This guest commentary is provided by guest contributors, Andrew Skodyn and Scott Rollwagen, of Lenczner Slaght LLP.
Comment: Andrew and Scott make a very interesting point about the doctrine of legitimate expectations, which does not appear to have been raised before Campbell J. in the Federal Court. Moreover their penultimate paragraph dealing with the potential relevance (or lack thereof) of a taxpayer’s state of mind independent of some allegation of colourable behaviour or malfeasance poses thorny issues for the Federal Court of Appeal (or beyond). Again it is unfortunate that this point does not seem to have been raised in the Federal Court.
In the recent decision of
Minister of National Revenue v. BP Canada Energy Company, 2015 FC 714, the Federal Court granted an application by the Minister of National Revenue to compel production of the tax reserve working papers of BP Canada Energy Company (“BP”) from the 2005-2007 tax years. This application is the first test of the current Canada Revenue Agency (“CRA”) policy regarding tax reserve working papers, which issued in 2010. If these requests become commonplace, they will raise a significant concern for corporations that are required to prepare their financial statements according to GAAP rules.
Those corporations must create reserves for contingent tax liabilities and, in doing so, support those reserves with an analysis of the likelihood of the company’s tax strategies being successful (or unsuccessful, as the case may be). The internal analysis and working papers underpinning those tax reserves would now be available to CRA for their use and review during the audit process. In a very real sense, CRA would be using the company’s own accounting requirements against it, so as to pinpoint exactly the areas where the company believes it has the most tax risk.
The Court (Campbell, J.) acknowledged that this request represented a change in policy on the part of the Minister and acknowledged that any ability to request these materials had previously been treated “with non-binding restraint”. In other words, CRA was prepared to do its own job in auditing these corporations and let them set aside reserves for contingent tax liabilities without interference.
The documents in question were known as “Issues Lists”, namely lists of issues that BP knew to exist with respect to potential tax liabilities. Not surprisingly, BP made numerous arguments on legal and policy grounds as to why the Issues Lists should not be compellable, but the Court rejected them all. In Justice Campbell’s view, the Minister was entitled to change the CRA policy on working papers if it chose to do so and entitled to access to the Issues Lists as a matter of law.
BP also argued that the Court should not grant the application, on the basis that the Minister had acted in bad faith. Significant emphasis seems to have been placed on this argument, which did not find favour with the Court. Indeed, the Court analysed the evidence and arguments at length, ultimately concluding that “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.” The Court had no sympathy for BP’s claims that it had been “seduced” into disclosing some information and now was being forced into disclosing the rest.
Given that the Issues Lists being sought were prepared before the Minister changed its policy concerning the routine production of such documents, it may have been arguable by BP that it acquired a form of legitimate expectation, not that the policy remain unchanged, but rather that the Minister give fair notice of a change in policy and refrain from taking advantage of taxpayer reliance on its previous position. The doctrine of legitimate expectations generally creates only procedural rights and does not ensure any substantive outcome, but in BP’s case it may have been arguable that the doctrine should have been expanded to address the manifest unfairness of the Minister’s attempt to take retroactive advantage of its own change in position.
Finally, while this recent decision is the culmination of a line of cases progressively expanding the Minister’s reach under Section 231.2(1) of the
Income Tax Act, it is worth asking whether it expands the scope of that reach beyond anything that has gone before. In previous cases, the relevance of a taxpayer’s subjective internal analysis of its tax situation rested on the independent relevance of the taxpayer’s state of mind. Where a given transaction may for some reason be colourable, it is arguable that such information is relevant. But to say that such information is always relevant simply because it may assist CRA in an audit may mean that there are no effective limits on the Minister’s reach. Given the breadth of such an approach, the Minister could almost establish an entitlement to information in a taxpayer’s file merely by requesting it.
It is assumed that BP will appeal this decision. That appeal will be watched with some interest, as the implications to publicly-traded corporations in Canada are significant.