Recent developments underscore importance of solicitor-client relationship in tax planning

Authors: Aaron Haight, Erin Bokshowan, Jorie Halcro

The Tax Court of Canada’s decision in Gaudreau v The King, 2023 CCI 115 (Gaudreau) and recent changes to the Income Tax Act (the Act) highlight the importance of solicitor-client privilege when engaging in sophisticated tax planning.

Gaudreau: No privilege for planning memos prepared by accounting advisory firm

Mr. Gaudreau, the appellant, was part of a group of shareholders who sold their interest in a corporation by way of a hybrid asset and share sale. The Minister applied s. 84(2) of the Act to deem the taxable gain reported on the sale of the shares to be a taxable dividend, thereby preventing Mr. Gaudreau from claiming the lifetime capital gains deduction.

During examination for discovery, Mr. Gaudreau revealed the existence of a memorandum prepared by one of the accounting advisory firms which advised the purchaser of the tax consequences and risks of the hybrid sale (the Memorandum). When the Minister sought to compel Mr. Gaudreau to produce the Memorandum, the appellant argued that it was not relevant and, alternatively, that it was subject to privilege.

The Court disagreed, ruling that the Memorandum had to be produced because it might contain relevant information about the circumstances surrounding the transactions and how the parties may have worked together to optimize the tax outcome for all parties. In responding to Mr. Gaudreau’s argument that ordering production would impair the ability of accountants to advise their clients on tax risks, the Court responded that there is no such thing as accountant-client privilege.

This ruling contrasts with another Tax Court of Canada case, 632738 Alberta Ltd. v The King, 2023 DTC 1070, in which the Court affirmed the importance of solicitor-client privilege in tax planning. In this case, the Court emphasized that solicitor-client privilege is “close to absolute” and may cover internal documents which communicate strategy, risk assessment and consideration of obligations provided such documents are prepared by counsel in the course of giving legal advice.

Safe-harbour in reportable transaction rules

On June 22, 2023, amendments to the “reportable transactions” regime in section 237.3 and the introduction of a “notifiable transactions” regime in section 237.4 of the Act came into force. The amendments broadened the scope of what is considered to be a “reportable transaction” and permit the Minister to designate certain tax-planning transactions as “notifiable transactions” that must be disclosed in a prescribed form to the Canada Revenue Agency (CRA).

A “reportable transaction” now exists if a transaction (or series of transactions) which is entered into for the purpose of obtaining a tax benefit features any one of following hallmarks:

  • Contingent fee arrangements – if a fee charged by an advisor or promoter is based on the amount of the tax benefit that results, is contingent on obtaining a tax benefit or is attributable to the number of persons who participate in the transaction or who have been provided access to advice or an opinion given by the advisor or promotor;
  • Confidential protection – if an advisor or promoter enters into an agreement with the participant that prohibits disclosure of the details or structure of the transaction; or
  • Contractual protection – if any participant in the transaction or an advisor or promoter obtains insurance, an indemnity, compensation, a guarantee or an undertaking that: protects a person against a failure of the transaction; pays for or reimburses any expense, fee, tax, interest, penalty or similar amount that may be incurred in the course of a dispute in respect of a tax benefit from the transaction; or provides any assistance to a person in the course of a dispute in respect of a tax benefit from the transaction.

If the requirements of a “reportable transaction” are met, or if a transaction is a designated “notifiable transaction,” every person for whom a tax benefit results, every person who entered into the transaction for the benefit of another person and any advisors or promoters in respect of the transaction must report the transaction to the CRA within 90 days of entering into the transaction. Penalties of up to $100,000 may apply for failing to report as required.

Subsections 237.3(17) and 237.4(20) of the Act contain carve-outs for lawyers who are advisors which provide that a lawyer is not required to disclose information to the CRA if the lawyer has reasonable grounds to believe it is subject to solicitor-client privilege. The CRA’s administrative guidance to date suggests this solicitor-client privilege exemption would extend to all parties who would otherwise be required to report the transaction but this has not yet been tested in court.  Note that the exemption likely only applies to privileged advice as the existence of a transaction is generally not privileged.

In a similar vein, the Federation of Law Societies has commenced a legal challenge in respect of the Act amendments, arguing that compelling lawyers to report transactions entered into by their clients undermines the constitutionally-protected rights and freedoms of Canadian citizens. An interim injunction is currently in place, which exempts lawyers from the requirements posed by sections 237.3 and 237.4, to allow the Court to hold a hearing about the harms that may result if the provisions apply to lawyers as proposed.


Solicitor-client privilege is a fundamental principle of the Canadian legal system. It allows clients and their lawyers to engage in open discussions of the legal benefits and risks associated with tax planning, without fear of being required to disclose such information to the CRA. Care must be exercised by clients, lawyers and other advisors to ensure that the protection provided by solicitor-client privilege remains intact.

Our team of taxation lawyers at MLT Aikins would be pleased to provide advice in respect of your tax planning objectives and steps that may be taken to ensure that such advice remains subject to solicitor-client privilege.

This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.