Western Canada Business Litigation Blog

Supreme Court safeguards solicitor-client privilege from requests under the Income Tax Act

Posted in Civil Litigation, Tax
Print Comment

In companion cases released on June 3, 2016, the Supreme Court of Canada (the “SCC”) confirmed the central importance of solicitor-client privilege to the rule of law in Canada. In Canada (National Revenue) v. Thompson, 2016 SCC 21, and Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, the Court considered provisions of the Income Tax Act (the “ITA”) requiring lawyers to disclose their clients’ privileged information without client consent during an audit or tax collection action against the lawyer.

Writing for a unanimous Court in both decisions, Mr. Justice Wagner and Mr. Justice Gascon held that lawyers’ accounting records are subject to solicitor-client privilege and that any intrusion on this privilege is permitted only if doing so is absolutely necessary to achieve the ends of the enabling legislation.  The current “exception” in the ITA in the definition of solicitor-client privilege, which excluded a lawyer’s accounting records, was determined to be constitutionally invalid as was the requirement scheme under the ITA which compelled lawyers to provide these records to Revenue Canada.

Thompson: Client information falls under solicitor-client privilege

During the course of an audit, Alberta lawyer Duncan Thompson received an order from the Canada Revenue Agency pursuant to section 231.2(1) of the ITA requiring the submission of various documents, including his accounts receivable. Thompson refused to submit the names of his clients, arguing that their identities fell within solicitor-client privilege.

Information that is protected by solicitor-client privilege is normally exempt from disclosure. However, the wording of section 231.2(1) is clear in its intention to exclude “an accounting record of a lawyer” from the scope of solicitor-client privilege.

On the point of client identity, the SCC gave a clear ruling: there is no difference between information about a communication with the client and information about the status or identity of the client. While not all communication in a lawyer-client relationship is privileged, facts connected with that relationship must be presumed to be privileged absent evidence to the contrary. Therefore, if section 231.2(1) of the ITA is held to require accounting records detailing the names of clients or the services rendered to them, the provision would effectively require the disclosure of otherwise privileged information.

Chambre des notaires: Fundamental principles of justice require solicitor-client privilege

In Québec, “professional secrecy” is a substantive fundamental right comprised of the obligation of confidentiality arising from the lawyer-client relationship and the resulting solicitor-client privilege.  A client’s right to professional secrecy is protected through various codifications, including in the Civil Code of Québec, the Act respecting the Barreau du Québec, and the province’s Charter of Human Rights and Freedoms. Clients therefore enjoy a reasonable expectation of privacy regarding their information and documents that are in the possession of their notary or lawyer.

In Chambre des notaires, the SCC found that the ITA creates a conflict between legal advisors’ duty of professional secrecy and their statutory duty of disclosure to the tax authorities. In balancing the client’s privacy interest and the state’s interest in carrying out a search or seizure of information or documents, the SCC held that professional secrecy must remain as close to absolute as possible. Though the ITA’s requirements serve the legitimate purpose of collecting amounts owed to the CRA and conducting tax audits, this important purpose could not justify infringing upon the protection afforded the Charter. As such, the impugned provisions – in this case sections 231.2(1), 231.7, and 232(1) of the ITA – were held to be unconstitutional.

The takeaway: solicitor-client privilege is here to stay

In February 2015, the SCC released its decision in Canada (Attorney General) v. Federation of Law Societies of Canada in which the Federation of Law Societies of Canada challenged the constitutionality of provisions in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act that required lawyers to record certain information about their clients’ financial transactions. In that case, I lead the Lawson Lundell team that successfully argued on behalf of the Canadian Bar Association that the Act offended sections 7 and 8 of the Charter by unduly interfering with solicitor-client privilege, thus weakening the independence of the bar.

Again in a unanimous decision, the SCC agreed that the Act’s provisions authorizing law office inspection did not sufficiently protect solicitor-client privilege. Finding that the provisions were unjustified and unreasonable under section 8 of the Charter, the Court declared section 64 of the Act to be of no force and effect, and read down certain other law office inspection provisions to exclude application to lawyers.

The recent decisions of Thompson and Chambre des notaires echo this important confirmation of the stringent limits on intrusions into the privileged relationship between lawyers and their clients. As the Court noted in Thompson, “the obligation of confidentiality that springs from the right to solicitor-client privilege is necessary for the preservation of a lawyer-client relationship that is based on trust, which in turn is indispensable to the continued existence and effective operation of Canada’s legal system.”