BP Canada Energy v. R - FCC: CRA not entitled to internal tax accrual working papers (TAWPs)

BP Canada Energy v. R - FCC:  CRA not entitled to internal tax accrual working papers (TAWPs)


BP Canada Energy Company v. Canada (National Revenue) (March 30, 2017 – 2017 FCA 61, Nöel C.J. (author), Stratas, Boivin JJ.A.).

Précis:  The Federal Court of Appeal has reversed the Federal Court’s decision that held that corporate taxpayers can be required to produce their internal tax accrual working papers (“TAMPs”).  This may be one of the most important cases in several years on the extent of the power CRA has in gathering private tax information compiled by Canadian businesses.  The Chief Justice of the Federal Court of Appeal, who is a noted tax expert, has written an intellectually compelling decision.  If the Supreme Court grants leave to appeal, which I think highly likely, it is difficult to predict what the Court will do.  If I were a betting person, I would be inclined to think that the McLachlin Court, which has always exhibited a balanced, pragmatic approach in tax cases, will accept the analysis of Chief Justice Nöel.

Decision:   The Decision of Chief Justice Nöel is thorough and erudite.  Ultimately however it boils down to the fact that a balancing of federal taxation interests and provincial regulatory interests means that the Minister cannot use her requirement power to compel a taxpayer to audit itself:

[95]           If anything, the U.S. experience which can be gleaned from these two cases confirms that general and unrestricted access to TAWPs would have a negative impact on financial reporting and impose on taxpayers an obligation which they do not have. The regulated approach referred to in Textron speaks to that in clear terms as there is no other explanation for the limits which this system imposes on the IRS’ power to access TAWPs (I.R.C., § 6011 and 6112; Treas. Reg. § 1.6011-4; Treas. Reg. § 1.6012-2).

[96]           I accept the intervener’s argument that legislation cannot be construed in a vacuum, and that the legal context, including the laws of the provinces, can inform the use to which subsection 231.1(1) can be put. The Supreme Court addressed the matter as follows in Giffen (Re), [1998] 1 S.C.R. 91, 155 D.L.R. (4th) 332  in a bankruptcy context (para. 64):

Even though bankruptcy is clearly a federal matter, and even though it has been established that the federal Parliament alone can determine distribution priorities, the [Bankruptcy and Insolvency Act] is dependent on provincial property and civil rights legislation in order to inform the terms of the [Bankruptcy and Insolvency Act] and the rights of the parties involved in the bankruptcy. Section 72(1) of the [Bankruptcy and Insolvency Act] contemplates interaction with provincial legislation.

(To the same effect, see Will-Kare Paving & Contracting Ltd. v. Canada, 2000 SCC 36, [2000] 1 S.C.R. 915 at para. 31; Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94 at para. 14.)

[97]           I recognize that we are not dealing here with a word in a federal statute which takes its meaning from provincial laws. Rather, we are dealing with a power created under federal legislation that was not intended to ride roughshod over provincial laws. The issue is one of harmonious interpretation: Parliament intended its laws to work with provincial laws, not against them.

[98]           Although raising taxes pursuant to subsection 91(3) of the Constitution Act, 1867 (U.K.), 30 & 31 Vict., c. 3, reprinted in R.S.C. 1985, App. II, No. 5, is a federal matter, in granting the Minister broad access to documents pursuant to subsection 231.1(1) of the Act, Parliament cannot have intended that this power be used to imperil the integrity of the financial reporting system put in place by the provinces.

[99]           I therefore conclude that the Minister cannot invoke subsection 231.1(1) for the purpose of obtaining general and unrestricted access to those parts of BP Canada’s Tax Reserve Papers which reveal its uncertain tax positions. In practical terms, this means that the Minister cannot enlist taxpayers who maintain TAWPs to perform the core aspect of audits conducted under the Act.

Accordingly the appeal was allowed with costs both in the Court of Appeal and in the Federal Court.

Comment:  It is highly likely that this case will reach the Supreme Court of Canada.  It will be fascinating to see how they handle this complex and delicate issue.