-reaching implications.

While the CRA has always believed that it has an almost unfettered right to access taxpayer information and documentation, subject only to solicitor-client and litigation privilege, its position on requiring third party working papers had been uncertain. In the past, there had been considerable controversy when the CRA demanded that a taxpayer’s accountant or auditor produce its working papers on the taxpayer. The controversy was that if the taxpayer had provided its source documentation and accounting records, why did the CRA feel it was necessary to also request its accountant’s or auditor’s working papers?

In this new policy, the CRA has clearly indicated its view that it is entitled to third party working papers, which are not just limited to accountant’s and auditor’s working papers, for the purpose of substantiating a taxpayer’s position and identifying audit issues and concerns with regards to tax at risk. Therefore, those working papers can be obtained if they relate to advice given to the taxpayer by third parties who are not lawyers.

In the policy the CRA does give some comfort in that it states CRA officials will always attempt to collect information from the most direct source in the least intrusive manner possible, and that third party working papers are not ‘routinely’ required for the determination of a taxpayer’s liability. However, the CRA also states “information from third parties will be sought when the taxpayer cannot or will not provide this information when it is needed by officials to determine the CRA’s position on an issue and in accordance with the scope of the review”. Whether this means that CRA officials will simply request the third party working papers from the taxpayer, and then request them from the third party when the taxpayer refuses to produce them, or whether the CRA will only request third party working papers as a last resort, remains to be determined.

For charities and not-for-profit organizations (“NPO”), it will be important to consider the following:

  1. What information and documents do their third party advisors collect, or have collected, as part of their work in advising the charity/NPO?
  2. What information and documents does the charity/ NPO collect, or has collected, as part of their work in assisting taxpayers in carrying out their donative intentions?

With the increasing trend for charities, NPO’s, and third parties like banks and brokerage firms to collect detailed information on taxpayers to document their thoughts and instructions for charitable arrangements, it is necessary that all parties involved consider what problems could arise should the CRA request this information. As always, involving a lawyer early enough in the advice process becomes a necessity if the parties wish to have information and documents remain confidential from the CRA.