Be Careful With Sensitive Tax Information!

The Federal Court's recent decision in Atlas Tube Canada ULC v MNR1 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 Canada2, 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...