In the wake of a recent court decision, the Canada Revenue Agency (CRA) now has significantly more access to business and other taxpayer-generated documents.
Companies that are required to prepare financial statements must typically estimate and take reserves for potential exposures, including a self-generated “uncertain tax positions” (UTPs) list that might successfully be challenged by tax authorities.
The overall reserve is generally disclosed in the financial statements; the list of issues underlying the uncertain tax positions is not. The CRA has always reserved the right to demand a taxpayer’s UTP analysis (unless protected from disclosure under lawyer-client privilege), but as a practical matter it has rarely done so in the absence of serious concerns.
In a recent Federal Court case (MNR vs. BP Canada Energy Co.), the CRA obtained an order forcing the taxpayer to turn over a list of UTPs on the mere pretext that it would be useful as a tax audit “road map” and to ensure the CRA hadn’t “missed anything.”
The taxpayer had already disclosed a version of its UTP working papers, which included the amount of each reserve, but did not include its description of the tax issue for which the reserve had been taken. This provocative and aggressive action on the CRA’s part signals a major change in what constitutes “fair game” in the CRA’s use of its extensive information-gathering powers.
The CRA can generally require a taxpayer to disclose not only unprivileged documents and emails, but even the content of verbal discussions with the taxpayer’s accountants and other non-lawyers. On the other hand, the CRA cannot compel a taxpayer to disclose anything protected by lawyer-client privilege. The BP Canada case illustrates that lawyer-client privilege is typically the only defence to tax-related CRA demands and queries.
BP Canada has appealed the decision to the Federal Court of Appeal, and unless the decision is overturned, it will leave a taxpayer’s subjective assessment of its own uncertain tax positions exposed to demands for disclosure from Canadian tax authorities, except where protected by lawyer-client privilege.
Properly structured, UTPs and other highly sensitive tax analysis can be created within the protective scope of lawyer-client privilege, and businesses would be well advised to do so until the appeal of BP Canada is decided.
Having uncertain tax position analysis prepared for presentation to tax counsel for legal review and advice should result in lawyer-client privilege applying to the work product. Moreover, the principle of limited waiver should ensure that privilege is not lost if these materials are shared with external accountants for the limited purpose of completing legally required financial statements.
While this case unfolds, the Vancouver business community should consider pressing the federal government for a change in law or in CRA policy to restrict demands for uncertain tax position analysis to exceptional circumstances, which did seem to be CRA policy until recently. Litigating tax disputes with CRA has become increasingly expensive and time-consuming and consequently impractical for most taxpayers and will likely not be an appealing alternative for most businesses. •
Danielle Lewchuk is an associate in Borden Ladner Gervais LLP’s tax group in Vancouver.