We use cookies on this site to enable your digital experience. By continuing to use this site, you are agreeing to our cookie policy. close
Focus On
In-House Counsel | Insurance | Intellectual Property | Immigration | Natural Resources | Real Estate | Tax

Tax provisions can't trump legal privilege

Thursday, October 13, 2016 @ 8:00 PM | By Vern Krishna


The Supreme Court of Canada has clipped the wings of the Canada Revenue Agency in its efforts to curtail solicitor-client or legal privilege for financial records.

In two companion cases Canada (National Revenue) v. Thompson 2016 SCC 21 and Canada (Attorney General) v. Chambre des notaires du Québec 2016 SCC 20, the court reiterated that legal privilege is a near constitutional right that can be abrogated only in the most limited circumstances.

In tax law, the text of the Income Tax Act is usually primordial. The statute confers virtually unlimited audit powers on CRA, which it uses aggressively to extract confidential information from taxpayers under threat of criminal prosecution. The minister of national revenue can demand that individuals, and third parties, provide information and documents for any purpose connected with the administration of the act. Since the act is considered an administrative statute, the minister’s powers are viewed generously in the wider public interest of tax collection. There are, however, constitutional restraints on the exercise of ministerial powers.

The scope of the audit powers rule in s. 231.2 of the act is broad. Taxpayers who are being audited, or against whom enforcement action is being taken, and third parties to the audit must respond to the minister’s demand for any information or document, other than privileged information. However, the act curtails the scope of legal privilege. Subsection 232(1) defines solicitor-client privilege as:

“…the right, if any, that a person has in a superior court in the province where the matter arises to refuse to disclose an oral or documentary communication on the ground that the communication is one passing between the person and the person’s lawyer in professional confidence, except that for the purposes of this section an accounting record of a lawyer, including any supporting voucher or cheque, shall be deemed not to be such a communication.”

Accounting records include not only accounts, but also agreements, books, charts, tables, diagrams, invoices, letters, memoranda, statements and any other thing containing information.

There are severe sanctions (including imprisonment) for persons who do not comply with the disclosure requirements of the act.

Ultimately, it is a question of fact whether a document is “an accounting record” for the purposes of tax law. Solicitors’ charge sheets and statements of accounts are not accounting records and, therefore, may be the subject of a claim of privilege. However, accounting records such as ledgers, books of accounts and supporting documents may not be privileged, depending upon who owns the records.

The minister has traditionally argued that the statutory exclusion of accounting records from the scope of legal privilege confers broad powers to abrogate what would otherwise be privileged documents under the common law. Thus, the minister frequently seeks to compel taxpayers to disclose documents that are professional secrets.

The protection of professional secrecy has a long history. Originally considered an evidentiary rule, the protection of legal advice evolved into a substantive rule of law. Since the advent of the Charter of Rights and Freedoms, the rule has evolved further into a principle of fundamental justice and a civil right. Thus, professional secrecy is now a fundamental rule of law that should not be interfered with unless absolutely necessary.

To be sure, language of subsection 232(1) is clear and unequivocal, and excludes a lawyer’s accounting records (including supporting vouchers and cheques) from the scope of solicitor-client privilege. The act, however, is subject to the Charter. In Thompson, for example, the CRA sent the taxpayer a requirement pursuant to subsection 231.2(1) demanding various documents pertaining to his personal finances, as well as his accounts receivable listing. Claiming solicitor-client privilege, the taxpayer refused to provide details about his accounts receivable, except for a general indication of the balance owing. (Similarly, in Chambre des notaires, the CRA imposed information requirements on lawyers and notaries in Quebec).

The Supreme Court recognized Parliament’s clear and unambiguous intent to define privilege in the act. However, Parliament’s intent and its ability, in constitutional terms, to define solicitor-client privilege in a particular way for the purposes of the administration of the act must be evaluated in the context of s. 8 of the Charter, which protects against unreasonable searches and seizures.

The requirement on legal advisers to produce information and documents under the act constitutes a “seizure,” which needs to be evaluated in the context of whether it is reasonable in the context of a free and democratic society under s. 1 of the Charter. The protection afforded to professional secrecy is high. A court will assess whether in a particular situation the public’s interest in privacy should give way to the government’s interest in order to advance its goals. There is a rebuttable presumption that all communications between client and lawyer and the information they share is prima facie confidential in nature. The burden on the CRA is high to dislodge the presumption.

Based on the near absolute protection of legal communications and the need for professional privacy, the Supreme Court held subsection 232(1) invalid in the context of solicitor-client privilege. The information contained in the accounts receivable was presumptively privileged, and its disclosure could not be required.

Further, the structure for judicial evaluation of privilege under section 231.7 of the act is not sufficient to validate the statutory scheme for disclosure of confidential information. There is no requirement under the provision to advise the client of the demand for disclosure, and the burden rests on the legal adviser to raise the defence of legal privilege. This placed an unwarranted risk that the CRA would gain access to protected information.

In both Thompson and Chambre des notaires, the Supreme Court clipped the government’s attacks against solicitor-client privilege. It remains to be seen if Parliament will now succumb to the CRA’s impetus to seek an alternative route to circumvent the court’s rulings.