Privilege for Tax Advice: Lawyers and Accountants
Solicitor-client privilege, or “attorney client privilege” as it is called in the U.S., can be a valuable asset for individuals and businesses engaging in tax planning or tax disputes. Where documents or communications are privileged, they need not be disclosed to third parties, including tax authorities such as the Canada Revenue Agency (CRA). Generally speaking, the CRA has broad powers to inspect, audit, or examine any documents that are relevant to administering the tax legislation. Such documents should indeed be disclosed. However, privilege can be invoked to prevent certain information or documents from coming directly into the hands of the CRA.
A flurry of recent cases that have ostensibly narrowed the scope of privilege in the context of tax planning. On the other hand, in a more taxpayer-friendly decision, the Supreme Court of Canada struck down a provision of the Income Tax Act that stated an accounting record of a lawyer is not protected by privilege, the relevant provision of the Act being held unconstitutional. The issue of whether a document is privileged is very fact-specific, and if a claim of privilege is challenged by the tax authorities, the person making that claim will be required to prove to the court that the privilege claim is valid.
In Canada, tax advice provided by an accountant does not fall under the umbrella of privilege, whereas advice provided by a lawyer may be privileged. Although this statement may sound like an attempt by a tax lawyer to solicit more business, it is often possible for tax lawyers and accountants, working together, to employ best practices to ensure that privilege is maintained and a client’s interests are protected.
The case of Redhead Equipment v Canada provides a good reaction of the law of privilege in the context of tax advice provided by accountants, summarized as follows:
"There is no such thing as accountant-client privilege. Accounting documents will be subject to solicitor-client privilege only if the accountant was used as a representative of a client to obtain legal advice. No privilege attaches where a communication is made to an accountant who must consider it and provide his or her own opinion. In such a situation the accountant is more than a conduit of information."[Citations omitted.]
Depending on the dynamic between the accountant and lawyer, there are several scenarios and different privilege considerations. An oversimplified summary of frequently encountered issues are shown in the table below.
|1. Lawyer is engaged by the client for the purposes of providing tax advice.||Easily privileged.|
|2. Accountant is the provider of tax advice, and the lawyer’s role is limited to implementation of the accountant’s advice.||Consider retainer letter between lawyer and accountant, and have the tax advice provided via the lawyer. A harmonious working relationship between the lawyer and accountant will be required to effect the goals of the client.|
|3. Accountant and lawyer jointly provide tax advice.||See, for example, Mutual Life Assurance Co of Canada v Canada, 84 DTC 6177, where law firm took responsibility for the advice.|
|4. Accountant provides tax advice; however, they do not have tax expertise in area where the lawyer practices (e.g., a U.S. accountant involving a Canadian tax lawyer to provide cross-border advice to clients).||It may be difficult to obtain privilege; the client may consider retaining lawyer directly.|
|5. Opposite parties are negotiating a commercial transaction and exchange privileged documents containing tax advice.||See our previous comments on Iggillis Holdings Inc. v Canada (National Revenue), 2016 FC 1352.|
It is important to note that the privilege belongs to the client. Thus, even if a document or communication is initially privileged, it can be inadvertently waived by clients or their advisors. If a document is disclosed to a third party, for example, privileged is typically waived. However, in the context of lawyers and accountants working together, it is possible to ensure that privilege is maintained through a properly structured retainer and education of the pitfalls of waivers of privilege.
In summary, great care should be taken in managing and disseminating information that may be privileged. It is normally required, and often advisable, to disclose information to the CRA when requested. However, the CRA is not entitled to privileged documents. Even if a taxpayer has committed no wrongdoing, communications and documents taken out of context by CRA auditors may lead to unfavourable, and unwarranted, decisions against the taxpayer. If an accountant, or his or her client, has any doubt over whether a document is privileged, legal advice should be sought immediately, especially before committing to disclosing a document that may produce irreversible results.
In most situations, the question of whether a document or communication is privileged will not become important. However, when it does become an issue in the context of an audit or tax dispute, privilege can be critical, and potentially determine whether a taxpayer wins or loses a case.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact Robert Worthington or any one of the lawyers in the Tax Law group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.
 See, for example, Canada v Revcon Oilfield Constructors Incorporated, 2015 FC 524.
 Canada (Attorney General) v Chambre des notaires du Québec, 2016 SCC 20 in relation to subsection 232(1) of the Income Tax Act.
 2016 SKCA 115.