Docket: T-908-12
Citation:
2015 FC 714
Ottawa, Ontario, June 5, 2015
PRESENT: The Honourable Mr. Justice Campbell
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BETWEEN:
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MINISTER OF
NATIONAL REVENUE
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Applicant
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And
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BP CANADA
ENERGY COMPANY
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Respondent
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ORDER AND REASONS
[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.
[2]
The present Application is supported by the
Affidavits of Ms. Dawn Temple, Large File Case Manager for the Minister, and
Mr. Steven M. Ingram, past Senior Tax Advisor to BP Canada, who were both
instrumentally involved in the subject matter under review.
I.
Overview of the Present Application
[3]
In written argument, Counsel for the Minister
provides the following overview:
The Minister of National Revenue is
conducting an audit of BP Canada Energy Company and seeks production of certain
of BP's working papers for purposes of the audit. The working papers were
prepared by BP's in-house staff and they list uncertain tax positions, thereby
identifying areas at the highest risk of loss of tax revenue. The Minister
seeks production of these working papers to verify whether BP has complied with
the Income Tax Act.
As with all other taxpayers in Canada, BP is
required by law to file a tax return and to estimate its tax payable. The
Minister has a statutory duty to verify whether taxpayers' self-assessments of
tax payable are accurate.
In order to assist the Minister in carrying
out her statutory duty, Parliament has provided the Minister with broad
information gathering powers. The Supreme Court of Canada has stated that these
include the power to “inspect, audit or examine a wide array of documents,
reaching beyond those that the Income Tax Act otherwise requires the taxpayer
to prepare and maintain”. The Supreme Court of Canada has also held that it is
the prerogative of the Minister to decide whether she will conduct an audit and
the form that audit will take.
The documents at issue in this application
are accounting documents generally called tax accrual or tax reserve working
papers. A taxpayer who takes uncertain tax positions must create prescribed
accounting entries known as “reserves”, which represent the tax and interest
that may be payable if that position is found to be incorrect. A tax reserve
for an uncertain tax position is only created if, in the taxpayer's opinion,
the Minister is unlikely to accept the taxpayer's position.
In the course of the Minister's audit of BP
and related corporations, the Minister asked BP to produce its tax accrual
working papers. The documents were produced with the list of uncertain tax positions
redacted. The Minister brings this application to obtain a compliance order
under s. 231.7(1) of the Income Tax Act requiring BP to produce
unredacted copies of the documents.
(Minister’s Memorandum of Fact and Law,
paras. 1-5 [Footnotes omitted])
[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
on 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 to verify whether BP's
uncertain tax positions are compliant with the Act.
(Minister’s Memorandum of Fact and Law,
paras. 31-32 [Footnotes omitted])
[5]
The Minister considers BP Canada as a “a large filed audit” and, thus, it is audited on an
annual basis. Specifically, Ms. Temple, the Minister’s Manager of the BP Canada
Audit Group at the time relevant to the present Application, states the audit
value of the unredacted working papers sought to be produced:
Risk analysis and assessment is a standard
audit procedure employed by CRA whereby CRA reviews information concerning a
taxpayer in order to determine the areas where there may be a loss of tax
revenues. This procedure is generally done at the start of an audit and
continues throughout the audit. The goal of this procedure is to determine the
areas of highest risk for loss of tax revenue and to focus CRA's audit
resources on these areas. This is an efficient and cost effective manner to
reduce the amount of necessary field audit work.
[…]
The unredacted working papers that CRA has
asked for during the 2005, 2006 and 2007 audits [specifically related to Query
2005-10.1, Query 2006-10.1, and Query 2007-10.1] will assist the CRA to verify
BP's taxable income. The working papers will identify areas where there is
greatest likelihood of a questionable tax position in those years and in
subsequent taxation years. This information will assist in the
identification of areas of highest risk for loss of tax revenue and will focus
the CRA's audit resources on these areas.
[...]
Production of the unredacted working papers
for 2005, 2006 and 2007 will also assist in the audit of subsequent taxation
years.
[Emphasis added]
(Affidavit of Dawn Temple dated May 30,
2012), paras. 5, 44 and 45)
[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)
[7]
The Minister and BP Canada both agree that the
Issues Lists provide a “roadmap” to target audit
resources on issues of concern.
II.
Issues for Determination
[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”.
[9]
For convenience, s. 231.1(1) and s. 231.7(1) of
the Act are quoted in Appendix A to these reasons.
III.
Issue One: Compellability of the Issues Lists
[10]
The issue is a matter of law. As such, the
Minister argues that the Minister’s long-standing policy on the issue is
irrelevant to the legal issue. I agree. However, I find that the policy is
relevant as contextual information with respect to the discretion-based
arguments advanced by BP Canada.
A.
The Minister’s Policy
[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 or practice 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)
[12]
On May 10, 2010, the Minister issued a statement
entitled “Acquiring Information from Taxpayers, Registrants and Third Parties.”
In the statement the Minister made two points cogent to the present
Application:
CRA Officials are authorized to request and
receive any documents needed to conduct a proper inspection, audit or
examination, subject to solicitor-client or litigation privilege.
[…]
“any document” includes accountants’
and auditors’ working papers that relate to a taxpayer’s books and records and
that may be relevant to the administration or enforcement of the ITA, ETA, and
other relevant legislation. Accountants’ and auditors’ working papers include
working papers created by or for an independent auditor or accountant in
connection with an audit or review engagement, advice papers, and 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.
[Emphasis added]
(Joint Application Record, Vol. III, Ingram
Affidavit, Exhibit K, pp. 499 – 500, 503)
[13]
Thus, in May 2010, the Minister clearly
expressed that tax accrual working papers such as those under consideration in
the present Application are compellable.
B.
The Minister’s Position
[14]
As a matter of law, the Minister argues:
Canada has a self-assessing and
self-reporting system of taxation. Each taxpayer who is required to file a
return must estimate the tax payable and report that amount in a return filed
with the Minister without notice or demand. While taxpayers are entitled to
arrange their affairs in such a way as to minimize their tax burden, some
taxpayers use elaborate plans and complex transactions designed to minimize or
avoid their tax liability.
The Minister's duty, through her officials
at the CRA, is to administer and enforce the Income Tax Act. The
Minister must determine whether the taxpayer's self-assessment is accurate or
whether some item contained in the tax return should be adjusted. The Minister
must do so within a limited period known as the “normal reassessment period.”
In order to verify taxpayers' self-assessments,
Parliament has provided the Minister with broad powers to obtain information
and documents from taxpayers under audit and from other parties. The exercise
of these powers to ensure taxpayers pay the correct amount of tax is in the
public interest.
The Minister has a statutory duty to assess
the amount of tax payable on the facts as she finds them in accordance with the
law. The taxpayer under audit cannot be allowed to frustrate the Minister's
ability to perform this duty. Where the Minister is conducting an audit in good
faith, it is not for the Court or anyone else to prescribe the intensity or the
extent of the review. This is exclusively a matter for the Minister, acting
through her officials, to decide. It is the Minister's prerogative to look
under any stone and to use any risk assessment technique she chooses to
identify tax at risk.
The taxpayer has all the information
relevant to its tax liability - the Minister does not. Where tax accrual
working papers are available, the taxpayer knows which issues may merit
adjustment and records that analysis in its working papers. In requesting those
working papers, the Minister is seeking to perform her obligation to verify the
self-assessment despite the information disadvantage inherent in our self-reporting
tax system.
Subsection 231.1(1) of the Act is the
Minister's primary audit tool for obtaining documents from taxpayers under
audit. […].
Subsection 231.1(1) is one of several
provisions that provide the Minister with the power to request and compel
production of documents from taxpayers and other parties for purposes of an
audit or for other purposes relating to the enforcement and administration of
the Act.
Pursuant to subsection 230(1), taxpayers are
required to maintain books and records containing information that will enable
their tax payable to be determined. However, in conducting an audit, the
Minister is not restricted to simply reviewing these documents. The Supreme
Court of Canada, in Jarvis, noted that the power of inspection afforded
the Minister under section 231.1 allows a person authorized by the Minister to
“inspect, audit or examine” an assortment of documents which reaches “beyond
those that the Act otherwise requires the taxpayer to prepare and maintain”.
The Minister regularly seeks from taxpayers,
and from third parties, production of documents that were created and
maintained by those persons for other purposes, for example: banking
statements, credit card information and corporate reorganization documents in
the possession of a bank; financial statements prepared for and submitted to
another regulator; financial statements of a taxpayer's foreign parent
corporation; sales records maintained by an online auction house; minute books
and other corporate records; transaction documents in the possession of a
lawyer; and tax planning documents that are not privileged.
BP was asked to produce its tax accrual
working papers pursuant to s. 231.1(l) of the Act. Where, as here, the taxpayer
refuses to provide documents in response to an audit query, compliance can be
ordered on application under s. 231.7 […].
(Minister’s Memorandum of Fact and Law,
paras. 21 – 30 [Footnotes omitted])
C.
BP Canada’s Position
[15]
The following arguments are advanced on the
point of law under consideration:
BP Canada submits that the Minister’s
application should be dismissed. The statutory requirements for the issuance of
a compliance order have not been satisfied: the Minister does not require the
Issues Lists to fulfill her duty to administer and enforce the Act. The
Minister is afforded broad authority to access the information that is (or
should be) in the books and records of a taxpayer - the source documents that
evidence the transactions and activities that result in the income that is (or
should be) reported. However, the Act does not require taxpayers to prepare
GAAP financial statements or the reserve analysis reflected therein. The Issues
Lists reflect BP Canada's subjective opinion regarding potential tax risk in
taxation years that are now statute barred. Any such list cannot be seen as
relating to the determination of taxable income under the Act. Moreover, it is
obvious that the Minister does not require the Issues Lists because she has
successfully completed her audit of each taxation year to date without them.
Even where the statutory requirements for a
compliance order are met, this Court must additionally find that the
circumstances of the application justify the exercise of its discretion to
grant the order. BP Canada says that the exercise of discretion is not
justified on the facts of this application. First, the disclosure of the Issues
Lists would constitute a compulsory self-audit by BP Canada, distorting the
operation of the Canadian taxation system. Second, the Minister's own policy
and established practice demonstrate that the Issues Lists are not required for
the administration and enforcement of the Act. Third, the Minister's requests
for the Issues Lists over the course of relevant audits have been misleading
and opaque, contrary to her duty to conduct audits in good faith. Finally,
compelling the production of the Issues Lists would be contrary to the public
interest in full and frank disclosure of tax risk for financial reporting
purposes, without fear of repercussions. Each of these factors weighs against
the exercise of discretion by this Court to grant the compliance order
requested by the Minister.
(BP Canada’s Memorandum of Fact and Law,
paras. 7 – 8)
[16]
In addition, BP Canada specifically argues that
the Issues Lists should not be compelled because to do so fundamentally offends
the principles of the self-reporting tax system that the Minister administers
as a matter of law:
Self-Audit Is Not Supported by the Scheme
of the Act
In this case, the Minister asserts an
unfettered entitlement under s. 231.1 to any and all taxpayer information
that may be of advantage to the Minister. She takes the position that she may
demand access to reserve working papers at any time for the purpose of
identifying audit issues. More particularly, she asserts at paragraph 32 of her
Factum that the Issues List "would identify the areas at highest risk for
loss of tax revenue" and that she "seeks disclosure of this list to
verify whether BP Canada's uncertain tax positions are compliant with the
Act."
In other words, the Minister asserts that s.
231.1 should be read so as to single out the class of taxpayers like BP Canada
that maintain tax accrual working papers, and require those taxpayers to
undertake a key part of the CRA's audit function and provide a checklist of
issues for the CRA to investigate. The Minister's assertion is incompatible
with a properly contextual reading of s. 231.1 within the Act. This
asserted interpretation ignores both the statutory context within which the
Minister is granted her investigative audit powers in Part XV of the Act and
the operating framework of the Canadian tax system which is founded upon
self-assessment by the taxpayer and audit by the Minister.
The scope of s. 231.1 has not previously
been considered by the courts in the circumstances raised by this Application.
However, the context and purpose of this provision are aids to its
interpretation. In this case, the starting point for construing the applicable
statutory scheme is that the Canadian income tax system relies on
self-reporting; it is not a self-auditing system. Taxpayers are obliged to
fully and accurately report their income, and the Minister is charged with the
duty of verification.
The common understanding of the roles of the
taxpayer and the Minister in the Canadian system is concisely summarized by
Vern Krishna as follows:
The income tax system relies
primarily upon self-assessment and "voluntary" reporting of tax
liabilities. The taxpayer initially determines his or her liability and submits
the tax return to the CRA.
...
But that is not the end of the tax
process. Although the tax system relies on self-assessment, the CRA has
substantial audit and investigative powers to ensure compliance with the Act.
...
The civil audit is an examination for
the purpose of verifying the accuracy of the taxpayer's self-assessed income.
Such an audit under the CRA's regulatory powers is simply a routine process for
verifying the taxpayer's financial information and examining relevant
supporting documents. The purpose of the audit is to ensure regulatory
compliance, mathematical accuracy and supporting data. If the Agency disagrees
with the taxpayer's self-assessed income, it will reassess the taxpayer and
charge interest on any deficiency in taxes paid.
[The Fundamentals of Canadian
Income Tax, 9th (2006) Edition, Thomson Carswell (Toronto) at 956]
Thus, it is the taxpayer who self-assesses
and reports income on the applicable information or tax return, and the CRA
conducts the often laborious task of auditing those returns.
(BP Canada’s Memorandum of Fact and Law,
paras. 49 – 52 [Footnotes omitted])
[17]
In the course of oral argument, Counsel for BP
Canada clearly and capably illustrates the point with the following analogy:
I don't know how many millions of Canadian
taxpayers just filed their tax returns in April. Many of these taxpayers are
business people. They carry on a business. Their returns are not simple.
Somebody is in an oil and gas business. Somebody has a widget manufacturing
business. They all file their tax returns. They prepare their tax returns the
way the law requires them to: truthfully. They fill in all the boxes, prepare
all the statements, sign at the bottom of the return saying, "As a citizen
and a taxpayer, I am now sending you my tax return, Mr. Minister. Thank you
very much."
The next day, the auditor shows up at the
taxpayer's offices. She says, "I am about to start my audit. Before I
start my audit because, you know, times are tough: we have to conserve audit
resources. Your return is complicated, it has all these issues in there, oil
and gas deductions, interest deductibility, financing costs, etc. Before I
start my audit, would you please give me a memorandum outlining for me which
part of your tax return is controversial, which part of your tax return do you
think I should focus on. Just write up a memo, the top five issues. If you do
that for me, it will make my audit easier, and it will help me direct the
scarce resources that I have.
"The taxpayer says with a smile to the
Minister, "Look. In a self-assessment system, I have to prepare an
accurate tax return, I have to remit the correct amount of tax: that is a
self-assessment system. Mr. Minister or Madam Minister, over to you. Part of
your job is to decide what you want to look at. I know there may be 50 issues
in my tax return. You can look at all 50 of them. You can choose to look at
two of them. You can look at 10 of them. The power to audit and the
responsibility to audit, I emphasize, the responsibility to audit is yours.
The responsibility to audit is not mine."
"We have a self-assessment system. We
do not have a self-audit system. I have all my books and records here. I have
a cancelled cheque for every dollar the business spent. I have an invoice for
everything we paid. I have bank statements showing every dollar I received. I
will give you access to everything unfettered but you must do your job. Your
job is to decide what issues you want to look at. You can't conscript me into
identifying for you what it is that you should look at. I have my judgment
about my tax return.
My judgment doesn't arise from any
dishonesty. It arises because your tax system is complicated."
(Transcript, pp. 64-66, edited for syntax)
D.
Conclusion
[18]
BP Canada is a taxpayer under the Act. As
any other taxpayer, BP has serious decisions to make in declaring its taxable
income. As any other taxpayer, BP must decide what income is taxable. In
instances of uncertainty, BP can choose to not declare certain income as
taxable, in hopes that the Minister will not disagree upon consideration.
[19]
However, only because it is a publicly traded
company, by an authority other than under the Act, BP Canada is required
to create accounting entries known as “reserves”
which represent the tax and interest that may be payable if its decisions
prove to be incorrect. The accounting entries are the working papers required
to be kept, which include the Issues Lists that identify the tax issues
concerning the undeclared income.
[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.
[21]
BP Canada does not object to accountability;
however, through the various arguments presented, it objects to the certainty
of accountability that will arise from the disclosure of the Issues Lists.
[22]
The following are my findings on the four
arguments presented.
[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 prepared, reflecting an
opinion on 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’s 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 307 at paragraph 29); relate to information in BP Canada’s
records; and also relate to an amount payable by BP Canada under the Act.
Regardless of the fact that tax accrual working papers contain subjective
analyses 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.
E.
Ramifications
[28]
BP Canada makes the following argument under the
heading: Disclosure of Working Papers both Detrimental & Discriminatory
:
In deciding whether to grant the compliance
order on a discretionary basis, BP Canada submits that this Court should
consider the public policy consequences of granting access to tax reserve
information. It is undisputed that tax accrual working papers contain
information that enables independent auditors to fulfill their responsibility
to "probe, question and exercise [their] professional judgment for the
purpose of forming an opinion relative to a corporation's financial
statements". Their access to these records is important for ensuring
public and international confidence in the functioning of Canadian and American
capital markets.
This was recognized by the Task Force
convened by the CICA in connection with the CRA's review of its policy
respecting the disclosure of working papers. In November, 2004, the Task Force
wrote to the Minister setting out its submissions about the CRA policy. In that
letter, it observed that a reversal of the CRA's established practice of not
routinely requesting access would lead "companies to seek legal privilege
to cloak procedures leading to estimates of tax liabilities," and warned
that such would result in "restricted access for auditors to information
critical for the assessment of financial statements and required by capital
markets."
Routine and unprincipled requests for the
list of issues underlying tax accrual working papers would place public
companies in an untenable position: required by law on the one hand to reserve
for their uncertain tax positions fairly and accurately, and compelled on the
other hand to disclose that internal analysis of tax risk to the Minister. Such
requests also run counter to the scheme reflected in the Act relating to the
Minister's audit function, which is neutral as between various classes of
taxpayers. Absent exceptional circumstances, this Court should not exercise its
discretion to order the disclosure of such information.
(BP Canada’s Memorandum of Fact and Law,
paras. 79 – 81 [Footnotes omitted])
[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.
IV.
Issue Two: Should the Court Exercise Discretion?
[30]
BP Canada argues that the Minister’s
representatives conducted themselves in bad faith during the factual scenario
leading to the present Application. BP Canada argues that this bad faith
conduct requires that discretion should be applied to deny the order for
production of the Issues Lists if compellable according to law (see: MNR v
Greater Montreal Real Estate Board, 2007 FCA 346 at paragraph 48). The
Minister does not contest that the Court has the discretion to deny an order
with respect to s. 231.7(1) of the Act.
A.
The Minister’s Perspective
[31]
The many discrete elements of the scenario are
provided in the following paragraphs of the Minister’s Memorandum of Fact and
Law:
THE MINISTER'S AUDIT OF BP AND BP'S REFUSAL
TO PRODUCE ITS WORKING PAPERS
The CRA conducts restricted or a full
compliance audits depending on the size and income of the taxpayer. The CRA
generally conducts full compliance audits annually on large corporations such
as BP. These audits are called “large file case audits” or “large file audits”.
Large file audits are conducted by audit
teams. Since 2003, Dawn Temple has been the Large File Case Manager for BP's
annual audits. By the fall of 2009, the audit team for BP's large file case
audit was staffed by officers from the Calgary Tax Services Office of the CRA
including several income tax auditors, a GST auditor, a tax avoidance auditor, an
international auditor and an electronic commerce audit specialist.
In the fall of 2009, the team was auditing
BP's taxation year ended July 31, 2005 and provided the company with a general
audit plan (the “2005 Plan”) setting out the issues and entities to be audited,
relevant audit procedures, past audit issues, timelines and budgeting concerns.
Throughout the 2005 Plan, the reader is advised that changes may be made to any
of the items under consideration, including adding other entities, adding other
issues, and auditing specialty issues identified by Tax Avoidance or
International Audit. While the 2005 Plan provides a very general list of the
records to be made available including, “Minute Books, Taxpayers' Working
Papers, Year End Trial Balances and AJE's, Published Annual Reports, Contracts
for Major Purchases and sales; AFE's and Invoices; [and] Computerized Data for
ECAS Section”, it also states that the team would be making requests for
information in writing at each monthly update meeting under the authority of
subsection 231.1 (1) of the Income Tax Act.
It is common when preparing these general
audit plans for the CRA to create its own risk assessment working papers
outlining and describing the audit issues and the amounts in issue. During the
course of a large file audit, a statement of proposed audit adjustments is
continuously updated in order to keep track of the potential changes to the tax
liabilities of the taxpayer.
The audit team identified issues considered
to be high risk for the oil and gas industry and for BP in particular. The
purpose of this was explained by Ms. Temple in her affidavit:
Risk analysis and assessment is a
standard audit procedure employed by CRA whereby CRA reviews information
concerning a taxpayer in order to determine the areas where there may be a loss
of tax revenues. This procedure is generally done at the start of an audit and
continues throughout the audit. The goal of this procedure is to determine
the areas of highest risk for loss of tax revenue and to focus CRA’s audit
resources on these areas. This is an efficient and cost effective manner to
reduce the amount of necessary field audit work. [emphasis added in the
original]
The 2005 Plan identifies 16 general audit
issues for BP, 12 general audit issues for its related corporations, and 30
industry issues. The 2005 Plan also itemizes 16 major adjustments to BP's
income from previous audits. Many of the issues and items so identified
involved recurring adjustments from prior taxation years.
[redacted]
In the course of verifying certain amounts
of interest recorded by BP in its 2005 taxation year, the CRA traced an amount
of [redacted] to a particular account in BP's working papers. The [redacted]
was an amount that was included in the computation of net income but excluded
from the computation of taxable income. The amount was included in an expense
account named “Interest Expense Taxes Payable Disputed Accruals”. On March 22,
2010, an auditor issued Query 2005-10 to BP, noting that no records were
maintained in BP's electronic database regarding this account, and requesting:
all the original supporting working
papers that were created at the time these entries were booked and all related
documentation. If not included in the original working papers, please also provide
all calculations, any assumptions that were made, the entity involved, taxation
year, type of tax, estimate of tax and the interest rate used.
BP resisted producing the requested working
papers. First, it provided an explanation without documentation. Then, in
response to a further request made by Query 2005-10.1, BP asked to meet with
the audit team. Two such meetings were held on May 4 and 6, 2010, during which
BP again expressed its resistance to production. One week following the second
meeting, BP generated and delivered a memorandum outlining their position, and
attached some of BP's working papers in redacted form. The redacted working
papers show the amounts of the reserves but conceal the description of the
income tax issues for which the reserves were taken.
The CRA observed that there were material
differences between the income tax reserve amounts identified in BP's working
papers and the tax at issue identified by the CRA in the course of the audit.
BP had tax reserves as at June 30, 2005 of [redacted] while the CRA had, by
July 2010, identified additional income of only [redacted] for the 2005 tax
year. Ms. Temple was “unable to confirm whether the CRA had identified the tax
issues identified by BP for 2005” and, having no other means by which to
ascertain BP's tax reserves, the CRA repeated its request for the unredacted
working papers. BP again refused to provide them.
Following those events, the audit team
undertook audits of BP's 2006 and 2007 taxation years. General audit plans were
also prepared and submitted in respect of these two years. The 2006 Plan and
the 2007 Plan were similar in form and substance to the 2005 Plan. As the issue
concerning BP's tax accrual working papers was already alive from the 2005
audit, specific requests were made for the same documents for the 2006 and 2007
audits.
BP refused to provide anything in response
other than redacted working papers. The redactions were akin to those made in
the 2005 working papers: BP's description of the tax issue for which the reserve
had been taken was redacted. The amounts of tax at risk were not redacted. BP’s
tax reserves as at June 30, 2006 were [redacted] and as at June 30, 2007 had
increased to [redacted]. Again Ms. Temple was unable to confirm whether the CRA
had identified the same tax issues in its risk assessment that BP identified in
its working papers.
(Minister’s Memorandum of Fact and Law,
paras. 6 – 17 [Footnotes omitted])
[32]
Counsel for the Minister provides the following
explanation for the requests made of BP Canada:
THE PURPOSE OF THE REQUEST FOR BP'S TAX
ACCRUAL WORKING PAPERS
The unredacted working papers that CRA has
asked for during the 2005, 2006 and 2007 audits will assist the CRA to verify
BP's taxable income. The working papers will identify areas where there is the
greatest likelihood of questionable tax positions. This information will assist
in the identification of areas of highest risk for loss of tax revenue and will
focus the CRA's audit resources on these areas.
BP's 2005 working papers were not initially
sought for this purpose during the audit of the 2005 taxation year. They were
initially sought for purposes of verifying whether BP was properly excluding
interest of [redacted] from taxable income in 2005. Since the 2005 and 2006
taxation years have already been reassessed, this information is no longer
being sought for purposes of auditing the 2005 and 2006 taxation years, but
rather for purposes of auditing subsequent taxation years.
[Emphasis added]
(Minister’s Memorandum of Fact and Law,
paras. 18 – 19 [Footnotes omitted])
B.
BP Canada’s Perspective
[33]
BP Canada argues that the Minister’s
representatives conducted the scenario with bad faith. The argument is based on
an opinion that the Minister’s true intentions, as held and played out by the
audit team, were not divulged during the course of the exchanges with BP
Canada’s representatives in the scenario.
[34]
On the face of the affidavit evidence, there was
nothing untoward in the exchanges which took place, albeit, on a contentious
topic. In the course of a respectful exchange leading to the present
Application, numerous requests were made for the Issues Lists with respect to
the 2005, 2006, and 2007 Queries under consideration. In the course of the
process, BP tried to satisfy the Minister’s persistence by accommodating as
much as it felt it could. In the end, BP supplied the Minister with a copy of
the working papers, but with the key Issues Lists being redacted.
[35]
However, BP Canada argues that the scenario was
conducted with an underlying pernicious intention to mislead on the part of the
Minister’s officials. This position is clearly stated in BP Canada’s written
argument:
Court Should Not Exercise Discretion to
Grant the Compliance Order
If this Court were to find that the Issues
Lists are within the scope of the documents required to be produced under s.
231.1 (contrary to the submissions above), the Court must additionally be
satisfied that the exercise of its discretion to grant the order sought by the
Minister is justified in the circumstances of this Application. As noted in Greater
Montreal REB in the analogous context of the Minister's information
gathering powers under s. 231.2, the Court must be "satisfied that the
information or documents are required for a tax audit conducted in good
faith. This good faith guarantees that the MNR will act judiciously
in the exercise of its audit power". [Emphasis added in original]
BP Canada submits that the issuance of a
compliance order would not be just and appropriate in this case. The Issues
Lists are not required for the Minister to conduct her audit, nor has the
Minister acted in good faith in requesting the Issues Lists during the conduct
of the relevant audits. In short, she is not acting judiciously in the exercise
of her audit power in relation to her request for the Issues Lists, having
regard to the information she has requested and received to satisfy her actual
audit inquiry (i.e., to determine whether the change in BP Canada's
account for interest on its tax reserves was properly excluded from taxable
income).
Disclosure of Issues Lists Facilitates an
Unauthorized Fishing Expedition
The evidence in this case shows that the
Minister has engaged in a fishing expedition. This is made clear by the fact
that her purpose for seeking disclosure of the Issues Lists has continuously
shifted over an extended period. She continually misled BP Canada into
believing that she was not seeking details regarding its uncertain tax
positions, and it was only after BP Canada had disclosed its tax accrual
working papers that the Minister admitted she no longer sought to verify its
taxable income for the 2005 Taxation Year, but sought instead to obtain a
"road map" for auditing future taxation years.
In contrast to the somewhat jaundiced view
of BP Canada reflected in the excerpt from the 2005 Audit Plan that is cited at
paragraph 12 of Minister's Factum [sic], the evidence in this Application
demonstrates that BP Canada has maintained a history of compliance. As noted in
that very Audit Plan, BP Canada has engaged in transactions having substantial
economic justification that are normal in the industry in which it operates and
"that seem reasonable".
BP Canada co-operated with the Minister
throughout the audit process for each of the Taxation Years and took proactive
measures to resolve the issues at hand. It is uncontroverted that BP Canada
provided copies of its working papers to the Minister in a proactive attempt to
resolve the Minister's professed concern that the entries in the Interest
Reserve Account represented taxable interest income. It did so only after
having received repeated assurances that the Minister was not seeking details
as to its uncertain tax positions and that she was not "hunting for new
tax issues." However, as Ms. Temple confirmed on cross-examination, the
Minister later demanded access to the Issues List for 2005 Taxation Year
because she wanted to "see what issues BP identified as uncertain so that
she [Ms. Temple] [could] use that as a roadmap to target audit resources [...]
for 2007 and subsequent years."
As the issues relating to the Refund
Interest, the Interest Reserve Account, the CRA Risk Assessment, and the audit
of the 2005 Taxation Year were resolved or abandoned one after the other,
without any reference to the Issues List, it became apparent to BP Canada that
the CRA, and Ms. Temple in particular, had requested "original supporting
working papers" for purposes of facilitating subsequent audits of BP
Canada. Mr. Ingram describes the evolution of the requests, under cross-examination,
in the following terms:
Q […] Ultimately, it was
apparent to you that the reason CRA was seeking this was for purposes of issue
identification?
A Ultimately, yes. […] Well,
and that was, frankly, quite disheartening when I finally heard that, because
throughout the whole process, I had been given multiple reasons why they wanted
these documents. They wanted them to resolve the interest query, they wanted
them to tie into a risk assessment, which ultimately proved to be an exercise
in futility, and they wanted to tie in to the total tax to be reassessed. Those
were the three reasons that they gave and we were trying to deal with as they
came up. So it wasn't until fairly late in the game that Mr. Shelton finally
told us and it became clear to me, as is stated in my affidavit, that all those
reasons really didn't matter anymore. They - it was just [they] were after the
issues.
In BP Canada's submission, the evidence
overwhelmingly suggests that issue identification was the overriding, if not
the only, purpose motivating the CRA from the time that it formulated the
Interest Reserve Account Query. Although Ms. Temple professed under
cross-examination to be uncertain as to the nature of the Interest Reserve
Account, she issued the initial Query with a detailed description of documents
sought. That description necessarily called for the production of tax accrual
working papers. Indeed, Ms. Temple repeatedly insisted that all along she
requested un-redacted copies of the working papers (i.e., the Issues List):
What I’m seeking is the working
papers. I requested during the audit to complete my audit which have been
redacted. I want the unredacted working paper[s]. I want the working paper[s]
in original form because that’s what I requested on the initial query from the
audit and that’s what I want.
Ms. Temple confirmed that this purpose was
crystallized in May 2010, when she first looked at the redacted version of the
Issues List, and yet this purpose was not communicated to BP Canada until the
Minister had commenced this Application, almost 2 years after the fact. She
stated that the efforts undertaken by BP Canada to respond to her purported
audit concerns were "of no consequence," because she believed that
she was entitled to it "no matter what." Ms. Temple asserted to Mr.
Scott Shelton, a CRA official from whom she takes direction, that "[t]he
Income Tax Act provides me - provides - forces them to provide me with
the original document." She accordingly maintained her request, despite
having confirmed the longstanding policy and practice of the CRA not to
routinely request tax accrual working papers, and the application of the Policy
Statement to the information requested in this case.
This court may have regard to the history of
the requests for the Issues Lists in deciding whether it would be just and
appropriate to grant the order under s. 231.7 on a discretionary basis. Over
the course of the 2005 audit, Ms. Temple articulated to BP Canada a series of
mutually inconsistent and misleading excuses for her request for the Issues
List. Her behaviour suggests that she was well aware that the request for the
Issues List was outside the legitimate scope of her audit power under s. 231.1.
BP Canada submits that this Court should decline to exercise its discretion in
light of the auditor's bad faith with respect to the Issues List requests.
(BP Canada’s Memorandum of Fact and Law, pp.
65-73) [Footnotes omitted])
[36]
In the course of oral argument, Counsel for BP
Canada went further in his description of Ms. Temple’s conduct by referring to
it as a “charade” (Transcript, p. 118).
C.
Conclusion
[37]
I am unable to give any weight to BP Canada’s
arguments.
[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 focussed 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.
[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.
[42]
It is important to note that the alleged bad
faith conduct had no impact whatsoever on the outcome of the exchange. The
scenario began with a request for further information, which moved to a demand
for the Issues Lists, and ended with an unfulfilled demand for the Issues
Lists. In my opinion, the Minister gained no advantage, and BP suffered no
prejudice, having gone through the process. It ended the way it started.
[43]
I am unable to find that BP Canada was in any
way seduced into giving over the redacted working papers. In my opinion, the
evidence points toward the conclusion that BP Canada’s strategy was to
cooperate with the information requests made by the Minister’s representatives,
and to ultimately provide the redacted working papers, based on a hope that the
Minister might be satisfied and give up its demand for the Issues Lists. The
exchange was professionally and seriously conducted with no power imbalance.
[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.
D.
Unfairness to BP Canada
[45]
The argument is as follows:
Further, the Minister's request for the
Issues Lists is inherently not an impartial one. Impartiality connotes the
equitable treatment of all taxpayers. The Minister can only request tax accrual
working papers from those corporations that are subject to the additional level
of diligence applicable to corporations that choose, or are required to prepare
their financial statements in accordance with GAAP. In this case, the Minister
seeks to turn BP Canada's own diligence against it and deputize BP Canada to
audit itself by compelling the disclosure of its own tax risk assessment. BP
Canada submits that this Court should not exercise its discretion to permit the
Minister to do so.
(BP Canada’s Memorandum of Fact and Law,
para. 78)
[46]
I am unable to give any weight to the argument.
While BP Canada is a taxpayer in a different position from taxpayers who do not
have contingent liability reserves, BP Canada is in the same position as others
who do have contingent liability reserves. In my opinion, this form of
distinction does not constitute inequitable treatment. As noted above, the
Minister’s policy does not discriminate: all taxpayers are subject to the
application of s. 231.1(1) and s. 231.7.
[47]
On the point of fairness, the question is: “fairness to whom?” I find the more compelling
argument is that expressed by Counsel for the Minister, quoted in paragraph 5
of these reasons:
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.
V.
The Result
[48]
For the reasons provided, I find that the
Minister is entitled to compel BP Canada to disclose the Issues Lists for the
purpose of expediting the Minister’s future audits.
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