Solicitor-client privilege is a constitutionally-entrenched right that protects communications between a lawyer and his or her client. The foundation of such privilege is to encourage full and frank disclosure between lawyers and their clients for the purpose of providing legal advice. A lawyer cannot be compelled to disclose information shared by his or her client and only the client can waive privilege. In the tax planning context, protecting the confidentiality of taxpayer information is important to ensure that a taxpayer’s tax position is not unfairly prejudiced by legal requirements to provide subjective analysis or information to taxing authorities where such analysis or information was communicated or created for purposes of providing tax advice. Further, to better ensure taxpayer compliance under a self-reporting tax system, the confidentiality of communications with one’s tax lawyer is protected to encourage full and complete disclosure of the facts necessary to provide tax advice.
While the trend in Canadian jurisprudence over the last decade has been a steady increase in the protection of solicitor-client privilege, the question of its application to other professionals, including accountants has been raised both in Canada and abroad. In 2013, the UK Supreme Court in Prudential v Special Commissions of Income Tax declined to extend solicitor-client privilege to taxpayers who seek advice from professional accountants. In the United States, federal legislation offers only narrow protection to accountants who are “federally authorized” tax practitioners. In Canada, the courts have refused to extend solicitor-client privilege to other tax professionals unless such communication is in furtherance to a function essential to the solicitor-client relationship or the continuum of legal advice provided by the solicitor. As a result, the ONLY way to keep tax planning confidential is to ensure it is protected by solicitor-client privilege.
Redhead Equipment v Canada (Attorney General), 2016 SKCA 115
A recent case of the Court of Appeal for Saskatchewan, Redhead Equipment v Canada has reiterated the sanctity of solicitor client privilege and yet again, confirmed that there is no tax accountant-client privilege known in law.
Redhead Equipment (“Redhead”), a heavy equipment dealer in Saskatchewan engaged a law firm to serve as tax advisers for its tax-related planning, including a corporate restructuring. In 2008, Redhead instructed their accountants to provide the necessary facts and information to allow its law firm to provide the legal advice requested. In 2012, the Canada Revenue Agency (“CRA”) made a formal request to Redhead for unredacted copies of all planning documents concerning specific transactions involving the Redhead entities and all planning documents related to certain restructuring activities. In response, Redhead provided 662 documents to the Judicial Centre of Saskatoon claiming solicitor-client privilege over each.
The Chambers judge conducted an individual assessment of each of the 662 documents and ultimately the privilege status of 32 documents remained in dispute and became the subject of appeal. In determining the privilege status of each document, the Saskatchewan Court of Appeal found that privilege extends to third parties, including accountants in certain limited circumstances. The court concluded that solicitor-client privilege applies only where the third party functions as an “interpreter” of information provided by the client for the solicitor, as a “conduit” of advice from the solicitor to the client, as a conduit of instructions from the client to the solicitor, or if the third party employs expertise in assembly of information provided by the client and in explaining it to the solicitor is the communication protected. The court stated that no privilege attaches to a communication to an accountant who must consider and provide his or her own accounting opinion. Furthermore, the court stated that accounting documents will be privileged only if the accountant was used as a representative of a client to obtain legal advice.
The Test for Privilege: The Functional Approach
To determine whether a communication by an accountant or other third party is privileged depends on the function served by the third party in relation to the communication. The court stated that solicitor-client privilege only extends to third party communications that are in furtherance of a function essential to the existence or operation of the solicitor-client privilege. While Redhead argued that most communications between a solicitor and a third party, such as an accountant should be privileged, the Court of Appeal of Saskatchewan rejected this broad, “umbrella” approach, citing concerns about diluting the functional approach to privilege because it would always be possible to argue that the function of any third party is to assist and facilitate the solicitor’s legal advice to the client. The court held (at para. 48 and 49) that:
There is nothing in [the leading jurisprudence] that would protect as privileged in a transaction the original tax work of the accountant provided to the lawyer on the client’s behalf. In situations where the accountant gives original and independent tax advice to either the lawyer or the client, this will not be privileged just because the lawyer has overall responsibility. The accountant’s advice would not otherwise be privileged. The client cannot do indirectly what they could not do directly.
In short, there is no transactional solicitor-client privilege for third parties in a multi-disciplinary transaction just because a lawyer is giving legal advice on the transaction.
Implications for Canadian Tax Planning
The Redhead decision highlights that the best practice to ensure confidentiality with respect to communications related to tax advice is to first retain a tax lawyer. To the extent that other professionals such as accountants, valuators or transfer pricing experts are required to perform essential functions in connection with the provision of the tax lawyer’s advice, he or she can engage those services and thereby, preserve privilege. The Redhead decision was clear that where a third party expert is required to assemble and explain information to and for the lawyer, the communications remain confidential. However, the lawyer cannot merely be involved in a transaction or given overall responsibility if third party communications are to be protected.
In a corporate environment that is dependent on specialized expertise provided by accountants, consultants, financial advisors and other experts, it is important to remember that only communications with legal counsel remain protected from disclosure. The courts in Canada have been clear that solicitor-accountant privilege does not exist and therefore the only way to ensure confidential tax planning is to access tax advice through a lawyer.