Overview 

The Federal Court of Canada (“FC”) judgment in Minister of National Revenue v. Iggillis Holdings Inc. and Ian Gillis (2016 FC 1252) (“Iggillis”) is a recent and important decision concerning common interest privilege (“CIP”) – also known as deal/advisory or “allied lawyer” privilege. CIP is likely a misnomer, since it is not a separate privilege, but rather an exception to the general rule that disclosure of otherwise privileged information to a third party results in a waiver of privilege. The CIP exception to waiver is intended to apply when privileged legal advice is shared amongst parties who share a common goal or seek a common outcome (for previous FC authority in a tax context, see Pitney Bowes of Canada Ltd v. R (2003 FCT 214) (“Pitney Bowes”)).

While the FC affirmed that deal/advisory CIP was an established component of solicitor-client privilege (“SCP”)1 supported by copious case law, it was swayed by a recent academic article and US case, concluding that deal/advisory CIP is contentious because it evolved under a cloud of confusion with joint client privilege (“JCP”)2 and litigation privilege.3The FC rejected deal/advisory CIP and adopted a restrictive approach inconsistent with not only with well-established CIP case law, but recent Supreme Court of Canada guidance affirming the quasi-constitutional strength of SCP. It is a perplexing result in the sense that Canadian case law was disregarded in favour of a piece of writing from an American law professor, Grace Giesel, and a US case. While in the short term the FC judgment may have ramifications for transactional work and the free exchange of information between lawyers, the judgment is under appeal to the Federal Court of Appeal (“FCA”), so the last chapter on deal/advisory CIP has yet to be written.

Briefly putting the case in context: the Minister of National Revenue (“Minister”) served requirements for information on the respondents pursuant to ss. 231.2(1) of the Income Tax Act (Canada) (“ITA”), which sought copies of a document defined in the judgment as “Abacus Memo” or “Memo” and which the respondents refused to turn over. The refusal to disclose the Abacus Memo led to the Minister bringing a compliance order application. Abacus Capital Corporations Mergers and Acquisitions (“Abacus”) intervened and argued the Memo was subject to SCP. The Abacus Memo described the sale of shares of the respondents’ corporations (including pre and post sale transaction steps) and the application of the ITA to the steps. The FC noted that counsel for both sides of the transaction consulted regarding tax consequences, including through email and on telephone calls. By way of example, the FC cited how counsel worked together to resolve an issue concerning taxation of dividends, which solution affected the structure of the transactions. The communications culminated in the Abacus Memo. Absent from the communications between counsel was any express client request for advice.

Principles summarized

The judgment has something for everyone. It is lengthy and includes a law and economics theory of privilege, which may entertain academics. However, practitioners need to know the principles that may be extracted, which were summarized near the end of the judgment.

“[298] Advisory CIP is not a valid constituent form of SCP and therefore has no application to the facts of this case for the following reasons:

  1. Advisory CIP was incorrectly accepted in both the United States and Canada based upon a misapprehension that it was supported by similar rationales and purposes said to support joint client privilege and litigation privilege, when they bear no relation to advisory CIP.
  2. JCP is a valid form of SCP, while CIP is not.
  3. Litigation CIP is compatible with litigation privilege based on a shared adversarial purpose. However, litigation privilege is distinct from SCP. The primary function of SCP is to maintain the solicitor-client relationship without which the administration of justice cannot function. It is not rationalized as serving any adversarial purpose. For that reason neither ligation privilege nor litigation CIP shares any functional compatibility with advisory CIP.
  4. Not only does advisory CIP not conform to the fundamental tenets of SCP, it is incompatible with them. Indeed, its application guts SCP of its purpose and function. The ad hoc rationales said to justify advisory CIP, such as it being an exception or defence to waiver, a form of selective waiver, or supported by an expectation of confidentiality, must be rejected because they eviscerate SCP of its purpose and function.
  5. Advisory CIP provides no benefit to the administration of justice in either enhancing compliance or maintaining the solicitor-client relationship, while significantly adding to its costs. Advisory CIP significantly expands the quantity of relevant evidence that is denied to the courts. It is not available to most users of advisory legal services and unfairly disadvantages them at trial. Furthermore, it provides an increased potential for abuse, while undermining the administration of justice by predominantly enabling transactions that anticipate creating litigation.
  6. External policy factors relating to the use of SCP, such as advisory CIP providing economic and social benefits to society by fostering commercial transactions are incompatible with SCP, which is limited to factors affecting the administration of justice.
  7. Resort to external policies represents an attempted case-by-case justification of a SCP which is incompatible with the class of SCP. Advisory CIP as a case-by-case justification of privilege requires the demonstration on a balance of probabilities to be of such unequivocal importance to society that it demands protection.
  8. The claimed policy benefit of advisory CIP of enabling commercial transactions is entirely speculative, and more likely represents a cost to society by the fact that advisory CIP mostly enables transactions that anticipate litigation which undermine the administration of justice, or are otherwise of no, or harmful value to society.

The prior jurisprudence of the Federal Court of Canada, namely the Pitney Bowes decision, is not binding on this Court. Pitney Bowes is distinguishable as it was a matter involving joint client representation, not allied lawyer CIP. The Court in Pitney Bowes also applied unsound jurisprudence from other Canadian and American courts that relied on the false external policy factor of advisory CIP fostering commercial transactions and unsupportable expectations of confidentiality.”

Impact for practitioners

In the short term, practitioners should beware of the risk that disclosure of privileged communications to other advisors in a deal context may result in a privilege waiver. Until the appeal is decided by the FCA, the outcome of any similar FC compliance order applications may be uncertain. Both Pitney Bowes and Iggillis are decisions emanating from the same level of Court and neither is binding in future cases. Thus, the likelihood that another FC judge would follow Iggillis is an open question. This uncertainty militates towards a cautious approach to disclosure for the time being.

Other aspects of Iggillis

Litigation privilege

Mercifully, the FC did not wholly adopt Professor Giesel’s rejection of CIP: litigation CIP survived. In the FC’s view, and relying on Blank v. Canada (2006 SCC 39), litigation privilege and SCP are fundamentally different and the sharing of information between lawyers representing different clients is consistent with the doctrinal basis for litigation privilege: while litigation privilege protects litigation strategies in adversarial process, SCP protects the solicitor-client relationship. Confidentiality is “intrinsic and essential” to litigation strategy.

Tax advising

Other than the endorsement of CIP in a litigation context, another somewhat bright spot in Iggillis was the FC’s rejection of the Minister’s argument that tax planning communications (including a lawyer’s advice) are never privileged, based on Canada v. Revcon Oilfield Constructors Inc (2015 FC 524) (“Revcon”). Few practitioners interpreted Revcon as standing for the proposition that tax advice from a lawyer was not privileged and that weak argument was doomed to fail in Iggillis. Similarly, the FC appropriately rejected the Minister’s argument that the Abacus Memo was not legal advice, but rather business advice, since it obviously included legal advice.

On the other hand, the FC suggested that deal/advisory CIP facilitates high-risk transactions and protects information that could show non-compliance with the law. In this regard, the FC’s views regrettably seem infected by popular misunderstandings of tax planning. The judgment states that “CIP will also enable commercial transactions that are of questionable legality given the purposes they are put to. … They may involve placing wealth off shore, or estate planning of wealthy persons … The transactions require the employment of lawyers … who excel at navigating the complexity and opacity of their legal world or of international treaties and arcane points of law that abound there. The schemes may resort to shell corporations, offshore trusts, and other legal constructs such as bankruptcies or cross-border protections that require secrecy of their advisory communications in order to be concluded. Like this matter, there is little or no economic reality to these transactions, nor any benefit to society.” With respect, “placing wealth offshore” is quite alright if the owner complies with the law, estate planning is not obviously of “questionable legality”, and the FC’s reference to tax planning synonymously with opacity, arcane laws, shell corporations and a lack of economic reality suggests that the Court may have been prejudiced by misunderstandings typically within the domain of media outlets.

Conclusion

Iggillis may warm the heart of professors for its reliance on an academic paper over well-established case law and for its lengthy theoretical analysis, but may also make the blood of tax practitioners run cold and chill the appropriate sharing of information between lawyers in the short term.