Is solicitor-client privilege for tax lawyers under threat?

Published by Jennifer Flood

A recent case out of the Federal Court is causing a stir in the tax community. In Canada (National Revenue) v. Revcon Oilfield Constructors Incorporated, 2015 FC 524, Mr. Justice Mosley made the following statements, which might suggest that a lawyer’s advice on tax planning matters is not subject to solicitor-client privilege:

Tax planning communications are not privileged. Also, facts that exist independently of a communication are not privileged: Belgravia, above, at paras 44-45.

Advice given by an accountant (or, I would add, by a lawyer for accounting or tax planning purposes) does not fall within the scope of solicitor-client privilege: Canada (National Revenue) v Grant Thornton, 2012 FC 1313 at para 22.

Read in isolation, these statements are alarming. Tax is an area in which clients often need extensive professional legal advice in order to understand and comply with the law. The Income Tax Act is the longest and most complex piece of legislation in Canada. While taxpayers are entitled to structure their affairs in order to minimize their tax obligations, running afoul of the requirements of the Income Tax Act can result in severe penalties and even criminal charges.

Solicitor-client privilege has long been held to be an essential part of the Canadian legal system and is close to absolute. Special protection is afforded to communications between solicitors and clients to promote open communication between the lawyer and client, ensuring the client’s interests can be fully represented.

Despite initial appearances, the decision does not represent a radical erosion of privilege in relation to tax advice. When read in the context of the facts of the case and in light of the existing jurisprudence, there is no suggestion that a lawyer’s legal advice in relation to tax matters falls outside the scope of solicitor-client privilege.

As the judge in Revcon notes, a communication between a solicitor and a client is privileged where:

  1. legal advice is sought from a lawyer in her capacity as such;
  2. the communications relate to that legal advice; and
  3. the communications are made in confidence.

The “tax planning communication” referred to by the judge is an instance in which a lawyer gives accounting or business advice or deals with administrative transactional matters as opposed to giving legal advice. In this regard, it is useful to look at the facts and result in Revcon for clarity.

In the course of an audit, the CRA sought the production of documents from the taxpayer in relation to a corporate restructuring. The taxpayer refused to produce the documents, claiming solicitor-client privilege. The judge viewed the disputed documents for the purpose of determining whether they were privileged. While the judge held that the contents of a closing book (such as corporate board resolutions, shareholder agreements, and share purchase agreements) are not privileged as they are evidence of completed transactions as opposed to legal advice, he found that the following documents are protected by privilege:

  • a series of emails between a lawyer and the client pertaining to legal advice;
  • a letter from a lawyer to the client regarding income tax reporting requirements and tax consequences of the transactions;
  • charts illustrating the corporate structure before and after the reorganization; and
  • reporting letters from law firms containing advice relating to the tax obligations of the taxpayer’s directors and shareholders arising from the corporate reorganization.

Despite the judge’s statements that tax planning communications are not privileged, he did not conclude that any document containing legal advice was not privileged because it was a tax planning communication. His conclusions are exactly what one would expect in light of the well-established principles of solicitor-client privilege.

Thus, there is little cause for concern over the judge’s comments about tax planning. The case confirms that where a tax lawyer provides advice in relation to the tax consequences of a transaction or provides advice on the most tax efficient method of structuring a transaction – commonly referred to as tax planning advice – that advice will be privileged.