Lawyer-client relationships enjoy what is commonly referred to as solicitor-client privilege – or lawyer-client privilege. Regrettably (and surprisingly to some), accountants do not have this protection!
As the recent Federal Court of Appeal (“FCA”) decision in Zeifmans LLP has confirmed, where pushed for client information by the CRA, accounting firms – but not law firms – are required to disclose client information, including work done in tax situations!
Background
When auditing or investigating a taxpayer, the Income Tax Act and the Excise Tax Act (which enacts the GST/HST) both give the Canada Revenue Agency (“CRA”) the power to compel third parties (like the taxpayer’s accountants) to provide any information about that taxpayer – business, financial, tax or otherwise.
Since this is a discretionary power the CRA can choose when and where to use it – often without any judicial oversight whatsoever.
Zeifmans
In Zeifmans, the CRA issued a Request for Information (“RFI”) to an accounting firm, requiring it provide all information regarding certain clients under audit including other connected entities that were likely unknown to the CRA at the time. Zeifmans resisted the RFI by filing an application for judicial review in the Federal Court of Canada. After losing that application, Zeifmans appealed to the FCA.
At the FCA, the Court upheld the CRA’s RFI – including its extension to information about connected third parties that CRA did not even know about yet – finding that it was reasonable and did not require any prior judicial approval.
Implications
Zeifmans likely comes as a surprise to most taxpayers, many of whom have undoubtedly been of the (mistaken) view that their “confidential” tax affairs with their accountants are protected from the purview of the CRA.
“Confidentiality” means that the accounting firm, as a professional service provider, has the professional obligation (like lawyers) to keep all information confidential from all third parties – unless disclosure is required by law. However, privilege is a client’s right, and one that even the CRA cannot easily overcome.
This means communications between a taxpayer and a tax lawyer, involving seeking or providing legal advice, cannot be compelled!
Solicitor-Client Privilege: Still Sacrosanct
Like it or not, almost any information or communications provided to or by a client seeking legal advice from a licensed and dues paying lawyer is privileged in addition to confidential. This means that lawyers generally maintain an enhanced ability (and duty) to safeguard taxpayer related information, and Courts are keen to preserve that protection. Even the CRA (or any other policing or judicial body) is unable to compel that information from a lawyer.
The Supreme Court of Canada (“SCC”) has consistently held that this “solicitor-client privilege” is a “fundamental tenet of our legal system … integral to the administration of justice”, flowing from the idea that clients must be able to speak freely with their lawyers for our justice system to function. In Smith v. Jones (1999) the SCC put it this way:
“Family secrets, company secrets, personal foibles and indiscretions all must on occasion be revealed to the lawyer by the client. Without [solicitor-client] privilege clients could never be candid and furnish all the relevant information that must be provided to lawyers if they are to properly advise their clients.”
This all said, there are some limitations to solicitor-client privilege, including situations where there is a clear, imminent threat to public safety or where the advice is being obtained to facilitate the commission of a crime or fraud. Other exceptions can also apply.
The Bottom Line
The bottom line here is that taxpayers involved in complex or sensitive tax matters still need tax accountants – but from a legal perspective, a better structure would include having the tax lawyer retain the tax accountant as an agent so that the taxpayer’s affairs can properly be given the legal advice they deserve.
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