I have had many hours of spirited conversation with my friend and colleague, Craig Sturrock Q.C., over the extent to which, or the way in which the Charter of Rights applies in tax law. In broad strokes, his position has been that our courts tend to view tax law as somehow being something different from other areas of law and for that reason, the Charter is applied more restrictively or sometimes not at all in the tax context. My position has been that the law is the law, and that Charter rights and protections must continue to apply even if Canadian tax law is a self-reporting system with various mechanisms of checks and balance designed to ensure the accuracy of that self-reporting.I
It is against this background that I write about the recent Supreme Court of Canada decisions of Canada (Attorney General) v. Chambre des Notaires du Quebec, and Canada (National Revenue) v. Thompson. These cases illustrate that though tax law may be different for some purposes, the objectives of tax law do not justify the circumventing or restriction of the law of solicitor and client privilege as it has been consistently developed by the SCC over the past two decades.
The facts in the two cases are simple. Mr. Thompson is a lawyer. CRA served s.231.2 ITA Requirements upon Mr. Thompson demanding the production of various documents. A similar demand was made upon a number of Quebec notaries. In their respective cases, Mr. Thompson and the notaries each took the position that they were being statutorily compelled to provide documents which are protected by professional secrecy and solicitor client privilege. In Chambre des Notaires, the notaries argued that ITA definition of solicitor client privilege is unconstitutional and the SCC agreed. Mr. Thompson argued that statutory compulsion of the privileged materials constituted an unreasonable search or seizure.
At issue in both cases was the statutory definition of solicitor client privilege (s.232(1) ITA) which excludes a lawyer’s accounting records “including any supporting voucher or cheque”. With this exclusionary phrase, this statutory definition is more restrictive than the common law definition that has been developed by the SCC and, in the result, the Court held that the common law definition must prevail.
In arriving at the result, certain important principles were stated.
- First, the Court held that a 231.2 ITA requirement is a search and therefore captured by s.8 of the Charter. The significance of this is twofold: First, s.8 of the Charter protects privacy interests and the Court has therefore recognized that ITA requirements engage the privacy interests of those whose information is subject of the search. Secondly, it follows that an ITA requirement can be scrutinized through the lens of s.8 of the Charter in order to protect the privacy interests that are engaged.
- Next, the Court determined that “for the purposes of analysis under s.8 of the Charter, the civil and administrative context of the requirement scheme does not diminish the taxpayer’s expectation of privacy for information that is protected by professional secrecy.”
“[I]t is well established that a client of a notary or a lawyer has a reasonable expectation of privacy for information and documents that are in the possession of the notary or lawyer and in respect of which a requirement is issued.” This is so even though the information could possibly be obtained from a third party or though it “may be a type of information that taxpayers must regularly provide to the tax authorities.”
Therefore, the requirements of the self-reporting income tax system do not and, constitutionally cannot erode privilege.
- Next, the use of a requirement to compel accounting records was found to be unreasonable and contrary to s.8 of the Charter because insufficient protection was given to professional secrecy. In part, this is because “the usual balancing exercise under s.8 will not be particularly helpful” when the privacy interest in question is privilege. It is also because the ITA does not contain a requirement that the person whose secrecy or privilege is engaged by the search, be given notice of or an opportunity to participate and defend against the loss of privacy.
In this regard, it should be noted that it was in 2002 that the SCC in Lavalee, Rackel and Heintz v. Canada, considered Criminal Code procedures for law office searches and found those procedures to be constitutionally deficient because privilege holders were not provided notice of the potential loss of privilege or an opportunity to assert their privilege. Therefore, this finding in the tax context is simply tax law catching up to 14 year old jurisprudence.
- Some earlier law that considered lawyer-client privilege recognized and attempted to develop a distinction between communications and facts. According to this distinction, communications may be protected by privilege but facts are not.
In Chambre des Notaires the Court observed that such a distinction “may be difficult to draw” and that facts, can at times “speak volumes about a communication.” Further: “It is well established that the accounting records of notaries and lawyers are inherently capable of containing information that is protected by professional secrecy” and such protected information is “permanently protected from disclosure.” In Thompson, the Court addressed this same issue by stating that facts which are “connected” with the lawyer client relationship “must be presumed to be privileged absent evidence to the contrary.”
For this reason, there is a “rebuttable presumption to the effect that “all communications between lawyer and client and the information they shared would be considered prima facie confidential in nature.” On this basis, the Court specifically rejected the argument that the information in an accounting record is a fact, rather than a communication and therefore not privileged.
- To determine whether the information set out in a particular document is protected by privilege, it is necessary to consider the information and “what it might reveal about the relationship and communications between a client and his or her notary or lawyer.” (Emphasis added) Therefore, information might be privileged on its face or, it might be protected by privilege because its disclosure might reveal or tend to disclose aspects of the relationship and communications between a client and his or her notary or lawyer which are privileged.
- In Chambre des Notaires the Court was critical of the fact that the Minister sought to compel the information from a legal advisor without first attempting to obtain the information from another source. The “entire requirement scheme” was found to be “flawed in that it authorizes a seizure that cannot be characterized as a measure of last resort.” Therefore, CRA must now attempt to obtain information from other sources, such as financial institutions rather than from a law office.
The following passage, though somewhat lengthy, captures the Court’s position on the use of requirements upon lawyers:
No one disputes the fact that the requirement scheme serves legitimate purposes, namely the collection of amounts owed to the CRA and tax audits. Nor does anyone dispute the fact that it is important to prevent firms of notaries or lawyers from becoming tax havens. However, such firms must not be turned into archives for the tax authorities either…The fact that the requirement scheme has an important purpose does not mean that it can be used to sidestep the protection afforded by s. 8 of the Charter . The authorities’ failure to even attempt to obtain the information or documents they seek from alternative sources indicates that the manner in which the seizure is conducted is unreasonable, as it does not minimally impair the right to professional secrecy.
- The remedy to cure the constitutional deficiencies is twofold: first, the “requirement scheme in the ITA” is to be read down “so as to exclude lawyers and notaries from the scope of their operation.” Secondly, the statutory definition of privilege which carves out accounting records from communications that might be privileged is unconstitutional.
The results in these cases are welcomed and the limited protection given to privileged information within the tax context has been out of step with the robust protections given to lawyer-client privilege in other contexts for far too long. It has now been affirmed in unequivocal terms that CRA’s need to have the tools to verify information provided by a taxpayer has limits and not all rights will be eroded or compromised by that need.
Going forward, information protected by lawyer-client privilege must now be as vigorously protected within the context of tax law as it is in other contexts and lawyers and notaries must ensure that they are protecting their client’s privilege interests on the basis of these changes. Looking back, it must be viewed as unfortunate that there have undoubtedly been instances where privileged information was compelled and given up under what we now know to be an unconstitutional statutory scheme.