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Canada Tax: Canada Revenue Agency (CRA) issues policy on access to audit working papers

The Canada Revenue Agency (CRA) released its long-awaited policy on requesting access to accountants' and auditors' working papers on 3 June 2021 (see PR 2010/06/03A).

As expected, the CRA's view is that it has an almost unfettered right to access. While the agency indicated that such access will not be "routinely required," it indicated that it will apply the same policy that it applies with respect to any third-party information.

That is, it will seek such information "when the taxpayer cannot or will not provide this information, when it is needed by officials to determine the CRA's position on an issue and in accordance with the scope of the review."

This essentially leaves it to the discretion of the relevant Canada Revenue Agency official whether to request access to working papers in a particular situation. It falls well short of the Canadian Institute of Chartered Accountants (CICA) recommendation that the Canada Revenue Agency (CRA) adopt a clear national policy of requesting working papers and information only in exceptional and well-defined circumstances in order to preserve open and frank communication between auditors, accountants and their clients.


Given the recent trend of more complete and detailed disclosure obligations for all corporations, it is not surprising that the question of whether tax authorities should have routine access to accountants' and auditors' working papers has become a controversial issue in a number of jurisdictions, including the United States and Canada.

The Income Tax Act (the Act) includes a number of provisions that give the Canada Revenue Agency (CRA) broad powers to obtain information for any purpose related to the administration and enforcement of the Act. In Canada, there is no recognition of tax accountant-client privilege. However, the separate concepts of solicitor-client privilege and work product privilege (called "litigation privilege" in Canada) are recognized.

Government tax auditors have traditionally relied on their review of "books and records" as the primary source of factual data to support the tax return, both in Canada and the US. On the issue of tax accrual working papers, the US Internal Revenue Service (IRS) has stated that although the US Supreme Court in the Arthur Young & Co. decision (465 US 805 (1984)) recognized the IRS's right to obtain tax accrual working papers, the IRS would continue its policy of restraint and would not request tax accrual working papers as a standard examination technique. This policy was subsequently modified in respect of listed transactions, as evidenced by the Textron case (2009 WL 136752 (1st Cir. 2009)).

The CRA's longstanding policy, as reflected in its Compliance Programs Reference Material, was to ask accountants and auditors to produce specific working papers only when they were necessary to reconcile clients' records or contain closing or balancing adjustments that are relevant to the tax returns. However, in some CRA offices requests for accountants' and auditors' working papers have become common, even routine.

At the Canadian Tax Foundation's 2004 Annual Tax Conference, Canada Revenue Agency (CRA) indicated that it would undertake broad-based discussions with the tax, accounting and business communities concerning a review of its policy on requesting access to accountants' and auditors' working papers. The CICA submitted a draft policy and protocol that recommended the CRA adopt a policy of seeking access to auditors' working papers only in "exceptional" circumstances. Such circumstances were defined as those in which:

- Canada Revenue Agency has a reasonably well-founded suspicion of fraud, evasion or other offence under the Act
- The taxpayer's source documents have been lost or destroyed, are otherwise unavailable, or are not made available by the taxpayer
- Canada Revenue Agency cannot otherwise obtain sufficient information to evaluate the taxpayer's income tax arrangements

As noted, Canada Revenue Agency (CRA) policy released on 3 June 2021 falls far short of these recommendations.

New Canada Revenue Agency (CRA) policy

The 3 June 2021 release is entitled "Acquiring Information from Taxpayers, Registrants and Third Parties," and is not limited to a discussion of working paper access. The policy emphasizes the CRA's very significant powers to access any document, including those of third parties that may be relevant to the administration or enforcement of the Act, the Excise Tax Act and other relevant legislation, subject to solicitor-client or litigation privilege.

"Any document" includes accountants' and auditors' working papers that relate to a taxpayer's books and records. Accountants' and auditors' working papers include working papers created by or for an independent auditor or accountant in connection with an audit or review engagement, advice papers and tax accrual working papers (including those that relate to reserves for current, future, potential or contingent tax liabilities).

According to the policy statement, officials will always attempt to collect information from the most direct source in the least intrusive manner possible. Officials will discuss the issue under review with the taxpayer and will target their requests to documents and records that, in their view, are necessary for the scope of their review. Canada Revenue Agency (CRA) will seek information from third parties when the taxpayer cannot or will not provide this information, when it is needed by officials to determine the CRA's position on an issue and in accordance with the scope of the review.

The policy states that "since accountants' and auditors' working papers relate to a taxpayer's books and records, they may be necessary, although not routinely required, in the determination of a taxpayer's liabilities and entitlements. Officials may narrow the scope of their review, or expand the scope, depending on the existence and nature of compliance issues identified."

The policy goes on to explain that when evaluating the need to request information from a taxpayer, a registrant or a third party, officials will also consider five key principles:

- Legislative authorities
- Intent
- Relevance
- Transparency
- Impartiality

While Canada Revenue Agency (CRA) expands on these principles in the policy statement, they do not add much to our ability to understand or predict when access to working papers will be requested.


The success of the CRA's new policy will depend on how it is implemented. It is hoped that it will not be considered by some CRA offices as justifying a requirement to automatically provide tax working papers. That could impair financial statement disclosure and have a detrimental effect on capital markets, as corporations could be reluctant to provide certain information to their independent auditors.

Moreover, it is inherently unfair that taxpayers should be obligated to provide a detailed risk assessment of matters that could potentially result in litigation. A fair and balanced legal platform will not be possible if taxpayers are forced to provide Canada Revenue Agency (CRA) with a "blueprint" to their tax planning and tax exposures. The Canadian taxation system succeeds on a strong foundation of self-assessment that would be dangerously compromised should the Canada Revenue Agency (CRA) insist on routine access to tax working papers.

The new policy, however it is implemented, has to be considered in the context of other developments, in Canada and in the US, which compel taxpayers to provide information that will allow tax authorities to more easily identify potential tax exposures.

On 26 January 2010, the IRS announced its intent to require certain business taxpayers with assets over US$10 million to disclose uncertain tax positions on a new schedule as a part of their tax returns.

Recently, as the Canadian government announced in the 2010 federal budget, the minister of finance released details of a proposed new reporting requirement for certain tax-avoidance transactions. Quebec already has a similar, even more onerous reporting requirement in place.

These trends further emphasize that corporations must develop appropriate tax controversy and risk management strategies. This is not simply a matter of how to deal with tax audits and requests for documentation when they arise. These strategies are an essential part of good corporate governance and should be part of the corporate boardroom agenda.
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