Canadian Federal Court of Appeal denies Canada Revenue Agency request for tax working papers

Transcription

1 4 April 2017 Global Tax Alert News from Americas Tax Center Canadian Federal Court of Appeal denies Canada Revenue Agency request for tax working papers EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Tax/Americas-Tax-Center---borderlessclient-service Executive summary On 30 March 2017, Canada s Federal Court of Appeal (FCA) released its decision in BP Canada Energy Company v Minister of National Revenue (2017 FCA 61), overturning a 2015 decision by the Federal Court of Canada (FCC) (2015 FC 714). The issue in this case was whether the Minister of National Revenue is entitled to compel a taxpayer under Sections 231.1(1) and 231.7(1) of the Income Tax Act (the Act) to produce, for the purpose of the Minister s present and future audits, details of the uncertain tax positions (UTPs) reflected in its tax accrual working papers (TAWPs), prepared by the taxpayer to calculate the reserves to account for contingent tax liabilities in its consolidated financial statements. The Chartered Professional Accountants of Canada was accorded intervener status in the FCA hearing. The Minister s policy since 2004 has been to not routinely request TAWPs while maintaining its entitlement to require production where appropriate. Detailed discussion Facts The taxpayer s ultimate parent is a publicly traded corporation that is required, for financial reporting and other regulatory purposes, to prepare consolidated financial statements in accordance with Generally Accepted Accounting

2 2 Global Tax Alert Americas Tax Center Principles (GAAP). To comply with GAAP, publicly traded corporations and their subsidiaries (including the taxpayer in this case) must calculate a reserve to account for contingent tax liabilities, which includes an estimate of the tax exposure that the publicly traded corporation or its subsidiary may face if the Minister were to challenge any UTPs on the tax return. The calculation would take into account the tax liability in question and the likelihood of a successful challenge by the Minister. In the present case, the calculation of the reserve was supported by the TAWPs prepared by the taxpayer s in-house staff. The TAWPs identified the UTPs on an Issues List and quantified the potential exposure of the UTPs if challenged by the Minister in court. In the course of an audit of the taxpayer s 2005 taxation year, the Minister sought production of the TAWPs under Section 231.1(1) of the Act. The taxpayer produced a redacted copy of the TAWPs, one which did not reveal the Issues List, the UTPs or the underlying analysis, and declined to produce an unredacted list. The Minister applied to the FCC to obtain a compliance order under Section 231.7(1) of the Act to compel the taxpayer to produce the unredacted TAWPs to the Minister. Ultimately, the concern that gave rise to the Minister s original request for the 2005 TAWP was resolved. However, in advance of the audit of subsequent taxation years, the Minister made a routine request for the relevant TAWPs for each taxation year, on the basis that they were compellable under the Act without restriction. The parties agreed that the Issues List of the unredacted TAWPs, if provided, would provide a roadmap for the Minister to focus her audit resources on issues of concern. The taxpayer objected to the productions sought on the basis that: 1. The taxpayer did not meet the statutory requirements for a compliance order. 2. Even if the statutory requirements were met, the FCC should exercise its discretion not to compel production of the unredacted TAWPs. The statutory requirements argument The taxpayer argued that the unredacted TAWPs were not necessary for the Minister to complete her audit because: The Minister s policy was to not seek these types of documents absent exceptional circumstances, and no such circumstances existed in this case. The Issues List related to taxation years that were already statute barred. The TAWPs were not prepared further to a requirement of the Act but rather a regulatory requirement, the proper discharge of which disadvantaged the taxpayer vis-à-vis the Minister s audit, effectively conscripting the taxpayer in the audit exercise. The TAWPs reflected subjective opinions of the taxpayer that cannot be seen as relating to the determination of taxable income under the Act. The discretion argument The taxpayer argued that, even if the statutory requirements were met, the FCC should exercise its discretion not to compel the taxpayer to produce unredacted copies of the TAWPs that would result in the disclosure of the Issues List. The disclosure of the Issues List would constitute a compulsory self-audit by the taxpayer and thus distort the operation of the Canadian tax system. The production of the unredacted TAWPs would be contrary to the Minister s own policy and the public interest in full and frank disclosure of tax risks for financial reporting purposes without fear of tax audit repercussions. The taxpayer further alleged that the Minister acted in bad faith in her requests and that the Minister was on a fishing expedition, which was contrary to the Minister s duty to conduct audits in good faith. FCC decision The FCC did not accept any of the taxpayer s arguments, and concluded that the statutory requirements for a compliance order had been met. The FCC found that the Minister s policy of not routinely requiring TAWPs was not a relevant consideration. Rather, the Minister was entitled to compel taxpayers materials for current or future audits, and such entitlement did not amount to compelling the taxpayer to self-audit. The FCC decided that what the Minister wants and needs to conduct a comprehensive and complete audit is a matter for the Minister to determine. The fact that the TAWPs were created and kept because of regulatory requirements outside of the Act was irrelevant; the TAWPs were an important tax record of the taxpayer and thus were relevant to the payment of tax under the Act, and were accordingly compellable under Sections 231.1(1) and 231.7(1) of the Act.

3 Global Tax Alert Americas Tax Center 3 On the question of discretion, the FCC again rejected the taxpayer s arguments. Audits are not fishing expeditions and the Minister in this audit was clear about her focus on obtaining the TAWPs to use in current and future audits, which was a legitimate objective. In seeking the TAWPs, there was no evidence that the Minister had acted in bad faith, but even if there had been, it would not have affected the Minister s entitlement to compel the taxpayer to produce the unredacted TAWPs to the Minister. Whether the Minister s requirement was contrary to the industry or public interest was for the Minister, not the FCC, to determine. Lastly, the Minister s requirement for the unredacted Issues List could not be construed as a compulsory self-audit, as the taxpayer had not been asked to create anything; rather, it had been asked only to produce documents that already existed. FCA decision The FCA began by acknowledging that on a plain reading of Section 231.1(1) of the Act, the language was broad enough to render the TAWPs accessible to the Canada Revenue Agency (CRA). However, the FCA considered that the real issue was whether Section 231.1(1) of the Act allowed the CRA general and unrestricted access to this information. The FCA allowed the taxpayer s appeal and overturned the FCC s decision, finding that the CRA did not have such general and unrestricted access. In reaching this conclusion, the FCA confined its reasons to the accessibility of those parts of the TAWPs that reflected its UTPs, being the Issues List. In the FCA s view, Section of the Act does not make all information in the TAWPs compellable without restriction ; rather, Parliament intended that the provision be used with restraint when dealing with TAWPs. The FCA found, contrary to the FCC decision, that allowing the Minister unfettered access to the Issues List would effectively compel the taxpayer to self-audit. It also found that providing the Minister with general and unrestricted access to the information reflected in the TAWP would imperil the integrity of the financial reporting systems put in place by the provinces, and this could not have been Parliament s intention in enacting Section 231.1(1) of the Act. In obiter, the FCA expressed an opinion that, even if it was wrong in its restrictive interpretation of Section 231.1(1) of the Act, the FCC should not have exercised its discretion in favor of the Minister, because the Minister was seeking a relief that was contrary to its published policy of restraint on requesting TAWPs. In the FCA s opinion, this policy reflected the very constraint the Act imposed on the Minister. Given the public interest imperative in this policy, the FCC should not have exercised its discretion in favor of the CRA. Lessons learned The FCA decision is a significant setback for the CRA on this issue. It will undoubtedly proceed more cautiously when making a determination whether to request a taxpayer s TAWP, and certainly more so when seeking a compliance order through the FCC. However, taxpayers should not read the decision as providing a blanket assurance that the CRA could never request TAWPs. After all, the FCA s decision was given in the context of the CRA s asserted right, supported by the Supreme Court of Canada (SCC), to make requests for information beyond specific questions arising in the course of a CRA audit. Rather, the FCA decision confirms that this asserted right must be tempered by a policy of restraint on the CRA s part, particularly with respect to access to TAWPs, consistent with the CRA s own published administrative policy. The Minister, if she chooses to do so, has until 29 May 2017 to seek leave to appeal the FCA decision to the SCC. As this issue has wide ranging implications, it would not be surprising to see this matter accepted for consideration by Canada s highest court.

4 4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Calgary Greg Boone Ernst & Young LLP (Canada), Montréal Sandy Maag Ernst & Young LLP (Canada), Toronto Vince Raimondo Ernst & Young LLP (Canada), St. John s Troy Stanley troy.a.stanley@ca.ey.com Ernst & Young LLP (Canada), Vancouver Dalbir Rai dalbir.s.rai@ca.ey.com EY Law LLP, Calgary David Robertson david.d.robertson@ca.ey.com EY Law LLP, Montréal Louis Tassé louis.tasse@ca.ey.com EY Law LLP, Ottawa Roger Taylor roger.taylor@ca.ey.com EY Law LLP, Toronto Daniel Sandler daniel.sandler@ca.ey.com EY Law LLP, Vancouver Allison Blackler allison.blackler@ca.ey.com

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Americas Tax Center 2017 EYGM Limited. All Rights Reserved. EYG no Gbl NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com