The Canada Revenue Agency (CRA) has extremely broad powers to audit Canadian taxpayers, which is a practical necessity in any self-reporting tax system. Included among these powers is s. 231.2(1), which generally authorizes the CRA to require any person to provide any information or documents concerning a particular taxpayer (commonly referred to as a Requirement or a Requirement Letter). This statutory power extends to a taxpayer’s legal advisors, with a limited protection afforded for information and documents protected by “solicitor-client privilege” as defined in s. 232(1). In Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, the Supreme Court of Canada declared s. 231.2(1) to be unconstitutional and inapplicable to notaries and lawyers in their capacity as legal advisers (see paragraph 93). A few points are worth quickly noting here:
- The provision violates the fundamental right in s. 8 of the Canadian Charter of Rights and Freedoms (the Charter) to be “secure against unreasonable search or seizure”, and could not be saved under s. 1 of the Charter which permits encroachment on the right only as can be “demonstrably justified in a free and democratic society” (see paragraph 6).
- Professional secrecy (in the civil law system) or solicitor-client privilege (in the common law system) is a “principle of fundamental justice” that is “a cornerstone of our legal system” (see paragraphs 28 and 29).
- There is a rebuttable presumption that all communications between client and lawyer and the information they share – including factual information – is confidential in nature (see paragraph 40).
- The constitutional defects in s. 231.2(1) arise because (1) the CRA is not legally obligated to notify the actual client (i.e., the taxpayer) of the Requirement that is sent to the client’s legal advisor, (2) an inappropriate burden is placed solely on the legal advisor, who automatically becomes subject to the “threat of prosecution” (under s. 238) if he or she does not comply with the Requirement, (3) compelling disclosure from legal advisors was not shown (by the Crown) to be absolutely necessary, because the same factual information is often available from other third parties, and (4) no statutory measures have been taken to help mitigate the potential impairment of the constitutional right to professional secrecy or solicitor-client privilege (see paragraph 44).
- Legal firms must not be turned into archives for the tax authorities (see paragraph 60).
- Accounting records of notaries and lawyers are inherently capable of containing information that is protected by the constitutional right to professional secrecy or solicitor-client privilege (see paragraph 72). Accordingly, the existing statutory exception for accounting records in the definition of “solicitor-client privilege” in s. 232(1) is equally unconstitutional and invalid (see paragraph 94).