Canada’s more than 155,000 legal professionals — with a global reputation for successfully challenging multiple unconstitutional state incursions on the bar’s independence and ethical duties to clients — went to court again Sept. 11, this time battling what they contend is yet another bid by Ottawa over the past 25 years to turn them into state agents, in this instance by mandating that legal professionals report to federal tax authorities confidential client information about certain client tax transactions that might constitute tax avoidance.
The new law extends to lawyers mandatory reporting obligations also imposed on taxpayers, and on clients’ other fee-earning “advisers” such as accountants (ss. 237.3 and 237.4 of the Income Tax Act (ITA)). Importantly, the changes repealed s. 237.3(4) of the ITA, which had provided a limited out for lawyers in that legal professionals required to file an information return with respect to a reportable transaction were not required to do so if the taxpayer or another advisor filed a return.
The constitutionally impugned provisions, which came into force June 30, 2023, require advisers to file an information return with Ottawa about clients' “reportable” transactions (i.e. tax avoidance transactions under the general anti-avoidance rule (GAAR), with specified hallmarks) and “notifiable” transactions (i.e. tax avoidance transactions and other transactions of interest to tax authorities), under penalty of up to one year in prison and a $110,000 fine for failing to do so.
The Federation of Law Societies of Canada (FLSC) — the national umbrella group for the country’s 14 law societies which have statutory mandates to regulate in the public interest — launched its constitutional challenge in British Columbia Supreme Court. It argues in its petition that that requiring legal professionals (including Quebec notaries and Ontario paralegals) to disclose clients’ confidential information so that the state can investigate those clients’ tax affairs violates the Charter, in part by placing legal professionals in a conflict of interest and thereby compromising the s. 7 Charter-protected duties of undivided loyalty to clients and commitment to the clients’ cause. This also amounts to an unreasonable search and seizure, in violation of s. 8 of the Charter, the federation argues in its petition.
As well, confidentiality “is the cornerstone of the solicitor-client relationship and an essential element of the lawyers’ duty of commitment to the client’s cause,” the legal regulators say, noting that the rules of professional conduct expressly oblige lawyers not to use or disclose a client’s information to the client’s disadvantage or to the benefit of the lawyer, absent client consent.
The FLSC contends the provisions cannot be “saved” under s. 1 of the Charter, as reasonable and demonstrably justified in a free and democratic society, because they do not “minimally impair” the lawyer’s duty of commitment to the client’s cause or the client’s reasonable expectation of privacy with respect to information held by their counsel.
The federation says the first possible deadline for legal professionals to submit an information return under the new law is Sept. 21.
However, the FLSC is asking the federal government to consent to suspending the application of the provisions to legal professionals, pending the outcome of the federation’s constitutional challenge. If consent is not given, the federation will ask the court for an interlocutory injunction, its counsel told Law360 Canada.
Roy Millen, Blake, Cassels & Graydon LLP
Although solicitor-client privileged information is not encompassed by the mandatory disclosure rules, the reporting obligation on legal professionals “extends to confidential information, and it requires the lawyer to disclose to the CRA the lawyer’s qualitative analysis of whether the transaction is a reportable or notifiable transaction and why,” Millen said. “And that qualitative analysis is fundamentally how lawyers advise their clients.”
The Canadian Bar Association said it is on side with the federation's view. The 37,000-member association “supports the federation position and is deciding on next steps,” said CBA spokesperson Vanessa Racine.
Next steps could include the CBA intervening in the constitutional case, which might make its way up to the Supreme Court of Canada, if history is any guide. Both the federation and the CBA have successfully litigated against Ottawa’s efforts over the years to draft lawyers to provide confidential or privileged client information in various contexts.
In the federation’s view, applicable case law, including governing Supreme Court of Canada jurisprudence, makes it clear that requiring lawyers to supply their clients’ confidential information to the federal authorities violates the Charter, Millen said.
“Because the government is requiring lawyers, on pain of imprisonment, to report on their clients’ activities, that is fundamentally is unconstitutional in our view, and we do have some authority for that proposition, having gone through this before,” he said.
(The organized bar’s winning litigation track record attacking unconstitutional legislation includes, for example, the Supreme Court’s 7-0 ruling in 2015 that 2008 federal regulations requiring financial intermediaries to verify clients’ identities, and record and retain their information for scrutiny by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), as well as statutory provisions from 2000 authorizing the federal agency to search offices and computers and seize information during compliance audits, were unconstitutional as they applied to Canadian lawyers and law firms, including Quebec notaries: Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7. And in Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, seven Supreme Court judges unanimously declared unconstitutional — as against notaries and lawyers in their capacity as legal advisers — the CRA’s sweeping regulatory power, pursuant to ss. 231.2(1) and 231.7 of the Income Tax Act, to require “any person” to provide information or documents for any purpose related to the administration of the ITA.)
Jill Perry, Federation of Law Societies of Canada
“Canadians place a high value on their constitutional protections, including those that ensure that legal advisers are not required by the state to choose between their personal interests and their legal and ethical duties to their clients,” FLSC president Jill Perry said in a Sept. 12 press release announcing the federation’s Charter challenge.
When Law360 Canada asked the federal government why it did not exempt lawyers from the mandatory disclosure provisions, despite vigorous representations from the organized bar, Canada Revenue Agency spokesperson Sylvie Branch replied by email “as the matter is currently before the courts, and the confidentiality provisions of the laws we administer prevent the CRA from disclosing taxpayer information, the CRA is not in a position to comment on the specific details of the court case. Ultimately, the courts provide Canadians with an independent review of disputed issues, and court decisions serve to clarify the law or resolve disputes between the CRA and taxpayers.”
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