Clients who share tax-related information with their lawyers can have more confidence that it will not be released to the Canada Revenue Agency (CRA), according to a decision handed down by the Supreme Court of Canada (SCC) on Friday.
In the case, the SCC found that an exception to solicitor-client privilege in the Income Tax Act (ITA) — which has been used by tax officials to gather information about taxpayers from their lawyers and, in Quebec, their notaries — is unconstitutional.
Furthermore, the privilege does not apply only to communications between lawyers and clients, as has sometimes been argued. It also covers facts, the SCC ruled. As the decision notes, “[W]e cannot conclude … that [a lawyer’s] communications with his clients are distinct from financial records that disclose various facts about their relationships in order to determine whether solicitor-client privilege covers those facts. Absent proof to the contrary, all of this information is prima facie privileged, and therefore confidential.”
The case arose when Duncan Thompson, a lawyer from a small town in Alberta, became the object of CRA enforcement action. Tax authorities sought personal financial information from Thompson, which included his accounts receivable.
Although Thompson complied with some of these requests, he declined to give the CRA information that would identify his clients. After the Minister of Revenue applied to the Federal Court for a compliance order against Thompson, the lawyer objected. He argued that the information sought was subject to solicitor-client privilege and, further, that it constituted unreasonable search and seizure, contrary to Sec. 8 of the Canadian Charter of Rights and Freedoms.
In a companion appeal, Canada v. Chambre des notaire, the SCC ruled that the exception under the ITA is constitutionally invalid because it violates Sec. 8 of the Charter. As a result, the SCC found that the Minister’s application against Thompson should be dismissed.
However, the ruling in Thompson’s favour also includes a discussion of the nature of the solicitor-client privilege. The decision notes that: “Solicitor-client privilege has evolved from being treated as a mere evidentiary rule to being considered a rule of substance and, now, a principle of fundamental justice.”
Further, the SCC’s decision notes that “an intrusion on solicitor-client privilege must be permitted only if doing so is absolutely necessary to achieve the ends of the enabling legislation.”
The decision takes note of the CRA’s argument that excluding the agency’s access to the financial books and records of lawyers “could enable lawyers and their clients to hide misreporting and tax evasion behind the veil of solicitor-client privilege.” The decision also notes that it’s possible that Parliament will amend the ITA to remedy the constitutional defect of the requirement scheme.
However, the decision does not address how such changes may be achieved, except to say that, in such circumstances, “a court assessing a request for access to presumptively privileged information will need to ensure that the clients whose information is being sought can participate in the process of asserting the protections that apply to them.”
In a brief note on the case, Ian Humphries, a lawyer with Thorsteinssons LLP in Vancouver, noted that the pair of cases represent, “an important confirmation of the constitutional limits to the administrative powers of the CRA under the [ITA].”
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