The recent Supreme Court of Canada (SCC) decisions in Canada (Attorney General) v Chambre des Notaires du Quebec and Canada (National Revenue) v Thompson illustrate that although tax law may be different for some purposes, the objectives of tax law do not justify the circumvention or restriction of the law of solicitor-client privilege as it has been consistently developed by the SCC over the past two decades.
Mr Thompson is a lawyer. The Canada Revenue Agency (CRA) served Section 231(2) of the Income Tax Act requirements on Thompson demanding the production of various documents. A similar demand was made to a number of Quebec notaries. In their respective cases, Thompson and the notaries took the position that they were being statutorily compelled to provide documents which were protected by professional secrecy and solicitor-client privilege. In Chambre des Notaires the notaries argued that the Income Tax Act definition of 'solicitor-client privilege' is unconstitutional and the SCC agreed. Thompson argued that statutory compulsion of the privileged materials constituted an unreasonable search or seizure.
At issue in both cases was the statutory definition of 'solicitor-client privilege' (Section 231(1) of the Income Tax Act), which excludes a lawyer's accounting records "including any supporting voucher or cheque". This exclusionary phrase makes the statutory definition more restrictive than the common law definition that has been developed by the SCC and, in the result, the SCC held that the common law definition must prevail.
In arriving at the result, certain important principles were stated:
First, the SCC held that a Section 231(2) requirement is a search and therefore captured by Section 8 of the Charter of Rights. The significance of this is twofold:
- Section 8 of the charter protects privacy interests and the court has therefore recognised that Income Tax Act requirements engage the privacy interests of those whose information is subject of the search.
- It follows that an Income Tax Act requirement can be scrutinised through the lens of Section 8 of the charter in order to protect the privacy interests that are engaged.
Next, the SCC determined that "for the purposes of analysis under s.8 of the Charter, the civil and administrative context of the requirement scheme does not diminish the taxpayer's expectation of privacy for information that is protected by professional secrecy".
"[I]t is well established that a client of a notary or a lawyer has a reasonable expectation of privacy for information and documents that are in the possession of the notary or lawyer and in respect of which a requirement is issued." This is so, even though the information could possibly be obtained from a third party or "may be a type of information that taxpayers must regularly provide to the tax authorities."
Therefore, the requirements of the self-reporting income tax system do not and constitutionally cannot erode privilege.
Next, the use of a requirement to compel accounting records was found to be unreasonable and contrary to Section 8 of the charter because insufficient protection was given to professional secrecy. In part, this is because "the usual balancing exercise under s.8 will not be particularly helpful" when the privacy interest in question is privilege. It is also because the act does not contain a requirement that the person whose secrecy or privilege is engaged by the search be given notice of or an opportunity to participate and defend against the loss of privacy.
In this regard, in 2002 the SCC in Lavalee, Rackel and Heintz v Canada considered Criminal Code procedures for law office searches and found those procedures to be constitutionally deficient because privilege holders were not given notice of the potential loss of privilege or an opportunity to assert their privilege. This finding in the tax context is simply tax law catching up to 14-year-old jurisprudence.
Some earlier law that considered solicitor-client privilege has recognised and attempted to develop a distinction between communications and facts. According to this distinction, communications may be protected by privilege, but facts are not.
In Chambre des Notaires the SCC observed that such a distinction "may be difficult to draw" and that facts can, at times, "speak volumes about a communication". Further, "[it] is well established that the accounting records of notaries and lawyers are inherently capable of containing information that is protected by professional secrecy" and that such protected information is "permanently protected from disclosure". In Thompson, the court addressed this same issue by stating that facts which are "connected" with the solicitor-client relationship "must be presumed to be privileged absent evidence to the contrary".
For this reason, there is a "rebuttable presumption" to the effect that "all communications between lawyer and client and the information they shared would be considered prima facie confidential in nature". On this basis, the SCC specifically rejected the argument that the information in an accounting record is a fact rather than a communication and therefore not privileged.
To determine whether the information set out in a particular document is protected by privilege, it is necessary to consider the information and "what it might reveal about the relationship and communications between a client and his or her notary or lawyer" (emphasis added). Therefore, information might be privileged on its face or, it might be protected by privilege because its disclosure might reveal or tend to disclose aspects of the relationship and communications between a client and his or her notary or lawyer which are privileged.
In Chambre des Notaires the SCC was critical of the fact that the minister sought to compel the information from a legal adviser without first attempting to obtain the information from another source. The "entire requirement scheme" was found to be "flawed in that it authorizes a seizure that cannot be characterized as a measure of last resort". Therefore, the CRA must now attempt to obtain information from other sources, such as financial institutions rather than law offices.
The following passage captures the court's position on the use of requirements on lawyers:
"No one disputes the fact that the requirement scheme serves legitimate purposes, namely the collection of amounts owed to the CRA and tax audits. Nor does anyone dispute the fact that it is important to prevent firms of notaries or lawyers from becoming tax havens. However, such firms must not be turned into archives for the tax authorities either…The fact that the requirement scheme has an important purpose does not mean that it can be used to sidestep the protection afforded by s. 8 of the Charter. The authorities' failure to even attempt to obtain the information or documents they seek from alternative sources indicates that the manner in which the seizure is conducted is unreasonable, as it does not minimally impair the right to professional secrecy."
The remedy to cure the constitutional deficiencies is twofold: first, the requirement scheme in the Income Tax Act is to be read down "so as to exclude lawyers and notaries from the scope of their operation". Second, the statutory definition of 'privilege' which carves out accounting records from communications that might be privileged is unconstitutional.
The result of these cases is welcome as the limited protection given to privileged information within the tax context has been out of step with the robust protections given to solicitor-client privilege in other contexts for far too long. It has now been unequivocally affirmed that the CRA needs to have the tools to verify that information provided by a taxpayer has limits and that not all rights will be eroded or compromised by that need.
Information protected by solicitor-client privilege must now be as vigorously protected within the context of tax law as it is in other contexts, and lawyers and notaries must ensure that they are protecting their client's privilege interests on the basis of these changes. It is unfortunate that there have undoubtedly been instances where privileged information was compelled and given up under what has now been held to be an unconstitutional statutory scheme.
For further information please contact Greg DelBigio at Thorsteinssons LLP by telephone (+1 604 602 4266) or email ([email protected]). The Thorsteinssons LLP website can be accessed at www.thor.ca.