Focus On

Sweeping power of CRA rolled back by Supreme Court ruling

Thursday, June 16, 2016 @ 8:00 PM | By Cristin Schmitz

New federal legislation restoring the tax man’s audit powers could follow the Supreme Court’s invalidation of provisions that purported to compel lawyers and notaries to disclose information to the Canada Revenue Agency (CRA), including their accounting records and clients’ names.

On June 3, seven judges of the Supreme Court of Canada unanimously declared unconstitutional — as against notaries and lawyers in their capacity as legal advisers — CRA’s sweeping regulatory power, pursuant to ss. 231.2(1) and 231.7 of the Income Tax Act (ITA), to require “any person” to provide information or documents for any purpose related to the administration of the ITA (the “requirement scheme”): Canada (A.G.) v. Chambre des notaires du Québec 2016 SCC 20.

Writing for the court, Justices Richard Wagner and Clément Gascon noted that the top court has previously held “that professional secrecy is a principle of fundamental justice” guaranteed by s. 7 of the Charter. “It is also a civil right of supreme importance in the Canadian justice system,” they stressed. “Professional secrecy must thus remain as close to absolute as possible, and the courts must adopt stringent standards to protect it.”

The judges also ruled unanimously that s. 232(1) of the ITA — which purports to exclude the accounting records of lawyers and notaries from the shield of “solicitor-client privilege” (as that term had been narrowly defined by the ITA for the past 51 years), is invalid on the same basis as is the requirement scheme — namely because it permits Ottawa to obtain information that would otherwise be privileged to a far greater extent than is “absolutely necessary” for the ITA’s administration and thus is an unjustified violation of the Charter’s s. 8 prohibition against unreasonable search and seizure.

The upshot, at least according to the attorney general of Canada’s submissions to the top court, “is a real problem for the CRA,” said Michael Feder of Vancouver’s McCarthy Tétrault. “It blows a bit of a hole in their otherwise very broad abilities to compel disclosure of information relevant to the administration and enforcement of the act.”

Feder, who successfully represented the respondent lawyer, Duncan Thompson, in the companion case of Canada (National Revenue) v. Thompson 2016 SCC 21, anticipates Ottawa will respond with legislation to revive, at least in part, the CRA’s powers to audit legal advisers. “I don’t think they want to create a lacuna for, for example, [tax] enforcement actions against lawyers,” he observed. However, as the court emphasizes in Thompson, any such legislation must include effective safeguards for solicitor-client-privileged information.

John B. Laskin of Toronto’s Torys, counsel for the Federation of Law Societies of Canada which intervened in both CRA appeals, called the judgments “a very important chapter in the development of protections” for solicitor-client privilege, which is known as “professional secrecy” under Quebec law.

The judges “make it clear that solicitor-client privilege applies with full force, regardless of the nature of the legal advice being sought, or the context in which it is sought…whether it’s a regulatory, a civil or a criminal context,” Laskin explained.

“These rulings will be precedential far beyond the income tax area and will apply to all regulators who seek to trespass onto the privilege by using lawyers to obtain information about their clients,” agreed Mahmud Jamal of Toronto’s Osler Hoskin & Harcourt, counsel for the intervener Canadian Bar Association.

Jamal predicted, “In the income tax context, this should all but shut down the practice of issuing requirements against lawyers — but this should also be the result in other regulated contexts. The decisions are crystal clear that regulatory demands against lawyers for their clients’ information are deeply problematic, and may often be unconstitutional.”

Laskin added it is important too that the top court confirmed that whether solicitor-client privilege applies turns on the substance and content of a document — not its form. (The cases at bar dealt, for example, with lawyers’ and notaries’ accounting records, including client names.)

Moreover, Laskin said, “the court confirms that solicitor-client privilege will give way to other considerations only where it’s absolutely necessary and that led, for example, to the court’s finding that in the administration of the ITA, the CRA can get at solicitor-client information only when, among other things, all other means have been tried to obtain the information, and those means have failed.”

CRA spokesman David Walters noted by e-mail the CRA “is responsible for ensuring that all taxpayers comply with Canada’s tax laws.” The agency is reviewing the rulings to evaluate their impact “on its operations and determine next steps,” he said.

University of Ottawa tax law professor Vern Krishna, of Toronto’s TaxChambers LLP, welcomed the shrinking of overbroad ITA audit powers in the face of solicitor-client privilege — an evidentiary rule which the Supreme Court has elevated to constitutional principle in the decades since the impugned ITA provisions were first enacted. “It curtails, in an important way, the access to information that the minister has traditionally enjoyed because…Parliament has legislated giving the [revenue] minister virtually unlimited access powers to information,” Krishna said.

University of Ottawa law professor Adam Dodek, author of the text Solicitor-Client Privilege, predicted the judgments “will make it extremely difficult for regulators and other state authorities to get at lawyer-client information. It will be virtually impossible in the absence of explicit statutory authorization, [and] even with explicit statutory authorization, as these two cases show, the constitutional hurdles will be very high.”

Dodek noted by e-mail that the decisions confirm, and consolidate, previous jurisprudence about solicitor-client privilege, rather than breaking new ground.

Perhaps more than legal professionals in any other country, Canadian lawyers and notaries have built up a constitutional track record in court of pushing back successfully against state incursions on their independence and on solicitor-client privilege, whether in the criminal context of police searches of law offices or anti-money laundering legislation, or in the regulatory context of income tax or privacy laws. “These rulings continue the momentum of almost four decades of jurisprudence from the Supreme Court of Canada providing very robust protection for solicitor-client privilege,” Jamal noted by e-mail. “As a result of these rulings, Canada remains the leading jurisdiction in the common law world protecting solicitor-client privilege.”

The cases, including constitutional attacks on the ITA provisions, were launched separately by the Chambre des notaires du Québec and Thompson, an Alberta lawyer.

In connection with an audit and tax enforcement action against Thompson, the CRA sent him a requirement under the ITA’s s. 231.2(1), demanding personal financial documents, as well as his current accounts receivable listing. Thompson supplied general information about how much his clients owed but, claiming solicitor-client privilege, declined to give more details about his accounts receivable, such as his clients’ names.

In the Chambre’s case, the minister of National Revenue demanded that some notaries in Quebec provide documents or information relating to their clients, for tax collection or audits with respect to those clients. Supported by the Barreau du Québec, the Chambre convinced the Quebec courts below that the information requirement scheme and the accounting records exception from solicitor-client privilege, were both unconstitutional and of no force or effect against Quebec notaries or lawyers with respect to all information and documents protected by professional secrecy.

The Supreme Court agreed, in a ruling applicable to legal advisers country-wide.

“A requirement under the ITA constitutes a seizure within the meaning of s. 8 of the Charter,” Justices Wagner and Gascon explained. “The seizures made in this case are unreasonable and are contrary to that section, because the requirement scheme and the exception for accounting records do not provide adequate protection for the professional secrecy of notaries and lawyers.”

They concluded that the procedure infringed the Charter’s guarantee against unreasonable search or seizure because: (1) it failed to require that the client (who holds the privilege) be informed that the CRA was demanding the accounting information from their notary or lawyer or (if disclosure was refused by a notary or lawyer) that the CRA was seeking a court order that the information be produced; (2) the procedure placed the entire burden of protecting the privilege on the notary or lawyer; and (3) the CRA and the attorney general of Canada failed to meet the test of establishing that it was “absolutely necessary” to impair “the right to professional secrecy.”

Nor could the s. 8 breach be upheld as reasonable and demonstrably justified in a free and democratic society, because the impugned provisions did not minimally impair the right to professional secrecy, Justices Gascon and Wagner held.