Canadian tax legislation endows the CRA with various powers to compel individuals and businesses to disclose information and documentation in support of administering or enforcing that tax legislation. Failure to comply with CRA’s requirements undert these rules can result in fines or imprisonment. Solicitor-client privilege and these disclosure rules collide where CRA attempts to compel client-related information and documentation from lawyers. The Supreme Court of Canada has recently dealt with this issue in Chambre des notaires du Québec (2016 SCC 20) and its companion case Thompson (2016 SCC 21). The decisions make clear that solicitor-client privilege will be upheld in the face of these disclosure provisions.
In Chambre des notaires du Québec, various Quebec notaries (i.e., lawyers) received notices requiring them to provide documents or information from CRA under s. 231.2 of the ITA (s. 289 of the ETA is the parallel provision for GST purposes). CRA was seeking information or documents relating to the lawyers’ clients for tax collection or audit purposes. Quebec’s notary and lawyer professional bodies brought a declaratory action to have s. 231.2 declared to be unconstitutional and of no force or effect with respect to Quebec notaries and lawyers, on the basis of the prohibition against unreasonable searches and seizures in s. 8 of the Charter of Rights and Freedoms. They sought the same declaration with respect to s. 231.7 (s. 289.1 ETA for GST), which allows the CRA to apply to have a court compel information or documentation from a person, and subs. 232(1) (subs. 293(1) ETA for GST) which excludes accounting records from the definition of “solicitor-client privilege” – an enumerated defence for lawyers who refuse to comply with s. 231.2. The Superior Court and Court of Appeal agreed with the professional bodies, concluding that the provisions were unconstitutional.
On appeal to the Supreme Court of Canada, the Court noted that the provisions intrude upon an individual’s reasonable expectation of privacy, therefore constituting a seizure under section 8 of the Charter. In doing so, the Court also noted that the information or documents are subject to professional secrecy of lawyers, which must remain as close to absolute as possible, and the courts must adopt stringent standards to protect it.
Although the Court noted that the scheme serves legitimate purposes (namely, the collection of amounts owed to the CRA and tax audits), it held that seizures under those provisions are unreasonable on the basis of several factors: (1) no notice of the requirement is given to the client; (2) an inappropriate burden is placed on the lawyer; (3) the provisions are not absolutely necessary to achieve their purpose; and (4) measures have not been taken to help mitigate the impairment of professional secrecy. Accordingly, the Court declared that the provisions be read down, such that lawyers are excluded from their operation.
With regard to the accounting records exception, the Court concluded that the exception is broad and undefined because it permits seizure of any lawyer accounting record, such that it cannot be considered absolutely necessary. Further, the exception does not allow for judicial review to determine whether such accounting records at issue are privileged. On those bases, the Court determined that the accounting record exemption to the definition of “solicitor-client privilege” should be struck out as unconstitutional and invalid. This conclusion was established in the Chambre des notaires du Québec decision and applied in the companion Thompson decision.
In our view, the Supreme Court rightly decided these appeals, based on the status of solicitor-client privilege as a principle of fundamental justice. The provisions were also unsustainable from a privilege perspective given the fact that they did not include any notice requirement to the client, who actually holds the privilege right.
From a policy perspective, the Court’s conclusion is welcome for a number of reasons. First, it prevents the CRA from engaging in fishing expeditions, looking for clients who may have taken contentious or aggressive tax positions based on advice from their lawyers. As the Court noted, the provisions conceivably could have been used to trigger future tax audits of those clients who have been identified in lawyers’ disclosed records, despite not even being targeted when CRA originally issued the requirement. Secondly, the provisions placed lawyers in the unenviable position of having to weigh their obligations under Canada’s tax legislation against professional rules outlining their professional obligations to their clients regarding confidentiality and privilege. This was especially significant given the significant penalties (including fines and imprisonment) that can be imposed under Canadian tax legislation and professional discipline possibilities (including fines and disbarment) under professional societies’ rules.
Although the identical ETA provisions were not directly at issue in this appeal, the effect of this decision will be that the ETA will not be able to override solicitor-client privilege where the CRA requests documents that could possibly disclose privileged information, including a lawyer’s client list. Taxpayers should welcome this decision as it properly protects their right to privilege and leaves waiver of such privilege solely within taxpayers’ hands. Lawyers should also welcome the decision as it provides clear guidance vis-à-vis the tension between those provisions and their professional obligations to clients.
That said, the question of whether a particular document is privileged will still be at issue going forward, as the SCC declined to establish a list of documents that are, on their face, protected from professional secrecy.
* A version of this article appears in the June 2016 edition of the GST & Commodity Tax Newsletter.