New Limits Upon 231.1(1) Audit Powers

Published by Greg DelBigio, K.C.

The Income Tax Act provides CRA with broad powers of administration and enforcement. In BP Energy Company v. Minister of National Revenue, 2017 FCA 61, the appeal court considered the authority to conduct the inspection of books and records given by s.231.1(1) of the Act and, on the basis of a contextual interpretation of the subsection, the Court placed significant restrictions upon the limits of the Minister’s authority.

BP Energy is a publicly traded company. To comply with the law, it was required to prepare consolidated financial statements. Therefore, the company prepared internal documents that set out uncertain tax positions as well as the analysis which underlay contingent tax reserves. Often referred to as tax accrual working papers (TAWPs), these documents were described by the Court as often identifying tax positions that the Minister might challenge, the likely outcome of such a challenge and, the reserve for a successful challenge by the Minister.

In brief, the facts are that in the course of an audit, CRA requested the “original working papers” for the company’s tax reserves. The company refused. The Minister applied for a compliance order. In granting the order, the Federal Court judge found that the tax accrual working papers fell within the statutory scope of 231.1(1) and that there was no basis upon which to exercise his discretion to refuse the order.

On appeal, the Chartered Professional Accountants of Canada intervened and argued that the order could have a chilling effect whereby corporations would “hesitate to voluntarily and fully disclose their tax risks”. The Minister, on the other hand, argued that she might well disagree with and challenge an uncertain tax position and that obtaining the documents and information therefore falls squarely within the administration and enforcement of the Act. Further, and while acknowledging that the Federal Court judge had a discretion to not grant the order, the Minister argued that the auditor did not act with bad faith, dishonesty or unfairness and the judge therefore did not err in refusing to exercise that discretion.

In allowing the appeal and dismissing the compliance order the Court observed that 231.1(1) “could not have been drafted in broader terms.”   Subsection 231.1(1) permits an inspection to be made “for any purpose related to the administration or enforcement of the Act.”  Based upon these words, the Court concluded: “The Minister wants to use these [uncertain tax] positions as a roadmap in order to facilitate audits conducted under this Act. Based on a literal reading of the introductory words, this looks like an authorized purpose.”

Further, the Court concluded that on “a plain reading” of the statutory language which permits the inspection of books, records and documents “that relates or may relate to the information that is or should be in the books and records of the taxpayer or to any amount payable by the taxpayer under this Act”, the documents sought by the auditor are captured.

However, it is both significant and interesting that the Court went on to state that those conclusions do not “settle the debate”. “The issue in this case is not whether the information revealed by BP Canada’s Tax Reserve Papers could be accessible under the Act…The real issue is whether subsection 231.1(1) allows general and unrestricted access to this information…”.