Canada: Tax Court Of Canada Issues A Comprehensive Ruling On Privilege Issues And The Appropriate Exercise Of Remedies To Address Deficient Lists Of Documents

Last Updated: May 22 2013
Article by Douglas B. B. Stewart

In a recent Tax Court of Canada ruling on a motion heard in Imperial Tobacco Canada Limited v. The Queen, 2013 TCC 144 the Court considered a motion for an Order directing the Appellant to attend and be cross-examined on its List of Documents pursuant to subsection 82(6) and paragraph 88(a) of the Tax Court of Canada Rules (General Procedure) (the "Rules"). Justice D'Arcy heard and dismissed the motion, choosing instead to exercise other remedies available to the Court under section 88 of the Rules. A portion of the Respondent's motion dealt with privileged documents. In ruling on these documents, the Court addressed several issues in the area of solicitor-client privilege and made a notable finding that email communications between the taxpayer and its lawyer lost privileged status as a result of the taxpayer's accountant being included on the communications.


The Appellant in Imperial Tobacco is a subsidiary of British American Tobacco p.l.c. The Appellant acquired preferred shares of affiliated subsidiaries (the "Affiliated Companies") and the Minister disallowed the Appellant's deductions of dividends received from those Affiliated Companies which was appealed to the Tax Court of Canada.

The Respondent had concerns with the Appellant's List of Documents, specifically with respect to identifying necessary metadata (electronic data relating to specific documents referred to in Schedule "A" including author, when the document was created and history of changes to the document), deleted documents referred to in Schedule "C", and privileged documents listed in Schedule "B". As a result of these concerns, the Respondent moved for an Order allowing cross-examination on the Appellant's List of Documents in order to gather further information relevant to its concerns. The Respondent relied upon the following provisions under the Rules:

82(6) The Court may direct a party to attend and be cross-examined on an affidavit delivered under this section.

* * *

88. Where the Court is satisfied by any evidence that a relevant document in a party's possession, control or power may have been omitted from the party's affidavit of documents, or that a claim of privilege may have been improperly made, the Court may,

(a) Order cross-examination on the affidavit of documents,

(b) Order service of a further and better affidavit of documents,

(c) Order the disclosure or production for inspection of the document or a party of the document, if it is not privileged, and

(d) Inspect the document for the purpose of determining its relevance or the validity of a claim of privilege.

Other Remedies under Section 88 should be considered before Cross-examination

Although the Court acknowledged that cross-examination should be considered if it has concerns that a List of Documents does not satisfy the requirements under the Rules, it agreed with the Appellant that subsection 82(6) takes away the automatic right to cross-examine. Instead, the Court found that all of the remedies under section 88 must first be considered before issuing an Order for cross-examination on a List of Documents. In this case, the Court found that perceived deficiencies in the Appellant's List of Documents could be better addressed by ordering the service of a further and better List of Documents. The Court went on to also make specific orders which required the parties to exchange information to pinpoint what documents the metadata would be required for, and to work towards an agreement on search terms to resolve the deleted documents concern.

The Court's Analysis and Rulings in respect of Privilege Issues

Since the parties agreed to provide the Court with a book of privileged documents, Justice D'Arcy was able to address the privilege concerns without the need for cross-examination through the remedy available to the Court under paragraph 88(d) which permits the Court to inspect a document for the purpose of determining a claim of privilege.

Several privilege issues were raised by the Respondent which afforded the Court an opportunity to canvass the applicable law in making its ruling. The issues and the Court's determination of each are listed below:

1. Internal communications between the Appellant's employees – The Court discussed the circumstances in which internal communications between employees of a company may be privileged, namely, if the communications reflect confidential legal advice provided by the company's lawyer or if the lawyer marks or makes a note on a disseminated document. The Court then went on to analyze what specific internal communications were privileged.

2. Solicitor-client communications disclosed to employees of the Affiliated Companies – The Court discussed common interest privilege under this issue and explained that privilege may be maintained where one party to a commercial transaction provides privileged documents to another party of the transaction to further their common interest of having the transaction concluded. In this case, the Court concluded that several documents exchanged between the Affiliated Companies were privileged on this basis.

3. Solicitor-client privileged documents disclosed to an accountant – This issue centered on disclosure of legal communications by the Appellant, its counsel and the Affiliated Companies to PriceWaterhouseCoopers Australia ("PWC Australia"). Relying on the principles espoused by the Exchequer Court in Susan Hosiery Limited v. M.N.R., the Appellant argued that solicitor-client privilege extended to the communications with PWC Australia on the basis that PWC Australia's input was necessary to the provision of legal advice by counsel. The Court accepted this principle of law but found a lack of evidence establishing that PWC Australia's role extended to any function which could be said to be integral to the solicitor-client relationship. Therefore, the disclosure of the documents to PWC Australia constituted disclosure to a third party which amounted to waiver of privilege. The Court placed some emphasis on the fact that there was no evidence of any accounting information that could only be provided by PWC Australia.

4. Implied waiver – The Respondent argued that there was implied waiver of solicitor-client privilege since the Appellant, in denying that tax avoidance was the principle purpose for its investments, placed its state of mind in issue and any legal advice obtained to help form that state of mind was waived. The Court disagreed, and found that state of mind waiver only applies where a party relies on legal advice as part of its claim or defence which had not been put into issue by the Appellant in this appeal. In that regard, the Court noted that nowhere in the Appellant's pleadings was there any reference to legal advice previously obtained.

5. Legal advice vs. business advice – Communications between a lawyer and client will only be privileged if it is in the course of providing legal advice, not advice relating to purely business matters. The Court found that the issue does not arise in the appeal.

Concluding Remarks

Justice D'Arcy's decision reflects what the Court likely regarded as a pragmatic approach to the exercise of remedies available to it. It is open to the Court to order cross-examination, but other less costly steps are available to it, and should be first considered. This aspect of the decision should be considered by counsel before deciding to pursue cross-examination. Counsel should first aim to reach agreement on other steps to address concerns relating to production issues.

The privilege discussion contained in this decision highlights the range of such issues that arise in tax appeals. The decision highlights that internal client communications and external communications with accountants and other experts needs to be carefully managed. Counsel should discuss privilege issues with clients at the front end of litigation so they are alert to the pitfalls of waiver.

For more information, visit our Canadian Tax Litigation blog at

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