CRA Granted Access to Taxpayer Documents During Audit

MNR v. Atlas Tube Canada ULC 2018 FC 1086


In this Federal Court case, the Minister brought an application pursuant to section 231.7 of the Income Tax Act (the “Act”) seeking an order for the Respondent Atlas Tube Canada ULC (“Atlas”) to produce a draft due diligence report prepared by Atlas’ accountants. The Court ultimately ordered Atlas to produce the document to the Canada Revenue Agency (the “CRA”).


Atlas is a private Albertan company and a subsidiary of Zekelman Industries Inc., a US company that was named JMC Steel Group Inc. (“JMC”) at the time of the relevant transaction. Atlas manufactures and sells tubing.

In 2012, JMC acquired the shares of Lakeside Steel Inc. (“LSI”), an Ontario holding company.  LSI owned an Ontario operating company (“LSC”) and a US holding company (“LSH”) with operating subsidiaries. A series of pre-acquisition steps took place as part of JMC’s acquisition of LSI, which involved an eventual transfer of shares and debt to Atlas. During the pre-acquisition process, JMC had its accountants prepare a draft due diligence report (the “Report”). This Report described and explained the tax profile and tax attributes of LSC and LSI. The Report also set out LSC’s material tax exposures resulting from its Canadian tax filings, including an analysis of potential tax exposures if challenged by the CRA, and whether appropriate reserves had been taken by LSI or LSC in respect of such exposures.

The CRA audited Atlas on the basis of the fair market value of the shares it eventually owned pursuant to the acquisition and the reasonableness of the rate employed in Atlas’ interest expense deduction taken on the debt. As part of its audit, the CRA requested a series of documents, including the Report.  The Court accepted that Atlas provided everything requested by the CRA, except for the Report.

The Report was filed with the Court under seal, and the Court acknowledged its own ability to review it to determine if a proper claim of privilege applied. However, the Court ultimately decided not to review the Report, on the basis that it was unnecessary to do so.

Position of Parties

Atlas refused to provide the Report to the CRA for the audit. Atlas took the position that the Minister had not established its relevance and that the Report was protected by solicitor-client privilege. Atlas also argued that the Report was not compellable under the Act, because compelling its production would impose on Atlas an obligation to self-audit.

Atlas emphasized the importance of focusing not on the purpose for which the overall due diligence was conducted, but rather upon the dominant purpose behind the creation of the particular document (the Report) for which privilege was claimed.

The Minister argued that the relevance threshold is low, pointing to section 231.1(a) of the Act.  The provision at issue permits the inspection of “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 by the taxpayer under th[e] Act.”

The Minister emphasized that the Report was relevant because it was requested for a 2012 audit, and the transaction occurred in that year.  The Report was prepared for the purpose of that transaction. According to the Minister, the law did not require the Minister to demonstrate that the Report was relevant to a particular issue under audit.

Decision & Analysis

Was the Report relevant?

The Court surveyed much of the case law interpreting the Minister’s audit powers and concluded that the relevance threshold is quite low. The Court further noted that both parties seemingly acknowledged that the Minister does not have to establish relevance per se, but only that the document may be relevant. In the Court’s view, the Report was relevant because it related to the administration or enforcement of the Act and that the information in the Report may have been relevant to an amount payable by Atlas under the Act.

Was the Report protected by solicitor-client privilege?

Section 231.7(1)(b) of the Act makes clear that the Court cannot order the production of a solicitor-client privileged document to the Minister.  Solicitor-client privilege is established by three criteria[1], namely, (i) a communication between solicitor and client; (ii) which entails the seeking or giving of legal advice; and (iii) which is intended to be confidential by the parties. The burden to establish privilege rests with the party alleging it.

In this case, JMC’s accountants prepared the report, but privilege can extend to this type of communication in situations where the accountant is a conduit or interpreter of information provided by the client for the solicitor. For communications to and from accountants, the Court extracted the following principles from Redhead Equipment Ltd. v Canada (Attorney General), 2016 SKCA 115:

(a) communications of accountants are not in themselves privileged;

(b) facts and figures are not in themselves privileged but may be if they are part of a communication which is privileged;

(c) whether a communication is privileged depends on the function served by the third party in relation to the communication;

(d) the privilege extends only to communications in furtherance of a function essential to the solicitor-client relationship or the continuum of legal advice provided by the solicitor, for example:

(i) a channel of communication between solicitor and client;

(ii) a messenger, translator or transcriber of communications to or from the third party by the solicitor or client;

(iii)employing expertise to assemble information provided by the client and explaining the information to the solicitor; and

(e) no privilege attaches to a communication to an accountant who must consider it and provide his or her own accounting opinion.

The Court agreed with Atlas’ position that in determining whether a due diligence report is privileged it is necessary to look at the purpose behind the creation of the report, and not the purpose of the due diligence generally. Atlas acknowledged that the Report’s findings relating to the Canadian tax due diligence were considered in the decision to proceed with the purchase of LSI, but its position was that the impact of those findings was minimal. The Report’s influence on the structuring of the transaction by its lawyers, however, was significant. Atlas argued that the principal purpose behind the Report was to inform Atlas’ counsel so that they could properly advise on the structuring of the LSI acquisition.  The Minister argued that its purpose was to inform JMC’s business decision whether to proceed with the acquisition of LSI and that any subsequent use by JMC’s counsel did not serve to cloak the document in privilege.

The Court agreed with Atlas that the Report had a dual purpose, namely, to inform whether to make the deal and to assist in the structuring of the deal. The Court disagreed, though, that the dominant purpose was to inform the structuring of the transaction. The Court found that the Report’s dominant purpose was to inform the decision whether to proceed with the transaction and at what price.

The record before the Court indicated that the Report dealt with tax attributes and reserves.  The Court found these to be accounting opinions, which could not be characterized as prepared for the purpose of obtaining legal advice on the structure of the transaction.  Thus, the Report was not subject to solicitor-client privilege.

Did BP[2] apply to prevent compellability of the Report?

The Court considered whether there were sufficient similarities between the Report on the one hand and the tax accrual working papers (“TAWPs”) in BP on the other. The TAWPs were highly sensitive and ultimately addressed uncertain tax positions, an estimate of events if challenged by the Minister and related reserves.  In BP, the Federal Court of Appeal ruled that TAWPs are not compellable to the Minister.  Taxpayers are not required to disclose their soft spots to the CRA. Atlas argued that the Report contained its uncertain tax positions.  As such, it should not be compellable, as per the reasoning in BP.  The Minister argued that a) the Report was a source document, the kind that underpins TAWPs and b) BP disallows ordering the production of documents only on a prospective basis, outside of a focused audit.

The Court did not find that the Report was a source document (although some of the information in it could be characterized as TAWPs).  But the Court did accept the Minister’s position on the narrow application of BP to situations where no audit is underway.  Recall that in BP, the request for the TAWPs had been made once the audit had concluded, and the Minister clearly requested them for a prospective subsequent audit. In this case, unlike in BP, the Minister’s request for access to the Report was made in the context of an active audit of particular issues.

In summary, the Court found that the Report was relevant, not protected by privilege and not the type of document contemplated by the Court in BP. Atlas was ordered to produce the Report to the Minister.

[1] Solosky v Canada, [1980] 1 SCR 821 at 837

[2] BP Canada Energy Company v Minister of National Revenue 2017 FCA 61 (BP)