Atlas Tube (on no privilege for tax due diligence reports) could be overturned

In Atlas Tube, the Federal Court found that a tax due diligence report - that EY had prepared on a target in advance of its acquisition – could be required to be provided to CRA. Southcott J found inter alia that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.

Arguments before the Federal Court of Appeal challenging the correctness of this decision may include the following:

• There was no requirement that legal advice be the due diligence report’s dominant purpose. Gower v. Tolko Manitoba Inc. (2001 MBCA 11) stated:

Nowhere in the definition 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….

• The characterization of the primary purpose of the report as being to inform the buyer’s business decision as to whether to buy the target (and at what price) is questionable. Instead, tax due diligence reports are an input to the commercial terms of the purchase agreement so as to inform what representations and indemnities are sought.
• Commercial use of legal advice (for which a tax due diligence report is an input) does not detract from it being legal advice.

Neal Armstrong. Summary of Steve Suarez, “FCA To Hear Atlas Tube Appeal,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 2 under s. 232(1) – solicitor-client privilege.