The due diligence report, prepared by Ernst & Young LLP (Canada) was commissioned by the general counsel of Atlas’s U.S. parent on the advice of Stikeman Elliott LLP and in the context of an M&A transaction that led to the acquisition of Atlas. The evidence was not clear as to whether the actual report, as opposed to the information in the report, was subsequently provided to Stikeman.
In the course of the transactional audit that followed, CRA requested the report, but Atlas resisted, claiming a lack of relevance, solicitor-client privilege and an infringement of the company’s right not to self-audit. The Federal Court rejected the arguments, and ordered Atlas to turn over the report to CRA.
But according to James Morand, a tax partner in Cassels, Brock & Blackwell LLP’s Toronto office, close examination of the two decisions suggests that Atlas does not herald a return to open season for the CRA in seeking corporate records.
“This decision does not expand the prior jurisprudence on when the minister is permitted to examine taxpayer records,” says Morand. “Previous decisions have established, and Atlas followed, the low threshold of ‘potential relevance’ to be met by CRA.”
In Atlas, Morand says, the evidence was clear that the due diligence report was prepared for the purposes of the transaction that was under audit.
“That was enough of a nexus for the court to conclude that the threshold had been met,” Morand said.
According to Morand, Southcott’s conclusion that the principal purpose of the report had to be ascertained to determined whether privilege applied was also consistent with prior jurisprudence.
Southcott acknowledged that the report was prepared for the dual purposes of “informing both the business decision, whether to proceed with the transaction and at what price, and the decision about how to structure the transaction”. The court also accepted “that both purposes were engaged as of the time EYC [Ernst & Young LLP (Canada)] was retained and generated the Report.”
But Southcott also found that the dominant purpose of the report was not the provision of tax information to Stikeman to inform the structuring of the transaction.
“With respect to the decision that JMC [the purchaser and Atlas’ subsequent parent, JMC Steel Group Inc.] made to proceed with the transaction, the tax-related assets were a consideration, but no more so than other non-material assets, and the effect of tax-related liabilities was similarly limited, as JMC identified no ‘nuclear bombs’ associated with tax attributes or other aspects of the transaction,” Southcott wrote.
“However, this outcome was not known at the time the report was commissioned. Nor does the evidence establish that this outcome was known when the Report came into existence, which is the relevant time at which to analyse its purpose.”
Southcott distinguished BP Canada on the basis that the request in Atlas to review the report arose in the context of an active audit of particular issues.
As Southcott noted, BP did not extend the self-audit prohibition to all circumstances, but only outside the context of a particular audit, with the aim of precluding “general and unrestricted access . . . on a prospective basis”.
As the BP court observed: “The issue in this case is not whether the information revealed by BP Canada’s Tax Reserve Papers could be accessible under the Act. After all, everyone is agreed that it is, if required, in order to respond to a specific inquiry made in the context of an audit.”
The upshot is that Atlas does not restrict BP’s application.
“Rather, it is consistent with the scope of that decision regarding the self-audit prohibition,” Morand said.
Besides, it appears that the facts of Atlas hardly favoured the taxpayer.
“So much so that the court was concerned that the only the information in the report, as opposed to the actual report, had been provided to the lawyers,” says Laurie Goldbach, in Borden Ladner Gervais LLP’s Calgary office. “The law is clear that it is in fact open season for CRA when accounting firms provide reports without the involvement of lawyers.”
Margaret Nixon, a partner in the tax group at Stikeman Elliott LLP who represented Atlas Tube Canada ULC, said she couldn’t comment on the decision because it has been appealed to the Federal Court of Appeal.