Due Diligence Report Obtained by CRA

In Canada (National Revenue) v. Atlas Tube Canada ULC (2018 FC 1086; under appeal), the FC found that the CRA, in the course of a tax audit, was entitled to obtain from Atlas Tube Canada ULC (Atlas) a due diligence report prepared by Ernst & Young (EY) in connection with a previous transaction involving Atlas. This decision is a reminder to taxpayers engaged in a due diligence process (and their advisers) that documents prepared for such purposes, when they are not subject to solicitor-client privilege, are difficult to shield from the CRA's broad audit powers.

In 2012, Atlas's parent company, JMC Steel Group Inc. (JMC), acquired the shares of an Ontario public corporation, Lakeside Steel Inc. (LSI), which at the time owned all of the shares of a subsidiary, Lakeside Steel Corporation (LSC). JMC hired EY to conduct due diligence as part of this acquisition. The audit report included sensitive information, such as LSI's and LSC's tax profiles and LSC's material tax exposures, gleaned from previous tax returns.

Atlas challenged the requirement to provide the report to the CRA on three grounds: (1) the document's relevance to the ongoing tax audit had not been established, (2) the document was protected under solicitor-client privilege, and (3) the disclosure of the report would impose on Atlas an obligation to self-audit. The FC dismissed all of Atlas's claims.

First, the FC found that the threshold of relevance under subsection 231.1(1) was low; the minister did not have to establish that the requested documentation was relevant to the audit, only that it might be. In this case, because the report had been prepared for JMC's acquisition of LSI's shares, and because the CRA's audit of Atlas was related to this transaction, the information in the report could be relevant in determining amounts payable by the company under the Act.

Second, although the due diligence report (prepared by an accounting firm) was not a direct communication between a lawyer and a client, the FC reiterated that solicitor-client privilege might still apply to a document generated by a third party. However, after a careful analysis of the events leading up to the preparation of the report, the court determined that JMC's main purpose in commissioning the report was to inform its business decision on the merits of the transaction and the purchase price of the shares, not to obtain legal advice on the structure of the potential transaction. Hence, the report was not covered by solicitor-client privilege.

Finally, the FC held that providing the document did not offend the principle developed in BP Canada Energy Company v. Canada (National Revenue) (2017 FCA 61), which precludes the imposition on taxpayers of an obligation to self-audit. In that decision, the FCA prohibited general and unrestricted access to tax accrual working papers that had been requested by the CRA to guide and facilitate any possible audit. In contrast, in Atlas the FC determined that the request for access to the report commissioned by JMC was made during an active tax audit and that, as such, the report could validly be requested.

The CRA indicated at CTF's 2018 annual tax conference that it will amend its official policy on access requests for documents containing sensitive tax information to reflect this FC decision.

François Desjardins
Raymond Chabot Grant Thornton LLP, Montreal
[email protected]

Canadian Tax Focus
Volume 9, Number 1, February 2019
©2019, Canadian Tax Foundation