Canadian Court Rules in Favor of BP Over Tax Working Papers

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Peter Menyasz

Large corporate taxpayers in Canada can rest easy—they won’t have to hold back from disclosing concerns over risky situations in their tax working papers over fear the tax authority may get them, an appeals court ruling involving BP Canada Energy Co has confirmed.

The March 30 ruling in BP Canada Energy Co. v. Minister of Nat’l Revenue (No. A-385-15, 03/30/17) confirms that the the Canada Revenue Agency can’t routinely ask taxpayers to turn over sensitive tax accrual working papers, which are required to support financial statements required under provincial securities laws, tax professionals say.

The Canadian tax agency wanted access to documents detailing the BP’s “uncertain tax positions”, which identify tax situations that could potentially be successfully challenged by the government.

But this was rejected when the appeals court upheld a March 30 appeal by BP Canada Energy Co., overturning the Federal Court of Canada’s June 2015 ruling which granted the Canada Revenue Agency the right to demand access to the company’s tax accrual working papers as part of a routine audit of its 2005 income tax return.

The ruling was primarily based on the tax agency exceeding its written policy on such requests. According to the policy, requests aren’t to be made on a routine basis but only in special circumstances. The ruling also highlighted that the tax agency did not provide adequate justification for seeking access in the BP Canada matter.

Self-auditing to Reveal ‘Soft Spots’

However, the court highlighted the difference between the Income Tax Act’s reliance on self-assessment by taxpayers and the tax agency’s apparent attempt to have BP Canada self-audit. Canada’s tax compliance system is based on self-assessment because the taxpayer generating the income is best positioned to identify, compute and report taxable amounts, Chief Justice Marc Noel said in writing the appellate panel’s 3-0 ruling.

“This obligation to ‘self-assess’ does not require taxpayers to tax themselves on amounts which they believe not to be taxable,” the court said.

The case law is full of decisions illustrating the coexistence of arguable issues on both sides, so a taxpayer faced with an issue that is reasonably open to debate is entitled to file a tax return that is most favorable to them, it said. That is why the government’s auditors engage in extensive “poke-and-check” exercises to verify the amounts the taxpayer will report, it said.

“To be clear, although auditors are entitled to be provided with ‘all reasonable assistance’ in performing their audits (paragraph 231.1(d) of the Act), they cannot compel taxpayers to reveal their ‘soft spots’. While this is an unwritten rule without clearly defined boundaries, it certain stands against any construction of the Act that would allow the Minister [of National Revenue] to compel a taxpayer to self-audit on an ongoing basis,” the court said.

‘Self-Assessing’ Versus ‘Self-auditing.’

The ruling is “very important” because the audit powers granted to the tax agency by the Income Tax Act are very broad. Courts have historically interpreted those provisions in the agency’s favor, Matthew Williams, a tax litigation partner in the Toronto office of Thorsteinssons LLP, said March 31.

If the appellate court had simply applied the provisions as they read in the Act—as the lower court did—the documents would have been “caught”, Williams told Bloomberg BNA.

However, the Court of Appeal read the Act in conjunction with the company’s financial reporting obligations under provincial securities law and refused to force the taxpayer to “self-audit”, he said.

“It is encouraging to see the court looking beyond the words to the effect of those words,” he said. “Recognizing the distinction between ‘self-assessing’ and ‘self-auditing’ is important, and it is certainly a positive step to see that distinction being recognized by the Federal Court of Appeal.”

Measure of Confidentiality

The ruling confirms that while the Canada Revenue Agency needs detailed information to administer the tax system, taxpayers are due a measure of confidentiality, Kim Moody, director of tax advisory services with Calgary, Alberta-based Moodys Gartner Tax Law LLP, said March 31.

“The decision strikes the right balance,” Moody told Bloomberg BNA.

However, Lauchlin MacEachern, a lawyer with Moodys Gartner, noted March 31 that the rulings “great” statements restricting the tax agency’s right to routinely access tax accrual working papers don’t change the state of the law because they only reconfirm the agency’s existing policy.

Taxpayers already have enough to do to meet their obligations under the Income Tax Act, MacEachern told Bloomberg BNA. “We don’t need to do their work for them, too,” he said. “The CRA was trying to ask the taxpayer to audit themselves and expose all the soft spots.”

Full and Frank Client Disclosure

The court provided a detailed contextual analysis of the Act’s interaction with provincial securities laws and confirmed that the government can’t use the provincial statutes to obtain information it can’t get otherwise, he said. “It was an excellent decision,” he said.

Professional body Chartered Professional Accountants of Canada is pleased with the court’s decision. The group had in intervened in the matter to ensure the court was aware of the accounting profession’s concerns that the tax agency’s actions did not harm full and frank disclosure between accountants and clients, Tobin Lambie, the association’s media principal, said March 31.

“We believe the decision confirms the right balance between addressing CRA’s needs to efficiently and fairly administer the tax system and the taxpayer’s right to keep confidential subjective opinions and information that does not affect the amount of tax owing,” Lambie told Bloomberg BNA.

The association selectively intervenes in certain situations, when courts make decisions that affect the accounting profession and its mandate to act in the public interest, to ensure that relevant facts and arguments are considered, he said.

To contact the reporter on this story: Peter Menyasz in Ottawa at

To contact the editor responsible for this story: Penny Sukhraj at

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