CRA Requests For Lawyers' Trust Ledgers

Sakab Saudi Holding v. Saad Khalid (2024 ONSC 1601; under appeal), a recent civil litigation decision on solicitor-client privilege, may strengthen protections for lawyers' accounting records if they are requested by the CRA, either from a taxpayer's lawyer or from the taxpayer directly in respect of records received from the lawyer (you can read our full analysis of the decision). The principle that emerges from the case is that any document that could reveal something about what transpired within the solicitor-client relationship—such as a road map of legal advice sought or given—is potentially privileged.

The plaintiffs in Sakab Saudi alleged that the defendants misappropriated billions of dollars and dissipated these funds around the world. The plaintiffs sought production of any lawyers' trust ledgers that showed funds sent, received, or held in trust for the defendants, arguing that this was necessary to determine where the defendants' assets were.

The court dismissed the plaintiffs' motion, concluding that the trust ledgers were presumptively privileged. Although the plaintiffs argued that the ledgers were not privileged because they would simply show the movement of funds and were not sourced from communications for the purpose of giving legal advice, the court held that the analysis ultimately turned on what the documents might reveal about the solicitor-client relationship. The trust ledgers were accounting records that contained administrative information connected to that relationship (such as the source of payment for legal fees) and were therefore presumptively privileged. The plaintiffs were unsuccessful in rebutting that presumption. They failed to establish (1) that there was no reasonable possibility that the disclosure they sought would reveal confidential solicitor-client communications; and (2) that the information was not linked to the merits of the case and would not prejudice the defendants if it were disclosed.

Income tax law on this topic is somewhat muddy. The ITA's definition of solicitor-client privilege excludes "an accounting record of a lawyer" (subsection 232(1)). Courts applied this exclusion to documents like lawyers' trust ledgers (Jakabfy, 2013 FC 706) until the exclusion was held to be unconstitutional (Chambre des notaires du Québec, 2016 SCC 20). Still, subsequent cases in and outside the tax context have suggested that lawyers' trust ledgers (and even aspects of their bills, including descriptions of work performed) may not be protected in all circumstances (Levett, 2021 FC 295; aff'd 2022 FCA 117; Yong Tai Construction, 2017 ONSC 2223).

Confusion arises in applying the law to tax practice because taxpayers responding to audit inquiries may not know how far the bounds of solicitor-client privilege extend. Relatedly, practitioners who provide clients with detailed narratives of the work they conducted in their dockets—which is otherwise a good business practice—may inadvertently increase the risk that such information is disclosed to the CRA. Moreover, unless the taxpayer claims privilege at the time that such documents are requested, privilege may be considered to have been waived. Sakab Saudi provides possible guidance in this area, though it is important to remember that lawyers' accounts are not absolutely privileged and the area remains under development.

This piece was first published by the Canadian Tax Foundation as part of Canadian Tax Focus. You can view the original piece here.