Minister of National Revenue v. BP Canada Energy Company (June 5, 2015 – 2015 FC 714, Campbell J.).
Précis: The decision of the Federal Court in
Minister of National Revenue v. BP Canada Energy Company (“BP Canada”) is one that is likely to reverberate throughout the corridors of the Canadian business community for a long time. Generally Accepted Accounting Principles (“GAAP”) require that corporations and their subsidiaries document contingent tax liabilities. These are sometime known as “Issues Lists” and contain all potential tax issues of which management is aware that might affect the tax position of the corporation. Traditionally CRA did not seek access to Issues Lists while conducting audits of corporations, particularly large public corporations. On May 10, 2010 the Minister announced a change of policy stating that CRA was entitled to production of “tax accrual working papers (including those that relate to reserves for current, future, potential, or contingent tax liabilities) … although not routinely required , officials may request tax accrual working papers”. In other words, the Minister could seek and obtain Issues Lists.
That is precisely what happened to BP Canada. There was an extensive audit in which BP provided CRA with responses to its audit queries with the Issues Lists redacted. The evidence of CRA was that it had determined in 2010 that it wanted copies of the Issues Lists but did not advise BP Canada of this until 2012 when it commenced an application under subsection 231.7(1) of the
Income Tax Act (the “Act”) to compel production of the Issues Lists. There was no evidence that CRA had any particular concerns that led to the requirement. Rather CRA’s position, as evidenced by the affidavit of Ms. Temple, the audit leader, was that they would get the Issues Lists “no matter what”; the “Income Tax Act provides me - provides - forces them to provide me with the original document” (p. 24).
The Federal Court, in a decision full of extremely long quotations from the written submissions of the parties, essentially dismissed all of BP Canada’s arguments as having no merit and ordered the production of the Issues Lists. This is a decision that will likely make its way to the Supreme Court of Canada and until it does it is almost certain to give the Canadian business community many sleepless nights.
Decision: CRA moved in the Federal Court to compel the production of BP Canada’s Issues Lists for 2005, 2006 and 2007 pursuant to subsection 231.7(1) of the Act:
[1] The present Application concerns a demand made by the Applicant Minister (Minister) pursuant to s. 231.1(1) of the Income Tax Act, RSC 1985, c.1 (5th Supp.), as amended (Act), requiring the Respondent (BP Canada), a publicly traded company, to provide records that describe its uncertain tax positions to assist the Minister in conducting its present and future tax audit responsibilities. BP Canada objects to providing the records. The Minister brings the present Application pursuant to s. 231.7(1) of the Act to obtain an order compelling BP to provide the records.
…
[4] More precise details of the Minister’s request are as follows:
Publicly traded corporations such as BP p.l.c. the ultimate parent
company of the respondent, are required for financial reporting and
other regulatory purposes to prepare consolidated financial
statements in accordance with generally accepted accounting
principles (“GAAP”). To prepare financial statements that comply
with GAAP, the corporation and its subsidiaries must calculate
reserves to account for contingent tax liabilities. Those calculations
must include an estimate of the liability BP would face if the
Minister were to challenge uncertain positions of BP’s self-
assessed tax return. The calculations are supported by working
papers.
The working papers maintained by BP identify the issues [the
Issues Lists] which BP knows may merit adjustment. BP’s list of
uncertain tax positions would identify the areas at highest risk for
loss of tax revenue. The Minister seeks disclosure of this list of
verify whether BP’s uncertain tax positions are compliant with the
Act.
(Minister’s Memorandum of Fact and Law, paras. 31-32
[Footnotes omitted])
CRA explained its position as follows:
[6] In addition, in the course of oral argument, Counsel for the Minister explained the
concern behind the request for the production order being sought:
If the CRA does not discover the transactions within the normal
reassessment period, there is no scrutiny of the tax compliance
with respect to these positions. There is no verification by the
CRA, and there is no review by the Tax Court of Canada. If the
CRA does not uncover the tax positions in time, the shareholders
of BP win, and the taxpayers of Canada lose. If the tax position is
discovered and challenged by the CRA, the matter can ultimately
be resolved by the Tax Court of Canada as to the propriety.
I submit these are cases that should be reviewed by the CRA and
ultimately by the Tax Court of Canada. Where large corporations
are taking positions that are on the line, that they are not black and
white, these are precisely the types of cases that should ultimately
be resolved before the courts.
(Transcript, p.11)
The Court summarized the issues:
[8] The issues for determination with respect to the scope and applicability of s. 231.1(1)and s. 231.7 the Act are as follows:
1. As argued by BP Canada, is the Minister entitled to compel BP Canada to
disclose the Issues Lists for the purpose of expediting the Minister’s future audits?
For the reasons that follow, I find the answer is “yes”.
2. Should the Court exercise discretion not to compel the Issues Lists?
For the reasons that follow, I find the answer is “no”.
3. Is the Minister’s demand for the Issues Lists unfair to BP Canada?
For the reasons that follow, I find the answer is “no”.
The Court related the Minister’s historic position on Issues Lists:
[11] For many years, the Minister has taken the position that tax accrual working papers, such as those at issue in the present Application, are compellable, but the position has been exercised with non-binding restraint. In 2004, the following confirmation was provided:
Department’s Position
It is not the policy of the Department routinely to
request audit files from accountants for inspection. Normally, any
such request would result only when the auditor’s files form part of
the taxpayer’s records and a proper examination could not be
carried out without access to those files.
[…]
It is not the policy of the CCRA to request a general access to
accountant’s working papers for the purpose of scrutinizing them
in the course of conducting an audit.
(Joint application Record, Vol. III, Ingram Affidavit, Exhibit F,
pp. 433-434)
It also noted, essentially without comment, the new position adopted in 2010.
The Court held that the principle of “accountability” required BP Canada to produce the Issues Lists:
[20] In my opinion, BP’s objection to divulging the Issues Lists is about accountability. Every taxpayer is accountable to the Minister. That accountability is enforced by an examination of the taxpayer’s records on an audit. For an understandable, reason, not all taxpayers are audited; it would take unavailable immense resources to do so. Some taxpayers are audited as a matter of course; BP Canada is one among many others. Because it is under constant audit, BP Canada, as a practical matter, is more accountable than other taxpayers. This differential is a matter of fact and is not contrary to the scheme of the Act.
The Court dismissed all four of BP’s arguments out of hand:
[23] First, as to the Minister not needing the Issues Lists to conduct and conclude a
comprehensive and complete audit. This might very well be true, except for the fact that the Minister wants them, not only to expedite the audit process, but also for use in its continuing and future auditing of BP Canada. The need is for the Minister to determine; this point is clearly stated in the Minister’s policy statement of May 10, 2010.
[24] Second, as to the Minister’s use of the Issues Lists as offending Canada’s self-reporting tax system by instituting a system of self-auditing. I am unable to give any weight to this argument. The “conscription of the taxpayer” argument is not apt to the facts of the present case. The Issues Lists were prepare, reflecting an opinion of tax liability based on a choice to create the reserve. The Minister is only asking for the disclosure of the Issues Lists already prepared and is not asking for anything to be prepared. In my opinion, to do so does not instigate the “self-audit” illustrated in the analogy.
[25] Third, as to the Issues Lists not being compellable simply because the Act does not require that they be kept. I disagree. 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’ possession.
[26] And fourth, as to the Issues Lists not relating to the determination of taxable income under the Act. On a literal interpretation of s. 231.1(1), I disagree. I find that the working papers, containing the Issues Lists, are documents that have a purpose related to the enforcement of the Act being taxation accountability (see: Tower v MNR, 2003 FCA 3007 at paragraph 29); relate to information in BP Canada’s records; and also relate to an amount payable at BP Canada under the Act. Regardless of the fact that tax accrual working papers contain subjective analysis of tax risk, together with factual information upon which tax reporting is founded, I find that the working papers under consideration fall within the scope of s. 231.1(1) because they are relevant to BP Canada’s intention in creating the reserves (see: Tower at paragraph 31).
[27] Thus, in my opinion, as a matter of law, the Issues Lists with respect to Query 2005-10.1, Query 2006-10.1, and Query 2007-10.1 are compellable.
The public policy ramifications were for the Minister, not the Court:
[29] By bringing the present Application, the Minister is adhering to, and implementing the policy that, without restriction, working papers are compellable under the Act. In the circumstances of the present case, and in view of the conclusion just expressed agreeing with the Minister’s position, if concerns arise within the industry, of which BP Canada is a part, it is for the Minister to address the concerns. The Minister is taken to know the ramifications of a successful outcome on the legal issue in the present Application. The public and industry interest is within the Minister’s purview, and not the Court’s.
The Court also rejected the concept that this was an impermissible “fishing expedition”:
[38] First, with respect to the fishing expedition argument, in my opinion, an audit is not an expedition. In particular, in the course of the audit of BP Canada, the Minister focused on a specific issue: the contents of the Issues Lists of the tax accrual working papers. Therefore, the Minister’s interest was specifically to obtain a clear roadmap to be used for current and future audits.
Finally the Court rejected the notion that the Minister had acted in bad faith:
[39] And second, I find that the bad faith argument raises an unresolved serious triable issue: on a balance of probabilities, did the Minister’s officials intend to mislead BP Canada’s officials? In the course of argument, neither counsel for the Minister nor Counsel for BP Canada directed attention to, or relied upon, evidence that the issue of a bad faith motive was ever directly addressed to Ms. Temple. BP Canada’s argument is based on a belief of her ill motive. In my opinion, it is not possible, or fair, to make a finding on motive without providing the individual involved an opportunity to present an explanation. Without this opportunity being provided, the risk of an error in reaching a conclusion on such an issue is high.
[40] In my opinion, BP Canada’s perspective is based on speculation. Equally as speculative is the following possibility based on Ms. Temple’s affidavit evidence (Joint Application Record, Vol. I, pp.5 - 17). The Minister’s policy that working papers are compellable, with restraint, was a dominant feature in how the scenario unfolded. At the outset, the auditors expressed legitimate concerns about the audit, and, therefore, more information was demanded. At that stage, adherence to the Minister’s policy of applying restraint to not usually seek working papers was dominant. In the middle of the process, that policy consideration abated in favour of gaining the information the working papers contain. And, at the end of the process, the Minister’s policy was applied, without restraint: a full-out demand was made for the Issues Lists, not only for the purposes present at the time, but into the future.
[41] Under examination by Counsel for BP Canada, Ms. Temple was very frank: early on she had made a decision that access must be gained to the Issues Lists. There is nothing nefarious about forming this opinion, not expressing it, and continuing to attempt to gather the information needed with restraint in mind. There is also nothing nefarious about finally applying the Minister’s policy to make an outright demand for the Issues Lists. Perhaps frustration played a role in the approach that changed over time due to BP Canada’s unwillingness to provide the Issues Lists. There is no way to know, on a balance of probabilities, which speculation is closer to the truth without having the benefit of a complete examination and cross-examination on the precise issue of motive.
…
[44] As a result, in my opinion, no supportable finding can be made on the existing evidence that the Minister’s officials made the demands for the Issues List in bad faith. Therefore, I dismiss BP Canada’s request for discretion to be applied to not grant the order for production of the compellable Issues Lists.
As a result CRA’s application to compel production of the Issues Lists was allowed.
The Court reserved on costs.
TAGS: Income Tax Act, Judicial Review, Requirement for Information, Accounting Working Papers