In Canada (MNR) v. Atlas Tube Canada ULC, 2018 FC 1086 (“Atlas Tube”), the Federal Court (“FC”) (Canada) held that the Canada Revenue Agency (“CRA”) was entitled to receive a copy of a due diligence report prepared by EY Canada during a transaction involving Atlas Tube Canada ULC (“Atlas”), a Canadian private company. Atlas had refused to provide the report to the CRA as requested in the course of the “Audit” on the basis that it was protected by solicitor client privilege and that the Minister had not established its relevance.

This case serves as a good refresher of the limitations of solicitor-client privilege principles in Canada in particular where non-lawyer advisors are involved, in this case to summarize or report on sensitive tax information. It also highlights that the CRA has realized that that due diligence reports prepared for taxpayers likely contain useful information to the CRA. Taxpayers should expect that the CRA will request such reports, and unless they are privileged, they will not be protected from having to disclose such reports to the CRA.

The facts in Atlas Tube are straight forward. Atlas, acquired the shares of Lakeside Steel Inc. (“Target”), a Canadian public corporation in 2012. Prior to the acquisition, at the recommendation of counsel, Atlas engaged EY Canada to conduct tax due diligence on Target, and to produce a “Report” with its findings. This Report, or at least the information contained in it, was provided to the Canadian legal counsel that had recommended it. Atlas argued the Report was privileged because it was done at the recommendation of counsel. This argument did not succeed.

Taxpayers are not required to disclose to the CRA documents subject to solicitor-client privilege. Based on the jurisprudence, solicitor-client privilege requires:

  1. communication between solicitor and client;
  2. which entails the seeking or giving of legal advice; and
  3. which is intended to be confidential by the parties. Solosky v. Canada [1980], 1 SCR 821 at 837.

Privilege will also extend to communications with or by third parties such as accountants if they are in furtherance of a function essential to the solicitor-client relationship or the continuum of legal advice provided by the solicitor (i.e. as a channel of communication between solicitor and client, as a translator or transcriber to or from the third party by the solicitor or client, or in employing expertise to assemble and/or explain information provided by the client to the solicitor). Atlas Tube at para 33 citing Redhead Equipment Ltd. v. Canada, 2016 SKCA 115 at paras 41-45.

Here, Atlas argued that the principal purpose of the Report was to provide information to their counsel to inform their provision of legal advice in developing the structure of the transaction. Atlas argued that while the impact of the Report on its decision to complete the acquisition was minimal, it did have an impact on their counsel’s structuring of the transaction, and that the Report informed the business decision by summarizing the tax attributes of the Target. The CRA argued that the Report was made to allow a business decision to be made, and even if used by counsel, does not result in the Report being subject to solicitor-client privilege.

The FC held in favour of the CRA that the dominant purpose of the Report was to inform the decision whether to proceed with the transaction and the price at which to do so. This was a business purpose even if it also informed the giving of legal advice by counsel which was ancillary to the business decision. The FC held that this was determinative of its conclusion that the Report was not subject to solicitor-client privilege. However, FC also noted that based on testimony as to the contents of the Report (as it was not reviewed by the court), it may have contained accounting opinions. If so, it likely did not meet the requirements for an accountant’s work product, and thus would not be protected by solicitor-client privilege in any event even if it had been assembled for the purpose of obtaining legal advice.

This case is currently under appeal. Thus, since the CRA has broad statutory powers to request documents from taxpayers in the course of an audit unless they are subject to privilege, taxpayers and their legal advisors should remain diligent when communicating with third parties in the course of providing legal advice. This appears timely as the CRA has seemingly become more aggressive in exercising these powers to gather sensitive documents.

Practically, taxpayers seeking to protect communications as subject to solicitor-client privilege when working with both legal counsel and accountants should consider whether or not to avail themselves of the services of the non-legal advisors in respect of sensitive areas. If this is not possible, then they should consider whether such work of non-legal advisors is an input to the legal advice provided by legal counsel consistent with the conditions above. If so, the scope of the third party's mandate should be limited to information gathering or preparation and they should not opine on the materials other than to inform legal counsel providing legal advice about the materials. Further, where possible, legal counsel should i) establish why the non-legal assistance is required to enable legal counsel to render a legal opinion or to provide legal advice and ii) gather the report directly from the third party (such as an accountant) rather than receiving it indirectly through the client.