The Canadian Bar Association has serious concerns that proposed Income Tax Act amendments included in Bill C-32 and other draft legislation compromise solicitor-client privilege. In letters to the Chair of the Standing Senate Committee on National Finance, to the Chair of the House of Commons Finance Committee and to Deputy Prime Minister and Minister of Finance Chrystia Freeland, CBA President Steeves Bujold says the proposed amendments would not pass constitutional muster, given the jurisprudence from the Supreme Court of Canada.
The CBA supports the objectives of the amendments, to counter aggressive tax avoidance, money laundering and other criminal activities. But these objectives must be pursued without compromising the fundamental principle of solicitor-client privilege, which Bujold says is a “quasi-constitutional right that has been repeatedly affirmed” by the highest court in the land, “as fundamental as the rule of law, access to justice and the proper administration of justice.”
Solicitor-client privilege allows clients to communicate freely and in confidence with their lawyers, which is necessary to receive the best possible legal advice. “Protecting full and frank communication between lawyers and their clients promotes the public interest in the observance of law, and respect for the administration of justice.”
Therefore, the proposed amendments in Bill C-32 imposing new reporting obligations on trusts, including reporting the identity of all trustees, beneficiaries and settlers of the trust, along with each person who has the ability to exert control over trustee decisions, are too broad. They exclude “lawyers’ general trust accounts” but fail to exclude “client-specific trust accounts.”
As the CBA letters to the Parliamentary Committees explain, lawyers and notaries are already subject to strict and comprehensive regulations, as well as rules of professional conduct enforced by Canada’s law societies “that prohibit them from engaging in or facilitating unlawful conduct in any way.”
Exempting all lawyers’ trust accounts from the new reporting obligations would in no way frustrate the Canada Revenue Agency’s ability to enforce the Income Tax Act, and it would ensure the fundamental principle of solicitor-client privilege is not compromised.
Disclosure of information
The proposed legislation may also require, in some cases, lawyers to disclose the name of a client and the amount received from them. This would violate the client’s reasonable expectation of privacy and place lawyers in a conflict of interest by making it difficult for them to fulfil their duty of confidentiality and to give their best, unbiased advice on the scope of privilege.
The CBA anticipates problematic compliance with the proposed legislation, especially for real estate lawyers who in some cases receive deposits from hundreds of condo buyers in a single development. “Since provincial legislation requires that lawyer trust accounts be maintained for those deposits, Bill C-32 could require law firms to file tens of thousands of returns per year on account of condo projects alone,” the letter says. It would be costly, both in money and administrative time, with little to no benefit to the CRA.
Reportable and notifiable transactions
In the letter to Minister Freeland, the CBA President says proposed changes in reporting obligations for “reportable” and “notifiable” transactions contained in draft legislation seeking to amend the ITA also compromise solicitor-client privilege.
Existing legislation requires that “advisors” who help a client with a reportable or notifiable transaction be subject to reporting obligations. This obligation does not apply to information covered by solicitor-client privilege. However, proposed changes would make third parties such as accountants or other advisors who work closely with lawyers advising clients subject to new reporting obligations.
It is common for third parties to be in possession of information that is protected by solicitor-client privilege. That’s why “courts have recognized the importance of extending solicitor-client privilege to communications between accountants and lawyers, so accountants are best able to perform their own duties to their clients,” says the letter.
The new rules would make information covered by privilege but in the hands of accountants or other advisors subject to reporting obligations, making “clients vulnerable by exposing their privileged information – information given confidentially by clients to their lawyers on the understanding that it would remain as such.”
The CBA supports the objectives of the ITA but the government must not do indirectly what it can’t do directly, namely to obtain information that is covered by solicitor-client privilege from third party advisors. If those amendments are enacted, “it may mean that lawyers, acting prudently to safeguard their clients’ confidentiality could reconsider sharing as much information with third-party advisors,” Bujold writes.
“We understand and appreciate that authorities require sufficient information to determine taxpayers’ tax liabilities to effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities,” the CBA President adds in conclusion. “However, these measures must be balanced with 1) respect for solicitor-client privilege, and 2) allowing lawyers to fulfil their duties to their clients without placing them in a conflict of interest.”