Lawyer-client confidentiality may fail to protect end-product tax documents, says FCA
The BMO Nesbitt Burns decision draws a distinction between legal advice and end-product documents says tax lawyer and accountant David J Rotfleisch
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.
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 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 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 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 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 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 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 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's] 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.
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 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 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.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.
With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.
Read the original article with links on Taxpage. Title image: iStock. Author photo courtesy Rotfleisch & Samulovitch P.C.