This article was originally published in the June 2016 issue of the International Enforcement Law Reporter, www.ielr.com, a highly respected publication covering issues in criminal law, financial crime and more. It is reprinted with the kind permission of attorney, financial crime expert, and ACFCS Advisory Board member Bruce Zagaris.
By Bruce Zagaris
April 14, 2016
On June 3, 2016, the Supreme Court of Canada (SCC) held in two different cases that the “accounting records” exception to solicitor-client privilege under the Income Tax Act (ITA) as it applies to lawyers and notaries is unconstitutional.
Canada (Attorney) General v. Chambre des notaires du Quebec
The first case, Canada (Attorney) General v. Chambre des notaires du Quebec (2016 SCC 20), involved some notaries practicing law in Quebec who received requirements to provide documents or information from the Minister of National Revenue under Section 231.2 of the Income Tax Act (ITA).
The purpose of these requirements was to obtain information or documents relating to clients of the notaries for tax collection or audit purposes. Some of the notaires who received such requirements contacted the Chambre des notaires to raise concerns about their clients’ right to professional secrecy.
Thereafter, the Chambre started a declaratory action against the Attorney General of Canada and the Canada Revenue Agency (CRA) to have §§ 231.2 and 231.7 of the ITA and the exception for the accounting records of notaries and lawyers contained in the definition of “solicitor-client privilege” in §232(1) declared to be unconstitutional and of no force or effect with respect to notaries.
The Barreau de Québec joined in the proceedings as an intervener for the purpose of having any declaration made by the courts concerning the legislative provisions in question apply equally to its members.
The Superior Court and Court of Appeal ruled in favor of the Chambre and the Barreau. The Court of Appeal found that, pursuant to §52 of the Constitution Act, 1982, §§ 231.2(1), 231.7 and the accounting records exception in §232(1) are unconstitutional and of no force or effect with respect to Quebec notaries and lawyers for all information and documents protected by professional secrecy.
The Supreme Court dismissed the appeal. The Court said two questions must be answered to determine whether a government action was contrary to §8 of the Charter which protects against unreasonable searches and seizures, in which case it constituted a seizure within the meaning of §8, and whether the seizure was an unreasonable intrusion on that right to privacy.
It observed that professional secrecy must remain as close to absolute as possible, and it is generally seen as a fundamental and substantive rule of law. In this respect, professional secrecy has a deep significance regardless of the nature of the legal advice being sought or the context in which it is sought.
The civil and administrative context of the requirement scheme does not diminish the taxpayer’s expectation of privacy for information that is protected by professional secrecy. A client of a notary or a lawyer has a reasonable expectation of privacy for information and documents that are in the possession of the notary or lawyer and in respect of which a requirement.
With respect to the second question, the courts must balance the interests at stake, namely an individual’s privacy interest on the one hand and the state’s interest in carrying out a search or seizure on the other.
Where the interest at stake is the professional secrecy of legal advisers, which is a principle of fundamental justice and a legal principle of supreme importance, the usual balancing exercise under §8 will not be particularly helpful.
Stringent standards must be adopted to protect professional secrecy. Hence, any legislative provision that interferes with professional secrecy more than is absolutely necessary will be found unreasonable.
The Court found the exception to professional secrecy in this case broad and undefined, as it allows the seizure of any accounting record of a notary or a lawyer, and hence is problematic from the viewpoint of the absolute necessary test.
The Court also expressed concern that the client was not notified about the requirement. Hence it found the accounting records exception unconstitutional.
Canada (National Revenue) v. Thompson (2016 SCC 21)
In this case, the CRA sent Thompson a requirement for documents relating to his personal finances and his accounts receivable listing under §231.2(1).
Thompson provided the CRA with certain material but claimed solicitor-client privilege in further details of his accounts receivable, such as the names of his clients. The Minister of National Revenue applied to the Federal Court for a compliance order pursuant to §231.7 ITA.
Thompson objected and asked the Federal Court to rule on whether §231.2(1) ITA may be interpreted and applied in a way that abrogates solicitor-client privilege. Additionally, Thompson claimed that the requirement issued by the CRA constituted an unreasonable search or seizure contrary to §8 of the Canadian Charter of Rights and Freedoms.
The Federal Court judge disagreed that client names can be shielded from disclosure to the Minister on the basis of solicitor-client privilege. He also did not find a breach of §8 of the Charter.
The Federal Court of Appeal held that in some rare circumstances, the records sought may contain privileged information.
The clients whose names were in fact privileged would be owed the opportunity to assert and defend this privilege, and Thompson should be given the opportunity to assert the privilege on their behalf. The Federal Court of Appeal sent the matter back to the Federal Court.
Additionally, it dismissed Thompson’s Charter Challenge. The sole issue raised by the Minister’s appeal is the statutory interpretation of the purported exclusion of lawyers’ accounting records from the protection of “solicitor client privilege,” as that term is defined in §232(1) ITA.
The SCC held in Thompson that given its holding in Chambre des notaires that the exception contained in the definition of “solicitor-client privilege” in §232(1) ITA is constitutionally invalid, the Minister’s request that Mr. Thompson be compelled to disclose the documents he has been withholding must be rejected.
The Court explained that the information contained in those documents is presumptively privileged, and the NRA cannot compel its disclosure unless a court first determines whether solicitor-client privilege actually applies.
The two above-mentioned cases cement the exemption of lawyers in Canada from parts of Canada’s anti-money laundering and anti-terrorism laws, which would have subjected them to searches and seizes without warrants.
In 2015, the Canadian Supreme Court found that the attorney-client relationship exempted lawyers from making suspicious activity reports (SARs) and the obligation not to tip-off clients about the fact they made SARs. 1 From an international perspective a problem is the lack of a level playing field with respect to anti-money laundering (AML) standards.
In implementing the Financial Action Task Force (FATF) AML standards, countries are not expected to take actions, such as enacting laws or issuing regulations that violate fundamental laws (e.g., laws violating the Charter of 1 Rights and Freedoms or the constitution in the case of other countries).
As a result, countries, such as Canada and the U.S., have been unable to apply some of the AML standards to lawyers and solicitors.
For instance, in the U.S., unlike Canada, there is no self-regulatory or government organization to implement the AML standards (e.g., by auditing offices of lawyers to ascertain whether they are implementing the standards). Instead, the standards are voluntary.
- Canada (Attorney General) v. Federal of Law Societies of Canada, 2015 SCC 7 (Feb. 13, 2015).