Date: 20170330
Docket:
A-385-15
Citation:
2017 FCA 61
|
CORAM:
|
NOËL C.J.
STRATAS J.A.
BOIVIN J.A.
|
|
BETWEEN:
|
|
BP CANADA ENERGY COMPANY
|
|
Appellant
|
|
and
|
|
MINISTER OF NATIONAL REVENUE
|
|
Respondent
|
|
and
|
|
CHARTERED PROFESSIONAL ACCOUNTANTS OF CANADA
|
|
Intervener
|
REASONS
FOR JUDGMENT
NOËL
C.J.
[1]
This is an appeal brought by BP Canada Energy
Company (BP Canada or the appellant) from an order of the Federal Court (2015
FC 714) wherein Campbell J. (the Federal Court judge) allowed an application
filed by the Minister of National Revenue (the Minister) pursuant to subsection
231.7(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act) compelling
the production of internal accounting documents, generally referred to as tax
accrual working papers (TAWPs). The order was issued for the purpose of
assisting the Minister in conducting ongoing audits of BP Canada.
[2]
The information contained in TAWPs is highly
sensitive as these papers typically reveal uncertain tax positions taken by public
corporations in filing their tax returns, opinions as to the likely outcome in
the event of a challenge by the Minister, and related reserves established to ensure
sound and fair financial reporting. BP Canada maintains that the Federal Court
judge failed to take into account the exceptional nature of this information in
ordering its production and committed a variety of related errors.
[3]
The Chartered Professional Accountants of Canada
as intervener (CPA Canada or the intervener) contends that formal requests for
the production of TAWPs cannot be routine and uncontrolled, and that the
obligation to produce TAWPs should not undercut the public interest role of its
members in certifying financial statements. CPA Canada takes no position on the
outcome of the appeal.
[4]
For the reasons which follow, I am of the view
that the documents ordered to be produced, given the purpose for which they
were sought, are beyond the reach of the Minister, and that the Federal Court
judge committed a number of legal and factual errors in ordering their
production. Therefore, I propose that the appeal be allowed.
[5]
The statutory provisions relevant to the
analysis are set out in the appendix to these reasons.
BACKGROUND
[6]
BP Canada is a Canadian subsidiary of BP plc, a U.K.
company active principally in the oil and gas industry (Appeal Book, vol. IV,
p. 443, para. 20). Being a publicly-traded company, BP plc is required to
prepare consolidated financial statements in accordance with Generally Accepted
Accounting Principles (GAAP) (Appeal Book, vol. IV, p. 440, para. 5). In the
process leading to the issuance of these financial statements, the appellant internally
created papers under the heading “BP Canada Tax Reserve” (Tax Reserve
Papers). They reflect, among other things, the uncertain tax positions adopted
by BP Canada in filing its tax returns, also referred to as “soft spots”,
as well as the corresponding analyses behind the contingent tax reserves
(Appeal Book, vol. IV, p. 440, para. 6).
[7]
The events which led to the issuance of the
formal request for the production of BP Canada’s Tax Reserve Papers need to be
reviewed in some detail as they determine the outcome of this appeal.
[8]
In the course of the audit of BP Canada’s 2005
taxation year, the audit manager and her group (collectively “the auditor”)
identified an issue relating to refund interest paid by the Minister to the appellant.
The auditor reviewed two accounts maintained by BP Canada in which this payment
could have been recorded (Appeal Book, vol. II, p. 53, para. 13). Being unable
to trace the refunded interest to either account, the auditor issued Query
2005-8 (Appeal Book, vol. IV, p. 593).
[9]
The audit eventually revealed that BP Canada reported
the refund interest payment in 2007, when it should have been included for the
2005 taxation year (Appeal Book, vol. IV, p. 444, para. 23). During the process
leading to this adjustment, the auditor became interested in several accounting
entries in one of two accounts, namely the “Interest Expense Taxes Payable – Disputed Accruals” account (Appeal Book, vol. IV, p. 445, paras. 27-28 and Appeal Book, vol. II, p. 54, para. 15). In
order to verify the source of those accounting entries, Query 2005-10 was
issued requesting the disclosure of the “original supporting working papers”
for this account (Appeal Book, vol. II, p. 98 and Appeal Book, vol. III, p.
250, lines 9-18). The “original
supporting working papers” for this account were
BP Canada’s Tax Reserve Papers.
[10]
The appellant initially refused to comply with Query
2005-10. The reason for this refusal was that, first, disclosure of its Tax
Reserve Papers would not only provide the Minister with a roadmap to its
uncertain tax positions, but the Minister would also gain access to the analyses
behind those positions (Appeal Book, vol. IV, p. 446, para. 31). Second, the
appellant took the position that the issue raised in that query had already been
addressed (Appeal Book, vol. IV, pp. 444-445, paras. 24-26).
[11]
During a meeting on May 4, 2010, the auditor advised
that the query was not to be read as requesting details concerning BP Canada’s
uncertain tax positions (Appeal Book, vol. IV, p. 446, para. 32 and p. 447,
para. 34). In response, BP Canada offered to produce a redacted version of its Tax
Reserve Papers showing all amounts, but without revealing the uncertain tax
positions or the underlying analyses. This would show the auditor that the
accounting entries of interest were not linked to a taxable source (Appeal
Book, vol. IV, p. 446, para. 32). The auditor agreed to this subject to the right
to insist on the full disclosure of the Tax Reserve Papers if the redacted
version did not provide a satisfactory answer (Appeal Book, vol. IV, p. 446,
para. 33).
[12]
A copy of BP Canada’s redacted Tax Reserve
Papers was provided to the auditor on May 13, 2010 (Appeal Book, vol. IV, p.
447, para. 35). The redacted Tax Reserve Papers did address the concern about
the accounting entries, but they gave rise to another concern: the taxes that were
proposed to be assessed were materially lower than the reserves set out in BP
Canada’s Tax Reserve Papers. This flagged a significant tax revenue loss. On
June 17, 2010, the auditor made a formal request for the unredacted version, insisting
that the uncertain tax positions be shown (Appeal Book, vol. IV, p. 448, para.
37).
[13]
Numerous exchanges followed. Both parties firmly
maintained their respective positions (Appeal Book, vol. IV, pp. 449-452,
paras. 41-53). On October 1, 2010, the auditor received information
establishing that contrary to what the numbers indicated, the amounts
associated with the uncertain tax positions in BP Canada’s Tax Reserve Papers
were significantly lower than the projected assessment (Appeal Book, vol. IV,
p. 451, paras. 49-50). This however did not resolve the matter as the auditor
took the position that these papers had to be produced whether the concern surrounding
these amounts was justified or not (Appeal Book, vol. III, p. 348, lines 9-13).
[14]
On October 15, 2010, the appellant confirmed
that it was not going to produce the unredacted version of its Tax Reserve
Papers, and the auditor responded by announcing that a compliance order would
eventually be sought (Appeal Book, vol. IV, p. 452, para. 53).
[15]
The 2006 and 2007 audits were then undertaken
with similar requests being issued for the full and complete disclosure of “all original working papers of the current
income tax liability […], including but not limited to the Reserve for Adverse
Taxes” (Appeal Book, vol. IV, pp. 452-453,
paras. 55 and 57). The appellant again opposed these requests and submitted
redacted versions.
[16]
On May 8, 2012, the Minister brought an
application before the Federal Court under subsection 231.7(1) of the Act
seeking an order “for the
production of [BP Canada’s] working papers requested by the Minister of
National Revenue in Query 2005-10.1, Query 2006-16 and Query 2007-6” (Appeal Book, vol. II, pp. 46-49).
[17]
By this time, the Minister had already
reassessed the 2005 and 2006 taxation years. Thus, BP Canada’s working papers
were no longer sought for the purpose of auditing those years (Appeal Book, vol.
II, p. 61, para. 45). The stated purpose for obtaining the Tax Reserve Papers
was to audit the 2007 and subsequent taxation years (Ibidem).
[18]
Before the Federal Court judge issued his
decision, the 2007 taxation year was reassessed with the result that only the
subsequent taxation years remained under audit. In this respect, the parties
informed the Court during the hearing of the appeal that the Minister has since
issued requests for the production of BP Canada’s Tax Reserve Papers in an
unredacted form for the 2008, 2009 and 2010 taxation years. The parties are
agreed that BP Canada’s obligation to comply with these outstanding requests
turns on the outcome of this appeal.
FEDERAL COURT DECISION
[19]
The Minister took the position before the
Federal Court judge, and before us, that the documents being sought are those “that list [BP Canada’s] uncertain tax positions” (Minister’s
Memorandum, para. 8). The documents so described were referred to by the
parties in the proceeding below as the “Issues Lists”. The Federal Court judge
adopted this language throughout his reasons, but the order that he issued
makes no reference to it.
[20]
In allowing the application, the Federal Court
judge addressed two issues: whether the Issues Lists come within the scope of
subsection 231.1(1) of the Act; and if so, whether he should exercise his discretion
not to compel the disclosure of this information.
[21]
Before addressing these issues, the Federal
Court judge provided a summary of the Minister’s policy with respect to
accessing TAWPs. It is useful to reproduce the 2004 and 2010 extracts which he quoted
(Reasons, paras. 11-12, without emphasis):
2004
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.
2010
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.
[22]
Addressing first the issue of the compellability
of the Issues Lists, the Federal Court judge summarily rejected the arguments
put to him by the appellant. In response to BP Canada’s assertion that the Minister
did not need the Issues Lists in order to perform the audit, the Federal Court
judge acknowledged that 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 [audits]”
(Reasons, para. 23). According to the Federal Court judge, only the Minister
can determine what is required in order to advance the audit process (Ibidem).
[23]
The Federal Court judge also dismissed the
contention that forcing the disclosure of the Issues Lists would cause the
appellant to self-audit rather than to self-assess. He pointed out that the Minister
was not asking for anything to be prepared, but rather sought disclosure of
already-prepared documents (Reasons, para. 24).
[24]
The Federal Court judge further rejected the
contention that the Issues Lists were not compellable because they were not
required to be kept under the Act. In his words, the Issues Lists “are relevant to the payment of tax under the Act
because they are an important tax record in BP Canada’s possession”
(Reasons, para. 25).
[25]
According to the Federal Court judge, the Issues
Lists come within the scope of subsection 231.1(1) of the Act, as they relate
to the determination of taxable income. In his view, the Minister’s purpose of
taxation accountability is related to the enforcement of the Act as stated in Tower
v. MNR, 2003 FCA 307, [2004] 1 F.C.R. 183 [Tower]. Moreover, the Issues
Lists “relate to information in BP Canada’s records”
and they “relate to an amount payable by BP Canada
under the Act” (Reasons, para. 26). He added that although the “[TAWPs] contain subjective analyses of tax risk, together
with factual information upon which tax reporting is founded, […] they are
relevant to BP Canada’s intention in creating the reserves” (Ibidem).
[26]
The Federal Court judge also dismissed the
public policy concerns hovering over independent auditors if TAWPs are held to
be compellable. In his words (Reasons, para. 29):
By bringing the present Application, the
Minister is adhering to, and implementing the policy that, without restriction,
[TAWPs] 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.
[27]
The Federal Court judge went on to dismiss BP
Canada’s contention that if the Issues Lists are compellable, the Court should
decline to exercise its discretion in favour of the Minister. In so doing, the
Federal Court judge rejected the contention that the auditor was on a fishing
expedition because the purpose underlying the request for disclosure had
changed over time. According to him, the auditor’s intention “was specifically to obtain a clear roadmap to be used for
current and future audits” (Reasons, para. 38).
[28]
The Federal Court judge further rejected the
contention that the auditor acted in bad faith or with “an
underlying pernicious intention to mislead” (Reasons, para. 35). In his
view, while this argument raised “an unresolved serious
triable issue on a balance of probabilities” (Reasons, para. 39), it rested
on speculation on the part of the appellant. In his view, the behaviour of the auditor
could be explained by a bona fide exercise of the powers granted under
the Act (Reasons, paras. 40-44).
[29]
Lastly, the Federal Court judge rejected the
appellant’s argument that it was unfairly singled out by the Minister. According
to him, the question was “fairness to whom?”
(Reasons, para. 47). If the Minister does not discover uncertain tax positions
within the limitation period, Canadian taxpayers lose. In his view, it was only
fair and just that these issues be identified in good time and resolved by the
courts (Ibidem).
[30]
The Federal Court judge went on to order BP
Canada to produce the “working papers requested by the Minister
of National Revenue in Query 2005-10.1, Query 2006-16, and Query 2007-6”
pursuant to subsection 231.7(1) of the Act (Order of the Federal Court).
POSITION
OF THE PARTIES
-
The appellant
[31]
The appellant submits that subsection 231.1(1)
of the Act is a “fact-finding tool” available to
the Minister only for the purpose of establishing a relevant fact (BP Canada’s
Memorandum, para. 46). A “relevant fact” in turn
is understood to mean a fact that will establish a taxpayer’s taxable income or
tax liability (BP Canada’s Memorandum, para. 46). While the word “fact” is
nowhere to be found in subsection 231.1(1), the appellant maintains that the
word “information”, which is used in the subsection, has to be interpreted to
mean a fact that is relevant to taxable income or tax liability. This
interpretation is rooted in the wording of a companion provision, subsection
230(1), which requires taxpayers to keep books and records containing “information as will enable the taxes payable under this Act
or the taxes or other amounts that should have deducted, withheld or collected
to be determined” (BP Canada’s Memorandum, para. 55).
[32]
Such an interpretation would strike the
appropriate balance with, on the one side, the Minister’s obligation to
administer the Act, and on the other, the appellant’s reasonable expectation of
privacy over the Issues Lists (BP Canada’s Memorandum, paras. 59 and 65 citing R.
v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, 68 D.L.R. (4th) 568).
[33]
Since the Minister neither alleges nor
establishes that the Issues Lists constitute relevant facts, but is rather
seeking them to establish a roadmap for the audit, the appellant argues that
the appeal should be allowed on this basis alone (BP Canada’s Memorandum, para.
47).
[34]
In the alternative, the appellant maintains that
the Federal Court judge erred in not exercising his discretion against the
Minister (BP Canada’s Memorandum, para. 73). If allowed to stand, the order
would bestow upon the Minister an “unqualified right” to require taxpayers to
disclose any issues identified in preparing their tax returns (BP Canada’s
Memorandum, para. 75(a)). Such a right would be available even in the absence
of a reasonable basis for considering that the information sought is relevant in
determining whether the tax return under audit is correct (BP Canada’s
Memorandum, para. 75(b)).
[35]
The appellant submits that giving paragraph
231.1(1)(a) a scope as wide as the Minister contends must be avoided. It
notes that Parliament has declined to grant the Minister such wide powers (BP
Canada’s Memorandum, para. 76(a)); the efficacy of such auditing powers would
be nil if companies were to assert solicitor-client privilege over TAWPs (BP
Canada’s Memorandum, para. 76(b)); and there is no harm in applying a
restrictive interpretation to subsection 231.1(1) of the Act and requiring the
Minister to prove that the Issues Lists are relevant facts (BP Canada’s
Memorandum, para. 76(c)).
[36]
Additionally, the appellant warns the Court
against relying on American jurisprudence, in particular United States v.
Textron Inc., 577 F.3d 21, 26-30 (1st
Cir. 2009) [Textron]. The appellant submits that
in the U.S., access to TAWPs is governed by specific regulations. In Canada, legislation
has not been enacted which would control access to TAWPs (BP Canada’s
Memorandum, para. 77).
[37]
The appellant further asserts that it was
unreasonable for the Minister to seek disclosure of the Issues Lists in
contravention with published policy and for “an
improper and unauthorized purpose” (BP Canada’s Memorandum, para. 78).
Short of exceptional circumstances, the Minister should not be allowed to
obtain the Issues Lists and the Federal Court judge should have exercised his
discretion against the issuance of the order (BP Canada’s Memorandum, para.
84).
-
The intervener
[38]
CPA Canada highlights the professional, ethical
and practical concerns raised by routine and uncontrolled requests for TAWPs
(Intervener’s Memorandum, para. 4). Professional accountants have a direct role
in ensuring a degree of confidence in publicly-traded corporations’ financial
statements through independent auditing. Because they act in the public
interest, they are subject to professional and ethical obligations, such as an
obligation of integrity, a duty of care, and a duty of objectivity
(Intervener’s Memorandum, para. 18). In keeping with those obligations, professional
accountants have to review TAWPs prepared by the corporations which they audit
(Intervener’s Memorandum, para. 22) in addition to preparing their own TAWPs
(Intervener’s Memorandum, para. 23).
[39]
CPA Canada thus fears that the order, if allowed
to stand, will cause corporations to “hesitate to
voluntarily and fully disclose their tax risks” (Intervener’s Memorandum,
para. 33). Moreover, routine access by the Minister to subjective opinions on
tax risks may “discourage corporations from preparing
such analysis in order to protect it from disclosure” (Intervener’s Memorandum,
para. 38).
[40]
CPA Canada invites the Court to interpret
subsection 231.1(1) of the Act in light of “the global
context of rules of professional ethics and financial reporting”
(Intervener’s Memorandum, para. 44). This means that only objective information
would be subject to production, such as the “disclosure
of all transactions that could have a material impact on the corporation’s tax
liability, without identifying the degree of tax risk that any of those
transactions may have” (Intervener’s Memorandum, para. 53).
-
The Minister
[41]
The Minister supports the conclusion reached by the
Federal Court judge and relies essentially on the reasons that he gave. According
to the Minister, the Issues Lists fall squarely within broad auditing powers.
[42]
The Minister adds that the purpose behind the
request for disclosure of the Issues Lists is a “tax
compliance audit” that relates to the administration or enforcement of
the Act within the meaning of subsection 231.1(1) (Minister’s Memorandum, para.
21). Disclosure of the appellant’s uncertain tax positions “with which the Minister may disagree and which, in [BP
Canada’s] opinion, the Minister may challenge successfully” furthers
efficiency: the Minister will be able to focus resources on problem areas
(Minister’s Memorandum, paras. 20 and 27, citing BP Canada’s Memorandum, para.
18).
[43]
The Minister maintains that the ability to
properly administer the Act requires broad powers to obtain information and the
empowerment to make use of all available risk assessment techniques (Minister’s
Memorandum, paras. 28-30).
[44]
Furthermore, the Minister maintains that the
Federal Court judge made no palpable and overriding errors of fact. According
to the Minister, the Federal Court judge properly rejected any suggestion that the
auditor acted dishonestly or for an improper purpose. Nor could it be said that
the Federal Court judge misunderstood the nature and purpose of TAWPs
(Minister’s Memorandum, paras. 32-37).
[45]
While the Minister agrees that the Federal Court
judge retains discretion not to compel disclosure under subsection 231.7(1) of
the Act, it remains the case that this Court should follow in the footsteps of
the Federal Court judge and American courts in rejecting the appellant’s
position. First, it was open to the Federal Court judge to find that neither
bad faith, dishonesty, nor unfairness arose from the auditor’s conduct
(Minister’s Memorandum, paras. 45-47). As to U.S. jurisprudence, the Minister
refers specifically to Textron and United States v. Arthur Young
& Co, 465 U.S. 805 (1984) [Arthur Young] where arguments of the
kind advanced by CPA Canada were rejected (Minister’s Memorandum, paras.
48-50).
[46]
The Minister disagrees with the appellant’s view
that Parliament has not put its mind to this issue. The present wording of
subsection 231.1(1) is as broad as can be. Parliament has given the Minister the
necessary powers to compel TAWPs (Minister’s Memorandum, para. 51).
ANALYSIS
-
The documents in issue
[47]
Before turning to the decision under appeal, it
is useful to consider the information contained in TAWPs generally, and in BP
Canada’s Tax Reserve Papers specifically.
[48]
The expression “tax
accrual working papers” generally refers to papers created by or for
independent auditors in order to assist in the process leading to the
certification of financial statements in accordance with GAAP. In Canada, the obligation
to issue financial statements that are certified by independent auditors is imposed
under provincial securities legislation (Appeal Book, vol. IV, p. 440, para.
5). TAWPs can be created internally or by the independent auditors but in both
cases, their purpose is to identify uncertain tax positions and provide for
reserves which will allow the independent auditors to certify that the
financial statements fairly and accurately reflect the financial situation of
the corporation under audit.
[49]
Given the reason for which they are prepared,
TAWPs typically identify tax positions capable of being challenged successfully
by the Minister, an opinion as to the likely outcome in the event that they are,
and a reserve intended to neutralize the financial distortion which would
result. To the extent that an uncertain tax position endures from one year to
the next, the reserve associated with the position is re-evaluated each year.
[50]
BP Canada’s Tax Reserve Papers were prepared
internally for use by the independent auditors in accordance with the
applicable accounting standards. Although partially redacted, these papers
identify the issues that are considered capable of being challenged
successfully by the Minister under the heading “issue” or “income tax issue”
(item #1); the underlying analyses leading to the selection of the issues
identified as uncertain (item #2); the “tax at risk” being a quantification of
the amounts by which BP Canada’s liability for tax and related interest could
increase if the Minister was to reassess these issues and prevail on appeal (item
#3); and the reserve reflecting the total of these contingent liabilities for
the year (item #4) (Appeal Book, vol. IV, pp. 440-441, paras. 5-7 and p. 447,
paras. 31-32).
[51]
BP Canada’s Tax Reserve Papers insofar as they reflect
the “tax at risk” amounts and the annual reserve – items #3 and #4 – were
provided to the Minister, but the uncertain tax positions and the underlying
analyses – items #1 and #2 – were redacted.
-
The scope of the order
[52]
There was uncertainty about whether the order
under appeal only compels the production of BP Canada’s uncertain tax positions
or whether the underlying analyses are also to be produced.
[53]
On this point, the reasons given by the Federal
Court Judge when read with the order that he gave cause confusion. The Federal
Court judge identifies the question before him as whether the Minister is
entitled to compel BP Canada to disclose the “Issues Lists” (Reasons, para. 8)
and concludes that BP Canada must “disclose the Issues
Lists” (Reasons, para. 48). The analysis that takes place in between is
conducted throughout by reference to the Issues Lists. However, the order that
he gave makes no reference to the Issues Lists. Rather, it compels the
production of “the working papers requested by the
Minister” in the queries, which begs the question as to precisely what
was requested by these queries (Order of the Federal Court).
[54]
Given this, the appellant expressed concerns
that the order could be read as compelling the production of both the uncertain
tax positions and the underlying analyses. According to the appellant, this result
would be inadvertent as the Minister was only seeking access to its uncertain
tax positions (BP Canada’s Memorandum, paras. 85-87).
[55]
The Minister took issue with that view up to the
time of the hearing before us (Minister’s Memorandum, para. 58). At the
hearing, counsel conceded that the order would go beyond the relief sought if
it was read as compelling the production of the underlying analyses. As a result,
the reasons which follow only address the compellability of those parts of BP
Canada’s Tax Reserve Papers which reflect its uncertain tax positions.
-
Standard of review
[56]
The construction that the Federal Court judge
gave to subsection 231.1(1) of the Act in granting the order under appeal gives
rise to a question of law to be assessed on a standard of correctness whereas
his application of this provision to the documents in issue gives rise to a
mixed question of fact and law, with respect to which he is entitled to
deference in the absence of an extricable question of law (Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at paras. 8 and 36).
-
The construction of subsection 231.1(1) of the
Act
[57]
As in all such cases, the words of subsection
231.1(1) must be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act
and the intention of Parliament (Rizzo & Rizzo Shoes Ltd. (Re),
[1998] 1 S.C.R. 27, 154 D.L.R. (4th) 193 at para. 21).
[58]
I agree with the Federal Court judge that
subsection 231.1(1) could not have been drafted in broader terms. Based on the plain
language of subsection 231.1(1), a document which “relates
or may relate to the information that is or should be in the books or records
of the taxpayer or to any amount payable under [the] Act” is accessible
under that provision.
[59]
The introductory words of subsection 231.1(1)
specify that in order to invoke this broad wording, the Minister must be acting
for a purpose relating to the administration or enforcement of the Act. In the
context of paragraph 231.1(1)(a), that purpose is verifying compliance
with the Act. In the present case, the Minister has made clear that the purpose
is to seek access to BP Canada’s uncertain tax positions. The Minister wants to
use these positions as a roadmap in order to facilitate audits conducted under
the Act. Based on a literal reading of the introductory words, this looks like
an authorized purpose.
[60]
Once it is shown that the Minister is acting for
an authorized purpose, one of three demonstrations must be made in order to
trigger the application of paragraph 231.1(1)(a). Either the document or
the part thereof being sought: (1) is part of, or is in, the “books and records of the taxpayer”; (2) “relates or may relate to the information that is or should
be in the books or records of the taxpayer”; or (3) “relates or may relate [...] to any amount payable by the
taxpayer under [the] Act.”
[61]
On a plain reading, the parts of BP Canada’s Tax
Reserve Papers which reflect its uncertain tax positions can be shown to meet
the second and third tests. Although the uncertain tax positions were not
recorded by reason of any obligation arising under the Act, it remains that
they “relate or may relate” to information that
is in the books or records of BP Canada, if only because they were quantified on
the basis of information that can be found in those books or records. As well,
the reference to “any document that relates or may
relate” to information that can be found in the books or records kept
under the Act necessarily comprises documents other than those that are
required to be kept under the Act.
[62]
As to the third test, the simple fact that access
to BP Canada’s uncertain tax positions may allow taxable amounts to be
identified provides a connection with the amounts payable by BP Canada under
the Act.
[63]
The appellant proposes a different reading. It
submits that subsection 231.1(1) must be read with subsection 230(1) which
deals with the obligation to keep books and records. When so read, the word
“information” in paragraph 231.1(1)(a) necessarily means “facts”, and
these can only be objective facts that are relevant in determining a taxpayer’s
liability under the Act. Specifically, “subjective
opinions as to which of its interpretative conclusions the Minister may dispute
[…] are not facts that are relevant in determining [BP Canada’s] taxable income
or its tax liability” (BP Canada’s Memorandum, para. 69(b)).
[64]
There are problems with the reading proposed by
the appellant. Paragraph 231.1(1)(a) provides access to facts as the
appellant contends, but also to information. The word “information” as it
appears in paragraph 231.1(1)(a) is unqualified. As was stated by this
Court with respect to the use of the same word in section 231.2, “information”
includes knowledge (Tower, at para. 20) and knowledge can be both
objective and subjective. In any event, this debate seems futile as it is a
fact, and an objective one at that, that BP Canada views the positions
identified in its Tax Reserve Papers as uncertain.
[65]
Beyond this, the appellant’s argument does not
address the second test set out in paragraph 231.1(1)(a) which, as
explained, permits access to the parts of BP Canada’s Tax Reserve Papers that
reveal its uncertain tax positions because these documents relate to
information that is or should be in its books and records (see paragraph 62
above). As to the third test, the key words are “relates
or may relate to […] any amounts payable […]” not “relevant to the determination of any amounts payable […]”
as the appellant would have it. As noted, this necessarily extends to documents
reflecting information that can assist in identifying amounts payable under the
Act.
[66]
This language, read on its own, gives the
Minister access to any documented information that can assist in carrying out
auditing functions. BP Canada’s uncertain tax positions can certainly be viewed
as coming within this description. This, however, does not settle the debate.
[67]
The issue in this case is not whether the
information revealed by BP Canada’s Tax Reserve Papers could be accessible
under the Act. After all, everyone is agreed that it is, if required, in order
to respond to a specific inquiry made in the context of an audit. The disclosure
of the redacted version of BP Canada’s Tax Reserve Papers in response to the query
made about the accounting entries attests to this (see paragraphs 11 and 12
above). The real issue is whether subsection 231.1(1) allows general and
unrestricted access to this information, if this is indeed what was sought and
authorized in this case.
-
What was sought and authorized?
[68]
CPA Canada has intervened because of its belief
that the decision under appeal does authorize general and unrestricted access
to BP Canada’s Tax Reserve Papers. The appellant shares that view insisting
that the concerns advanced by the auditor in order to justify the need to access
these papers were all addressed during the course of the audit.
[69]
The Federal Court judge did not discuss the circumstances
which led the Minister to bring the application before him. These must be
reviewed in order to understand what his decision stands for.
[70]
The record reveals that the auditor began the 2005
audit by conducting a review of various issues identified by using conventional
auditing techniques. A series of inquiries led to a request for the “original supporting working papers” for specified
entries in a particular account under review. The source documents to be
produced in response to this query were BP Canada’s Tax Reserve Papers (see
paragraph 9 above).
[71]
BP Canada agreed to give the auditor a redacted
version of its Tax Reserve Papers which showed the “tax at risk” amounts associated
with its uncertain tax positions. This satisfied the auditor’s initial concern.
However, the “tax at risk” amounts were such that the issue “evolved into something bigger” (Appeal Book, vol. III,
p. 300, lines 4-10). The auditor observed that the “tax at risk” amounts were “materially bigger” than those which were proposed to
be added to BP Canada’s income for the year (Appeal Book, vol. II, p. 57, para.
28 and Appeal Book, vol. III, p. 283, lines 19-27). As a result, a decision was
made to seek the disclosure of the uncertain tax positions which gave rise to the
“tax at risk” amounts for 2005 (Appeal Book, vol. III, p. 282, lines 3-9 and p.
283, lines 2-6). The redacted Tax Reserve Papers provided for 2006 and 2007 reflect
“tax at risk” amounts that exceed those disclosed for 2005 (Appeal Book, vol. V,
pp. 774, 779, and 786).
[72]
I am not at liberty to identify the “tax at
risk” amounts, because this information is protected by a publication ban
issued by the Federal Court, which is binding on this Court (Rule 152(3) of the
Federal Courts Rules, S.O.R./98-106). It suffices to say that the gap
between these amounts and those proposed to be assessed is such that one can understand
why the auditor, after coming upon this information, would have felt justified
to insist on the production of BP Canada’s uncertain tax positions.
[73]
However, as it turned out, this became a
non-issue as BP Canada was able to demonstrate that the situation was the
opposite of what it appeared to be, i.e., BP Canada’s “tax at risk”
amounts were actually much smaller than the amounts underlying the auditor’s risk
assessment (Appeal Book, vol. V, p. 748).
[74]
The record further reveals that when apprised of
this demonstration, the auditor commended BP Canada for making it available,
but took the position that BP Canada’s Tax Reserve Papers had to be produced whether
or not the “tax at risk” amounts were a cause for concern (Appeal Book, vol. II,
pp. 167-176). Therefore, the auditor insisted on compliance in order to
complete the 2005 audit. Similar requests were made for the 2006 and 2007
taxation years. The auditor made it clear that these requests were made in
order to make the conduct of the audits for those years more cost efficient and
confirmed that similar requests would be made for future years (Appeal Book, vol.
III, p. 307, lines 10-14). As noted, requests have since been issued for 2008,
2009 and 2010.
[75]
During the hearing, counsel for the Minister insisted
that the auditor did not start out asking for production of the TAWPs. Rather, the
auditor raised legitimate questions which led to the production of BP Canada’s
Tax Reserve Papers showing the “tax at risk” amounts. This in turn led to other
questions which culminated with a formal request for the production of those
parts of BP Canada’s Tax Reserve Papers which identified its uncertain tax
positions.
[76]
That is a fair depiction of what transpired so
far as it goes. However, as explained, the auditor continued to insist on
compliance with the request after all these legitimate concerns had been
addressed. Focusing on the last concern – i.e. the magnitude of the
disparity between BP Canada’s “tax at risk” amounts and those identified in the
auditor’s risk assessment – I agree that the auditor did not verify the
analysis prepared by BP Canada in response, given the stated belief that BP
Canada’s uncertain tax positions had to be produced regardless of what this
analysis showed. However, the fact that BP Canada’s analysis effectively puts this
concern to rest cannot be questioned as the analysis is part of the record (Appeal
Book, vol. V, p. 748) and the Minister has not seen fit to challenge it nor the
conclusion which BP Canada draws from it (Appeal Book, vol. V, p. 751).
[77]
Counsel for the Minister further argued that the
uncertain tax positions identified by BP Canada’s Tax Reserve Papers should be
viewed as aggressive positions which called for further inquiry because they were
all “risked at 100%” (Appeal Book, vol. IV, pp.
671 and 673). However, as explained during the hearing, there is no correlation
between this percentage and the soundness of the position to which it relates. The
optimization of the reserves simply reflects a conservative approach to
financial reporting. This explains why the auditor did not see this as a
concern.
[78]
Therefore, we are left with a request for the
production of BP Canada’s Tax Reserve Papers with respect to which a compliance
order was sought and obtained on the sole basis that these papers are
compellable under the Act “without restriction”
(Reasons, para. 29; Appeal Book, vol. III, p. 349, lines 11-14).
[79]
The Federal Court judge’s decision is the first
one that authorizes the Minister to resort to the power under subsection
231.1(1) in order to obtain general access to TAWPs without advancing any particular
justification for their production. Should it stand, BP Canada will be required
to routinely turn over to the Minister its uncertain tax positions every year
from this point on and the Minister will be authorized to place the same demand
on all taxpayers who, by law, are required to maintain TAWPs. Indeed, the
Minister would be hard-pressed not to do so, given the Federal Court judge’s
conclusion that his decision applies equally to all taxpayers who maintain
TAWPs (Reasons, para. 46).
[80]
In my view, subsection 231.1(1), properly
interpreted, does not make papers such as these compellable “without restriction”. When one examines the context
and purpose of subsection 231.1(1), it is clear that Parliament intended that
the broad power set out in subsection 231.1(1) be used with restraint when
dealing with TAWPs. It follows that the decision of the Federal Court judge
must be set aside.
-
Self-assessment vs self-audit
[81]
An important part of the context surrounding
subsection 231.1(1) is the notion of self-assessment which is at the root of
the compliance system put in place under the Act. The system is one of
self-assessment because the person who generates income is best positioned to
identify, compute and report the amounts that are subject to tax under the Act.
[82]
However, this obligation to “self-assess” does
not require taxpayers to tax themselves on amounts which they believe not to be
taxable. Faced with an issue that is reasonably open to debate – I
emphasize this point insisting on the fact that the case law is replete with
decisions which illustrate the coexistence of arguable issues on both sides of
the debate – taxpayers are entitled to file their tax return on the basis most
favourable to them. This explains why auditors in conducting audits must engage
in extensive poke-and-check exercises, and are essentially left to their own
initiative in verifying the amounts reported by the taxpayer. To be clear, although
auditors are entitled to be provided with “all
reasonable assistance” in performing their audits (paragraph 231.1(1)(d)
of the Act), they cannot compel taxpayers to reveal their “soft spots”.
[83]
While this is an unwritten rule without clearly
defined boundaries, it certainly stands against any construction of the Act that
would allow the Minister to compel a taxpayer to self-audit on an ongoing
basis.
[84]
The Federal Court judge did not believe that his
order imposed on BP Canada an ongoing obligation to self-audit. He explained
that he did not order BP Canada to prepare documents listing its uncertain tax
positions, but to turn over existing ones which reflect this information (Reasons,
para. 24).
[85]
With respect, this is a distinction without a
difference. BP Canada has no choice but to document its uncertain tax positions
annually and the Federal Court judge has confirmed the Minister’s access to
these documents through legal compulsion every year from 2005 onwards. However
one looks at the matter, the decision of the Federal Court judge allows the
Minister to compel BP Canada to self-audit.
-
The impact on financial reporting
[86]
Another part of the context surrounding
subsection 231.1(1) is the existence of financial reporting obligations under provincial
securities legislation. These impose on publicly-traded corporations and their
subsidiaries a disclosure obligation to ensure that the financial statements
they issue for public consumption are reliable and accurately reflect their
financial situation. By enacting subsection 231.1(1), Parliament could not have
intended to vest the Minister with a power so sweeping that it would undermine
those obligations. The Federal Court judge erred in finding that these concerns
were not relevant to the matter before him (Reasons, para. 29).
[87]
In this respect, the intervener asserts that general
and unrestricted access to TAWPs, if authorized, would be “in direct confrontation with the CPAs’ ability to perform
financial statement audits because they may not have access to all the required
information” (Intervener’s Memorandum, para. 49). Specifically, publicly-traded
corporations would, as a direct consequence, tend to refrain from documenting
issues for their external auditors and be less candid in disclosing their tax
risks (Intervener’s Memorandum, paras. 33-38). Inducing less disclosure of tax
risks to auditors is detrimental to Canadians, be they individuals,
corporations or governments, as it necessarily results in less protection by reason
of the decreased reliability of financial statements.
[88]
The Minister takes issue with the intervener’s
contention that the general and unrestricted access to TAWPs authorized by the
Federal Court judge will have a negative impact on financial reporting. The
Minister invites us to consider the U.S. experience which shows that ongoing access
to TAWPs by the IRS has had no such effect.
[89]
The Minister first refers to Arthur Young
where the U.S. Supreme Court refused to recognize an accountant-client privilege
with respect to TAWPs. In deciding against the recognition of such a privilege,
the U.S. Supreme Court observed that the integrity of the securities markets
would not suffer, highlighting the fact that the obligation vested on
independent auditors to serve the public interest assures that integrity will
be preserved (Arthur Young, at pp. 818-821). The Minister invites us to make
the same observation in this case.
[90]
However, the Minister fails to note that Arthur
Young dealt with an audit which turned into a criminal investigation when a
questionable payment came to light. That is the context in which a summons was
issued against Arthur Young to compel the production of the TAWPs that were
relevant to the payment under investigation.
[91]
One can easily see why the U.S. Supreme Court
did not believe that allowing the investigator to have access to the TAWPs, in
the context of a criminal investigation into a specific payment, would have a damaging
effect on the work of independent auditors generally.
[92]
The Minister also relies on the majority
decision of the U.S. Court of Appeals for the First Circuit in Textron where
it was also held that providing access to TAWPs would not suppress the
disclosure of information to external auditors.
[93]
However, the Minister fails to note that this decision
which was rendered in 2009 makes clear that the IRS does not “automatically”
request the production of TAWPs. Indeed, it is explained that the IRS only
seeks the production of TAWPs where the taxpayer can be shown to have engaged
in designated transactions that have been recognized as abusive and that “[o]nly a limited number of transactions have been so
designated” (Textron, footnotes 1 and 2).
[94]
Again, one can see why, having regard to this
regulated scheme, the majority in Textron was satisfied that allowing
access to Textron’s TAWPs would not impact negatively on financial reporting
generally.
[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.
-
The exercise of discretion
[100] Given this conclusion, I need not address the question whether the
Federal Court judge properly exercised his discretion in granting the relief
claimed by the Minister. However, I believe it useful to address one aspect of this
debate as it is intimately connected with the above discussion.
[101] Before the Federal Court judge, the appellant took the position that
even if subsection 231.1(1) of the Act authorizes the Minister to access BP
Canada’s uncertain tax positions, he should not have ordered this information
to be produced because the Minister was seeking a relief that was contrary to published
policy.
[102] The Federal Court judge dismissed this argument based on his reading
of the policy. In his view, the Minister, by bringing the application, was “adhering to, and implementing the policy that, without
restriction, [TAWPs] are compellable under the Act” (Reasons,
para. 29).
[103] With respect, this turns the policy on its head. I agree with the
appellant that the policy, as it presently stands, states that the power to
access TAWPs, although available to the Minister, will not be used routinely.
This is what the words say (see paragraph 21 above) and when regard is had to the
tension which the policy was intended to address, they cannot be read otherwise
(Appeal Book, vol. IV, pp. 469-470, 472-489 and 498-499).
[104] Therefore, the Federal Court judge erred when he held that the unrestricted
and ongoing access to BP Canada’s Tax Reserve Papers was consistent with the
Minister’s policy (Reasons, para. 29).
[105] For the reasons already expressed, my view is that the policy reflects
the very constraint which the Act imposes on the Minister so that the Federal
Court judge had no choice but to adhere to it. If I am wrong in this regard, it
remains that the Minister acted in defiance of published policy by seeking
routine access to BP Canada’s uncertain tax positions.
[106] Given the public interest imperative behind this policy, the Federal
Court judge ought not to have exercised his discretion in favour of granting
this remedy.
DISPOSITION
[107]
For these reasons, I would allow the appeal with
costs, and giving the order which the Federal Court judge should have given, I
would dismiss the application brought by the Minister pursuant to subsection
231.7(1) of the Act, with costs.
“Marc Noël”
|
“I agree
|
|
Stratas J.A.”
|
|
“I agree
|
|
Boivin J.A.”
|
Email this Content