The Australian Taxation Office (ATO) recently announced that, through a consultation process, it is examining the use and, more particularly, what it says are occasions of misuse of claims of solicitor-client privilege. The Consultation is interesting but, it also provides an opportunity to examine solicitor-client privilege, advocacy and legal ethics in Canada.
In the Consultation document, the ATO states: “The challenge for us on LPP (legal professional privilege) is mainly a practical one – dealing with privilege claims not grounded in the applicable law and established principles, but grounded in a desire to obfuscate the facts and frustrate investigations.”
The Consultation sets out a list of “Key concerns with purported LPP claims”. These include:
- Claims are made over documents that clearly could never meet the dominant purpose test.
- Claims are made over documents like (pre-engagement) pitchbooks, engagement letters and fee accounts.
- Claims being made on the assumption or ‘decision rule’ that all documents where a lawyer (external or internal) is cc:ed are privileged, without consideration as to the role of that lawyer and/or the purpose of the communication.
- Providing insufficient, inaccurate, and misleading details, or generic/formulaic statements when making and supporting LPP claims so we cannot properly assess the claims.
- Documents prepared for an improper purpose, including tax evasion.
The ATO indicates that there are “a range… of conduct based approaches being considered as a result of intelligence recently obtained”. These “conduct based approaches” include:
- Prosecution for reckless LPP claims.
- Actions based on false and misleading statements (including that a reckless / baseless privilege claim may itself form a false or misleading statement).
- Actions based on fraud and/or evasion, noting that:
- deliberate obstruction of the Commissioner from obtaining facts can constitute evasion in its own right – the Commissioner will be seeking to test whether reckless / baseless privilege claims may constitute evasion
- development and communication of knowingly incorrect and/or manufactured facts and assumptions to the Commissioner, particularly non-tax commercial purposes, may constitute participation in fraud.
This Consultation is both interesting and concerning because it suggests that lawyers and/or clients are improperly making claims of solicitor-client privilege in order to shield certain materials from the tax authorities in Australia. Against this, it might be timely for a reminder of what solicitor-client privilege is and of the professional duties of lawyers in tax disputes. We hasten to add that we are not aware of any suggestion that lawyers in Canada are not conducting themselves in accordance with law and ethics. However, tax controversy engages both technical aspects of tax law, and advocacy, and it is important that the advocacy component of this practice area be as informed and refined as the technical component.
In Canada, solicitor-client privilege is a principle of fundamental justice. The privilege is constitutionally protected and communications which are protected by the privilege are, unless the privilege is waived, beyond the reach of the CRA or any other authority. These principles are unequivocal and have been since at least the decision in Lavallee, Rackel & Heintz v. Canada (Attorney General), 2002 SCC 61. In Lavallee, the Court held (para. 24):
It is critical to emphasize here that all information protected by the solicitor-client privilege is out of reach for the state. It cannot be forcibly discovered or disclosed and it is inadmissible in court. It is the privilege of the client and the lawyer acts as a gatekeeper, ethically bound to protect the privileged information that belongs to his or her client. Therefore, any privileged information acquired by the state without the consent of the privilege holder is information that the state is not entitled to as a rule of fundamental justice.
The application of these Lavallee principles rests on a communication having been identified as privileged. The basic definition is easily stated. A communication is protected by solicitor-client privilege if: (1) it is a communication; (2) between a lawyer and client; (3) for the purpose of giving or receiving legal advice; and (4) which is intended to be confidential. As is often the case, the general rule is easy to state but there are nuances and exceptions and the rule is not always easy to apply.
There are also a number of related considerations that surround this rule. For example, solicitor-client privilege is not dependent on either a formal or an ongoing retainer; it might extend to communications with others who are assisting the lawyer in the representation of his or her client; it belongs to the client; and it can only be waived by the client.
The proper determination of what is protected by solicitor-client privilege requires a full understanding of the underlying facts and a comprehensive understanding of governing law. Further, and perhaps in response to some of the concerns expressed by the ATO in the Consultation, the circumstances under which a claim of privilege is made on behalf of a client requires a comprehensive understanding of the professional duties that govern a lawyer’s conduct.
In BC, these are found in the Code of Professional Conduct for British Columbia (BC Code). Other provinces have similar codes of conduct. In what follows below, we will refer to the BC Code. First and foremost, lawyers are under a professional duty to assert a claim of privilege over documents that are or may be protected:
A lawyer who is required, under federal or provincial legislation, to produce a document or provide information that is or may be privileged must, unless the client waives the privilege, claim solicitor-client privilege in respect of the document. [Emphasis added.]
The exercise of this duty requires an understanding of the law governing privilege, but the ethical imperative is unambiguous and a lawyer who fails to uphold this duty may be subject to professional discipline.
At one level, this rule is a full answer to whether a claim of privilege is to be made. However, the ATO Consultation suggests that some lawyers may be improperly asserting privilege in order to advance or protect their client’s tax position. The BC Code also addresses this. For example, when retained to act as an advocate on behalf of a client, the “lawyer must represent the client resolutely and honourably [but] within the limits of the law”. The commentary to this rule governing advocacy states that a “lawyer has a duty to the client to raise fearlessly every issue, advance every argument and ask every question, however distasteful, that the lawyer thinks will help the client’s case and to endeavour to obtain for the client the benefit of every remedy and defence authorized by law.” However, this must be done “by fair and honourable means [and] without illegality”.
Similarly, lawyers owe a duty “To the State” and, under this rule, a lawyer “should not aid, counsel or assist any person to act in any way contrary to the law.” A lawyer’s duty to his or her client is also limited to acting within the law. “The office of the lawyer does not permit, much less demand, for any client, violation of law or any manner of fraud or chicanery. No client has a right to demand that the lawyer be illiberal or do anything repugnant to the lawyer’s own sense of honour and propriety.”
More directly, there is a rule that specifically addresses dishonesty and fraud by a client: a lawyer “must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud.” In addition, a lawyer “should be on guard against becoming the tool or dupe of an unscrupulous client.”
These professional duties are clear. Lawyers are professionally required to vigorously defend the interests of their clients, and this includes the duty to make a privilege claim over information that may be privileged. Equally, lawyers are required to act within the bounds of law, and therefore are forbidden from making privilege claims that are known to the lawyer to be false. Lawyers should also be aware that falsely asserting a privilege claim might constitute the criminal offence of obstruction of justice.
What all of this translates into is that a lawyer’s duty to a client does not require and, indeed, does not permit a lawyer to act outside of the law or to knowingly and purposefully assist a client in acting outside of the law. Therefore, while it might be to a client’s benefit if a certain document were to be protected by solicitor-client privilege, and therefore beyond the reach of the CRA, the claim of solicitor-client privilege must only be made where there is a proper basis for doing so.
Some clients might at times have unrealistically high expectations about what a lawyer can or is permitted to do on their behalf. However, it is worth repeating that a client’s expectations or demands can never serve as justification for a lawyer acting contrary to his or her professional obligations or contrary to the law.
We have, so far, focused upon the lawyer-client relationship as it exists between a taxpayer and his or her lawyer. However, it is important to understand that relationship within the context of an adversarial relationship between the lawyer’s client and the CRA. It is easy and obvious to say that in representing a client, lawyers must act in accordance with their professional duties and the law. However, there are other propositions that are equally obvious:
- A taxpayer is permitted to retain counsel.
- The relationship between a taxpayer and the CRA might be adversarial in the sense that their interests don’t align.
- In Groia, the SCC reminded us that “trials are not – nor are they meant to be – tea parties”. This is not an invitation to incivility. Instead, it is a recognition that the adversarial process will, at times, bring forceful disagreement.
- In advancing its statutory function, the CRA must act within its purposes and in accordance with the law. A taxpayer is not required to accept a position on facts or law that might be advanced by the CRA.
- A taxpayer is permitted to vigorously advance his or her own position or challenge a position advanced by the CRA. This includes vigorously defending a valid claim of privilege.
- Where there is disagreement that matters, including with respect to privilege claims, the disagreement can be placed before a court.
We specifically do not take a position on the wisdom or necessity of what has been proposed in Australia. Fortunately, in Canada there is no suggestion of the issues that appear to have prompted the Australian Consultation. It is hoped that occasional reminders, such as this, will keep the Canadian legal profession free of the controversy that now exits in Australia. More importantly, discussions like the one taking place in Australia are of interest, but such discussions must not discourage lawyers from their professional duty of offering determined advocacy on behalf their clients on all matters, including the protection of communications that are privileged.