ISSUED BY: Policy and Technical Working Group – Compliance Programs Branch (CPB)
SECTIONS AFFECTED: International and Large Business Directorate, Small and Medium Enterprises Directorate, GST/HST Directorate, High Net Worth Compliance Directorate, and Scientific Research and Experimental Development Directorate
SUBJECT: Privilege Claims
The purpose of this communiqué is to describe the types of privilege, in the context of legal advisers, that exist within Canada and to explain the Canada Revenue Agency’s (CRA) approach to addressing claims of privilege. Three types of possible privilege claims will be discussed below: solicitor-client privilege, litigation privilege and common interest privilege.
The communiqué is organized in three parts, beginning with a description of the three types of privilege, followed by guidance for compliance staff on how to respond to claims of privilege and concludes with a brief discussion of privilege in the context of CRA obtaining legal advice.
This policy does not cover other types of restrictions on information disclosure which may apply in various contexts, including for example exemptions under the Access to Information and Privacy (ATIP) legislation or public interest privilege which might be applicable to certain government held information sought during a court proceeding. For information regarding informer privilege refer to AD-21-02 Offshore Tax Informant Program - Information Handling and Storage Policy.
This communiqué supersedes communiqué AD-10-03, Solicitor-Client Privilege.
It applies to CRA officials Footnote 1 who have the authority to examine the records of and obtain information from taxpayers that may be relevant in the administration or enforcement of the Income Tax Act (ITA) and the Excise Tax Act (ETA). It applies to the administration or enforcement of civil matters only. It does not apply to matters under criminal investigation. Chapter 8 of the Criminal Investigations Manual sets out how solicitor-client privilege applies to criminal investigation matters.
CRA officials are authorized to inspect, audit, review or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to a taxpayer’s books and records that may be relevant to the administration or enforcement of the ITA and ETA.
CRA officials are also authorized to request and receive any documents needed to conduct a proper inspection, audit or examination unless these documents are privileged.
When seeking to verify the compliance of a taxpayer with the taxpayer’s duties and obligations under the ITA and ETA, CRA officials can encounter claims of privilege on some of the information or documents being sought.
The Minister of National Revenue’s information gathering powers are subject to privilege. Generally, the CRA cannot compel production of information or documents subject to privilege, whether that material is sought from the taxpayer or the taxpayer’s lawyer Footnote 2. Privileged communications, both oral and written, remain privileged whether in the hands of the taxpayer or the taxpayer’s lawyer. Any client information or any records of communications with their clients held by lawyers in their capacity as legal advisers are presumed to be privileged. This is the case whether the lawyer is the taxpayer under audit or whether the client/taxpayer is under audit. There is no such presumption concerning documents in the possession of a taxpayer that is not a lawyer. Only the privilege holder (client) can waive privilege. A lawyer cannot waive the privilege, but could do so on behalf of a client when authorized by the client.
Where the CRA is conducting a review of a non-lawyer taxpayer who engages a lawyer (that is, where the lawyer is considered a third party), the CRA must seek the documents in question from the taxpayer, or a source that is not the taxpayer’s lawyer. In light of the Supreme Court of Canada (SCC) decisions in Chambre des notaires du Québec (Chambre) and Thompson Footnote 3, CRA’s authority to request information from a lawyer has been significantly restricted. Any potential requests for information to a lawyer, whether as a third party, or as the taxpayer subject to a review, should be done in accordance with the guidelines set out in communiqué AD-21-05, Requesting Information From Lawyers and Notaries.
There is no similar privilege for accountants in relation to documents or communications between an accountant and the accountant’s client.
Types of Privileged Communications
Solicitor-Client Privilege (Legal Advice Privilege)
In common law jurisdictions, solicitor-client privilege protects communications between a lawyer and the clients from being disclosed without the permission of the client. The purpose of solicitor-client privilege is to facilitate full and frank communication between a client and a lawyer in the seeking and giving of legal advice.
Legal advice privilege is not confined to telling the law but includes advice regarding what should be done in the relevant legal context. It is not necessary that the communications specifically request or offer advice as long as it can be placed within the “continuum” of communication in which the lawyer tenders advice Footnote 4. This will be discussed further in the section titled General Guidelines for Communications in the Possession of the Taxpayer/Client.
In Quebec, professional secrecy is a fundamental right that many professionals must observe. Within the lawyer/client or notary/client relationship, professional secrecy is a privilege that ensures that any information provided to a lawyer or a notary is kept confidential; it also applies to verbal or written opinions provided by a lawyer or a notary. Under professional secrecy, a lawyer or a notary is forbidden from revealing this information, even if questioned before a judge.
The Chambre decision confirmed that there are strong similarities between the professional secrecy of legal advisers in civil law in Quebec and common law’s solicitor-client privilege in the law of other provinces.
The legal doctrine of solicitor-client privilege is both an evidentiary rule Footnote 5 and a substantive rule of law Footnote 6. The SCC has elevated solicitor-client privilege to the level of a quasi-constitutional right protected under the Canadian Charter of Rights and Freedoms.
While solicitor-client privilege is a substantive rule of law, it is often codified within legislation. The ITA and ETA contain a definition of solicitor-client privilege which the SCC has ruled is unduly restrictive as it excludes accounting records of lawyers, which might be subject to a claim of privilege, from the definition. The SCC declared the exception to be unconstitutional and invalid Footnote 7.
Traditionally, solicitor-client privilege, or legal advice privilege applies to communications:
- between a lawyer and a client Footnote 8;
- for the purpose of seeking or giving legal advice; and
- that are intended by the parties to be confidential Footnote 9.
“Once privileged always privileged” is the general principle unless privilege has been waived. Communications remain privileged even if the solicitor-client relationship has ceased or the client has died.
The privilege belongs to and can only be waived by the client. A lawyer cannot waive privilege unless instructed to do so by the client. If privilege has been waived, CRA officials can request that information as part of a review of the taxpayer’s tax obligations.
The SCC ruled in Chambre that communications between a lawyer and a client are prima facie privileged. Client information is presumed to be protected by solicitor-client privilege while in the hands of a lawyer in their capacity as a legal adviser.
The presumption concerning solicitor-client privilege does not apply to documents or information in the possession of the client. The following are general guidelines to determine whether information or documents in the possession of a taxpayer/client are subject to solicitor-client privilege.
General Guidelines for Communications in the Possession of the Taxpayer/Client
Some examples of what is protected by legal advice privilege or solicitor-client privilege are requests for legal advice, legal opinions and information a person provides in order to obtain legal advice, given in confidence.
Whether information or a document is privileged will depend, not on the type of document, but rather on the content of the information or document and on what it might reveal about the relationship and communications between a taxpayer/client and their lawyer. Accounting records may occasionally contain privileged information, but the fact remains that no matter what type of document is being reviewed, any records may contain elements of privileged information.
In Redhead Equipment Footnote 10, the Court reviewed the law regarding solicitor-client privilege and identified the following principles:
- The nature or content of the communication must involve legal advice.
- A lawyer must be acting as a lawyer giving legal advice rather than in some other non-legal capacity.
- Purely business or policy advice, as opposed to legal advice, is not privileged.
- Documents of an accounting or factual nature or those providing strategic business direction are not privileged.
- Documents which simply come into the possession of a lawyer that are not related to the provision of legal advice are not privileged.
- The privilege is not confined to telling the law but includes advice regarding what should be done in the relevant legal context. It is not necessary that the communications specifically request or offer advice as long as it can be placed within the “continuum” of communication in which the lawyer tenders advice.
- A significant analytical factor at play on a document by document examination of whether privilege applies is whether the lawyer was performing the function of a legal adviser at the exact moment of the communication.
- Privilege extends to all situations in which the third party functions as an interpreter of information provided by the client for the lawyer or serves as a conduit of advice from the lawyer to the client or a conduit of instructions from the client to the lawyer, or employs expertise in assembling information provided by the client and in explaining it to the lawyer.
- Solicitor-client privilege extends only to third party communications that are in furtherance of a function essential to the existence or operation of the solicitor-client relationship. Therefore, determining whether the communication is privileged requires an analysis of the function of the third party vis-à-vis the client and the lawyer in respect of the communication.
Principles with respect to documents and communications created specifically by accountants [para 44]:
- 10. There is no such thing as accountant-client privilege;
- 11. 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;
- 12. 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 no more than a conduit of information and
- 13. Tax accountants do not give legal advice.
Principles regarding communications with and of third parties such as accountants [para 45]:
- 14. Communications of third parties are not in themselves privileged;
- 15. Facts and figures are not in themselves privileged but may be if they are part of a communication which is privileged;
- 16. Whether a communication is privileged depends on the function served by the third party in relation to the communication;
- 17. The privilege extends only to communications in furtherance of a function essential to the solicitor-client relationship or the continuum of legal advice provided by the lawyer, for example:
- a channel of communication between lawyer and client;
- a messenger, translator or transcriber of communications to or from the third party by the lawyer or client;
- employing expertise to assemble information provided by the client and explaining the information to the lawyer and
- 18. No privilege attaches to a communication to a third party who must consider it and provide his or her opinion.
Other principles that were not addressed in Redhead Equipment to consider:
Solicitor-client privilege would also not apply to communication regarding administrative work and policy advice, communication regarding management matters and communication that was in furtherance of a criminal act or to facilitate a crime.
In general, privilege is lost once a document or a communication subject to privilege has been voluntarily disclosed to a third party by the client, or privilege holder (or his authorized agent), who is then said to have waived that privilege. Communications will remain privileged if they are disclosed without the informed consent of the client.
The general rule that privilege will be waived if the information or document has been disclosed to a third party, may not apply in the following situations:
- Situations of inadvertent disclosure Footnote 11.
- The common interest privilege, discussed below.
- When legal opinions are provided to an external auditor to complete financial statements. Since the external auditor is reviewing the legal opinion(s) to fulfil the company’s financial reporting obligations, privilege is not waived Footnote 12.
Litigation privilege covers documents created for the dominant purpose of litigation, either anticipated or actual, and encompasses communications, whether confidential or not, made for the dominant purpose of litigation. Litigation privilege arises and operates even in the absence of a solicitor-client relationship; it applies to all litigants, whether or not they are represented by a lawyer.
The purpose of litigation privilege is to create a “zone of privacy” in relation to pending or anticipated litigation. It includes information obtained from third parties. Litigation must be reasonably anticipated, not just a mere possibility or suspicion.
Litigation privilege, unlike solicitor-client privilege is neither absolute in scope nor permanent in duration Footnote 13. The information or document ceases to be protected once the litigation has ended, unless also protected by solicitor-client privilege.
Common Interest Privilege
Common interest privilege (CIP) is a privilege that allows the sharing of otherwise privileged information between third parties without loss of the privilege. CIP can apply in both litigation and transactional contexts Footnote 14.
For CIP to apply, the communication would have been initially protected by solicitor-client privilege. CIP can apply to 1) a communication that was prepared jointly by the respective lawyers of two parties pursuing common interest or shared transactional goal, and provided to both parties; and 2) a communication prepared by one party’s lawyer and then shared with the lawyer for the other party to the transaction.
In order for the CIP to apply and subsist, communication of privileged information must be limited to parties sharing a sufficient common interest. Although CIP can exist without any written agreement, parties will sometimes sign a “CIP agreement”, especially in a transactional context which includes a tax-planning component.
Claims of Privilege
Privilege Claims by In-house Lawyers
In-house lawyers enjoy the same privilege in solicitor-client communications with their clients as outside counsel. Solicitor-client privilege applies to communications made by the lawyer acting in the role of lawyer, and not as a corporate officer or employee.
Communications between an in-house lawyer and a board of directors may not be privileged if the lawyer also provides services other than as a legal adviser Footnote 15.
Privilege Claims by Accountants
In Tower v MNR Footnote 16, it was determined that privilege does not extend to claims made by accountants in relation to documents or communications between an accountant and the accountant’s client. The court rejected the proposition that accountant-client communications can be cloaked with privilege on a case-by-case basis. The court stated that “If tax accountant-client communications are subject to the spectre of case-by-case privilege, the harm done to the verification and enforcement of the [Income Tax] Act would be considerable, and would outweigh whatever injury, if any, that would inure to such relationships Footnote 17.”
Although an accountant may be under a professional and ethical obligation of confidentiality with respect to communications and information concerning the accountant’s client, no legal privilege attaches to those communications based solely on the accountant-client relationship Footnote 18.
Where however, the accountant acts as an agent of the client for purposes of obtaining legal advice, the communications may be covered by privilege Footnote 19. See above for the discussion of the role of an accountant as third party to solicitor-client relationship.
Privilege in a Multidiscipline Partnership
Multidiscipline partnerships (MDPs) are partnerships between lawyers and other professionals. The rationale underlying MDPs is to provide integrated professional services that meet the demands of the business community and provide a seamless approach to commercial transactions. MDPs are becoming a common form of a partnership in Canada.
In a fully integrated MDP, accountants, lawyers and other professionals provide both legal and non-legal services to clients. In these situations, there will be limitations on the solicitor-client privilege. Privilege does not extend to communications with non-lawyer members in the MDP. Tax advice and assistance from an accountant in an MDP are not privileged even though the advice is legal in nature and some members of the MDP are lawyers.
If a lawyer and an accountant in the MDP work together to provide a legal opinion on a matter, the legal opinion may be protected by solicitor-client privilege if the lawyer is the author of the communication and takes responsibility for it. The advice must be the lawyer’s notwithstanding that some portion of it is attributable to the contribution of the accountant.
As well, the solicitor-client privilege does not apply to communications with lawyer members of the MDP where legal advice is neither sought nor given. For example, advice of a lawyer acting in the capacity of a business consultant is not privileged.
Privilege may be lost if confidential client information or documents held by a lawyer member are shared with members of the MDP who are considered to be third parties to the solicitor-client relationship.
Procedure for Resolving Privilege Claims
CRA officials can request documents that are privileged and documents that may be privileged from a taxpayer who is not a lawyer but CRA officials must provide the taxpayer an opportunity to assert privilege.
CRA officials must respect claims for solicitor-client privilege. However, when a CRA official is faced with a privilege claim in the following circumstances:
- where privilege is being claimed over information or documents that do not appear privileged;
- where the amounts under review are large;
- where the CRA official cannot adequately support the disallowance of a claim based on the information otherwise available or
- where the information or documents are needed to raise the assessment
that CRA official should write to the person claiming privilege and ask why they believe a specific document is privileged. CRA officials should also seek to obtain a privilege log including:
- title of the document;
- date of document or other communication;
- name and title of the author;
- to whom the document is addressed and a list of all the persons who have been carbon copied;
- whether copies have been provided to anyone else;
- type of document (such as a letter, a memorandum notes) and
- whether there are any attachments and the particulars regarding such attachments.
Note that CRA officials should not be routinely requesting privilege log details when requesting documents from the taxpayer. Privilege log details should only be requested once privilege has been asserted on any of the documents sought during the course of the audit.
The objective in seeking this additional information is to better understand the reasons for the claim, such as why a specific document is likely to contain legal advice. Once the privilege log has been obtained, or if the person claiming privilege refuses to provide a privilege log, CRA officials should contact the Department of Justice (Justice) for assistance in resolving the claim for privilege.
If it appears that privilege is being asserted over non-privileged information or documents, or the information or documents that may be relevant to the audit or other inspection action, the privilege claim can be resolved before the courts or through an alternative dispute resolution procedure.
Typically, to resolve the claim of solicitor-client privilege through the courts, this will be done by way of a compliance application made pursuant to section 231.7 of the ITA or section 289.1 of the ETA. At the application hearing, the judge can rule on the questions of privilege. As part of the application, the judge may also review the document.
The alternative dispute resolution procedure is a mechanism agreed upon by Justice on behalf of the CRA and the person claiming privilege. This procedure can be used as an alternative to having a privilege claim resolved by the courts. When using the alternative dispute resolution procedure, the practice is to use a Justice counsel from another office or section, to review the contested documents.
The above principles regarding privilege also apply to in-house government lawyers, including Justice. The privilege will arise when in-house government lawyers provide legal advice or opinions to their client, a government department or agency.
Legal advice that the CRA receives from Justice is privileged. Legal advice/opinions are not to be released to the taxpayer or the taxpayer’s representative
CRA officials can disclose the mere fact that they have received legal advice from Justice with low risk of waiving privilege, as long as they do not disclose the nature or substance of the advice. CRA officials should not volunteer the fact that Justice has provided legal advice, and should only disclose that fact if the taxpayer asks. If the taxpayer does ask - and if a CRA official does disclose the existence of legal advice, CRA officials should state that they are not waiving solicitor-client privilege. Appendix A contains examples of situations that CRA officials may find themselves in and some recommended responses.
Where, in extraordinary circumstances, CRA officials are considering releasing CRA privileged documents, consult with your HQ functional program contact in order to obtain the required approvals before releasing the documents.
The disclosure of the existence of an opinion is up to the discretion of the CRA official. The CRA official has no obligation to disclose in the course of the audit who was consulted and in general should refrain from doing so and volunteering information about whether legal advice was obtained on a specific file and the specifics of that legal advice. If prompted by the taxpayer as to whether legal advice was sought, the CRA official may simply issue a generic response to the effect that the CRA regularly seeks legal advice in respect of legal issues related to the interpretation and application of the law. The question of whether or not legal advice was sought is not privileged. Careful consideration should be given before divulging to the taxpayer who was consulted on a particular file because this may cause the taxpayer to reconsider their strategic position.
A CRA official should not quote a portion of the legal advice/opinion when communicating with a taxpayer, as doing so can lead to a finding that the privilege has been waived over the entire legal advice/opinion, and require it to be released to the taxpayer. Any paraphrasing of a legal advice/opinion by a CRA official will become the official’s own work product and should not be identified as a paraphrase of legal advice/opinion.
The assessing position taken by the CRA when auditing or (re)assessing the taxpayer must be the CRA’s and not Justice’s. If the CRA agrees with the legal advice/opinion provided with respect to the position taken by the CRA, then the CRA can adopt that legal advice/opinion, without disclosing the legal advice/opinion to the taxpayer. The legal advice/opinion and position taken by the CRA, becomes the CRA’s opinion and position and not Justice’s.
Taxpayers cannot use a formal request under ATIP, or a request for an informal disclosure, to gain access to privileged legal advice/opinion or to portions of information or documents that refer to it, provided the CRA is claiming privilege.
Where the CRA has sought legal advice/opinion from Justice, the resulting privilege in the advice belongs to the Government of Canada, as the client. Within the CRA, CRA officials can discuss the legal advice/opinion, quote from it and provide copies of it to others within the CRA for work purposes without risking waiving privilege.
However, the CRA’s policy is that no CRA official is to share any legal advice/opinion with another department without first obtaining approval . Your HQ functional program contact can provide assistance with obtaining approval. In some circumstances privilege over the legal advice/opinion provided by Justice will be waived such as when:
- the legal advice/opinion from Justice is given to the taxpayer or the taxpayer’s representative;
- there is wide distribution of the legal advice/opinion outside of the government;
- a portion of the legal advice/opinion is reproduced in the official’s report.
Please direct any questions relating to this communiqué to your functional program contact at Headquarters.
Original signed by
A/Director General, International and Large Business Directorate
Compliance Programs Branch
Circulate to: Regional Directors of Programs
Assistant Directors of Audit
Regional Program Advisors
Directors General, Small and Medium Enterprises Directorate, GST/HST Directorate, High Net Worth Compliance Directorate, Scientific Research and Experimental Development Directorate, Criminal Investigations Directorate, Compliance Services Directorate
|Situation||What CRA officials can do / say|
Taxpayer/Representative wants to know whether Audit has consulted with Justice.
If yes – CRA has consulted with Justice. The advice is privileged and we will not discuss it.
If not yet – Not yet, but we anticipate seeking legal advice.
If no – We have not consulted with Justice. CRA is comfortable with the assessing position.
Audit is under time pressure (either from taxpayer or because of statute-barred limitation period) but wants to consult with Justice prior to finalizing assessing position.
CRA is going to seek legal advice, and will respond to you after we have finalized the (proposed) assessing position.
CRA is going to seek legal advice, and would like a waiver.
Taxpayer/Representative wants to know what Justice said.
The advice is covered by solicitor-client privilege. CRA is happy to discuss the (proposed) assessing position.
CRA will not discuss the legal advice that Justice gave us. We are happy to discuss the (proposed) assessing position.
Taxpayer/Representative wants to know whether assessing position is consistent with the legal advice.
Taxpayer/Representative wants to know whether the assessing position follows the legal advice
This is CRA's (proposed) assessing position. The advice is covered by solicitor client privilege.
CRA will not discuss the legal advice that Justice gave us.
Taxpayer/Representative wants to know why CRA is taking the position that it is taking.
CRA must be able to explain its assessing position without reference to the legal advice provided by Justice.
Even if the assessing position has been significantly influenced (or even fully adopts) the legal advice, it is still CRA's assessing position.
In other words, even where the assessing position completely follows the legal advice, CRA can only discuss the assessing position and cannot discuss the legal advice that informed the assessing position.
Taxpayer/Representative wants to know:
You are asking for details about our solicitor client communications – that information is privileged.
You are asking for details about the legal advice we received – that information is privileged.
Taxpayer/Representative wants Justice to consider certain jurisprudence / rulings / other information
I (CRA official) will consider this information before finalizing the assessing position (or have considered this when coming to the assessing position).
The legal advice I seek from Justice and the information Justice considers when providing that advice is privileged.
Taxpayer/Representative wants to talk to Justice about the advice that they provided and/or about the assessing position.
The advice that Justice provided is privileged and we will not waive that privilege.
It may be possible to set up a meeting with the taxpayer/representative and CRA/Justice to discuss the assessing position.
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