Introduction – Ministry of National Revenue v Cameco Corporation
Cameco Corporation (“Cameco”) refused to grant the Canada Revenue Agency (“CRA”) oral interviews with 25 employees and former employees during the course of a transfer pricing tax audit. The CRA applied for a compliance order to the Federal Court of Canada to force the interviews to take place on the grounds that its tax audit powers gave it the right to compel oral interviews. The Federal Court of Canada sided with Cameco and gave a number of different reasons for their decision. Most prominently, the Court was aware that Cameco had an active appeal at the Tax Court of Canada dealing with similar issues from earlier taxation years, and found that it was prejudicial to Cameco to allow the CRA to use its tax audit powers to assist its case at Tax Court.
Facts - Ministry of National Revenue v Cameco Corporation
Cameco is a large Canada based uranium producer that operates in many countries through a corporate group that includes wholly owned subsidiaries situated outside of Canada. Cameco was audited by CRA multiple times regarding its transfer prices with its foreign subsidiaries. A transfer price is the price paid in exchange for goods or services from a related party, such as a subsidiary, located in a different country. The Canadian Income Tax Act imposes a requirement that taxpayers must use the price that arm’s length parties would have agreed to for their transfer prices. In the absence of this requirement, taxpayers would be able to shift profits by choosing their transfer prices such that the party in the jurisdiction with lower corporate income tax rates earned all of the profits.
The CRA audited Cameco’s transfer pricing for its 2003 taxation year. In the course of that tax audit, the CRA interviewed key personnel from Cameco with Cameco’s consent in 2006, 2007, and 2008. The CRA tax auditors disagreed with Cameco’s transfer pricing position and reassessed Cameco’s 2003 through 2007 taxation years. Cameco appealed the reassessments to the Tax Court of Canada. As of August 2017 when Ministry of National Revenue v. Cameco was decided this appeal was still ongoing.
The CRA began auditing Cameco’s transfer pricing for its 2010-2012 taxation years in 2013. The CRA tax auditors requested interviews with approximately 25 key Cameco personnel. Many of the requested interviews were with people who had been interviewed in 2006 through 2008. Some of these employees had since retired or moved to jobs at different companies. The CRA offered to interview each employee either in Canada, the United States, Switzerland, or by video conference. Cameco refused to consent to these interviews, so the CRA brought an application for a compliance order before the Federal Court of Canada.
Federal Court Decision - Ministry of National Revenue v Cameco Corporation
The CRA took the position that section 231.1 of the Canadian Income Tax Act granted them the power to conduct oral interviews of taxpayers during the course of a tax audit. Section 231.1 allows the CRA to inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer that may relate to any amount payable to the taxpayer under the Canadian Income Tax Act. Section 231.1 also allows the CRA to enter premises where business is carried on and have the owner of the business or other people on the premises answer questions relating to the administration of the Canadian Income Tax Act and provide all reasonable assistance. The CRA interprets this section as granting them broad tax audit powers including the right to oral interviews with the employees and former employees of a corporation being audited. The CRA also took the position that it would be absurd to interpret the section as explicitly allowing tax auditors to ask questions when they visit the premises of a business but not compel oral interviews.
The CRA also argued that it was normal practice for tax auditors to orally ask questions to taxpayers in person and over the phone, and that the relevant provisions of the Canadian Income Tax Act should be interpreted in a way that is consistent with normal audit practice. The CRA also pointed out they have a limited amount of time to audit returns before they become statute barred and that it is more efficient to conduct oral interviews instead of being required to prepare written lists of questions. The CRA also argued that since Cameco is a large company, a request to interview approximately 25 key employees was proportionate and that they were being reasonable by offering to accommodate the employees regarding the location of the oral interviews.
Cameco argued that although the CRA’s tax audit powers are broad, the Canadian Income Tax Act does not grant them the unlimited right to oral interviews with the employees of a taxpayer. Cameco pointed out that the section 231.1 should be read in the context of the objection and appeals provisions and that Cameco’s appeal to the Tax Court of Canada would be prejudiced. Cameco also asserted that the compliance order requested by CRA was disproportionate, vague, and overbroad.
The Federal Court of Canada rejected the CRA’s application for a compliance order and gave a number of reasons for doing so. One reason given by the court is that courts should be reluctant to give wide interpretations to already powerful provisions. As support for this, the court cites a recent Federal Court of Appeal Case, BP Canada Energy Company v MNR, in which the Federal Court of Appeal found that section 231.1 of the Canadian Income Tax Act could not always be used to compel the production of tax accrual working papers. Tax accrual working papers are used by taxpayers to keep track of their potential tax liabilities if the CRA disagrees with the uncertain aspects of their filing positions. The Federal Court of Appeal found that despite the broad wording of section 231.1, parliament could not have intended the tax audit powers granted to CRA to be so sweeping that taxpayers could always be compelled to reveal which specific aspects of their tax positions they viewed as uncertain.
The court also emphasized that allowing the CRA an unlimited ability to compel oral interviews would effectively allow CRA a much broader form of examination for discovery than is available in appeals before the tax court and without any of the corresponding procedural safe guards. This suggested to the court that the CRA’s interpretation of section 231.1 is not harmonious and consistent with Canada’s tax dispute legislation. The court noted that this concern is important to the present case because the interviews requested in the application for a compliance order in fact deal with subject matter that is currently the subject of an appeal before the Tax Court of Canada. The court also pointed out that requiring the interviews was disproportionate and wasteful because the subject matter of the interviews would be dealt with through the Tax Court of Canada’s discovery process as well.
The Court also observed that by failing to provide oral interviews, Cameco was not limiting the information that could be requested by the CRA, only the form, written vs oral, that the answers to their queries would take.
The basic lesson of this case is that the CRA cannot always compel oral interviews with taxpayers, their employees, or other related people. More broadly, the CRA is not always able to rely on their tax audit powers under the Canadian Income Tax Act to determine the form questioning in a tax audit will take, so long as the taxpayer provides the information they request. The decision does not specifically state whether the existence of the ongoing Tax Court of Canada appeal on the same subject matter was a necessary condition for denying the compliance order. The Court assigned weight to that fact, but also to other arguments, so it is unclear whether taxpayers who do not have an active appeal before the Tax Court of Argument will be able to succeed in opposing similar applications for compliance orders.
Together with BP Canada Energy Company v MNR this case shows some of the limits of the CRA’s tax audit powers. Both cases involve an appeal to basic features of the Canadian income tax system to reign in a very broad provision of the Canadian Income Tax Act. In this case, it was the showing that an attempted use of the CRA’s tax audit powers was in tension with parliament’s regime for the resolution of tax disputes. In BP Canada Energy Company v MNR it was the tension between the broad power of CRA tax auditors to request information and Canada’s self assessment system. This suggests that the Courts will be sympathetic to similar legal strategies in future cases regarding the CRA’s tax audit and other administrative powers.