Accountant Work Product not Privileged and must be Produced to CRA: Canada v. Atlas Tube Canada ULC

18 December 2018

In Canada v. Atlas Tube Canada ULC, the Federal Court (FC) ordered a draft due diligence report prepared by Ernst & Young LLP (Canada) to be produced to the Canada Revenue Agency (CRA). The Minister of National Revenue applied to the FC, pursuant to section 231.7 of the Income Tax Act (Canada)[1], seeking an order requiring Atlas Tube Canada ULC to provide the report.

The CRA had requested the report in the context of auditing Atlas, who declined to provide it, claiming it was protected by solicitor-client privilege.

The FC allowed the application, deciding that Atlas did not meet the burden of establishing that the Report was privileged, that the Minister met the low threshold for relevance applicable to an audit under section 231.1 and that producing the Report did not impose on Atlas the obligation to self-audit.

In its audit of Atlas for its taxation year ended April 21, 2012, the CRA requested a copy of the Report as part of its review of a series of transactions involving Atlas' parent company, JMC Steel Group Inc. ("JMC"). JMC acquired shares of Lakeside Steel Inc. ("LSI") by way of a Plan of Arrangement. The acquisition included a number of pre-acquisition and post-acquisition steps involving the subsidiaries of LSI, which were Lakeside Steel Corporation ("LSC") and Lakeside Steel Holdings USA Inc. E&Y prepared the Report as part of the due diligence for the series of transactions. The Report described and explained the tax profiles of LSI and LSC and included an assessment of the probability that the filing positions leading to the tax exposures would be sustained if they were challenged by the CRA. E&Y was engaged at the recommendation of JMC's legal counsel ("Canadian Counsel") and it was asserted that the Report was delivered to the Canadian Counsel.

The FC first considered the threshold question of whether the Report was relevant to the CRA's audit of Atlas and decided that the CRA could examine the Report because the Minister met the low threshold for relevance under subsection 231.1(1). Paragraph 231.1(1)(a) provides that an authorized person may 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 under the Act. The FC agreed with the Minister's position that the Report was prepared for purposes of the transaction under audit. Moreover, the FC agreed that the Minister did not need to demonstrate that the document requested under subsection 231.1(1) was relevant to a specific issue under audit. The FC found that the Minister's purpose in seeking the Report related to the administration or enforcement of the Act and that the information in the Report may be relevant to an amount payable by the taxpayer under the Act.

Next, the FC decided that the Report was not protected by solicitor-client privilege and shielded from production pursuant to subsection 231.7(1). Paragraph 231.7(1)(b) provides that, to order the production of a document to the Minister under section 231.7, the FC must be satisfied that the document is not protected from disclosure by solicitor-client privilege. The FC found that the Report did not represent a direct communication between solicitor and client as it was prepared by an accounting firm. To reach its decision, the FC determined the principal purpose for generating the Report. The FC found that it was not clear that E&Y had provided the Report to JMC 's Canadian Counsel. Rather, the Report was provided to JMC 's Director of Tax and shared internally with senior executives of JMC. JMC also directed its Canadian Counsel to discuss with E&Y tax issues related to the acquisition.

The FC held that the dominant purpose of the Report was not to provide tax information to JMC 's Canadian Counsel to inform the structuring of the transaction. Instead, the FC decided that Canadian tax diligence was only one of several categories of due diligence that JMC was undertaking with the assistance of third parties. The dominant purpose of the Report, according to the FC, when it was commissioned and generated, was to inform the decision whether to proceed with the transaction and at what price. The FC found this was a business purpose and, to the extent the Report or the information in it informed the legal advice given by JMC 's Canadian Counsel, that was ancillary to the business decision. Consequently, the FC found that the Report was not protected by solicitor-client privilege and was properly subject to production to the Minister on application for a compliance order pursuant to subsection 231.7(1).

Atlas raised one final argument to try to avoid the Report being produced to the CRA, which the FC also rejected. It argued that providing the Report would obligate Atlas to self-audit, because the Report revealed LSI's and LSC's uncertain Canadian tax positions relating to taxation years that ended before JMC 's acquisition of LSI. The FC applied the leading case of BP Canada Energy Co. v Canada ("BP Canada") and found that some of the information in the Report was tax accrual working papers ("TAWPs"). However, the FC applied BP Canada narrowly, as only precluding general and unrestricted access to TAWPs on a prospective basis, outside the context of an audit of particular issues. The FC therefore held that compelling Atlas to provide the Report would not offend the principle in BP Canada that a taxpayer is not required to self-audit.

It remains difficult for taxpayers to successfully avoid being required to provide accountant's work product to the CRA, based on a claim of solicitor-client privilege. Essentially, to assert solicitor-client privilege over accountant's work product requires that it be done for the purpose of facilitating the provision of legal advice. It is therefore helpful to ensure lines of communication amongst the taxpayer, the accounting professionals and legal counsel consistently demonstrate that purpose. We also recommend that contemporaneous documents be circulated, confirming that communications amongst the taxpayer, legal counsel and accounting professionals are intended by the taxpayer to be subject to solicitor-client privilege. Finally, all such communications should be conspicuously marked accordingly.


[1] All statutory references are to the Act.

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