Published: May 16, 2023
In BMO Nesbitt Burns Inc. v Canada, 2023 FCA 43, Canada’s Federal Court of Appeal ruled that if a taxpayer fails to demonstrate how an end-product document, such as an accounting schedule or working paper, reveals confidential legal advice, then solicitor-client privilege doesn’t protect the end-product document. In other words, the confidentiality protection traditionally given to communications between a Canadian tax lawyer and client may fail to protect the end product of that communication if it cannot be shown how the end product discloses the legal advice that led to its creation. The decision highlights the importance of establishing a clear link between a document and confidential legal tax advice in order to claim privilege.
This article begins by introducing the notion of solicitor-client privilege and discussing the Canada Revenue Agency’s tax-audit powers under Canada’s Income Tax Act. It then analyzes the Federal Court of Appeal’s decision in BMO Nesbitt Burns Inc. v Canada, 2023 FCA 43. Afterwards, it provides pro tax tips from our top tax lawyers, and it answers some frequently asked questions.
Solicitor-Client Privilege – What is It?
Solicitor-client privilege is a legal principle that protects confidential communications between a lawyer (solicitor) and a client from being disclosed without the client’s consent. This privilege is an important aspect of the lawyer-client relationship and is essential for maintaining trust and confidence between the parties. The availability of solicitor client privilege to the client of the Canadian tax lawyer is one of the key protections not available when dealing with a Canadian tax accountant unless the Canadian tax lawyer has retained the accountant to extend the solicitor client privilege.
Because of solicitor-client privilege, a lawyer cannot be compelled to disclose any information that a client has given to the lawyer in confidence or any legal advice that the lawyer has given the client. In other words, a lawyer cannot be forced to reveal any information that may detriment a client’s case—even if the lawyer is under subpoena or other legal obligation to disclose information.
Solicitor-client privilege applies to all communications arising in the context of a lawyer-client relationship, including oral, written, and electronic communications, and it extends to all aspects of the relationship, including consultations with a Canadian tax lawyer, legal advice from a Canadian tax lawyer, and representation by a Canadian tax lawyer. This legal privilege persists even after the relationship between the lawyer and the client has ended.
Solicitor-client privilege is not absolute, however. Legal advice loses the protection of solicitor-client privilege if the client waives that protection. A client may choose to explicitly waive privilege to, say, defend against a legal claim. A client can also implicitly waive privilege. The recipient of legal advice implicitly waives solicitor-client privilege if that individual demonstrates that the communication wasn’t intended to remain confidential—for example, by sharing an otherwise privileged document with a third party who isn’t a lawyer, such as an accountant. Yet not all instances of sharing your lawyer’s advice with a third party constitute a waiver of solicitor-client privilege. For example, solicitor-client privilege persists when a party discloses a legal opinion to another party with a common interest in completing a transaction that is the subject of the opinion (e.g., see: Maximum Ventures Inc. v De Graaf, 2007 BCCA 510, at para 14).
The Canada Revenue Agency’s Tax Audit Powers: Demand for Information under Sections 231.1 and 231.2 and Compliance Order under Section 231.7
Sections 231.1 and 231.2 of Canada’s Income Tax Act govern the Canada Revenue Agency’s tax audit and information-gathering powers. In particular, in the name of enforcing or administering the Income Tax Act, these sections permit the CRA to:
- inspect, audit, or examine any document of the taxpayer;
- examine the property of the taxpayer or any other person;
- inspect, audit, or examine any document of any other person;
- enter any premises to examine documents or property; and
- require any person to provide any information or document.
These provisions empower the CRA’s tax auditors to issue a requirement-for-information request, which is essentially a letter demanding that taxpayer turn over specified documents or information. If the taxpayer refuses, the Canada Revenue Agency can, under section 231.7 of the Income Tax Act, pursue a court order forcing the taxpayer to comply or face sanction.
The Canada Revenue Agency cannot, however, demand that a taxpayer turn over information that benefits from the protection of solicitor-client privilege. Sections 231.1, 231.2, and 231.7 don’t apply to information that falls under the protection of solicitor-client privilege. Subsection 232(1) of Canada’s Income Tax Act includes its own definition of “solicitor-client privilege”:
the right, if any, that a person has in a superior court in the province where the matter arises to refuse to disclose an oral or documentary communication on the ground that the communication is one passing between the person and the person’s lawyer in professional confidence…
As a result, solicitor-client privilege ensures that communications between a lawyer and a client remain permanently protected from compelled disclosure—and away from the Canada Revenue Agency’s tax auditors and other agents.
The BMO Nesbitt Decision: Drawing a Distinction Between Legal Advice and End-Product Documents Implementing Legal Advice
A document must meet three criteria to benefit from solicitor-client privilege: (1) It must be a communication between lawyer and client, (2) it must entail the seeking or giving of legal advice, and (3) it must be intended to be confidential by the parties (Solosky v Her Majesty the Queen,  1 SCR 821, at page 837). One example of a privileged document is a tax memorandum prepared by a Canadian tax lawyer.
The question, however, is whether legal privilege also applies to a document that implements, or that was prepared in accordance with, the legal advice in the tax memorandum. This very issue lay at the centre of BMO Nesbitt Burns Inc. v Canada, 2023 FCA 43.
The Canada Revenue Agency commenced a tax audit of BMO Nesbitt Burns Inc., an investment firm and subsidiary of Bank of Montreal. As part of the audit, the CRA’s tax auditor issued an information request under section 231.1 of Canada’s Income Tax Act.
In response, BMO Nesbitt claimed solicitor-client privilege over some of the documents that the CRA had requested, including a spreadsheet entitled the “Master Summary Pricing Model.” BMO Nesbitt asserted that the computations in the spreadsheet stemmed from privileged legal advice, and that the spreadsheet itself was therefore privileged. Although BMO Nesbitt offered a redacted version of the spreadsheet, the CRA’s tax auditors sought the unredacted version and applied to the Federal Court for a compliance order under section 231.7 of the Income Tax Act.
Appearing before the Federal Court of Canada, BMO Nesbitt’s Canadian tax-litigation lawyer argued that an unredacted version of the spreadsheet couldn’t be compelled because it was protected by solicitor-client privilege. To provide context, the taxpayer’s Canadian tax-litigation lawyer clarified that, in the 2016 taxation year, the taxpayer had engaged in share repurchase transactions with specific Canadian issuers, wherein the taxpayer sold equities to the same issuers of those equities. Before the taxpayer sought and received legal advice in 2012 and 2013, a spreadsheet was maintained with one worksheet for each issuer of the Canadian equities. Then, in 2012 and 2013, the taxpayer obtained two legal opinions, and during ongoing communications with the taxpayer’s Canadian tax lawyer, the taxpayer modified the spreadsheet to include the legal advice in the calculations.
The court disagreed with BMO Nesbitt’s privilege claim. The judge reasoned that, while the 2012-2013 legal opinions were confidential communications between the Canadian tax lawyer and client, the spreadsheet was a distinct document. The court acknowledged that solicitor-client privilege had a broad scope, but the court wasn’t persuaded that disclosure of the spreadsheet would “undercut” the need for Canadian tax lawyers and their clients to “freely and candidly exchange information and advice so that clients could know their true rights and obligations and act upon them.” After reviewing the redacted column of the spreadsheet, the court didn’t find, as BMO Nesbitt claimed, that it “translated” or reflected legal advice, or that the legal advice would be revealed by the computations or the associated text. According to the court, this wasn’t apparent; the redacted column contained computations with minimal text adjacent to the computations. The spreadsheet reflected the operational implementation, outcome, or end product of legal advice, but it didn’t reveal how the taxpayer implemented that advice, nor did the court find any clarification in the “vague evidence” of the taxpayer’s witnesses. As a result, the Federal Court granted the CRA’s compliance order.
In response, BMO Nesbitt’s Canadian tax-litigation lawyers appealed to Canada’s Federal Court of Appeal, arguing that the Federal Court had erred in putting BMO Nesbitt in an untenable position whereby it would have had to reveal privileged information to adduce evidence of sufficient detail to convince the Federal Court that privileged information would be revealed.
The result remained the same, however. The Federal Court of Appeal upheld the lower court’s decision, finding that it contained no error of law, no error of fact, and no error of mixed fact and law. The Federal Court of Appeal reasoned that “it was open to the Federal Court to find [BMO Nesbitt’s] evidence insufficient. [BMO Nesbitt] has also not convinced us that it could have corrected this insufficiency if it had referred to privileged information. Moreover, we do not accept that [BMO Nesbitt’s] concern about the need to expose privileged information to fully respond to the Minister’s application was insurmountable. [BMO Nesbitt] attempts before this Court to hide behind the same vagueness about which the Federal Court expressed concern.” The appellate court dismissed the taxpayer’s appeal.
Canadian Tax-Litigation Lawyer’s Commentary: Does BMO Nesbitt give CRA Tax Auditors the Tools to Reverse Engineer Confidential Legal Advice?
The court’s decision is somewhat ambiguous, making it challenging to discern where the boundary lies between documents that simply implement legal advice (and therefore may not be subject to privilege) and those that actually disclose legal advice (and are thus privileged). This serves as a cautionary reminder that when Canadian taxpayers put legal advice into action, the final result—if not protected by privilege—could potentially be used to reconstruct or reveal that advice.
Often, the circumstances will allow for a clear answer as to whether legal privilege applies. For example, in most contexts, solicitor-client privilege won’t protect an income-tax return, even if it was prepared according to a Canadian tax lawyer’s confidential legal. Income-tax returns are generally meant to be disclosed to a third party—namely, the Canada Revenue Agency. So, the return itself won’t qualify as privileged.
But in this case, BMO Nesbitt Burns used legal opinions to calculate its reserves, resulting in a situation where the tax lawyer’s evaluation of probabilities was integrated into the calculations. This raised the possibility that the Canada Revenue Agency’s tax auditors could have reverse engineered the legal opinions from the spreadsheet. In these circumstances, it’s unclear whether the spreadsheet was merely implementing the advice or also disclosing it.
In any event, the lower court’s decision provides a useful overview of the law of privilege and how it applies to a “continuum of communications.” The court acknowledged that privilege has a broad scope but noted that it does not necessarily extend to all legal advice “end products,” which are only protected to the extent that they convey the actual legal advice provided by Canadian tax counsel. The test for determining whether an end product is protected is whether its disclosure would undermine the ability of clients and lawyers to exchange information and advice freely and openly in a manner that enables clients to understand and act on their rights and obligations. The party claiming privilege bears the burden of demonstrating that this test has been met.
Pro Tax Tips – Protecting Solicitor-Client Privilege in Tax Matters
Solicitor-client privilege shields information from being disclosed to the Canada Revenue Agency. This means that the Canada Revenue Agency’s tax auditors are prohibited from accessing legal advice that you receive from your Canadian tax lawyer.
But no such privilege exists for Canadian tax accountants, so your conversations with an accountant remain unprotected from a CRA compliance order. To safeguard your tax advice from the CRA, you should first consult with our expert Canadian tax lawyers. If you also require the assistance of an accountant, we can engage one on your behalf and take measures to extend and preserve solicitor-client privilege.
Solicitor-client privilege doesn’t apply retroactively. So, if you engage an accountant before engaging a Canadian tax lawyer, every document that your accountant prepared before your Canadian tax lawyer’s involvement will remain unprotected.
The BMO Nesbitt decision demonstrates that, unless you can establish a clear link between a document and confidential legal advice, your claim of solicitor-client privilege will fail. For example, if you compiled records so that your accountant could prepare and file your tax returns, those records won’t be privileged—even if you prepared them after hiring a Canadian tax lawyer. This is because your records have nothing to do with seeking or obtaining confidential legal advice: you arranged those records specifically so that a non-lawyer could use them to prepare a document that would be disclosed to a third party—namely, your tax return, which will go to the Canada Revenue Agency. Even if your accountant also uses those same records to prepare working papers that your Canadian tax lawyer requires to give you legal advice, it doesn’t make the records that you prepared privileged.
There are now two separate sets of documents. The ones that your accountants prepare for your Canadian tax lawyer will be privileged; the ones that you prepared for your accountant won’t be. Legal privilege is a complex principle of evidence law, and it highlights the importance of seeking an experienced Canadian tax-litigation lawyer, who thoroughly understands this area of law.
FREQUENTLY ASKED QUESTIONS
Question: What is solicitor-client privilege?
Answer: Solicitor-client privilege is a legal principle that protects confidential communications between a lawyer (solicitor) and a client from being disclosed without the client’s consent. It’s an important aspect of the lawyer-client relationship and is essential for maintaining trust and confidence between the parties. Because of solicitor-client privilege, a lawyer cannot be compelled to disclose any information that a client has given to the lawyer in confidence or any legal advice that the lawyer has given the client. In other words, a lawyer cannot be forced to reveal any information that may detriment a client’s case—even if the lawyer is under subpoena or other legal obligation to disclose information. Solicitor-client privilege applies to all communications arising in the context of a lawyer-client relationship, including oral, written, and electronic communications, and it extends to all aspects of the relationship, including consultations with a Canadian tax lawyer, legal advice from a Canadian tax lawyer, and representation by a Canadian tax lawyer. This means that solicitor-client privilege bars the Canada Revenue Agency from compelling your Canadian tax lawyer to reveal details about legal advice that you received.
Question: I’m currently undergoing a CRA tax audit. What happens if I refuse to provide the information that the CRA tax auditor has requested?
Answer: Sections 231.1 and 231.2 of Canada’s Income Tax Act govern the Canada Revenue Agency’s tax audit and information-gathering powers. These provisions empower the CRA’s tax auditors to issue a requirement-for-information request, which is essentially a letter demanding that taxpayer turn over specified documents or information. If the taxpayer refuses, the Canada Revenue Agency can, under section 231.7 of the Income Tax Act, pursue a court order forcing the taxpayer to comply or face sanction.
Question: My accountant says that our discussions are confidential, and that he can refuse to disclose information about me to the Canada Revenue Agency. Is this true?
Answer: No. While solicitor-client privilege allows your Canadian tax lawyer to refuse to disclose information to the Canada Revenue Agency, no such privilege exists for accountants. As a result, the Canada Revenue Agency can, under section 231.7 of the Income Tax Act, pursue a court order forcing your accountant to disclose information or face sanction, including contempt of court, which is a criminal offence. But this doesn’t apply to information that your accountant received while acting as an agent in a solicitor-client relationship. For example, your Canadian tax lawyer might direct your accountant to prepare an analysis that gives your lawyer a better understanding of your situation and allows the lawyer to provide you with confidential legal advice. Solicitor-client privilege will very likely apply to the accountant’s analysis.
This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."