Corporate tax strategies should be disclosed

United States tax positions law should be adopted here, Allan Lanthier says.

Multinational corporations routinely use tax avoidance strategies to defer tax to future years, and to eliminate tax altogether by shifting profits from Canada and other high-tax jurisdictions to offshore tax havens.

A taxpayer has the right to reduce its tax to the minimum allowed by law.

Still, Canadian corporations should be prepared to both disclose and defend their strategies before the Canada Revenue Agency.

A recent court decision makes it less likely that they will be required to do either.

First, how do corporations go about the process of avoiding tax? A multinational corporation develops a number of tax strategies, and decides which are most likely to succeed. The plans are studied in great detail. What is the degree of risk that, if challenged by a revenue authority, the plan will fail? What arguments and precedents can the corporation use to support its position, and what can be used against it? If discovered and challenged, might a settlement be negotiated?

The strategies are then put in place, step by step, in careful and meticulous detail.

While no tax is volunteered, a reserve is recorded in the financial statements for the tax the corporation expects to pay if these “uncertain tax positions” (UTPs) are discovered and challenged by the revenue authorities. Now we wait for the CRA to arrive.

The CRA begins its tax audit, using its own risk assessment tools, but otherwise having little idea how many tax avoidance strategies may have been implemented or how much tax might be at risk. Some strategies may be discovered and challenged. Others will not, and tax revenue will be lost.

So why doesn’t the CRA simply ask the company for a listing of its UTPs? Well, that is precisely what the CRA tried to do — without success — in the recent case of BP Canada Energy.

Canadian corporations should be prepared to both disclose and defend their strategies before the (CRA).

In the course of an audit, the CRA requested copies of BP’s analyses of its UTPs. BP provided only certain documents in redacted form, and the CRA sought a court order compelling BP to provide unredacted copies of all documents. The order was granted, and BP appealed.

In late March, the Federal Court of Appeal found in favour of BP and reversed the order.

The appeal court decided that, while the CRA has wide powers to request taxpayer information, it does not have general and unrestricted access to a corporation’s tax analyses.

The court stated it is securities law — not tax law — that requires publicly traded corporations and their subsidiaries to document and record reserves for UTPs, and concluded taxpayers should not be compelled to reveal their “soft spots” to the CRA.

The Chartered Professional Accountants of Canada was granted intervenor status in the case. It argued routine and uncontrolled requests for tax documentation might discourage corporations from preparing analyses of tax risks, or sharing these analyses with their external auditors — arguments with little if any factual basis. Still, the appeal court agreed and, with considerable flourish, suggested broad CRA access to such documents might “imperil the integrity of the financial reporting system.”

The Crown has until May 29, today, to seek leave to appeal to the Supreme Court.

In the United States, any corporation with assets that exceed US$10 million must, by law, file an annual return disclosing its UTPs. It is a balanced approach — the IRS stated it purposely chose less disclosure rather than more. A U.S. corporation is required to provide a concise description of each UTP, but not the amount of tax at risk, its analysis, or the amount reserved in its financial statements.

So what are Canadian legislators waiting for? Allan Lanthier is a former chair of the Canadian Tax Foundation, and a retired senior partner of Ernst & Young. He lives in Montreal.