“In this world nothing can be said to be certain, except death and taxes.” (Benjamin Franklin, 1817). But if you get the right legal advice, you can at least be fairly certain that you’re not paying more tax than you need to. And legal advice (or lawyer-client) privilege means you can be certain that the government won’t be able to compel disclosure of the legal advice you received to do your tax planning. Right? Well, maybe.
Legal advice privilege has always been described as a right of the client. But the client’s ability to claim that right depends on who gave the advice. So far, English and Canadian courts have upheld the traditional rule that, unless the advisor was a lawyer, privilege will not shield the legal advice from scrutiny by the taxing authorities. A January 2013 decision of the highest court in the United Kingdom (referred to as the Prudential case) reflects that the profession of the advisor matters at least as much as the nature of the advice. Given the rationale for legal advice privilege, there’s a good argument that the advisor’s profession should be irrelevant as long as legal advice is given in confidence by a qualified professional. But, until Canadian law changes, clients need to keep in mind that they will only be able to claim legal advice privilege if they involve a lawyer in obtaining the legal advice. Legal advice received directly from accountants is not privileged, no matter how expert in tax law the accountants may be.
PRINCIPLES UNDERLYING LEGAL ADVICE PRIVILEGE
Since the 16th century, the common law has upheld a person’s right to receive legal advice in confidence, whether or not the advice is sought in contemplation of litigation. This right was recognized by the courts as promoting the administration of justice. It was explicitly not tied to any particular importance of the legal profession. In other words, it was the receiving of legal advice in confidence that gave rise to the privilege – not the profession of the advisor. This right has become known as legal advice privilege or solicitor-client privilege. The Supreme Court of Canada recognizes this privilege as a substantive constitutional right, deserving of the strongest protection. Unless the client waives it, the only two exceptions are public safety and “innocence at stake.”
Originally, the focus of legal advice privilege was whether legal advice was sought and given in confidence: if it was, then it was privileged. Some judges have recognized that the focus on lawyers in the cases dealing with privilege flowed from the historical reality that, in the past, legal advice was generally available only from lawyers. Over time, however, the courts have modified their focus. Instead of focusing on whether the client received legal advice in a confidential, professional advisory context (sometimes known as the functional approach), the determinative issue has become whether it was a lawyer who gave the advice.
“ ...a client can rely on legal advice privilege...only if the advice was received from a lawyer.”
TAX ACCOUNTANTS AND LEGAL ADVICE
In a dispute with the taxing authorities, it is often to your advantage not to have to disclose the legal advice on which you relied in structuring your affairs. This is why legal advice privilege matters. As observed by one judge in the Prudential case:
Legal advice privilege is sometimes described as essential to the effective administration of justice, … [T]he relevant public interest was in reality the rule of law, which depends upon the citizen being able without inhibition to find out what his legal position is. The complexity of the modern law and its progressive invasion of the interstices of daily life, have made this a public interest of greater importance than ever before. It is perhaps particularly significant in the area of tax law, where the citizen is brought up against the power of the state and the law is often technically complex.
Tax law is complicated, especially if your affairs are complex, or your business is multi-faceted, large or international. Creative, competent tax advice is essential. And these days it is often highly knowledgeable and skilled tax accountants who are the preferred tax advisors.
THE PRUDENTIAL CASE
The Prudential group of companies implemented a tax avoidance scheme devised by their tax advisors, PricewaterhouseCoopers. As required by UK legislation, PwC disclosed the scheme to Her Majesty’s Revenue and Customs. A tax inspector served notices on Prudential to obtain disclosure of documents. Prudential disclosed some, but asserted that legal advice privilege protected the rest. The inspector obtained a court order that Prudential disclose the rest. Prudential applied for judicial review of that order. Two levels of court held that the disputed documents would have been subject to privilege had the advice in them been provided by a lawyer, but that “no such privilege extended to advice, even if identical in nature, provided by a professional person who was not a qualified lawyer”. [emphasis added]
On final appeal to the UK Supreme Court, five of the court’s seven judges held that, while there were strong arguments in favour of extending legal advice privilege to advice given by non-lawyers, there was an equally strong case for confining the protection to advice by lawyers. To extend the privilege to non-lawyers would involve uncertainties and unknown consequences. What professions would qualify? What would be characterized as legal advice? The majority was concerned that saying privilege should be extended to advice from professionals “whose profession ordinarily includes the giving of legal advice” did not provide enough clarity with respect to professionals like municipal planners, engineers, surveyors, architects or actuaries, who often have considerable legal expertise, but do not always give legal advice, and who are governed by their own codes and disciplinary procedures.
Though the majority acknowledged there were powerful arguments in favour of extending legal advice privilege to non-lawyers qualified to give legal advice, they ruled that any radical change in the longstanding policy of confining privilege to advice given by lawyers was better left to the UK Parliament, especially in light of recent changes to the UK legal profession itself.
Two judges dissented. In their view, there was no principled basis to deny extension of legal advice privilege to non-lawyer professionals who gave legal advice. They emphasized that, properly understood, English common law has always taken the functional approach to privilege: its availability depends on the nature of the advice and the circumstances in which it is given, not the status of the adviser. The dissenting judges did not see this as an area of legal policy where the courts should defer to Parliament. They observed that common law courts are well equipped to develop the law of privilege on a case-by-case basis. This is what the common law courts have always done.
In summary, all seven judges in the Prudential case accepted that PwC had given confidential legal advice to the Prudential group. In spite of this, the majority of the court refused to recognize that legal advice privilege protected a client unless the advice was given by a lawyer – even where the client had received legal advice from the professionals best qualified to give it: tax accountants. The result is that, under UK law, a client can rely on legal advice privilege in respect of tax advice only if the advice was received from a lawyer.
In light of the fundamental rationale for legal advice privilege, it is logically inconsistent that the client’s right to claim privilege should depend on the profession of the advisor, rather than on whether the advice is legal, and given in confidence, in a professional, as opposed to social, context. The majority in the Prudential case acknowledged this inconsistency.
The Canadian Federal Court of Appeal has taken the same position as the majority in the Prudential case.To date, the Supreme Court of Canada has not decided this issue.
The result of this kind of reasoning is that a client’s right to obtain expert legal advice from a qualified professional – the fundamental right that legal advice privilege is supposed to protect – is constrained. To be protected the advice must be from a lawyer, even if another professional is more qualified to give it. Some argue this is an illogical and undesirable result. Some say it is anomalous that if a client communicates directly with an accountant, those communications will not be privileged, but if the client retains a lawyer, who in turn retains an accountant, then the same communications will be privileged.
Not all countries have accepted that only lawyers’ tax law advice should be privileged. In the United States, Congress has amended the Internal Revenue Code to extend privilege to some communications with accountants who are ‘federally authorized’ tax practitioners. Given that example, and the strength of both the majority and dissenting reasons in the Prudential case, it will be interesting to see whether Canadian law extends legal advice privilege to confidential legal advice given by qualified non-lawyers. In the meantime, taxpayers should retain lawyers (who can then retain tax accountants) to provide confidential tax law advice that will be protected by legal advice privilege.