Limits on CRA’s Tax Audit Powers

Limits on CRA’s Tax Audit Powers to Procure Tax Accrual Working Papers

The Canada Revenue Agency is granted broad tax audit powers under the Income Tax Act. Essentially, the CRA can inspect, audit or examine any books or records of a taxpayer and any documents of the taxpayer or any other person that may relate to information that should be in the taxpayer’s books and records or relate to any amount payable by the taxpayer under the Tax Act. This can be justified under a self-reporting taxation system like the one Canada has in order for the CRA to ensure that Canadian taxpayers are reporting and paying taxes correctly.

On the other hand, provincial securities legislation requires that public corporations meet various accounting and reporting standards, one of which involves the preparation of tax accrual working papers, also known as uncertain tax positions. Tax accrual working papers lay out a corporation’s tax positions as well as the likelihood that each position may be challenged and the likelihood of success in the event that the corporation will succeed on notice of objection or in tax court for each tax position.

But the CRA’s tax audit powers and the requirement for corporations to keep tax accrual working papers collided and became the key issue in BP Canada Energy Company v Canada (National Revenue) in the Federal Court of Canada and then the Federal Court of Appeal.

In the course of the tax audit of BP Canada’s 2005 taxation year, the CRA tax auditor found an issue with certain refund interest paid by the Minister to BP Canada, but was unable to trace the refunded interest into BP Canada’s accounts. In the course of this tax audit, the CRA tax auditor became interested in several accounting entries in BP Canada’s accounts. To verify the source of these accounting entries, the CRA tax auditor requested the disclosure of the original supporting working papers. These original working papers were BP Canada’s tax accrual working papers. However, BP Canada refused to comply with the request. The reason for the refusal was that the tax accrual working papers would provide the Minister a roadmap to BP Canada’s uncertain tax positions as well as the analyses behind those positions.

BP Canada produced a redacted version of the working papers to the CRA tax auditor with BP Canada’s uncertain tax positions .The redacted version addressed the CRA tax auditor’s concern about the accounting entries, but raised another concern. The taxes that were proposed to be assessed were materially lower than the reserves set out in BP Canada’s working papers. As a result, the tax auditor demanded the unredacted version of the tax accrual working papers. BP Canada confirmed that it would not produce the unredacted version of its tax accrual working papers.

CRA brought an application before the Federal Court seeking an order for the production of BP Canada’s working papers. Ultimately, the Federal Court Judge ordered BP Canada to produce the tax accrual working papers. As a result of the Federal Court’s order to produce the tax accrual working papers, BP Canada’s Canadian tax litigation lawyers appealed the decision to the Federal Court of Appeal.

The Federal Court of Appeal concluded that the Minster could not obtain general and unrestricted access to the portions of BP Canada’s tax accrual working papers which reveal its uncertain tax positions. To learn more about the CRA tax auditors powers to compel tax information and how this decision on uncertain tax positions and tax accrual working papers can affect your business, call our experienced Toronto tax law firm and speak to one of our expert Canadian tax lawyers.


Team of Canadian Tax Lawyers

Nathaniel Hills

Nathaniel Hills

Nathaniel completed his Juris Doctor degree at Osgoode Hall Law School where he excelled in the areas of tax law and legal writing and research.He successfully completed all of the requirements of Osgoode’s Taxation Law Curricular Stream

Carson Pillar

Carson Pillar

Carson Pillar articled with us and then joined our tax law firm as an associate Canadian tax lawyer having been called to the Ontario bar in June 2016. Carson runs our Calgary tax office. Carson earned his Juris Doctor from Western University and graduated in 2015.

Ian Thomas

Ian Thomas

Ian Thomas joined our Toronto tax law firm as an articling student (student at law) in July 2016 and upon becoming a Canadian tax lawyer in June 2017 he becomes our latest tax associate. Ian earned his Juris Doctor from Osgoode Hall Law School and graduated in 2016.

Tigra Bailey

Tigra Bailey

Tigra Bailey has now joined our tax law firm as a summer tax law student and is expected to return as an Articling Student in 2017-2018. Tigra is completing her Juris Doctor at Queen’s University and her expected graduation date is in 2017.

Ildi Makrai

Ildi Makrai

Ildi has joined the law firm of Rotfleisch & Samulovitch PC in June, 2000 and brings over 25 years of legal secretarial experience to the firm. She started as a Legal Secretary and after obtaining Certificates from The Institute of Law Clerks of Ontario

Jamin Chen

Jamin Chen

Jamin Chen joins our tax law firm as an articling student in September 2016 after earning his Juris Doctor from Allard Hall at the University of British Columbia.

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