Canada: BP Canada: Uncertain Tax Positions And The Importance Of Maintaining Privilege

Introduction

In its recent decision in Minister of National Revenue v. BP Canada Energy Company,¹ the Federal Court of Canada considered the Minister's ability to compel BP to provide its tax accrual working papers pursuant to the Minister's inspection powers in subsection 231.1(1) of the Income Tax Act.² The decision in favour of the Minister signals a substantial change to the audit process and may require modifications to the way in which corporate taxpayers analyse their uncertain tax positions.

The BP Case

The case concerned an application by the Minister to compel BP to disclose working papers describing BP's uncertain tax positions. Like other corporations that are required to comply with GAAP, BP prepared these working papers in order to identify reporting issues that could merit adjustment (the "Issues Lists") and to quantify reserves necessary to account for tax and interest that could become payable. Contrary to a long-standing policy of not exercising her power to request general access to accountants' working papers, the Minister sought disclosure of BP's tax accrual working papers for the purpose of providing a roadmap for both current and future audits. BP resisted participation in what it described as a "compulsory self-audit".³

The Court held for the Minister, finding that there was no conscription of BP, as neither the Minister nor the Income Tax Act compelled the creation of the Issues Lists. Rather, the Minister sought disclosure of documents already prepared. Critically, the Court held that it was not a requirement that the Minister need the information in order to conduct the audit, only that the working papers existed and were relevant to BP's intention in creating the reserves.

The Court rejected BP's arguments, which it characterized not as an objection to accountability but "to the certainty of accountability that will arise from the disclosure of the Issues Lists." ⁴ It also did not find compelling BP's argument that the Minister's policy constituted discrimination against corporations which are required to prepare financial statements in accordance with GAAP. Instead, the Court preferred the Minister's argument that, "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." ⁵

Risk Minimization and Solicitor-Client Privilege

In the result, BP was ordered, pursuant to subsection 231.7(1) of the Income Tax Act, to comply with the Minister's demand. However, an important exception exists in subsection 231.7(1) that protects information from disclosure if it is subject to solicitor-client privilege. Accordingly, maintaining solicitor-client privilege will be an important tool for minimizing the compellability of a corporation's own analysis of its uncertain tax positions. In future, a key part of a corporation's risk minimization strategy could be to ensure that, to the greatest extent possible, this analysis is performed by a lawyer and that the legal opinions sought maintain their status as confidential communications between counsel and client.

It is critical to the maintenance of solicitor-client privilege that a corporation's actions be consistent with the confidential nature of the communication. Accordingly, tax counsel's analysis should not be disclosed to third parties. To the extent that auditors require access to legal opinions provided to the corporation, auditors should make formal demands for the information they require and cite any relevant provisions of corporate statutes or other legislation conferring on the auditor the right to access such information.⁶ Responses to such requests should clearly state that the disclosure is for the purpose of compliance with the corporation's legal obligations and, where possible, set restrictive limits, such as prohibiting copying of the opinions or retaining notes pertaining to confidential legal advice in the audit file. These steps are necessary in order to advance a compelling argument that the disclosure was for the limited purpose of compliance with the auditor's request and did not constitute a general waiver of solicitor-client privilege.

Footnotes

 1 2015 FC 714 ("BP Canada").

2 R.S.C. 1985 c. 1 (5th Supp.) ("Income Tax Act").

3 BP Canada at para. 15.

4 BP Canada at para. 21.

5 BP Canada at para. 47.

6 For example, subsection 170(1) of the Canada Business Corporations Act, R.S.C. 1985 c. C-44, requires a corporation to provide to an auditor all records and information the auditor deems necessary to examine and report on the financial statements.

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