Steve Suarez is a partner in Toronto with law firm Borden Ladner Gervais LLP.
The Canada Revenue Agency plays an essential role in Canada's self-assessment tax system: auditing taxpayers to ensure the integrity of the system. Taxpayers are required to prepare and file their tax returns honestly, and provide the CRA with access to source documents and other records necessary to allow their taxes owing to be verified. The CRA chooses who to audit, what records it wants to review and which issues it feels warrant further scrutiny.
However, a recent court case indicates that the CRA is changing the rules of engagement with corporate taxpayers. To make its job of auditing them easier, the CRA has demanded to see a list of any issues on their tax returns where significant interpretational uncertainty exists ("uncertain tax positions" – UTPs). This development constitutes a major change in CRA policy and has provoked concern in the business community.
Corporations required by law to prepare audited financial statements are obligated to analyze and quantify various potential exposures on their balance sheets, including UTPs. Shareholders, creditors and capital markets rely on the disclosure contained in these financial statements, and for this reason, transparency is encouraged.
In Minister of National Revenue v. BP Canada Energy Company, the CRA sought and obtained a court order requiring the taxpayer to turn over its UTP analysis. The CRA acknowledged that its purpose in demanding this material was simply to use it as an audit "road map," notwithstanding its own formal policy that it "will not be influenced by any subjective analysis, comments or opinions contained in" the taxpayer documents it reviews.
This unprecedented result is inequitable, since requiring these taxpayers to create prejudicial UTP analysis and then turn it over to the CRA effectively obligates them to do the CRA's job for it as a matter of convenience for the government. It is one thing to give the CRA full access to source documents and records it needs to conduct its own review of taxpayers' affairs; it is quite another to require a taxpayer to self-assess by making it create and hand over a list of issues of legitimate uncertainty resulting from Canada's complex tax laws.
Not surprisingly, corporate Canada is alarmed by this development and at being caught between the competing public interests at stake. On one hand, they are being told to consider, quantify and disclose tax issues where the law (drafted by the government) isn't clear, on the basis that it is in the public interest that audited financial statements meet prescribed standards of accuracy and disclosure. Yet on the other hand, the resulting work product is apparently going to be used by the CRA as a "road map" to pursue them on tax audits. This result is unfair and creates the wrong incentives for corporations faced with conflicting legal demands.
Whatever the outcome of this particular case (which has been appealed), the business community should be organizing itself to lobby the government for a better result generally. Courts are not equipped to debate and make difficult choices between competing public policies, and litigating tax disputes with the CRA is so expensive and time-consuming as to be impractical for most taxpayers. A change in law or in CRA policy to restrict demands for UTP analysis is the optimal result, and indeed, until recently, the CRA's practice had acknowledged that UTP materials warranted special treatment and were to be sought only in exceptional cases.
Until such a change occurs, corporations are increasingly likely to conduct their UTP analysis with their tax lawyers (not accountants), in order to protect the resulting work product from disclosure under lawyer-client privilege. While this form of self-help is certainly effective in preserving confidentiality, it is costly, and the most efficient outcome for everyone would be consensual agreement as to the appropriate limits in the exercise of the CRA's powers.