CRA's Power To Compel Taxpayers To Disclose Uncertain Tax Positions Affirmed

Canada (National Revenue) v Atlas Tube Canada ULC1 is the latest in a series of cases considering the ability of the Canada Revenue Agency (CRA) to compel corporate disclosure of confidential reports analyzing the tax positions of a company. In Atlas Tube, the Federal Court held that CRA could compel taxpayers to disclose sensitive accounting reports in the context of an active audit under sections 231.1 and 231.7 of the Income Tax Act.2 Taxpayers engaging in transactional due diligence should carefully consider the source and content of reports acquired for planning purposes.

Background

In 2012, Atlas Tube Canada ULC (Atlas), a private Alberta company, was a subsidiary of a private U.S. company called JMC Steel Group Inc. (JMC). On March 30, 2012, JMC acquired the shares of a public Ontario corporation, Lakeside Steel Inc. (LSI), for $148 million, by way of a plan of arrangement approved by the Ontario Superior Court of Justice. LSI was a holding company which owned two subsidiaries: Lakeside Steel Corporation (LSC), an Ontario company, and Lakeside Steel Holdings USA Inc. (LSU). The purchase transaction included the following pre- and post-acquisition steps:

Another amalgamation of LSI to form a new LSI; Transfer of LSU shares by the new LSI to JMC for a stated value of $57 million; Transfer of new LSI shares and debt of $32 million to 6582125 Canada Inc. (658) resulting in a $90 million debt owing by 658 to JMC; and Atlas acquiring the $32 million debt and new LSI shares from 658, and consequently owing $90 million to 658. CRA audited Atlas for its taxation year ended April 21, 2012, and reviewed the steps in the purchase transaction above as part of that audit. In particular, CRA was considering the issues of whether:

The $57 million of stated value for LSU shares was fair market value; and The rate employed in Atlas's interest expense deduction for the debt owed to 658 was reasonable. In preparing for the transaction, a due diligence process was conducted by JMC. As part of the due diligence process, Ernst & Young LLP (Canada) (EY) was engaged to conduct Canadian tax diligence upon the recommendation of JMC's Canadian legal counsel, Stikeman Elliott (Stikeman). EY prepared a draft due diligence report (the Report), the information in which was shared with Stikeman. CRA requested a copy of the Report in its audit of Atlas, which refused, citing solicitor-client privilege.

The Federal Court Decision

The Federal Court was asked to...