In Gaudreau c. Le Roi, 2023 CCI 115* (Gaudreau), the Tax Court of Canada (theTCC) reminds taxpayers that there is no accountant-client privilege in Canada, and that documents prepared by accountants may be producible to tax authorities.
Background
The dispute arose from a transaction whereby Sébastien Gaudreau (the Appellant) and other individuals disposed of their interests in an insurance company to a purchaser by way of a hybrid share/asset sale (the Transaction). The Transaction was structured so that the Appellant realized capital gains on the sale and was able to claim the capital gains exemption on the sale of his shares.1
The Canada Revenue Agency (the Minister) reassessed the Appellant to deny capital gains treatment, instead treating the proceeds as deemed dividends pursuant to subsection 84(2) of the Income Tax Act (the< strong>ITA). The Appellant appealed to the TCC.
At examinations for discovery, the Appellant disclosed the existence of a document prepared by an accounting firm for the purchaser in the Transaction, which related to the Transaction (the Memo). The Appellant refused to produce the Memo on the basis that it did not offer any new relevant information that had not already been disclosed through other means or documents, and that it would likely disclose subjective opinions that the Appellant was under no obligation to disclose.2 The Crown moved to compel production of the Memo.
The TCC's decision
The TCC considered whether the Crown had established that the Memo was relevant for the purposes of examination for discovery. The Appellant argued that the Memo did not disclose any new relevant information and that the Memo was irrelevant because it made no reference to subsection 84(2), the provision at issue in the appeal. The Appellant also relied on the Federal Court of Appeal (FCA) case of BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61 (BP Energy) to support the position that discovery cannot be used to conduct a search blindly and a taxpayer need not disclose their weaknesses.3
The Crown argued that the Memo was relevant because it was prepared in the context of the Transaction and could be useful in identifying the reasons underlying each of the steps at issue.4
The TCC reviewed the principles relating to relevance in examinations for discovery, and reaffirmed the principle that relevance must be broadly and liberally construed and given wide latitude.5 It acknowledged that a document that may (i) relate to issues in a dispute, (ii) enable a party to plead its case or (iii) harm its opponent's case, may be "relevant" and, therefore, producible. However, requests for document production should not amount to a blind search or a means of accessing an opponent's legal research or reasoning behind their argument.6 The TCC also noted the importance of the particular factual context when determining relevance for discovery, including in this case the application of subsection 84(2) of the ITA and the need to understand and review the transactions subject to this provision. In particular, the TCC approved of the broad interpretation to subsection 84(2) upheld in Foix v. Canada, 2023 FCA 38, wherein courts were urged to consider the "transactions leading to an alleged distribution or appropriation of funds or property are to be considered as a whole in a way that is temporally flexible."7
The TCC concluded that the Memo was relevant, was not protected by privilege, and was therefore discoverable. First, the TCC held that the fact that a document may contain information previously obtained does not justify non-disclosure at the discovery stage.8 In finding relevance between the Memo and the subject appeal, the TCC relied on the Appellant's own acknowledgement that the subject of the Memo was the Transaction and that most of its pages described the relevant Transaction steps.9 With respect to the Appellant's argument that the Memo was irrelevant because it contained no references to subsection 84(2), the TCC rejected this argument, instead adopting the broaderapproach that involved examining the circumstances surrounding the transactions in question to determine whether subsection 84(2) was applicable.10 The TCC briefly responded to the Appellant's argument, based on BP Energy, that a taxpayer need not disclose their weaknesses. The TCC emphasized that BP Energy did not concern the rules or scope of examinations for discovery, but rather concerned the Minister's information gathering powers during an audit under section 231.1 of the ITA and so was not applicable to the Appellant's case.11 Finally, the TCC reaffirmed that accountant-client privilege does not exist, notwithstanding the chilling effect such a result may have on accountants providing tax advice.12
Broader significance
Gaudreau is another case reminding taxpayers that there is no accountant-client privilege in Canada. Taxpayers engaging in transactions with complex tax consequences should ensure they seek appropriate legal guidance and counsel from legal tax advisors.
The authors would like to thank Jacob Yau for his valuable contributions to this article.
*An unofficial English translation of this decision was referenced when preparing this Dentons Insight
Footnotes
3. Ibid at para 16 and para 53, citing2017 FCA 61at para 82.
5. Ibid at para 28, citing Baxter v. Canada,2004 TCC 636at para 13.
7. Ibidat para 39, citing2023 FCA 38at para 67.
10. Ibidat paras 34-41, and 61.
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