ACCOUNTANT-CLIENT PRIVILEGE UNDER THE INCOME TAX ACT
Per se, in a contest with the Canada Revenue Agency (CRA) over seized client documents, accountant-client privilege does not exist. However, in such a situation, solicitor-client privilege often does extend to them. Whenever lawyer-client privilege attaches to documents in the possession of an accountant, failure by the accountant to claim this privilege may be a breach of duty owed to the client and could leave the accountant open to a claim for damages.
The provisions of the Income Tax Act entitles the CRA to demand production of documents. Such demands are often made of accountants and others, such as financial advisers, bankers, planners, etc., advising on business transactions, particularly if the effect of the transaction is a large reduction of taxes. Often such seizures are made incases where there is some evidence of tax evasion or an aggressive plan to avoid tax. But even in an ordinary audit, tax officials often find useful ammunition in the hands of advisers. Typically, the taxman collects information by appearing simultaneously at the offices of the accountant, the advisers and the client and serving demands for the production of all relevant documents.
If this occurs the accountant must consider carefully both the obligation to comply under the Tax Code and the obligation to the client to protect confidential communications and any privileged information.
While the CRA has broad investigatory and seizure powers, lawyers’ records usually are protected by solicitor-client privilege. This means the right to refuse to disclose oral or documentary communication on the ground that the communication is one passing between a client and his/her lawyer in professional confidence.
The law provides that no CRA official may examine or seize a document in the possession of a lawyer without giving him/her a reasonable opportunity of making a claim of privilege. If the lawyer claims that the client has solicitor-client privilege in respect of that document, the tax officer must place the document in a sealed package without examining or making copies of it and deliver it to the local Sheriff or to a mutually acceptable custodian.
The general common law rule of lawyer-client privilege is that communications passing between a client and his/herlawyer are privileged and cannot be voluntarily given, nor compelled by a court of law to be given, in evidence without the consent of the client if the communication was to enable the lawyer to give legal advice.
It should be noted that the privilege belongs to the client and may be waived only by him/her.
While accountant-client privilege has generally not been allowed by the courts, the doctrine of solicitor-client privilege has been expanded to include cases where the accountant is acting as an agent on behalf of the client and certain documents prepared by the accountant are in the hands of the lawyer.
Take A Cautious Approach
Accountants should take a cautious approach in providing client information to the CRA to avoid unauthorized production of confidential and privileged documents of their clients. They should consider it advisable not to retain those that may be the subject of solicitor-client privilege and instead have them held by the lawyer.
Usually there is a demand by the CRA to produce the documents without delay. Despite this, accountants are permitted to take the time to contact the client’s lawyer to seek advice on determining which are privileged and which are not.
The subject of privilege and confidentiality of client documents in the hands of an accountant is difficult and must be handled with extreme caution.
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