Budget Bill’s Proposed Tax Reporting Obligations Violate Charter, Solicitor-Client Privilege: Lawyers

A sign outside the Canada Revenue Agency building in Ottawa on May 10, 2021. (The Canadian Press/Adrian Wyld)

A new budget bill that would modify the Income Tax Act has lawyers warning that the legislation, if passed, would violate the Canadian Charter of Rights and Freedoms and break lawyer-client privilege by requiring lawyers to identify clients to the Canada Revenue Agency (CRA).

Bill C-32, the Fall Economic Statement Implementation Act, 2022, imposes new obligations on a broad group of trusts, requiring them to file annual tax returns to report client information to CRA, including names and addresses.

“In some circumstances, the proposed legislation would require a lawyer to disclose, among other things, the name of the client and the amount received from that client,” wrote the Canadian Bar Association (CBA) in a Nov. 22 letter to the House of Commons Standing Committee on Finance.

“This disclosure would violate the client’s reasonable expectation of confidentiality in connection with their dealings with lawyers,” the letter said.

“The lawyer’s obligation to file a return may conflict with the duty of confidentiality owed to the client, as well as make it difficult to give unbiased advice on the scope of the client’s privilege,” added the CBA, a national association of over 37,000 lawyers, Quebec notaries, law students, and law professors.

In addition to lawyer-client privilege and conflict-of-interest concerns, the association said the proposed reporting requirements for client-specific trust accounts would impose costly and unreasonable burdens on lawyers.

It gave an example involving real estate lawyers that it said would be especially problematic.

“For example, it is common for deposits to be received from hundreds of unit purchasers for a single condominium 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,” wrote the CBA.

‘Serious Concerns’

A charter statement provided by Justice Canada for Bill C-32 says the requirement to provide information about trusts potentially relates to section 8 of the charter, and that the justice minister has reviewed the relevant provisions and “has not identified any potential effects that could constitute an unreasonable interference with privacy as protected by section 8 of the Charter.”

The Federation of Law Societies of Canada (FLSC), the national association of the 14 law societies at the provincial and territorial level, stated , however, that “the trust reporting provisions of Bill C-32 that target trust accounts of legal professionals are unconstitutional and would violate Section 8 of the Charter.”

In a Nov. 29 letter to the Standing Senate Committee on National Finance, the FLSC said it was “surprised” the charter statement does not engage in “any robust analysis” of how the bill would affect solicitor-client privilege.

It also states that the minister’s conclusion is contrary to a 2016 Supreme Court decision that said the protection afforded to lawyer-client privilege “in the context of a s. 8 analysis is invariably high” regardless of whether the seizure of information occurred in a criminal or an administrative context.

In that court decision, the FLSC said, the country’s highest court held that the requirement to produce information protected by professional secrecy—the civil law equivalent of solicitor-client privilege—“for the purpose of enforcing tax requirements constituted an unreasonable interference with privacy and violated Section 8 of the Charter.”

The CBA said it had “serious concerns” about how Bill C-32 would amend the Income Tax Act and that it did not believe the amendments would “withstand constitutional scrutiny.”

“Lawyers and notaries are already heavily regulated when holding clients’ funds in trust accounts,” wrote the association, stating that clients must be able to “communicate freely and in confidence with their lawyers, in a trusted environment, in order to receive the best legal advice possible.”

Bill Amendment Recommendation

“Solicitor-client privilege is a quasi-constitutional right that has been repeatedly affirmed by the Supreme Court of Canada as fundamental to the rule of law, access to justice and the proper administration of justice,” wrote the CBA.

“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.”

The FLSC asked to appear before the Senate national finance committee to “address the serious problems with the trust reporting requirements under Bill C-32.”

Meanwhile, the CBA asked to appear before the House finance committee to discuss the issues it raised and its recommendation to amend subsection 150(1.2)(c) of the bill to specifically exempt trust accounts maintained by lawyers and notaries, which would include trust accounts maintained for clients.

According to Blacklock’s Reporter, the 2016 Supreme Court Decision came after a Cardston, Alberta, lawyer, Duncan Thompson, refused to disclose to CRA his clients’ names and the billable hours they were charged, citing lawyer-client privilege. Instead, Thompson submitted accounts that listed income, expenses, and assets only.

The ruling determined that lawyers’ billings were shielded from auditors.

“Professional secrecy is a principle of fundamental justice,” wrote the court. “Professional secrecy must thus remain as close to absolute as possible and the courts must adopt stringent standards to protect it.”