Modern Canadian law holds up solicitor-client privilege as a foundational principle of the legal system, going so far as to recognize the privilege as a principle of fundamental justice under Canada’s constitution.[1] Amongst other things, the importance of solicitor-client privilege means that Canada’s courts have been directed to give the privilege maximum protection and to accept instances of its breach only in rare circumstances.[2] The Supreme Court of Canada has emphasized that a client’s expectation of privacy in relation to “professional secrecy” is not weakened when the context of the legal advice sought is civil instead of criminal.[3]
The implications of this position are well entrenched and deeply felt throughout the Canadian legal system when a client is seeking legal advice from a lawyer. But, in modern Canada, lawyers are not the only professionals offering advice on legal matters. Because professional accountants in Canada frequently work on tax matters with their clients, it sometimes becomes necessary for the courts to address whether the advice rendered by an accountant can be protected from disclosure and, if so, in what specific types of situations some form of legal privilege will protect the accountant’s relationship with the client from compelled disclosure.
This article will take up one particular instance of the problem in relation to tax analysis prepared by an accounting firm in the context of a transaction.
Gaudreau c. Le Roi: Case Background
In brief, in Gaudreau c. Le Roi (at the time of writing only available in French),[4] an individual taxpayer was reassessed by the Canada Revenue Agency (CRA) in relation to his sale of his interest in an insurance company. The sale had been structured as a hybrid transaction (i.e., asset and share sale) to enable the taxpayer to realize capital gains on the sale and then to claim the capital gains exemption. The CRA’s reassessment was based on subsection 84(2) of the Income Tax Act (the ITA)[5] to deny the capital gains characterization of the transaction, instead regarding the taxpayer’s proceeds as deemed dividends.[6]
The taxpayer filed an objection and commenced an appeal to the Tax Court of Canada against the CRA’s reassessment. While being examined for discovery by the Crown on the appeal, the taxpayer was asked whether there were any tax planning documents prepared considering the possibility of a hybrid transaction. In response, the taxpayer disclosed that an accounting firm had prepared a memorandum for the buyer in the transaction and shared it with the taxpayer as seller. However, the taxpayer refused to produce the memo itself.[7]
The Crown brought a motion before the Tax Court under the Tax Court of Canada Rules (General Procedure) governing tax appeals seeking to compel the taxpayer to disclose the accounting firm’s memo.[8]
The Tax Court of Canada granted the Crown’s motion and ordered the taxpayer to produce the memo.[9] The taxpayer has appealed the Tax Court’s decision and, as of the date of writing, the matter is headed before the Federal Court of Appeal.[10]
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