Written by Claire Kennedy

The Federal Court of Appeal has limited the Canada Revenue Agency's (CRA) access to tax accrual working papers that reveal a taxpayer's uncertain tax positions. This case is an important one for every company that has audited financial statements.

The court's decision in BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61 overturns the Federal Court's ruling in the case, which held that BP Canada had to disclose multiple years' worth of tax working papers to the CRA under the CRA's general and admittedly broad audit power. The case followed a change in CRA's policies and practices with regard to seeking tax working papers as part of an audit. In a 2004 policy document, the CRA stated that it was not its policy "to request a general access to accountant's working papers for the purpose of scrutinizing them in the course of conducting an audit"; however, in 2010, the CRA revised its policy to state that "officials may request tax accrual working papers" in the course of an audit and indeed, in recent years, the CRA has become more aggressive in seeking access to tax working papers. These working papers outline uncertain tax positions or "soft spots" in a taxpayer's tax filings and are therefore a rich source of information and a potential roadmap for the CRA's audit. Public companies prepare these working papers as part of the support for their audited financial statements—which are a requirement for public companies under provincial securities legislation—and so companies are in a Catch-22 if they also have to routinely disclose the working papers to the CRA.  

The Federal Court of Appeal recognized that extending the CRA's routine audit reach to tax working papers would jeopardize transparency in the preparation of audited financial statements as companies would be less willing to prepare detailed working papers for uncertain tax positions and would also effectively impose a requirement that taxpayers "self-audit", which goes beyond the Income Tax Act's requirement that taxpayers self-assess their taxes.  The Federal Court of Appeal did affirm that taxpayers must disclose tax working papers in a CRA audit "to respond to a specific inquiry" but denied "general and unrestricted access" by the CRA to those parts of a taxpayer's working papers that reveal its uncertain tax positions. The court thereby struck a fair and appropriate balance that should restore audit practices to those adopted by the CRA before its 2010 policy change.