Professional communications between taxpayers and their legal advisers are privileged from disclosure to third parties. Legal privilege, the oldest common law right, is a fundamental principle of justice that grants a defense against disclosing evidence.
Our courts zealously protect privilege, even just in the face of recent government legislation to compel disclosure of suspected money laundering transactions. Subject to a few exceptions especially in tax law, neither counsel nor the client could be compelled to disclose the items in such communications where these were intended as confidential.
And observe that the phrase counsel includes not just barristers and solicitors, but also their law clerks, their agents and even interpreters.
The purpose of legal privilege is to promote uninhibited communications between professionals to enable them to render services within an effective manner. Thus, privilege is essential towards the well being of a free society.
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There are lots of skilled professionals who render confidential advice and knowledge, yet who are not protected by class privilege. What the law states accords special status to legal privilege, much towards the chagrin of accountants and financial advisers who handle vital and sensitive confidential financial information.
Legal privilege, which started being an evidentiary rule within the common law, is now a constitutional doctrine in Canada. Recently, in a decision involving the Federation of Law Societies of Canada, the Supreme Court figured certain provisions from the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act limited the freedom of lawyers in a manner that was not depending on the principle of fundamental justice relating to the lawyer’s duty of committed representation.
The privilege reaches litigation, settlement discussions, and solicitor-client transactions. Additionally, it pertains to those situations where a document or details are distributed to persons other than the client and the lawyer, so long as there is a common interest with the client within the same anticipated or current litigation.
However, in tax law – which is a world unto itself – the income tax statute restricts the right in a number of aspects. Tax law presumes that the Minister’s assumption of fact underlying an exam is deemed correct, unless the taxpayer demolishes the assumption by prima facie evidence. This can be a type of reverse onus around the taxpayer.
In case called Dr. Mike Orth, 2014 FCA 34, for example, the taxpayer claimed deductions for attorney’s fees paid according of his business and investment planning. The test for deductibility in tax law is whether or not the taxpayer incurs the legal expenses for the purpose of earning income from a business or property, and is not due to capital or personal expenses. The court considered the saying “business and investments” to be ambiguous for the reason that it might refer to either earnings earning or capital purpose.
The taxpayer could disclose the nuances of its legal expenses, but only by waiving its solicitor and client privilege. The Federal Court of Appeal accepted the privilege claims as valid, but dismissed the appeal because the taxpayer refused to waive the claim of solicitor and client privilege regarding evidence that could resolve the dispute.
The court therefore gave the taxpayer Hobson’s choice: waive your privilege or lose your case.
Tax law also excludes from privilege a lawyer’s accounting records, including supporting vouchers and cheques, which are not considered confidential communications. This seemingly innocent exclusion of “records” is in fact very broad. It not only includes accounts, but also agreements, books, charts, tables, diagrams, invoices, letters, memoranda, statements “and anything else containing information.” The only real restraint is that the record must have to do with “accounting,” which in itself might have varied meanings.
Ultimately, it’s a question of fact whether a document is “an accounting record.” Solicitors’ charge sheets, and statements of accounts, are not accounting records and, therefore, may be the subject of the claim of privilege. However, accounting records such as ledgers, books of accounts and supporting documents can’t be privileged.
A detailed statement of account, and computerized dockets, could be a beacon to an auditor as to the underlying nature of a tax plan, and shine a light on regions of concern if they are particularized.
Hence, the tax lawyer’s dilemma: provide detailed accounting to keep the customer informed, but leave a road map showing the tax auditor the path to areas that warrant closer scrutiny.
In the result, privilege, the oldest common law right, that is regarded as a simple principle of justice in criminal law, is curtailed in tax law within the interests of revenue collection. Tax lawyers are encouraged to remember the difference when rendering tax advice.
Vern.Krishna@TaxChambers.ca
Vern Krishna is a professor in the common law portion of University of Ottawa Law School and counsel with TaxChambers LLP in Toronto
