In MNR v. Iggillis Holdings Inc. and Ian Gillis, 2016 FC 1352, tax lawyers on both sides of a share sale cooperated in the ultimate preparation of a comprehensive step memo (Memo). The Memo described the expected tax consequences of each step of the proposed transaction (see paragraph 68). The seller and purchaser agreed that solicitor-client privilege attaching to the Memo would not be waived as a result of the tax lawyers trading views and opinions in the course of preparing the Memo (see paragraph 81). This legal concept had become widely-known and accepted as transactional or advisory common interest privilege (Advisory CIP). In the course of a subsequent audit of the share sale, the Canada Revenue Agency (CRA) issued a requirement letter under s. 231.2(1) of the Income Tax Act (Canada) demanding disclosure of the Memo. The seller claimed the Memo was privileged. The Minister then brought an action in Federal Court to require disclosure of the Memo. The Federal Court readily acknowledged that: (1) Advisory CIP has existed for a very long time (see paragraph 24); (2) Advisory CIP is strongly implanted in Canadian law and indeed around the common-law world (see paragraph 91), and (3) Advisory CIP has overwhelming acceptance in the common law world except in 13 US states (see paragraph 133). Nonetheless, in a wide-ranging 125-page judgment, the Federal Court concluded that Advisory CIP is “not a valid component” of the solicitor-client privilege doctrine (paragraph 92). Accordingly, the Memo was not privileged and had to be disclosed to the CRA. This will be a case to watch on appeal to the Federal Court of Appeal. Some additional and interesting comments expressed by the Federal Court are as follows:
1. Cloak of confusion and theory-induced blindness: The numerous cases which have supported the existence of Advisory CIP merely show that the concept entered Canada under the guise of its similarity to joint client privilege (JCP) in litigation situations, and no court had yet to fully consider the substantive issues that Advisory CIP raises (see paragraph 126). This jurisprudence was thus “established under a cloak of confusion” and with very little analysis of the factors and considerations relating to the legitimacy of Advisory CIP (paragraph 134). Furthermore, this jurisprudence may have been perpetuated through a form of theory-induced blindness: i.e., once you have accepted a theory and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws (see paragraph 135).
2. Disclosure destroys (waives) the privilege: The Memo was found to be legal advice provided by the tax lawyers to their clients “in the strictest confidence”, and was therefore protected from disclosure under solicitor-client privilege “subject to” whether that privilege was waived or was protected by Advisory CIP (see paragraph 72). Ordinarily, solicitor-client privilege is waived where a client explicitly or implicitly discloses a confidential solicitor-client communication to a party outside of the solicitor-client relationship (see paragraph 146). The cases which have supported Advisory CIP show that it is not a separate class of privilege; rather, Advisory CIP has operated to protect solicitor-client privilege from a waiver of that privilege (see paragraph 149). However, the consequences of Advisory CIP “have not been fully thought through”, and on closer examination Advisory CIP is “irreconcilable with and eviscerates” the solicitor-client doctrine of any meaning (see paragraph 150). A similar problem exists with the notion of selective waiver as a basis for Advisory CIP, which notion does not “adhere in any fashion to the doctrinal foundation of” solicitor-client privilege (see paragraph 172).
3.Influence of a recent US case: The Federal Court appears to have been inspired in part by the recent decision of the New York Court of Appeals (NYCA) in Ambac Assurance Corp v. Countrywide Home Loans Inc., 27 NY (3d) 616 (CA 2016). The NYCA acknowledged the theory that common interest privilege acts as an exemption to a waiver of solicitor-client privilege. However, the majority of the NYCA found that it was reasonable to exempt the waiver only in a litigation context, and not in a transaction or advisory context (see paragraph 25). The Federal Court in this case arrived at a similar decision, albeit not for identical reasons.