Federal Court Sets a Low Bar For CRA to Obtain Tax Accrual Working Papers

In 2017, the Federal Court of Appeal provided welcome clarification in BP Canada Energy Company v. MNR (“BP Canada”)[1] that the Minister of National Revenue (the “Minister”) was not entitled to have access to Tax Accrual Working Papers (“TAWPs”) without restriction. However, a recent judgement of the Federal Court in MNR v. Atlas Tube Canada ULC (“Atlas Tube”)[2] limits the applicability of BP Canada, and highlights the need for taxpayers to consider solicitor-client privilege carefully when creating documents that record uncertain tax positions.

TAWPs generally refer to papers created by or for independent auditors in order to assist them in their certification of financial statements. TAWPs are created for the purposes of identifying uncertain tax positions, usually include an opinion as to the likely outcome in the event that such positions are challenged by tax authorities, and provide for the establishment of reserves on financial statements.

The dispute in BP Canada arose during an audit of the taxpayer’s 2005 taxation year when a Canada Revenue Agency (“CRA”) auditor identified an issue relating to refund interest paid by the Minister to the taxpayer, BP Canada. In turn, the auditor issued a query, which resulted in an adjustment, but also drew the auditor’s attention to several accounting entries. The auditor issued a subsequent query requesting the disclosure of the “original supporting working papers” for a particular account of BP Canada.

BP Canada refused to comply with the query on the basis that the “original supporting working papers”, which were its TAWPs, would provide the Minister not only with a roadmap to its uncertain tax positions, but also to the underlying analyses supporting such positions. Nonetheless, BP Canada produced a redacted version of its tax reserve papers, showing all amounts, but without revealing the uncertain tax positions or underlying analyses. The redacted version raised further red flags and resulted in a formal request by the Minister for the unredacted version revealing the uncertain tax positions, which BP Canada refused to provide.