The bar and Ottawa continue to fundamentally disagree over the constitutionality of the ITA reporting requirements for client trusts enacted last month — as well as about the notifiable and reportable transactions proposed in draft legislation last November — despite more than four years of representations to the federal government by the umbrella group for Canada’s 14 legal regulators and the 37,000-member CBA.
The stage could be set therefore for a possible court challenge by the bar to the new trust reporting obligations, unless Ottawa and the federation/CBA find common ground during discussions about accompanying Income Tax Act regulations that are expected in 2023.
CBA president Steeves Bujold
“We still have current discussions [with the government] about the regulations that will come supporting this piece of legislation, and we’re confident that we will in 2023 come to a successful resolution,” Bujold explained. “If it’s not the case, we’ll evaluate our options later this year, closer to the time limit at which this law will come into effect.”
Bujold emphasized that the bar association supports the federal government’s goals of fighting abusive tax avoidance, money laundering and other illegal activities.
However, Canadians can be assured that the bar will continue to stand up vigorously for their clients’ constitutionally protected rights to solicitor-client privilege/professional secrecy and an independent bar — even if litigation is eventually required, Bujold said.
“You can not only be confident, you can be certain of that,” he said. “It’s one of our main missions, and that’s what our members are expecting from us.”
For its part, the Department of Finance said the new reporting obligations for trusts in Bill C-32, which apply for taxation years that end after December 2023, deliver on the Liberal government’s “commitment to increase transparency on the beneficial ownership of trusts, in line with Canada’s international commitments to increase transparency of beneficial ownership and to keep pace with peer countries. The bill makes clear that information related to solicitor-client privilege does not need to be disclosed.”
Legal regulators and the bar contend the reporting obligations for trust accounts, which Ottawa says will help the Canada Revenue Agency (CRA) assess the tax liability of trusts and their beneficiaries, are unconstitutional or likely unconstitutional. The groups are also raising constitutional concerns about the government’s proposal to require “advisers” to report notifiable tax transactions (i.e. tax avoidance transactions and other transactions of interest) and to expand disclosure obligations for “reportable” tax transactions (i.e. avoidance transactions under GAAR, with specified hallmarks).
The trust reporting amendments received royal assent Dec. 15, 2022, as part of the Liberal government’s 172-page omnibus Bill C-32, which implemented diverse measures from the Nov. 3, 2022, fall economic statement and the April 7, 2022 federal budget.
Justice Minister David Lametti
But Lametti certified he did not detect “any potential effects that could constitute an unreasonable interference with privacy as protected by s. 8 of the Charter.”
He laid out in three sentences the “considerations” that support the compliance of the ITA’s amendments with s. 8 of the Charter: “The purpose of the measure is to improve the collection of relevant information to help the Canada Revenue Agency assess the tax liability for trusts and its beneficiaries. In the regulatory and administrative contexts, privacy expectations are reduced. Powers to compel the production of information for the administration of the Income Tax Act, which is based upon a self-assessment system, have been upheld as reasonable under section 8.
(The practice at the Department of Justice is for the minister to certify legislation as Charter-compliant if it meets what a court has described as a “weak” standard, i.e. is there any “credible” argument that is capable of being successfully argued in good faith before the courts, even if there is a “very high’’ or “almost certain’’ risk (defined as 81-100 per cent) of a successful court challenge, except at the “far end’’ of this range.)
The government’s legal reasoning did not convince the CBA and the FLSC, which conveyed their concerns and objections to Bill C-32 to the federal government and both Houses of Parliament in writing, as well as during talks with officials of the Department of Finance and Department of Justice, including during consultations on draft legislation emanating from Budget 2018 and Budget 2021.
The ITA exempts lawyers’ general, or pooled, trust accounts from the new trust reporting requirements but does not exempt trust accounts held separately for a particular client or clients. However, the bar contends that all trust accounts held by legal professionals should be exempted from the obligation to report to the CRA.
“The federation is surprised that the Charter statement does not mention, let alone engage in any robust analysis of the implications of the trust reporting provisions for solicitor-client privilege within the context of s. 8 of the Charter,” FLSC president Jill Perry, a managing lawyer with the Nova Scotia Legal Aid Commission, wrote Nov. 29 to Sen. Percy Mockler, the chair of the Senate’s National Finance Committee.
Perry called the justice minister’s conclusion that the amendments are constitutionally compliant “clearly contrary” to the Supreme Court of Canada’s decision in Canada (Attorney General) v. Chambre des Notaires du Québec, 2016 SCC 20.
A decision co-written by now-Chief Justice Richard Wagner, the top court declared in Chambre des Notaires that professional secrecy is “a civil right of supreme importance in the Canadian justice system” which must “remain as close to absolute as possible.”
The Supreme Court went on to unanimously strike down — as against notaries and lawyers in their capacity as legal advisers — the CRA’s sweeping regulatory power to require “any person” to provide information or documents for any purpose related to the ITA administration, and also s. 232(1) of the ITA which purported to exclude the accounting records of lawyers and notaries from the shield of solicitor-client privilege. While five of the seven judges who ruled have since departed from the top court, it seems unlikely that this robust approach will be watered down. Notably, Supreme Court Justice Mahmud Jamal, who joined the court in 2021 after a distinguished career as a civil and constitutional appellate litigator with Toronto’s Osler, Hoskin & Harcourt, represented the CBA in its intervention in support of solicitor-client privilege in the Chambre des Notaires case. After judgment was handed down, he told The Lawyer’s Daily “Canada remains the leading jurisdiction in the common law world protecting solicitor-client privilege.”
“In the income tax context, this should all but shut down the practice of issuing requirements against lawyers — but this should also be the result in other regulated contexts,” he predicted at the time. “The decisions are crystal clear that regulatory demands against lawyers for their clients’ information are deeply problematic, and may often be unconstitutional.”
According to the federation’s Nov. 21 submission to the Commons Standing Committee on Finance, “Chambre des Notaires is unambiguous: any compelled disclosure of information that identifies a legal professional’s client, even if just by name, breaches that client’s right to solicitor-client privilege. Further, the Supreme Court has held that information protected by solicitor-client privilege may be ordered disclosed only where ‘absolutely necessary’, a test the court has described to be ‘as restrictive a test as may be formulated short of an absolute prohibition in every cases.’ The Supreme Court has also held that any legislative provisions that interfere with solicitor-client privilege more than ‘absolutely necessary’ will be found to be unconstitutional.”
In reaching its conclusion in Chambre de Notaires, the federation said the Supreme Court “cited defects in the legislation that also exist in Bill C-32. An inappropriate burden is placed solely on the legal professional to safeguard a client’s right to solicitor-client privilege (paras. 53-57); and compelling disclosure of the information being sought is not absolutely necessary as required to justify any infringement on solicitor-client privilege (paras. 58-61).”
“Given the existence of the same defects in Bill C-32, the provisions on on trust reporting as they apply to the trust accounts of legal professionals would breach” Charter s. 8, Perry wrote Mockler Nov. 29.
The federation noted that the Supreme Court has ruled that both basic personal information (names, addresses etc.) and accounting information may be privileged. “At the very least, the requirement to file returns for separate trust accounts creates uncertainty about what could be included in a return without violating solicitor-client privilege,” the federation said in its Nov. 21 submission to the House of Commons Standing Committee on Finance.
“At worst, the positive obligation to file a return for a separate trust account creates a real threat to privileged information. The amendments also do nothing to address the conflict that the reporting obligation will create between the duty of loyalty that legal professionals owe to their clients and the requirement to report trust account information to the CRA.”
Writing Nov. 22 to Deputy Prime Minister and Finance Minister Chrystia Freeland, who sponsored Bill C-32, Bujold said the bar association believes the provisions, as drafted, “would not withstand constitutional scrutiny” in the light of Supreme Court of Canada jurisprudence.
“The requirements to disclose information are substantially the same as the government’s previous attempt to subject lawyers to the FINTRAC regime,” the CBA said, noting Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7, “clearly ruled this was not allowed.”
In the Federation of Law Societies of Canada decision (then-litigator Mahmud Jamal represented the intervener Canadian Civil Liberties Association) the Supreme Court ruled 7-0 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.
Yet the CBA said the new reporting obligations to the CRA, on a broad group of trusts, will require annual tax returns disclosing the identity of all trustees, beneficiaries and settlors of the trusts, and each person with the ability to exert control over trustee decisions.
In that regard, ITA s. 150(1.4) states “for greater certainty, subsections (1.1) to (1.3) do not require the disclosure of information that is subject to solicitor-client privilege.”
However, the CBA said that Bill C-32’s exemption for lawyers’ general trust accounts (which the bar considers ambiguous in scope) “is inadequate, impractical and risks placing lawyers in a conflict of interest with their clients.”
The bar association said that Parliament’s failure to exempt client-specific trust accounts would, in some circumstances, require a lawyer to disclose, among other things, the client’s name and the amount received.
“This disclosure would violate the client’s reasonable expectation of confidentiality in connection with their dealings with lawyers,” the CBA said. Moreover, lawyers could face a conflict of interest as the lawyer’s obligation to file a return “may conflict” with the duty of confidentiality owed to the client, as well as make it difficult for a lawyer to give unbiased advice on the scope of the client’s privilege.
In addition, the reporting obligations for client-specific trusts impose unreasonable reporting burdens on lawyers (with limited benefit to the CRA), the CBA said, noting the obligations will be “especially problematic” for real estate lawyers. The association pointed out, for example, that it is common for lawyers to receive deposits from hundreds of purchasers in a single condominium development.
“Bill C-32 could require law firms to file tens of thousands of returns per year on account of condo projects alone,” the CBA said. “This would be financially and administratively onerous and impractical, both for law firms and the CRA. It could ultimately result in higher purchase prices (counter to the government’s objective of increasing affordable housing) because of higher transaction costs related to the reporting obligation.”
The CBA recommended s.150 be amended to specifically exempt from the filing obligation any trust account maintained by a lawyer or notary in accordance with the rules of professional conduct governing them, including trust accounts maintained for particular clients.
With respect to the government’s proposals on reporting obligations to the CRA for “advisers” — including lawyers, accountants and other third-party advisers — who assist clients with “reportable” transactions and “notifiable” transactions, the CBA said the ITA confirms that a lawyer-adviser is not required to disclose any privileged information.
However, the association said the exception is too narrow in that it applies only to lawyers, even though solicitor-client privileged information is commonly shared with accountants and other third-party advisers who work closely with lawyers in giving tax advice.
The bar urged that the ITA’s exception for solicitor-client privileged information be amended to specify, “for greater clarity,” that the information reporting requirements do not apply to any information in respect of which the person subject to the reporting obligation (not limited to a lawyer), on reasonable grounds, believes solicitor-client privilege applies.
The CBA said excluding solicitor-client privileged information from the reporting measures would not hinder the effectiveness of the ITA’s rules, noting individuals and corporations already have disclosure obligations under FINTRAC and other beneficial ownership registry requirements. The association asserted it is more effective for the CRA to obtain such information directly.
“Compelling the disclosure of solicitor-client privileged information, under threat of penalty, by persons who validly possess the information is unconstitutional as it undermines a fundamental aspect of our legal system and ultimately the public’s confidence in its ability to obtain comprehensive legal advice,” the CBA said. “Solicitor-client privilege is a quasi-constitutional right and is fundamental to the rule of law and the proper administration of justice. It will be vigorously defended by the legal profession and justice system stakeholders.”
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