Solicitor-client privilege is a constitutionally-entrenched right that protects communications between a lawyer and his or her client. The foundation of such privilege is to encourage full and frank disclosure between lawyers and their clients for the purpose of providing legal advice. A lawyer cannot be compelled to disclose information shared by his or her client and only the client can waive privilege. In the tax planning context, protecting the confidentiality of taxpayer information is important to ensure that a taxpayer’s tax position is not unfairly prejudiced by legal requirements to provide subjective analysis or information to taxing authorities where such analysis or information was communicated or created for purposes of providing tax advice. Further, to better ensure taxpayer compliance under a self-reporting tax system, the confidentiality of communications with one’s tax lawyer is protected to encourage full and complete disclosure of the facts necessary to provide tax advice.
In a summary judgment released on September 16, 2015, the Federal Court of Canada examined and disposed of the non-constitutional arguments in the Hillis and Deegan case generally finding that the automatic data collection and disclosure of taxpayer information to the United States by Canada pursuant to the Canada-U.S. Intergovernmental Agreement (IGA) is not inconsistent with the Canada – U.S. Tax Treaty (Tax Treaty) and does not otherwise violate the taxpayer confidentiality provisions in section 241 of the Income Tax Act (Canada) (ITA).
The plaintiffs had originally filed a claim seeking a declaration that the relevant provisions under the Canada – U.S. Tax Information Exchange Agreement Implementation Act (IGA Implementation Act) which implements the IGA are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights. An amended statement of claim was subsequently filed adding the non-constitutional arguments. The plaintiffs sought a permanent prohibitive injunction preventing the collection and automatic disclosure of taxpayer information to the United States by the CRA. A special sitting of the Court was scheduled so that the issues could be disposed of before taxpayer information was to be automatically sent pursuant to the IGA.
The Canadian government’s position was that the collection of taxpayer information is authorized by the IGA and that disclosure to the United States is not inconsistent with the Tax Treaty or in violation of section 241 of the ITA.
In its decision, the Federal Court endorsed the general reasoning and the legal arguments submitted by the government.