Alan Baggett
2015-09-08 06:00:46 UTC
Decision opens working papers on taxes to CRA: CRA SOTW
By Donalee Moulton The Lawyers Weekly - August 21 2015 issue
The Tax Court of Canada has unexpectedly ruled that the Canada Revenue Agency is entitled to access tax accrual working papers -- documents that individuals and companies use to assess reserves for current, future, potential or contingent tax liabilities.
The June 5 decision in Canada (Minister of National Revenue) v. BP Canada Energy Co. [2015] F.C.J. No. 750 has significant ramifications for accountants and their clients. It centred on a request from the minister for working papers prepared by BP Canada staff detailing uncertain tax positions the company faced and identifying the greatest risk for losing tax revenue. Under generally accepted accounting principles (GAAP), corporations and their subsidiaries are required to document contingent tax liabilities. Often called issues lists, the documentation itemizes tax matters that could affect a company, and only came within the purview of the CRA in 2010, when the agency changed policy and the information could be requested only if essential to an audit.
"This case shows that the CRA has decided to change what it thinks is fair game," said tax lawyer Steve Suarez of Borden Ladner Gervais. "The CRA has rarely gone after this type of information. In fact, it may be unprecedented.
"The judgment is clear that the CRA wanted this data to use as a road map for future audits. That is a very new development in Canadian tax law. The CRA is changing the rules of engagement."
BP Canada is classified by the CRA as a "large filed audit," which means it is audited every year. In the case, the national tax agency requested unredacted working papers for three tax years, from 2005 to 2007, to help verify the company's taxable income. According to an affidavit from the CRA, the working papers were necessary to "identify areas where there is the greatest likelihood of a questionable tax position in those years and in subsequent years."
The documents requested by the CRA are not evidence, said William Innes, a tax lawyer with Rueter Scargall Bennett in Toronto.
"It's just the state of mind of the people putting this information together. State of mind is admissible only in limited circumstances," said Innes. "This is a huge breach of privacy."
BP Canada argued, among other things, that the requested information was unnecessary for the CRA to conduct its audit, and that the Income Tax Act does not require taxpayers to prepare GAAP financial statements or the analyses they contain, so the material could not be compelled. The tax legislation does, however, include subsection 230(1), which requires a taxpayer to keep books and records that help determine the taxes payable, and the CRA may request these book and records be produced.
The tax court found that it was "unable to give any weight to BP Canada's arguments." With respect to the energy company's contention that the information could not be legally compelled under the Income Tax Act and that GAAP requirements were a separate issue, the court ruled that what mattered was the significance of the documents to the CRA.
"The fact that the Issues Lists are required to be kept by an authority other than under the Act is irrelevant. However, they are relevant to the payment of tax under the Act because they are an important tax record in BP Canada's possession," Justice Douglas Campbell wrote in his decision.
In an e-mail response, the CRA said the tax court's decision clarifies the scope and application of subsection 231.1(1) of the tax legislation and also confirms the CRA's policy on issues lists and related documentation.
"Acquiring appropriate information is critical to a review or audit. CRA auditors ask for this information when appropriate to do so given the facts and circumstances of the audit," said Magali Deussing, the tax agency's spokesperson in Ottawa.
BP Canada may redefine what constitutes appropriate information. "Since there is no obvious basis to restrict the principle, if upheld, to tax accrual working papers, taxpayers being audited should expect to be greeted with a demand in one form or another to identify uncertain tax positions," said Suarez, "and those who are required to prepare that sort of analysis as part of the preparation of their financial statements will need to seriously rethink how that work is done and what form it takes."
The recent decision is expected to be appealed.
"I'd be shocked if there weren't an appeal," said Innes. "This is important to the whole tax community."
In the meantime, he added, issuers and their accountants need to be extremely careful.
"They are required to keep this information. But how do you do this without walking [the information] right into the CRA?"
The only safeguard appears to be lawyer-client confidentiality.
It is not absolute, however. While communication between a client and a lawyer is confidential, simply copying a lawyer on financial information is not sufficient. The communication must be for the purposes of providing legal advice. It may be that companies will more actively and thoroughly involve their lawyers in tax-related matters moving forward.
"It would not be surprising to me to see companies prepare relevant analysis of uncertain tax provisions and run it by their lawyer for real legal advice," said Suarez. "That would allow the work to be done in a way that would not enable access by the CRA."
Suarez said a more detailed approach determining how this issue should be resolved in the future is needed. "The judgment was more statements of opinion. What we really need from a court is a comprehensive framework for resolving the next case."
----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - http://www.taxcollectorsbible.com/ - Tax Collector's Bible
By Donalee Moulton The Lawyers Weekly - August 21 2015 issue
The Tax Court of Canada has unexpectedly ruled that the Canada Revenue Agency is entitled to access tax accrual working papers -- documents that individuals and companies use to assess reserves for current, future, potential or contingent tax liabilities.
The June 5 decision in Canada (Minister of National Revenue) v. BP Canada Energy Co. [2015] F.C.J. No. 750 has significant ramifications for accountants and their clients. It centred on a request from the minister for working papers prepared by BP Canada staff detailing uncertain tax positions the company faced and identifying the greatest risk for losing tax revenue. Under generally accepted accounting principles (GAAP), corporations and their subsidiaries are required to document contingent tax liabilities. Often called issues lists, the documentation itemizes tax matters that could affect a company, and only came within the purview of the CRA in 2010, when the agency changed policy and the information could be requested only if essential to an audit.
"This case shows that the CRA has decided to change what it thinks is fair game," said tax lawyer Steve Suarez of Borden Ladner Gervais. "The CRA has rarely gone after this type of information. In fact, it may be unprecedented.
"The judgment is clear that the CRA wanted this data to use as a road map for future audits. That is a very new development in Canadian tax law. The CRA is changing the rules of engagement."
BP Canada is classified by the CRA as a "large filed audit," which means it is audited every year. In the case, the national tax agency requested unredacted working papers for three tax years, from 2005 to 2007, to help verify the company's taxable income. According to an affidavit from the CRA, the working papers were necessary to "identify areas where there is the greatest likelihood of a questionable tax position in those years and in subsequent years."
The documents requested by the CRA are not evidence, said William Innes, a tax lawyer with Rueter Scargall Bennett in Toronto.
"It's just the state of mind of the people putting this information together. State of mind is admissible only in limited circumstances," said Innes. "This is a huge breach of privacy."
BP Canada argued, among other things, that the requested information was unnecessary for the CRA to conduct its audit, and that the Income Tax Act does not require taxpayers to prepare GAAP financial statements or the analyses they contain, so the material could not be compelled. The tax legislation does, however, include subsection 230(1), which requires a taxpayer to keep books and records that help determine the taxes payable, and the CRA may request these book and records be produced.
The tax court found that it was "unable to give any weight to BP Canada's arguments." With respect to the energy company's contention that the information could not be legally compelled under the Income Tax Act and that GAAP requirements were a separate issue, the court ruled that what mattered was the significance of the documents to the CRA.
"The fact that the Issues Lists are required to be kept by an authority other than under the Act is irrelevant. However, they are relevant to the payment of tax under the Act because they are an important tax record in BP Canada's possession," Justice Douglas Campbell wrote in his decision.
In an e-mail response, the CRA said the tax court's decision clarifies the scope and application of subsection 231.1(1) of the tax legislation and also confirms the CRA's policy on issues lists and related documentation.
"Acquiring appropriate information is critical to a review or audit. CRA auditors ask for this information when appropriate to do so given the facts and circumstances of the audit," said Magali Deussing, the tax agency's spokesperson in Ottawa.
BP Canada may redefine what constitutes appropriate information. "Since there is no obvious basis to restrict the principle, if upheld, to tax accrual working papers, taxpayers being audited should expect to be greeted with a demand in one form or another to identify uncertain tax positions," said Suarez, "and those who are required to prepare that sort of analysis as part of the preparation of their financial statements will need to seriously rethink how that work is done and what form it takes."
The recent decision is expected to be appealed.
"I'd be shocked if there weren't an appeal," said Innes. "This is important to the whole tax community."
In the meantime, he added, issuers and their accountants need to be extremely careful.
"They are required to keep this information. But how do you do this without walking [the information] right into the CRA?"
The only safeguard appears to be lawyer-client confidentiality.
It is not absolute, however. While communication between a client and a lawyer is confidential, simply copying a lawyer on financial information is not sufficient. The communication must be for the purposes of providing legal advice. It may be that companies will more actively and thoroughly involve their lawyers in tax-related matters moving forward.
"It would not be surprising to me to see companies prepare relevant analysis of uncertain tax provisions and run it by their lawyer for real legal advice," said Suarez. "That would allow the work to be done in a way that would not enable access by the CRA."
Suarez said a more detailed approach determining how this issue should be resolved in the future is needed. "The judgment was more statements of opinion. What we really need from a court is a comprehensive framework for resolving the next case."
----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - http://www.taxcollectorsbible.com/ - Tax Collector's Bible