Canada: CRA's Power To Compel Information Protected Under Solicitor-Client Privilege — Canadian Tax Lawyer Analysis

Last Updated: July 27 2017
Article by David Rotfleisch

Introduction – Solicitor Client Privilege

Legal privilege protects information from disclosure. That is, if your conversation with another person qualifies as privileged, that person cannot be compelled to reveal the contents of that conversation. Canadian courts repeatedly recognize solicitor-client privilege as a fundamental tenet of our legal system.

Yet Canada's Income Tax Act grants the CRA with broad powers to collect—and force individuals to reveal—information for the purpose of enforcing tax laws. In fact, prior to recent Supreme Court of Canada decisions, the CRA's information-gathering powers permitted the agency to compel disclosure of seemingly privileged information.

This tax article discusses the relationship between privileged information—in particular, information protected under solicitor-client privilege—and the CRA's tax audit and information-gathering powers. First, the article provides a brief overview of privilege. Second, it explains the basic legal framework surrounding the CRA's powers to audit and gather information as found in the Income Tax Act. Third, it discusses recent Supreme Court of Canada decisions, which reigned in the CRA's powers to encroach upon solicitor-client privilege yet provided Parliament with the tools to reinstate those powers.

What is Legal Privilege?

As mentioned, legal privilege enables one to withhold information. The notion comes from evidence law. Ultimately, it prevents information that you revealed to a certain individual from being used as evidence against you in a legal proceeding. In other words, unless you waive your right to the legal privilege, the protected information cannot be used as evidence. The classic example is the privilege protecting legal advice—known as solicitor-client privilege.

In fact, several forms of privilege exist. They fall into two basic categories: class privilege and case-by-case privilege(R v McClure, 2001 SCC 14 at paras 26-29).

Class privilege protects communications between parties whose relationship falls within a certain class. For example, this category of privilege includes solicitor-client privilege, which involves the lawyer-client relationship, and spousal privilege, which involves the spousal relationship. Notably, there is no privilege between an accountant and client.

Case-by-case privilege protects exceptional communications between parties whose relationship class privilege does not protect. As its name suggests, this form of privilege protects communications between parties in certain specialized cases.

Privilege is not absolute. For example, the danger that an innocent person may be wrongfully convicted ousts another's right to claim privilege. Likewise, solicitor-client privilege only protects legal advice for a lawful purpose; it does not protect a person who seeks legal advice to commit a crime.

The CRA's Tax Audit and Information-gathering Powers under Canada's Income Tax Act

Sections 231.1 and 231.2 of the Income Tax Act and sections 288 and 289 of the Excise Tax Act spell out the CRA's tax audit and information-gathering powers. In particular, in the name of enforcing or administering Canada's Income Tax Act or Excise Tax Act for GST/HST, these sections permit the CRA to:

  • inspect, audit, or examine any document of the taxpayer or any other person, including the taxpayer's lawyer or accountant
  • examine the property of the taxpayer or any other person
  • inspect, audit, or examine any document of any other person
  • enter any premises to examine documents or property
  • require any person to provide any information or document, which may even require that a lawyer provide client information.

In addition, if a person refuses to accommodate any of these CRA powers, section 231.7 allows the CRA to apply to a Tax Court judge for a compliance order. If the application succeeds, the compliance order forces the disobedient person to assist the CRA or risk penal sanction.

But a judge will not grant a compliance order if the disobedient person refuses to turn over information or a document because it is protected by solicitor-client privilege. The Income Tax Act includes its own definition of solicitor-client privilege under subsection 232(1). In general terms, the Tax Act defines solicitor-client privilege as a person's right to refuse to reveal a communication that the person had with his or her lawyer in professional confidence.

Notably, however, the Income Tax Act's definition of solicitor-client privilege excludes "an accounting record of a lawyer." The Act does not define what constitutes an accounting record, but excluding such records from the protection of solicitor-client privilege departs sharply from the Supreme Court of Canada's treatment of privilege (see: Maranda v Richer, 2003 SCC 67 at para 33). Simply put, the Income Tax Act seemingly permits the CRA to compel a person to produce information that would normally find protection under privilege.

This tension ultimately resulted in a pair of cases in which the Supreme Court of Canada pared down the powers granted to the CRA under the Income Tax Act.

The Supreme Court of Canada Restricts the CRA's Power to Collect the Accounting Records of a Taxpayer's Lawyer

The Supreme Court of Canada recently released a pair of important judgments involving the CRA's power to compel legal professionals to produce documents and information.

Canada v Chambre des notaires du Quebec (2016 SCC 20) involved Quebec notaries, who faced a CRA demand to produce accounting records. The CRA justified its demand on the basis that the Income Tax Act's definition of solicitor-client privilege excluded such records. After failed negotiations between the notaries and the CRA, the notaries brought an action to have the Act's definition of solicitor-client privilege declared unconstitutional.

The dispute ultimately reached the Supreme Court of Canada, where the SupremeCourt held that the carving out of accounting records from the definition of solicitor-client privilege was indeed unconstitutional. Specifically, the Court found that the definition—in concert with the CRA's tax audit and information-gathering power—infringed the Charterof Rightssection 8 protection against unreasonable search and seizure.

The Court's decision in Chambre des notaries foreshadowed the outcome of Canada v Thompson (2016 SCC 21). Mr. Thompson, a lawyer, was under CRA tax audit. The CRA requested that Mr. Thompson disclose his finances, including a list of his accounts receivable. While Thompson revealed the balance owing on his accounts receivables, he refused to disclose client names on the basis of solicitor-client privilege. Litigation ensued.

The arguments before the Supreme Court primarily focused on whether the Income Tax Act's definition of solicitor-client privilege signaled Parliament's genuine attempt to limit the right. It was, the Court decided. Of course, the Court quickly reminded us that, regardless of Parliament's intent, the provisions remained unconstitutional and thus unenforceable.

Despite these decisions, the Court suggested that the impugned provisions may pass constitutional scrutiny if Parliament amended them so that:

  • the lawyer's client received notice of the CRA's demand for information;
  • the scheme did not inappropriately burden the lawyer with the dilemma of either breaching client confidentiality or facing prosecution;
  • the scheme permitted the CRA to seek information from legal practitioners only as a last resort; and
  • the scheme included measures that mitigated impairing professional secrecy, such as not prosecuting legal professionals who withhold documents in good faith.

The Court has seemingly provided Parliament with the roadmap to constitutional validity. Presumably, we might see these changes soon.

You may wish to consult one of our experienced Canadian tax lawyers for advice on how various changes may affect you.

Tax Tips Solicitor-Client Privilege

You may wish to consider the following tax tips:

  • While solicitor-client privilege protects discussions you have had with a lawyer, your communications with an accountant remain unprotected. So, if you seek tax advice but wish keep that information away from the CRA, you should approach a Canadian tax lawyer first. If an accountant is needed the tax lawyer can retain the accountantand extend the privilege.
  • If a third party accompanies you when you visit your Canadian tax lawyer, that party's presence may undermine your claim to privilege. So, you should meet privately with your tax lawyer when possible.

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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