Solicitor-Client Privilege Generally
Solicitor-client privilege (also known as “legal advice privilege”) operates to protect communication between a lawyer and his/her client from disclosure to third parties. The privilege belongs to the client and can only be waived by the client. Solicitor-client privilege is not time sensitive and does not expire.
Communication is subject to solicitor-client privilege when three conditions are met:
- The communication is communication between a lawyer and their client;
- The communication is in respect of legal advice; and
- The communication is intended by the parties to be confidential (therefore, privilege may be lost or waived when it is shared with a third party).[1]
The party asserting the privilege bears the burden of establishing the privilege on the balance of probabilities.
Solicitor-client privilege is different from “litigation privilege,” which covers documents prepared in contemplation of litigation and whose dominant purpose is to aid in the conduct of litigation. This litigation privilege expires when the litigation ends.
Solicitor-Client Privilege and Tax
Prior to designing and implementing a transaction or series of transactions, the tax advisor and their client ought to consider whether they would seek to keep certain communications private. This objective can be achieved by invoking privilege to keep information from the CRA, the courts and/or third parties. However, in order to successfully invoke privilege, advisors and their clients must turn their attention to how they will create and maintain privilege.
The burden of establishing the claim of privilege rests on the party asserting the privilege and that party must demonstrate that each of the three conditions of solicitor-client privilege exists. This provides an opportunity for that party to create and maintain privilege. In order to create and maintain privilege, the following strategies should be considered and implemented (where necessary) by the client’s team of advisors:
- Only circulate privileged information to individuals who are essential to the solicitor-client relationship.
- Label all privileged records “Privileged and Confidential” and maintain them in folders with that same label (ie, privileged documents should be stored separately from non-privileged documents).
- The roles of third parties should be formalized under agency agreements. Usually, solicitor-client privilege exists only in a lawyer-client relationship and, therefore, privilege can be lost if the information/documentation is disclosed to a third party. There exists an exception for agents when certain conditions are met. This is particularly important in the tax context when accountants may be engaged by lawyers to assist on a transaction.
- Enter into engagement documents which note the respective roles and expertise of any agents and explain the desire of the parties to maintain privilege and confidentiality.
- Enter into a common interest privilege agreement.[2]
Recent Case Law
In BP Energy Company v MNR,[3] the CRA’s audit powers were restricted by the Federal Court of Appeal (FCA). BP prepared financial statements and internal documents to set out uncertain tax positions as well as the analysis which underlay contingent tax reserves (usually referred to as tax accrual working papers [TAWPs]). During an audit, the CRA requested the working papers (including for years not under audit). BP refused and the CRA sought a compliance order. The federal court judge found hat the request fell within the statutory scope of the CRA’s audit powers.
BP appealed to the FCA. The FCA allowed the appeal and noted that 231.1(1) (the provision which provides CRA with its audit powers) “could not have been drafted in broader terms.” The FCA noted that on a “plain reading” of the statutory language, the document sought by the CRA would be captured. However, the FCA said that these conclusions do not settle the debate and that the real issue is whether 231.1(1) allows a general and unrestricted access to this [the TAWPs] information.”
On May 31, 2017, the CRA announced that it would not seek leave to the Supreme Court to Appeal the BP Energy Company decision.
The CRA considers the facts in BP Energy “unique” and rather than appealing the decision, the CRA is updating its procedures to clarify when and why information can be requested from taxpayers. The CRA will seek TAWPs when that request is relevant to specific risks or items under audit and the CRA will a “certain amount” of restraint in seeking the information. Factors that the CRA will consider when seeking such records include:
- The taxpayer’s past level of compliance;
- The existence of large amounts of unexplained tax reserves; and
- The potential tax at risk.
Conclusion
Tax is an area in which taxpayers usually require professional legal advice in order to understand and comply with their tax obligations. Taxpayers are also permitted to structure their financial affairs in order to minimize their tax obligations. However, failing to meet their obligations under the Income Tax Act (and other tax statutes) can result in significant financial, civil penalties and, possibly, criminal charges. For these reasons, solicitor-client privilege can be an important tool in tax-related transactions and can provide protection when faced with a CRA audit. Taxpayers who engage in corporate reorganizations and other tax-driven transactions ought to include a lawyer to benefit from solicitor-client privilege. Documents such as minute books, director and shareholder resolutions, and shareholder agreements will likely not be privileged. However, privilege will likely attach to emails and other correspondence between the lawyer and the client which include legal advice, reporting letters (including reporting requirements and tax consequences of the transactions entered into), and organizational charts before and after the transaction.
[1] Solosky, [1980] 1 SCR 821.
[2] Common interest privilege (CIP) is an exception to the general rule that privilege is lost when information/documents is disclosed to third parties. This type of privilege is dependent on the existence of underlying solicitor-client privilege or litigation privilege. Recently, in Iggillis Holdings Inc. v Canada (National Revenue), 2016 FC 1352, the Federal Court ruled that CIP was not a valid legal principle. The Federal Court of Appeal (2018 FCA 51) overturned the Federal Court.
[3] 2017 FCA 61.