On March 21, 2014, the Quebec Court of Appeal in the case of Canada (AG) and the Canada Revenue Agency v. Chambre des notaires du Quebecdeclared that subsection 231.2(1), section 231.7 and the definition of “solicitor-client privilege” in subsection 232(1) of the Income Tax Act (the “Act”) are unconstitutional and are of no force or effect with respect to notaries and lawyers in Quebec concerning documents and information protected by solicitor-client privilege.  On December 18, 2014, the Supreme Court of Canada granted leave to appeal that decision.

By way of background:

  • Section 231.2 allows the Minister to issue, for the purpose of administration or enforcement of the Act, tax treaty or listed international agreement, demand letters to a person requiring that person to provide any information or document. Failure to comply with a demand letter is an offence punishable by summary conviction resulting in a fine and possibly imprisonment.
  • Section 231.7 allows the Minister to obtain an order from a judge to require a person to comply with a demand letter. A person who fails to comply with an order from a judge is in contempt of court and is punishable in accordance with the processes and punishments of the particular court.
  • The definition of “solicitor-client privilege” in subsection 232(1) excludes accounting records of a lawyer, including any supporting voucher or cheque, from the protection of solicitor-client privilege.

In this case, the CRA had issued demand letters to notaries in Quebec.  Some notaries complied with the demand letters; others refused citing professional secrecy, a fundamental right enshrined in Quebec’s Charter of Human Rights and Freedoms (http://www.barreau.qc.ca/en/public/relation/secret/).  In response to the notaries who had refused to comply, the CRA sought compliance orders pursuant to section 231.7 of the Act.  Unwilling to yield to the CRA, the Chambre des notaires brought an action to Quebec Superior Court for a declaration that the sections of the Act authorizing the CRA to issue demand letters and to seek compliance orders to be unconstitutional on the basis that it infringed the Charter of Rights and Freedoms.

The Quebec notaries were successful in both the superior and appellate courts.  The Quebec Court of Appeal held that the scheme of demand letters and compliance orders created in subsection 231.2(1) and section 231.7 to be “a scheme blighted by what Arbour J. characterized as a ‘principal fatal feature, namely, the potential breach of solicitor-client privilege without the client’s knowledge, let alone consent’”.

The CRA will now have an opportunity to present their case to the Supreme Court of Canada in hopes of convincing the highest court in the land that the impugned provisions in the Act create a fair balance between the opposing forces of the CRA’s investigative powers and solicitor-client privilege.