Vern Krishna: Tax law chips away at the tradition of solicitor-client privilege

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 several exceptions most notably in tax law, neither counsel nor the client could be compelled to disclose the contents of such communications where these were intended as confidential.

And note that the definition of counsel includes not just barristers and solicitors, but additionally their law clerks, their agents as well as interpreters.

The reason for legal privilege is to promote uninhibited communications between professionals to enable them to render services in an effective manner. Thus, privilege is important towards the wellness of a free society.

Related

Banks cleared in cheque fraud caseNew takeover rules limiting poison pills will make it harder to create hostile bids

There are lots of skilled experts who render confidential advice and knowledge, yet who aren’t protected by class privilege. The law 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, has become a constitutional doctrine in Canada. Recently, in a decision involving the Federation of Law Societies of Canada, the final Court concluded that certain provisions from the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act limited the liberty of lawyers in a manner that was not depending on the principle of fundamental justice concerning the lawyer’s duty of committed representation.
 
The privilege reaches litigation, settlement discussions, and solicitor-client transactions. It also applies to those situations where a document or information is shared with persons apart from the client and the lawyer, so long as they have a common interest using the client in the same anticipated or current litigation.

However, in tax law – which is a world unto itself – the income tax statute restricts the best in several aspects. Tax law presumes that the Minister’s assumption of fact underlying an assessment is deemed correct, unless the taxpayer demolishes the assumption by prima facie evidence. This is a form of reverse onus around the taxpayer.

In case called Dr. Mike Orth,  2014 FCA 34, for example, the taxpayer claimed deductions for legal 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 with regards to earning income from a business or property, and isn’t due to capital or personal expenses. A legal court considered the phrase “business and investments” to become ambiguous in that it might make reference to either an income earning or capital purpose.

The taxpayer could disclose the nuances of its legal expenses, 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 aren’t considered confidential communications. This seemingly innocent exclusion of “records” is in fact very broad. It not only includes accounts, but additionally agreements, books, charts, tables, diagrams, invoices, letters, memoranda, statements “and any other thing containing information.” The only real restraint would be that the record must have to do with “accounting,” which in itself can 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 a 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 for an auditor as to the underlying nature of the tax plan, and shine a light on regions of concern if they are particularized.

Hence, the tax lawyer’s dilemma: provide detailed accounting to help keep the customer informed, but leave a guide showing the tax auditor the road to areas that warrant closer scrutiny.

In the result, privilege, the oldest common law right, which is regarded as a simple principle of justice in criminal law, is curtailed in tax law in the interests of revenue collection. Tax lawyers are advised to remember the difference when rendering tax advice.

Vern.Krishna@TaxChambers.ca

Vern Krishna is a professor within the common law section of University of Ottawa School and counsel with TaxChambers LLP in Toronto