Gaudreau c. Le Roi: Advice Provided by Accountants Not Sheltered by Privilege

Modern Canadian law holds up solicitor-client privilege as a foundational principle of the legal system, going so far as to recognize the privilege as a principle of fundamental justice under Canada’s constitution.[1] Amongst other things, the importance of solicitor-client privilege means that Canada’s courts have been directed to give the privilege maximum protection and to accept instances of its breach only in rare circumstances.[2] The Supreme Court of Canada has emphasized that a client’s expectation of privacy in relation to “professional secrecy” is not weakened when the context of the legal advice sought is civil instead of criminal.[3]

The implications of this position are well entrenched and deeply felt throughout the Canadian legal system when a client is seeking legal advice from a lawyer. But, in modern Canada, lawyers are not the only professionals offering advice on legal matters. Because professional accountants in Canada frequently work on tax matters with their clients, it sometimes becomes necessary for the courts to address whether the advice rendered by an accountant can be protected from disclosure and, if so, in what specific types of situations some form of legal privilege will protect the accountant’s relationship with the client from compelled disclosure.

This article will take up one particular instance of the problem in relation to tax analysis prepared by an accounting firm in the context of a transaction.

Gaudreau c. Le Roi: Case Background

In brief, in Gaudreau c. Le Roi (at the time of writing only available in French),[4] an individual taxpayer was reassessed by the Canada Revenue Agency (CRA) in relation to his sale of his interest in an insurance company. The sale had been structured as a hybrid transaction (i.e., asset and share sale) to enable the taxpayer to realize capital gains on the sale and then to claim the capital gains exemption. The CRA’s reassessment was based on subsection 84(2) of the Income Tax Act (the ITA)[5] to deny the capital gains characterization of the transaction, instead regarding the taxpayer’s proceeds as deemed dividends.[6]

The taxpayer filed an objection and commenced an appeal to the Tax Court of Canada against the CRA’s reassessment. While being examined for discovery by the Crown on the appeal, the taxpayer was asked whether there were any tax planning documents prepared considering the possibility of a hybrid transaction. In response, the taxpayer disclosed that an accounting firm had prepared a memorandum for the buyer in the transaction and shared it with the taxpayer as seller. However, the taxpayer refused to produce the memo itself.[7]

The Crown brought a motion before the Tax Court under the Tax Court of Canada Rules (General Procedure) governing tax appeals seeking to compel the taxpayer to disclose the accounting firm’s memo.[8]

The Tax Court of Canada granted the Crown’s motion and ordered the taxpayer to produce the memo.[9] The taxpayer has appealed the Tax Court’s decision and, as of the date of writing, the matter is headed before the Federal Court of Appeal.[10]

The Tussle over the Accounting Firm’s Memo

Resisting the Crown’s motion, the taxpayer took the position before the Tax Court that he was not required to produce the accounting firm’s memo. The taxpayer explained that the memo consisted of analysis that had been prepared by the accounting firm acting for the buyer in the transaction. The memo had been shared with the taxpayer as seller. (In that regard, a common interest between the buyer and seller in relation to the tax analysis is implied.[11]) Of the memo’s six pages, the taxpayer stated that five of them merely described the underlying steps in the deal as “objective” matters. The taxpayer added that this portion of the analysis did not provide any new information to the CRA, observing that the factual description of the transaction also appeared in the CRA’s audit report, in the taxpayer’s notice of appeal to the Tax Court, and in the Crown’s reply.[12]

The remainder of the memo, the taxpayer explained, provided the accounting firm’s views on how the ITA applied to the transaction. These “subjective” opinions from the accounting firm did not discuss subsection 84(2) but apparently addressed how other provisions in the ITA applied to the circumstances. For the taxpayer, because the memo could not be relevant to an assessment made on the basis of subsection 84(2), its production would merely serve to validate the Crown’s search for an alternative basis to sustain the CRA’s assessment.[13] The Crown, for its part, argued that disclosure was warranted as the threshold for establishing relevance in tax litigation was low. For the Crown, the accounting firm’s memo was prepared in relation to the sale of the insurance company and could prove useful in identifying the reasons underlying each one of the transactions in the context of that overall deal.[14]

The Tax Court began its analysis by summarizing the principles applicable to the determination: While a determination as to a document’s discoverability is to be made on a case-by-case basis, the concept of relevance used in making that decision is construed in a broad fashion. Moreover, the party requesting production is entitled to seek any documentation or information which could potentially lead the party to a course of inquiry that would either advance its case or adversely affect that of the opposing party.[15]

Addressing the taxpayer’s contention that the Crown could potentially use the memo if produced to support a new basis to assess the taxpayer, the Tax Court noted that such an approach would entail the Crown seeking to amend its reply to the taxpayer’s notice of appeal. Assuming the taxpayer would be opposed to such revision, the Crown would have to seek the Tax Court’s approval in accordance with the General Procedure Rules for amendments to pleadings. That determination would itself then require the Tax Court to consider the taxpayer’s worries over potential prejudice with reference to the actual facts of the case. Because that scenario had not yet arrived, the Tax Court responded that the taxpayer’s concern would be left for another day.[16]

On the decision, then, to order production of the accounting firm’s memo, the Tax Court looked to subsection 84(2) of the ITA and how it had been interpreted in previous cases. That authority, the Tax Court found, required a consideration of the circumstances surrounding the transactions impugned in the CRA’s assessment. And it was that need for regard to the broader circumstances surrounding the transactions under challenge which could render the memo relevant.[17]

Putting Gaudreau in Context

Perhaps the most interesting aspect of Gaudreau relates to a point not fully argued before the Tax Court. Near the outset of its reasons granting the Crown’s motion seeking production of the memo, the Tax Court recorded that both the taxpayer and the Crown had accepted that the accounting firm’s document was not covered by “solicitor-client privilege”.[18] That said, the taxpayer nevertheless argued that, as a general proposition, accountants need to be in a position where they can freely give advice on how the tax law applies to their clients’ situations without facing the risk that their communications recording that advice could face compelled production in a tax dispute.[19]

The Tax Court disposed of the point very quickly: Citing to the Federal Court of Appeal’s decision in Tower v. Minister of National Revenue, 2003 FCA 307, the Tax Court noted that there is no accountant-client privilege recognized by law with respect to the tax advice provided by accountants to their clients. If considered akin to “solicitor-client” privilege, such a hypothetical privilege for accountants would be regarded as a “class” (or blanket) form of privilege. There is, however, an alternative basis that could have been sought as a “case” privilege.[20]

Here too, however, the Tax Court stated that the taxpayer had not invoked such a situational form of privilege. For that reason, the Tax Court declined to consider whether the factors supporting a finding of a case-by-case privilege could be made out.[21]

The Federal Court of Appeal’s older decision in Tower worked through both claims for privilege in relation to accountants, finding in that case that neither was supported. Respectfully, however, the analysis deployed in Tower is not persuasive and arguably no longer holds up, although this article is not the place to pursue such a critique.[22]

Before the Tax Court in Gaudreau, the taxpayer pressed the argument that the ITA does not require self-audit in addition to self-assessment. That orientation is understandable, particularly in the face of rather unhelpful jurisprudence taking up whether privilege can directly attach to tax advice provided by professional accountants to their clients. Nevertheless, the problem of whether and how an accountant can offer privileged advice to a client in Canada deserves a more comprehensive evaluation. It remains to be seen whether the Federal Court of Appeal in Gaudreau will take up the issue.

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