The special relationship between a lawyer and his client is one that receives unique status and protection under Canadian law, including the Canadian Charter of Rights and Freedoms. In essence, the lawyer-client privilege protects communications between the lawyer and client from disclosure to others (including tax authorities and other government officials) in certain circumstances, and in some cases may also extend to communications with third parties involving the client’s legal affairs. The legal protection given to communications between a lawyer and client is considered essential to a fair justice system.
There are two basic forms of lawyer-client privilege: solicitor-client privilege and litigation privilege. While they both prevent information and communications from being disclosed without the client’s consent, they have different objectives and requirements.
The purpose of solicitor-client privilege is to facilitate full and open discussion between a lawyer and client to allow the client to receive proper legal advice. Communications (e.g., conversations, written memoranda and opinions, emails) that are protected by solicitor-client privilege are protected from seizure or disclosure, meaning that they need not be given to government officials or third parties who would otherwise have a right to see them, and neither the lawyer nor the client can be compelled to testify about them.
In order for a communication to be protected by solicitor-client privilege, four basic conditions must be met:
- a lawyer must be involved in the communication;
- the communication must be confidential;
- the purpose of the communication must be for the client to obtain the lawyer’s advice as to the law (not other matters, such as business advice); and
- there must be a professional relationship between the lawyer and client (i.e., the lawyer must be acting for the client).
Solicitor-client privilege does not apply to communications made for the purpose of committing a crime, nor will it apply if the client has waived confidentiality by disclosing the contents of the communication to a third party (discussed below).
In a tax context, solicitor-client privilege is most relevant in terms of protecting tax planning memoranda and opinions from disclosure demands by the Canada Revenue Agency and other tax authorities. It is not uncommon for tax authorities to demand that taxpayers or their accountants (accountants do not have any special legal protection) turn over all documents and other information related to tax planning undertaken by the taxpayer, in the hopes that they will reveal sensitive issues, weak points in the analysis or insight as to the taxpayer’s motivation in undertaking transactions. Only if such materials are protected by lawyer-client privilege can disclosure be legally resisted.
No privilege applies to communications between an accountant and client, either in terms of tax planning communications or the accountants’ working papers for preparation of the tax provision in the client’s financial statements. As such, a taxpayer should be prepared to see these materials disclosed to tax authorities should they ask to see them. The CRA’s policy on demanding access to accountants’ working papers (released on June 3, 2009, and discussed here, is clearly that the CRA may ask to see these materials at any time. As such, unless the accountant can be brought within the scope of the lawyer-client relationship such that solicitor-client privilege may apply (this can be done in some situations, by establishing the accountant as the lawyer’s or taxpayer’s agent to assist in the delivery of legal advice by the lawyer), taxpayers must carefully consider the consequences of communications with their accountants.
Litigation privilege arises where work is done as part of or in preparation for contemplated or actual litigation (i.e., a court case). This form of privilege is founded in the principle that under the adversarial system of litigation, a person must have the ability to seek expert advice in order to understand and prepare their case without fear of that advice later being used against them. As such, litigation privilege is not limited to legal advice, but may include other forms of expert analysis or opinion (e.g., medical, environmental or financial information), so long as that advice is being sought in the context of preparing for litigation. Three requirements exist for litigation privilege:
- the relevant advice or communication (oral or written) must have been provided with the litigation in mind (not before the litigation was contemplated);
- the dominant purpose of the materials prepared or advice given must be to prepare for actual or anticipated litigation; and
- there must in fact be a reasonable prospect of litigation.
Unlike solicitor-client privilege (which exists until the client chooses to waive it), litigation privilege ends once the litigation is over and no related litigation is anticipated.
As noted, lawyer-client privilege is lost if the client waives the privilege, such as by deliberately disclosing the relevant information to a third party. In order for a waiver of privilege to have occurred, it must be shown that the client was aware of the privilege and clearly intended to waive it. It is possible to effect a “limited waiver” of privilege for a specific purpose in certain narrow circumstances, such as a corporation providing privileged information to its external auditors in order to comply with the relevant corporate law on disclosure to auditors for that narrow purpose. In some cases, it is also possible for different persons with a “common interest” to share legal advice they have obtained towards a shared objective (e.g., completing a business transaction) without waiver being considered to have occurred.
Lawyer-client privilege is a powerful protection available for information and communications arising out of the lawyer-client relationship. It is particularly valuable in the tax planning context, as it allows a taxpayer the ability to obtain a full and candid assessment of the strengths and weaknesses of different tax planning alternatives without fear of that advice being disclosed to tax authorities. Persons involved in tax planning are well advised to structure their affairs to come within the scope of lawyer-client privilege wherever possible and to ensure that such privilege is preserved and not waived.