From: canada.revenueagency@yahoo.com   
      
   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."   
      
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