Canada: Maintaining Privilege For Cross-Disciplinary Tax Advising

Last Updated: November 4 2016
Article by John Sorensen

Most Read Contributor in Canada, October 2018

Redhead Equipment Ltd et al v. AG (Canada) (2016 SKCA 115) ("Redhead") provides a helpful summary of key principles governing solicitor-client privilege when lawyers and accountants are involved in transactional work and tax planning.

The background facts are as follows: 

  • Ownership and management:  Gary Redhead was the president of Redhead Equipment Ltd. ("REL") and president and director of the sole shareholder of REL, GLR Enterprises Inc. ("GLR"); GLR Consulting Ltd. ("GLR Consulting") was the sole shareholder of GLR; and Mr. Redhead was a shareholder, director and officer of related companies within the "Redhead Group".
  • Subject transactions:  REL restructured its business in 2009 and 2010 involving the creation of Redhead Equipment Partnership; REL, GLR and LCMR Enterprises Ltd. ("LCMR") commenced carrying on business in partnership as of January 1, 2010.
  • Tax advising:  MacPherson, Leslie & Tyerman LLP ("law firm") provided tax advice for the restructuring; Mr. Redhead instructed the CFO/COO for REL and the Redhead Group to engage REL's accountants at MNP LLP ("accounting firm") as agents to provide necessary facts and information to allow the law firm to provide legal advice; Mr. Redhead also instructed the CFO/COO to instruct and obtain advice from the law firm, either directly or indirectly through the accounting firm.
  • CRA audit and privilege claim:  in August 2012, the CRA made an audit request of Mr. Redhead, REL and GLR Consulting, including un-redacted legal invoices and all planning documents; 662 documents were provided to the Sheriff at the Saskatoon Judicial Centre on the basis that they were privileged; the Chambers judge made various determinations concerning whether the 662 documents were privileged (2014 SKQB 172); the appeal to the Saskatchewan Court of Appeal ("SKCA") concerned 32 documents which the Chambers judge held were not privileged.

While Redhead provided a helpful summary of the relevant principles, which are set out below, perhaps the unique aspects of the case concerned the standard of review and the Court's rejection of a broad "transactional umbrella" sheltering communications involving accountants. 

With respect to the standard of review, the SKCA noted there was little authority concerning standard of review in cases where the argument deals with whether discrete documents are privileged.  It is trite to say that an appellate Court reviews questions of law by a standard of correctness and will readily overturn a lower Court on such a question.  It is also trite law that questions of fact are reviewed on the standard of palpable and overriding error, while questions of mixed fact and law are reviewed on the same standard unless the question of law is extricable.  A palpable error is one that is plainly seen (Housen v. Nikolaisen 2002 SCC 33).  The palpable and overriding error standard is deferential to the factual findings of the lower Court.  The SKCA stated that the Chambers judge made factual determinations and applying the law of privilege to the factual findings was not a pure question of law, but of mixed fact and law from which a question of law was not extricable.  This was because there were so many factual variables for each individual document.  The SKCA held that, based on the limited available legal authority on point, the standard of review with respect to privilege claims for particular documents is palpable and overriding error. 

The SKCA reiterated the following key points from the lower Court's judgment, with which the parties apparently agreed:

  • Solicitor-client privilege extends only to communications involving third parties that further the essential functioning of the relationship between the solicitor and client;
  • Accounting documents are subject to privilege only if the accountant was used as a representative of the client to obtain legal advice;
  • Privilege does not attach when a third party / agent such as an accountant considers a communication and provides an individual opinion, since in such a case the accountant is more than a mere conduit for information and is providing independent professional advice;
  • The question to ask concerns whether what is being communicated is essential to obtain legal advice, which turns on the role of the accountant in each communication and whether the accountant is the "designer" of the document and included information;
  • If an accountant acts as the designer of a document and information contained therein, that would negate the role of the accountant as an agent or a conduit for information, thus negating solicitor-client privilege.

While the parties did not dispute these conclusions, they argued the scope of the Chambers judge's approach.  Redhead's counsel argued the approach was too narrow and a functional approach would make most documents connected to the accounting firm in the reorganization context privileged under the "transactional umbrella".  Crown counsel argued that there is no "transactional umbrella" created simply because a solicitor is leading a transaction.  With that in mind, the SKCA reviewed the fundamentals of solicitor-client privilege:

  • A communication must involve legal advice, where the lawyer is acting as a lawyer rather than in a non-legal capacity (for example, business advice);
  • Accounting documents, factual documents or those providing business strategy are not privileged;
  • Documents that merely come into the possession of a lawyer that are not related to the provision of legal advice are not privileged;
  • Documents that are not privileged do not acquire privilege because they pass through a lawyer's hands;
  • Privilege does not subsist where the timing, format or nature of a document setting out factual information would not allow the nature of legal advice that was sought to be discerned;
  • Privilege is not limited to explaining the law, but includes advice concerning what should be done in a legal context;
  • It is not necessary that a communication either specifically request or offer advice as long as the communication lies on the continuum of communication in which a lawyer offers advice;
    • The determination of where the continuum of protection lies requires an inquiry into whether the communication is part of the necessary exchange of information for the purpose of legal advice;
  • The party asserting privilege has the onus of establishing that a document was privileged;
  • Notwithstanding the otherwise clear principles governing legal privilege, the boundaries are difficult to ascertain when communications involve third parties interposed between a solicitor and client:
    • If an agent is employed to help a client obtain legal advice from a lawyer, the agent is in the same position as the client and the agent's communications with the lawyer are as protected as communications between the principal and lawyer;
    • With respect to accountants, where an accountant is used to place a factual situation or problem before a lawyer to obtain legal advice, the fact that the intermediary is an accountant using the knowledge and skill of an accountant does not make the communications with the lawyer any less privileged than if the communications came from the principal;
    • Facts and figures are not privileged, but may be if included in a communication that is privileged;
    • There is no class of privilege for accountant-client communications per se and no privilege attaches to a communication with an accountant who must consider the information and provide an opinion, since in that situation the accountant is more than a conduit;
    • Apropos the knowledge and skill of an accountant, communications remain privileged where a third party uses expertise in assembling for, and explaining information to, a lawyer;
    • Thus, essentially, privilege extends to all situations where a third party interprets client information for a lawyer or where the third party is a conduit for instructions to, and advice from, the lawyer; and
    • A functional analysis is required to establish the role of the third party as between the client and lawyer and whether the third party communications are essential to the existence or operation of the lawyer-client relationship.

As noted above, the argument advanced by Redhead's counsel was that the scope of the functional relationship between client, accountant and lawyer should be broadly interpreted.  The SKCA rejected that argument as being unsupported in the jurisprudence.  There is nothing to protect original and independent tax advice from an accountant, even where a lawyer has overall responsibility, and there is no transactional umbrella privilege in a multi-disciplinary transaction.

The balance of the judgment concerned the appropriate treatment of the 32 documents in issue, holding that in almost every instance the Chamber's judge did not make a palpable and overriding error.

The take-away points from Redhead are many and varied, but can be distilled down to:

  • Legal advice in tax matters must come from a lawyer to be privileged;
  • Communications to and from accountants in a multi-disciplinary transaction must be for the purpose of enabling the client to obtain legal advice from a lawyer;
  • The knowledge and skills of an accountant may be brought to bear in transactional work, thus an accountant need not be a simple, passive conduit for facts, but the application of that knowledge and skill must be limited to assembling and explaining information to the lawyer – going beyond that into the realm of tax advising cannot be a protected communication;
  • An appellate Court is unlikely to overturn a lower Court's determination of whether a document or communication is privileged.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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