The right of tax authorities to demand production of documents

sarsA recent decision in the Federal Court of Canada in the matter of Minister of National Revenue v BP Canada Energy Company 2015 FC 714 dealt with the Canadian law concerning the right of the Canadian Revenue Authority (‘CRA’) to demand information from taxpayers.

In the preparation of its annual financial statements, BP Canada Energy Company (‘BP’) prepared workings in which it analysed tax positions that it had taken in which there might have been a difference between its interpretation of the law and the interpretation of the CRA. These working papers supported a reserve for tax contingencies. They also listed issues on which the interpretation was uncertain (‘issues list’).

In the course of evaluating audit risk for the years 2005, 2006 and 2007, CRA requested BP to provide it with copies of the working papers in respect of its tax contingencies. BP supplied the workings but redacted the issues list and statements of subjective opinion relating to the issues. CRA therefore made application to court for an order compelling the production of unredacted working papers.

The law

The relevant provision of the Canadian Income Tax Act is found in section 231.1(1)(a), which provides:

(1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,

(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act.


The case of the CRA was based upon the following submission:

Publicly traded corporations such as BP p.l.c., the ultimate parent company of the respondent, are required for financial reporting and other regulatory purposes to prepare consolidated financial statements in accordance with generally accepted accounting principles (‘GAAP’). To prepare financial statements that comply with GAAP, the corporation and its subsidiaries must calculate reserves to account for contingent tax liabilities. Those calculations must include an estimate of the liability BP would face if the Minister were to challenge uncertain positions on BP’s self-assessed tax return.

The working papers maintained by BP identify the issues [the Issues List] which BP knows may merit adjustment. BP’s list of uncertain tax positions would identify the areas at highest risk for loss of tax revenue. The Minister seeks disclosure of this list to verify whether BP’s uncertain tax positions are compliant with the Act.

The critical issue from BP’s perspective was that the information did not relate to any information that it was required to maintain under the Income Tax Act, but to information that was required to be recorded in the consolidated financial statements in terms of GAAP. This position was clearly stated in the following submission by its counsel:

The Minister is afforded broad authority to access the information that is (or should be) in the books and records of a taxpayer – the source documents that evidence the transactions or activities that result in the income that is (or should be) reported. However, the Act does not require taxpayers to prepare GAAP financial statements or the reserve analysis reflected therein. The Issues Lists reflect BP Canada’s subjective opinion regarding potential tax risk in taxation years that are now statute barred.

The ruling

The Court ruled that the CRA could compel the production of unredacted working papers. Its finding was summarised in paragraphs [18] to [27] of the judgment of Campbell J:

  • As a taxpayer, BP must decide what amounts are to be declared as taxable;
  • By an authority other than the Income Tax Act, BP is required to create reserves that represent the tax and interest that may be payable if its decisions prove to be incorrect;
  • The accounting entries are the working papers required to be kept, and include the Issues List;
  • While the CRA may not need the Issues List to conduct the audit, the CRA requires the list to establish its audit scope;
  • The CRA is not asking for information to be manufactured – the Issues List is in existence and reflects an opinion on tax liability based on a choice to create a reserve;
  • It is irrelevant that the Issues List is required to be kept under an authority other than the Income Tax Act; and
  • The working papers containing the Issues List are related to the enforcement of tax, relate to information in BP’s records and relate to an amount payable under the Income Tax Act – they are within the scope of section 231.1(1) because they are relevant to BP’s intention in creating the reserve.

It is interesting to note that the Canadian law does not use the term ‘relevant’; it refers to information that ‘relates to or may relate to’ information in the books or records of a taxpayer. It must therefore be understood in that context.

BP has a right to appeal the decision, which must be exercised no later than 8 September 2015, and it will be interesting to see whether an appeal is noted.

A South African perspective

In the South African context, Section 46(1) of the Tax Administration Act (‘TAA’) prescribes the circumstances under which SARS may require a person to produce material:

SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer, whether identified by name or otherwise objectively identifiable, require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires.

For purposes of income tax, South Africa taxes persons on assessment but, increasingly, the filing processes introduced by SARS in recent years are propelling us towards a self-assessment system. As a result, a return of income is prepared through responding to specific questions in an on-line questionnaire, from which a return of income, setting out the information that SARS requires to be submitted, is generated. Whereas under the classical assessment system the taxpayer was required, in addition to the return, simultaneously to submit explanatory information in support of the information contained in the return, the taxpayer now merely populates the return and submits it to SARS
with no supporting information.

Assessment usually involves the electronic capture of the data supplied online, the automated checking of arithmetic accuracy and the issue of an electronically generated assessment.

In terms of section 40 of the TAA, SARS may select a taxpayer’s return for audit or verification. In that event, SARS will call for material to be made available, and rely on section 46(1) of the TAA as its justification for requiring the material.

In terms of section 46(6) of the TAA:

Relevant material required by SARS under this section must be referred to in the request with reasonable specificity.

The term ‘relevant material’ is defined in section 1 of the TAA as being:

any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3.

The relevance is therefore determined (and limited) by what constitutes the administration of a tax act. Section 3 of the TAA prescribes the powers and duties involved in the administration of a tax act. These (inter alia and to the extent applicable in this context) include:

  • obtaining information in relation to anything that may affect a liability for tax, a taxable event or an obligation of a person to comply with a tax act;
  • ascertaining whether correct returns, information or documents have been filed;
  • establishing a person’s identity; and
  • determining the liability of a person for tax.

All of the activities referred to above involve establishing the factual position. Information means the facts about a person or an event. The activities that are part of the administration of a tax act must, in their context, all be interpreted as giving SARS the right to establish the facts upon which to base its determinations.

SARS’ duty in administering a tax act is to identify the facts, identify the law that applies to those facts and determine the liability based upon its (SARS’) interpretation of the law applicable to those facts.

Thus, where SARS is interrogating a taxable event, it may request evidence by which the facts may be identified. It cannot, it is submitted, require production of documents that are of no probative value in relation to the facts. Whether a taxpayer’s interpretation of the law may differ from SARS’ interpretation is a question of opinion and not of fact, and is certainly not relevant to determining a person’s liability to tax. It is submitted that the term ‘information’ in section 3 of the TAA does not extend to expressions of opinion, whether in documents from advisors or in internal risk assessment records maintained by a taxpayer.

Where a notice requiring the production of material is received from SARS, recipients should be astute to establish whether the material requested goes to a purpose or activity specified in section 3 of the TAA, namely whether it is required to:

  • obtain facts about a liability, event or obligation to comply;
  • ascertain the correctness of information already in SARS’ possession;
  • establish a person’s identity; or
  • determine a liability to tax.

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