Two recent Supreme Court of Canada decisions, Canada v. Chambre des notaires du Québec, 2016 SCC 20, and Canada v. Thompson, 2016 SCC 21, confirm that a client's right to solicitor-client privilege applies prima facie to shield a lawyer's accounting records (including invoices and any other records disclosing facts about the client relationship) from disclosure to the Canada Revenue Agency. The constitutionally-protected privilege cannot be abrogated by the CRA's extensive audit and enforcement powers unless "absolutely necessary". Conceptually, these cases are particularly significant because they uphold the blanket nature of the privilege in the face of a specific legislative attempt to carve away from that right in the context of federal tax law. Practically, they are also of note as many tax advisors have recently seen a marked increase in CRA queries or information requirements covering material that is likely privileged.
The CRA has broad powers to require persons to provide information and documents in the course of an audit or enforcement action. For example, the CRA may compel production of "any information" or "any document" for "any purpose" related to the administration or enforcement of the Income Tax Act, Excise Tax Act, or a tax treaty. This includes information and documents relating to third parties. Where a person fails to comply with a CRA requirement for information or documents, the CRA may obtain a court order requiring compliance. Failure to comply with a CRA requirement or the resulting court order may lead to the imposition of significant monetary penalties, conviction for contempt of court, or imprisonment.
A longstanding statutory exception to the CRA's requirement power exists for information and documents protected by solicitor-client privilege. In general terms, solicitor-client privilege is a client's right to have communications with their lawyer kept confidential. This privilege developed initially as an evidentiary and common law rule, but it is unique in that it is today considered to be a fundamental constitutionally-protected right; no similar protection exists for communications with other tax advisors. However, certain federal and provincial tax statutes include a definition of solicitor-client privilege in their respective audit regimes that explicitly excludes a lawyer's "accounting records".
Chambre des notaires considered the CRA's practice of issuing requirements to civil law notaries in Québec to obtain accounting records relating to the notaries' clients. Québec notaries are equivalent to lawyers for purposes of the privilege analysis as notaries' clients enjoy a corresponding protection for "professional secrecy". The Thompson case involved a CRA request for details concerning a lawyer's accounts receivable in the course of auditing the lawyer for tax compliance. Solicitor-client privilege issues were raised in both cases, and both cases were ultimately granted leave to appeal to the Supreme Court.
The Supreme Court held that both the requirement scheme and the legislative attempt at excluding a lawyer's accounting records from the concept of solicitor-client privilege were unconstitutional and invalid as applicable to lawyers and notaries. With respect to the requirement provisions, the Court determined that a requirement issued to a lawyer or notary for information or documents relating to a client was an unreasonable seizure (against which persons enjoy constitutional protection). The limited statutory definition of solicitor-client privilege and the compliance order scheme improperly removed from a supervising court’s jurisdiction the determination of whether accounting records sought by the CRA were privileged. In that regard, the Court noted that "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 ITA are not necessarily equivalent" (Thompson at para. 35). While the Court's decisions leave open the possibility that the legislative scheme could be amended so as to acceptably address a lawyer's potentially-privileged accounting records, the Court also commented that "any legislative provision that interferes with [solicitor-client privilege] more than is absolutely necessary will be labelled unreasonable" (Chambre at para. 38). The Court's reasons suggest that a revised scheme would, at minimum, provide for notice to the client (when the CRA pushes the disclosure issue to court) and an opportunity for the client to fully assert solicitor-client privilege (e.g. Thompson at para. 40).
Chambre des notaires and Thompson therefore make clear the great importance of a client's right to solicitor-client privilege and its ability to remain free from government intrusion, even in the tax context where statutory rules often limit privacy rights in taxpayer information.
About the Authors
Stephanie Dewey and Mark Tonkovich are tax lawyers with Baker & McKenzie LLP in Toronto. Mark is the Chair of the OBA Taxation Law Section and practises exclusively in the tax controversy field. Stephanie's practice includes work in both tax planning and tax dispute resolution.
* A version of this article was first published by Baker & McKenzie LLP's North American Tax Practice Group in Tax News and Developments, vol. XVI-3 (June 2016).