The case of Canada (National Revenue) v. Atlas Tube Canada ULC (2018 FC 1086) involves a number of interesting issues surrounding a tax diligence report prepared by an accounting rm for a potential purchaser of a target corporation. The report contained information on the tax prole and attributes of the Canadian target entities and an evaluation of their tax exposures drawn from their four most recent tax returns. The FC determined, inter alia, that the report was not protected from disclosure under solicitor-client privilege. The court's ndings on the privilege issue in particular are open to question on a number of fronts, all of which one hopes will be considered by the Federal Court of Appeal.

First, the FC applied the wrong legal test as to when work product may come within the protection of solicitor-client privilege. The court stated that privilege applies to a document that is not itself legal advice only where the "principal purpose" of the document's creation was obtaining such legal advice; the FC cited as authority only a master's decision on an interlocutory motion involving litigation privilege. This is the wrong legal test: obtaining legal advice need only be one of the document's purposes. In Gower v. Tolko Manitoba Inc. (2001 MBCA 11, at paragraph 36), the Manitoba Court of Appeal considered and specically rejected the use of a "dominant purpose" test for solicitor-client privilege:

Legal advice privilege is not dependent upon there being litigation in progress or even in contemplation at the time the communication takes place. Nowhere in the denition of legal advice privilege is there any requirement that the communications between the lawyer and his/her client be for the dominant purpose of litigation. Rather, what must be present is the provision of legal advice as one of the purposes of the document, but that legal advice is not conned to a situation where litigation is contemplated.

For a more detailed discussion of this issue, see Steve Suarez, "Canadian Court Orders Disclosure of Accounting Firm Diligence Report in Atlas Tube," Tax Notes International, December 24, 2018, at 1283.

Second, the court's conclusion that the primary purpose of the report was to inform the buyer's business decision as to whether to buy the target (and at what price) seems questionable. It was the buyer's lawyers who recommended that the accounting rm perform the tax diligence investigative work, and who subsequently received and used a copy of the resulting report. In this writer's 30 years of tax practice (most of which has been transactional), issues arising from tax diligence have virtually never caused a buyer to decide not to purchase, and have rarely been so consequential as to aect the price. Moreover, the judgment does not suggest that the report in fact disclosed tax issues or exposures signicantly out of the ordinary; therefore, it is baing to claim that the report's primary purpose was to inform a go/no-go purchase decision or price.

To the contrary, in virtually every M & A transaction, the results of tax diligence are used primarily to inform the lawyers drafting the share purchase agreement as to what representations and warranties to demand, what covenants to seek, and the scope and structure of the indemnities required to adequately protect the buyer. In the vast majority of cases, tax exposures are addressed by drafting the purchase agreement to give the buyer a legal indemnity against the seller should a tax issue result in actual damages. This is the very core of the legal advice the buyer's lawyers provide to their client to preserve the client's legal rights against the seller.

Similarly, an understanding of the target's tax attributes is the basic information the buyer's lawyers need to determine how best to structure the transaction from a tax-law perspective and make optimal use of those tax attributes. Again, these activities are clearly the provision of legal advice.

These are the principal (if not the exclusive) purposes of incurring the expense of the type of tax diligence contained in the report. If a buyer's lawyers genuinely use such a report (even if it was created by non-lawyers) to render legal advice to their client, there is no policy reason for not protecting it from disclosure. Indeed, the CRA's own most recent administrative statement (AD-19-02R, "Obtaining Information for Audit Purposes," June 3, 2019) acknowledges the important distinction between facts (which the CRA needs to do its job) and the taxpayer's own subjective analysis:

It is important not to be inuenced by any subjective analyses, comments or opinions contained in the information or documentation reviewed. While CRA ocials may, in certain circumstances, request a list of what the taxpayer has determined to be its uncertain tax positions, in considering the structures and transactions outlined, CRA ocials should perform their own research and analysis in forming the basis of any reassessment. Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors' analysis of the legal and tax eects of the transactions may be accommodated.

This, in turn, leads to a third concern. To some extent the court seems to conate the separate questions of what constitutes the giving of legal advice and what the client does with that advice. Clients obtain legal advice to assist them in making commercial decisions, not because they are interested in the state of the law as an academic exercise. The fact that a client may use the lawyer's legal advice as an input in making a business decision (whether or not to buy, and at what price) in no way detracts from the fact that the lawyer is providing legal advice to the client; this is important to remember when applying the relevant privilege tests to documents or communications. Where a work product has been used by the buyer's lawyers as an input to the legal advice they render, the client's use of that legal advice to make a commercial decision should be irrelevant as to whether that legal advice (and the work product generated wholly or partially for that purpose) is protected from disclosure under solicitor-client privilege. In regard to solicitor-client privilege, diligence work on nancial or other non-legal issues stands in a dierent position from diligence work on legal issues, such as compliance with or transaction structuring within tax laws.

Finally, the court's primary authority on the question of when non-lawyer work product may come within the scope of solicitor-client privilege was Redhead Equipment v. Canada (Attorney General) (2016 SKCA 115). That case (which represents a restrictive view) held that "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: . . . employing expertise to assemble information provided by the client and explaining the information to the solicitor" (at paragraph 45). Even on that limited denition, using non-lawyers to assemble and document information needed by a tax lawyer to render legal advice qualies for solicitorclient privilege. As the Manitoba Court of Appeal stated in Gower:

[L]egal advice is not conned to merely telling the client the state of the law. It includes advice as to what should be done in the relevant legal context. It must, as a necessity, include ascertaining or investigating the facts upon which the advice will be rendered. Courts have consistently recognized that investigation may be an important part of a lawyer's legal services to a client so long as they are connected to the provision of those legal services. As the United States Supreme Court acknowledged: "The rst step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant." [Upjohn Co. v. United States, 449 U.S. 383 (1981) (S.C.) at para. 23] . . .

It is clear that the client requested [that the investigator] make recommendations based on the facts that she gathered and provided advice with respect to the legal implications of those recommendations. Thus, the fact gathering was inextricably linked to the second part of the tasks, the provision of legal advice.

These observations are equally applicable to tax diligence legwork performed by non-lawyers for the buyer's lawyers to use in rendering tax-law advice to their client. The tax community will be very interested in the FCA's disposition of the Atlas Tube appeal. CPA Canada has been granted intervenor status.

Originally Publish by Canadian Tax Highlights

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