Nov 26, 2024
EU Court Ruled that Privilege in Tax Matters Extends Only to Lawyers
Mossack Fonseca, the law firm involved in the Panama Papers scandal, was closed, but the scandal’s impact on the legal profession endures. Although little criminal activity by lawyers has been proven, the negative optics surrounding Mossack Fonseca have led the European Parliament (EP) to issue recommendations scrutinizing lawyers’ roles in offshore finance and tax practices.
The EP’s recommendations, issued in December 2018, criticize lawyers for potentially enabling aggressive tax practices and suggest measures that would curb solicitor-client privilege. They urge governments to clarify privilege’s scope, ask the legal profession to ensure privilege does not obstruct the reporting of suspicious activities, and propose that lawyers may need to report information on activities outside traditional legal duties. Additionally, the recommendations would hold lawyers responsible for designing not only tax evasion schemes but also aggressive tax planning punishable by law. While these are not binding, the recommendations reflect mounting pressure on the profession and may influence national legislation in the EU.
This scrutiny extends beyond Mossack Fonseca to Appleby, another offshore firm implicated in the Paradise Papers, which remains operational but could face increased pressure. If Appleby were to close, the “offshore magic circle” firms specializing in low-tax jurisdictions, such as Ogier and Mourant Ozannes, could also be at risk. This could lead to mainstream firms inheriting the criticism once directed at offshore firms.
With the Paradise Papers also implicating Canadian politicians, including three former prime ministers, scrutiny of tax lawyers facilitating tax avoidance is growing internationally. Solicitor-client privilege, particularly in tax matters, is under increasing pressure, and the EP’s recommendations indicate that legal privilege may no longer protect professionals suspected of enabling aggressive tax schemes. This evolving landscape suggests that lawyers, particularly in Europe, may face ongoing challenges to balancing client confidentiality with regulatory demands for transparency in tax practices.
In July 2024, the Court of Justice of the European Union determined in Belgian Association of Tax Lawyers and Others v Premier Ministre/ Eerste Minister that legal privilege in tax matters applies exclusively to lawyers, excluding other professionals, even if they provide similar advice. The court ruled that the EU’s reporting requirements on tax matters are a justified and proportionate limitation on privacy rights, as they serve the EU’s overarching goal of combating aggressive tax planning, tax avoidance, and evasion.
Solicitor-Client Privilege in Canada
Solicitor-client privilege is a legal principle that safeguards confidential communications between lawyers and their clients, protecting these exchanges from disclosure without the client’s consent. This privilege is crucial to the lawyer-client relationship, fostering trust, complete transparency and disclosure from the client, and confidentiality. Under solicitor-client privilege, a lawyer cannot be compelled to disclose any information provided by the client in confidence or any legal advice given, even under subpoena or other legal duties. This means that a lawyer cannot be forced to reveal any information that might harm the client’s case.
The privilege applies to all communications within a lawyer-client relationship, including oral, written, and electronic interactions, and covers all aspects of the relationship, from consultations to legal advice and representation. This protection remains in effect even after the lawyer-client relationship ends.
However, solicitor-client privilege is not absolute. A client may waive it explicitly, for instance, to defend against a legal claim, or implicitly, by actions that indicate the information isn’t confidential. For example, privilege is waived if the client shares a privileged document with a third party outside the lawyer-client relationship, such as an accountant.
Pro Tax Tips – Communication with Accountants is not Covered by Solicitor-Client Privilege Unless a Lawyer is Retained
While Canadian tax lawyers and tax accountants often perform overlapping work for clients, a recent event highlights a key difference between the two professions. In 2020, the Canada Revenue Agency (CRA) seized several files from a Halifax branch of accounting firm Grant Thornton amid allegations of a tax offence by one of its clients.
This incident underscores the critical advantage of working with Canadian tax lawyers: solicitor-client privilege. Clients of a tax lawyer enjoy protection that prevents their confidential communications from being disclosed, even to CRA. In contrast, the CRA can and will seize an accountant’s files, including notes from meetings, conversations, or tax planning memos, which may then be used in tax evasion prosecutions.
Still, solicitor-client privilege can be extended to an accountant if the accountant is retained by a Canadian tax law firm on the client’s behalf. For this protection to apply, the tax lawyer must first be retained and then enter into a written agreement with the accountant. This arrangement allows the accountant’s files and communications to be covered by solicitor-client privilege, protecting them from seizure by the Canada Revenue Agency (CRA).
FAQ:
What is solicitor-client privilege?
Solicitor-client privilege is a legal principle that safeguards confidential communications between a lawyer and their client, protecting these exchanges from disclosure without the client’s consent. A lawyer cannot be compelled to disclose such information provided by the client in confidence or any legal advice given, even under subpoena or other legal obligations.
Is communication between a taxpayer and his/her accountants also covered by solicitor-client privilege?
No, solicitor-client privilege only applies to communications with a tax lawyer. Solicitor-client privilege can be extended to an accountant if the accountant is retained by a Canadian tax law firm on the taxpayer’s behalf.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
