Supreme Court of Canada Protects Solicitor-Client Privilege in Tax Audits

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

Requiring legal professionals to release information related to clients and their files to the Canada Revenue Agency (the “CRA”) constitutes unreasonable search and seizure and unjustifiably violates section 8 of the Charter of Rights and Freedoms (the “Charter“), according to a recent decision of the Supreme Court of Canada (the “SCC”).  In Canada (Attorney General) v Chambre des notaires du Québec, 2016 SCC 20 (“Chambre des notaires“), the professional associations representing notaries and lawyers in Quebec secured a declaration that the CRA’s use of sections 231.2 and 231.7 of the Income Tax Act (the “ITA“) to request the release of documents normally covered by solicitor-client privilege is unconstitutional.

Sections 231.2 and 231.7 of the ITA permit the CRA to require any individual, by written notice or under a court order, to release documents related to a taxpayer which the CRA can then use for tax collection or audit purposes.  Typically, solicitor-client privilege provides near-absolute confidentiality for a client, but according to subsection 232(1) “an accounting record of a lawyer” is not a privileged document under the ITA.  The CRA has used this limitation on solicitor-client privilege to require Quebec notaries, who offer legal advice to clients as well as prepare legal documents, to produce client documents for the CRA’s use.

The SCC’s analysis in Chambre des notaires focused on whether requiring a lawyer or a notary to produce a client’s financial records is an unreasonable intrusion on privacy.  While solicitor-client privilege is not explicitly protected by section 8 of the Charter, it is a principle of fundamental justice under section 7 of the Charter and should not be interfered with unless absolutely necessary.  The court identified several defects in the ITA provisions: a client is not given notice of the request for documents, the legal professional inappropriately bears the sole responsibility of protecting their client’s right to confidentiality, it is not clear that compelling the disclosure of this information is absolutely necessary, and no alternative measures have been taken to mitigate the infringement of solicitor-client privilege.

In a companion case, Canada (National Revenue) v Thompson, 2016 SCC 21, the CRA conducted an audit on an Alberta-based lawyer and sought a court order to compel him to produce a schedule of his accounts receivable including client names. The SCC held that while subsection 232(1) demonstrates sufficient parliamentary intent to exclude accounting records from solicitor-client privilege under the ITA, the CRA’s request for disclosure must be rejected because the “requirement scheme” of the ITA is not compliant with the Charter.

Although Québec notaries have a unique role in the Québec legal system, the SCC’s ruling in Chambre des notaires applies equally to lawyers in Canada’s common law provinces.  Therefore, any communication between a lawyer and a client is presumed to be covered by solicitor-client privilege, and disclosure of such records cannot be required under sections 231.2 and 231.7 of the ITA.  While the Parliament may choose to amend the impugned provisions of the ITA, the SCC has affirmed the importance of solicitor-client privilege especially in the face of pressure from administrative bodies such as CRA.  Any law affecting a client’s right to confidentiality will be closely scrutinized by the courts.