The Federal Court’s recent decision in Atlas Tube Canada ULC v MNR[1] showcases an important advantage that lawyers bring to multi-disciplinary teams working on corporate transactions, namely solicitor-client privilege. The case instructs that, wherever appropriate, arrangements should be made to protect communications and other documents as legal advice. We recommend consulting with a tax lawyer to determine where and how this can be achieved.
The case concerned a due diligence report (the “Report”) prepared by an accounting firm for Altas Tube Canada ULC (“Altas”) in respect of a transaction that occurred in 2012.
In the course of auditing Altas for its 2012 taxation year, the Minister of National Revenue (the “Minister”) relied on subsection 231.1(1) of the Income Tax Act (the “Act”) to request a copy of the Report. Atlas refused and the Minister applied to the Federal Court for a compliance order under subsection 231.7(1) of the Act.
At the time the Report was commissioned, Atlas’s U.S. parent corporation was in the process of acquiring two corporations. The purpose of the Report was to describe and explain the tax attributes of the target corporations.
The Federal Court observed that paragraph 231.7(1)(b) of the Act requires that before issuing a compliance order for a document, a court must be satisfied that the document is not protected from disclosure by solicitor-client privilege. Holding that, among other things, the Report was not protect by solicitor-client privilege, the Federal Court decided in favor of the Minister.
The Federal Court relied on the test for solicitor-client privilege set out in Solosky v Canada[2], which established that a communication will be subject to solicitor-client privilege if it is a communication (i) between solicitor and client; (ii) seeking or giving legal advice; and (iii) intended to be confidential by the parties.
Reviewing the evidence, the Federal Court found that while the Report was commissioned for two purposes – the business purpose of assessing whether to proceed with the acquisition and the legal purpose of determining how to structure the transaction – ultimately the business purpose was dominant. The Federal Court concluded that the legal purpose was merely ancillary.
In addition, the Federal Court noted that Redhead established that solicitor-client privilege can extend to communication with a third party where the communication is “in furtherance of a function essential to the solicitor-client relationship or the continuum of legal advice provided by the solicitor”[3], but cannot be extended to communications in which a third party such as an accountant provides an opinion. The Federal Court found that the Report included an explanation of material tax exposures, an assessment of the probability that filing positions would be challenged, and an evaluation of whether appropriate reserves had been taken. In other words, the Report provided accounting opinions and as result could not draw upon Redhead’s extension of solicitor-client privilege.
Finding that the legal advice provided in the Report was ancillary to the Report’s business purpose and finding that the Report provided an accounting opinion, the Federal Court concluded that the Report was not protected by solicitor-client privilege. Accordingly, the Federal Court was able to issue a compliance order requiring Atlas to provide the Report to the Minister.
This case serves as a reminder that, wherever appropriate, arrangements should be made to protect communications and other documents as legal advice. Taxpayers involved in corporate transactions including sensitive tax information should consult with their tax lawyer to determine what can be protected and how to do so.
[1] 2018 FC 1086.
[2] [1980] 1 SCR 821.
[3] Redhead Equipment Ltd v Canada, 2016 SKCA 115, at para 45.
