In MNR v. Grant Thornton and Foremost Industries, the taxpayer successfully asserted solicitor-client privilege (Privilege) over documents inadvertently disclosed to its accounting firm. The judgment is a useful reminder that any Privileged documents should not be disclosed to an accounting firm unless it is clearly documented that (a) the disclosure is for the sole and limited purpose of enabling that firm to perform its audit functions and (b) the intention is to maintain Privilege for all other purposes. Further, if Privileged documents are inadvertently disclosed to an accounting firm, the taxpayer should “take swift action” to reassert the Privilege as soon as the inadvertent disclosure is discovered. The story in this case is certainly not new in Canada.
- In the course of an acrimonious audit, the CRA issued a “requirement letter” to the taxpayer’s accounting firm requiring the firm to turn over all relevant documents pertaining to the taxpayer. In its response, the accounting firm identified three documents in respect of which it understood the taxpayer was asserting Privilege. The CRA subsequently sought a “compliance order” against the accounting firm in the federal court, which resulted in this judgment. The taxpayer intervened in the court application.
- The court found that the disputed documents were indeed subject to Privilege at the time they were created. However, the documents had been disclosed to the accounting firm, and this raised the further question of whether that Privilege was lost as a result. The court held that the “doctrine of limited waiver” could not save the Privilege because there was no evidence the taxpayer had “knowingly disclosed the documents to the accounting firm for the limited purpose of enabling it to perform its audit and with the intention of maintaining the Privilege over those documents for all other purposes”.
- Notwithstanding this finding, the court went on to find that the taxpayer could rely on the “doctrine of inadvertent disclosure”. The latter applied because (a) there was no evidence of carelessness, (b) the taxpayer took swift action to reassert the Privilege as soon as the inadvertent disclosure (to the accounting firm) was discovered, and “most importantly” (c) it could be inferred that the accounting firm came into possession of the documents “in confidence” in the course of that firm’s audit of the taxpayer – because the accounting firm implicitly had a relationship of confidence with the taxpayer. The latter is an importance and useful inference, as a practical matter.
- Finally, the judgment contains a helpful summary and useful reminder of the law of Privilege, including (a) the scope documents initially protected (paragraphs 20-23), (b) the doctrine of common interest privilege (paragraph 57), (c) the principles of limited waiver and inadvertent disclosure (paragraph 47 and paragraphs 59-69) , (d) the obligation on the CRA to contact the privilege-holder should the CRA come into possession of what appears to be a privileged document (paragraph 24), (e) the inability of the CRA to inspect privileged documents until “it has been judicially determined that the documents are not protected by privilege” (paragraph 24), and (f) the possible need for taxpayers to at least list privileged documents that would otherwise fall within the scope of a statutory demand or requirement to provide information issued by the CRA (paragraph 33). The foregoing also highlights the practical importance of clearly labeling all Privileged documents as “Privileged and Confidential”, or words to this effect, at the time they are created.