The Federation of Law Societies of Canada initiated legal proceedings in the BC Supreme Court to challenge the constitutionality of recent amendments to the Income Tax Act
The Federation of Law Societies of Canada has taken legal action in the BC Supreme Court, contesting the constitutionality of recent amendments to the Income Tax Act. The Federation is specifically disputing certain sections of the Income Tax Act, which require legal counsel to divulge confidential client information to the Canada Revenue Agency (CRA). In a recent statement, the Federation asserted that these contested provisions within the Income Tax Act violate rights protected by the Canadian Charter of Rights and Freedoms and fundamental principles of justice that exist to safeguard the interests of the Canadian people.
Jill Perry, the president of the Federation, underscored the significance of upholding constitutional safeguards that ensure the independence and integrity of legal advisors. On September 11, 2023, the Federation initiated legal proceedings by filing an application in the BC Supreme Court, challenging the constitutionality of recent amendments that mandate reporting obligations within the Income Tax Act for members of the legal profession. This application seeks to exempt legal counsel from the requirement to disclose transaction details to the CRA, which could constitute tax avoidance, affecting not only legal advisors but also taxpayers and promoters. While the Federation expressed its support for the government’s efforts to combat tax avoidance, it also stressed the importance of adhering to vital legal and constitutional principles in the pursuit of these objectives.
This case echoes many of the issues raised in the Federation’s successful challenge to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in 2015. The Federation contends that obliging legal counsel to report their clients’ activities to a government agency creates an insurmountable conflict with the legal and ethical responsibilities that lawyers and other legal professionals owe to their clients. The legislation, accompanied by penalties that include substantial fines and the potential for imprisonment for non-compliance, effectively forces legal advisors to make a difficult choice between their own interests and those of their clients. This dilemma undermines legal professionals’ commitment to their clients’ causes, a commitment recognized as a fundamental principle of justice by the Supreme Court of Canada in the Federation’s 2015 case. Consequently, the legislation infringes upon section 7 of the Charter. Furthermore, the obligation for legal counsel to disclose confidential information to the CRA also violates the protection against unreasonable search and seizure outlined in section 8 of the Charter.
In response to the Federation’s legal challenge, the government has agreed to a 30-day injunction, temporarily suspending the application of the disputed provisions to members of the legal profession, pending a hearing on the Federation’s injunction application.
Distinguishing CRA’s tax audit powers from criminal tax investigation powers
When investigating suspected tax evasion cases, the CRA typically relies on search warrants as part of the evidence-gathering process. However, the CRA cannot rely on its normal CRA tax audit and information-gathering powers such as those found in sections 231.1 and 231.2 of Canada’s Income Tax Act and in sections 288 and 289 of Canada’s Excise Tax Act, which permits the CRA to do any of the following:
- inspect, audit, or examine any document of the taxpayer;
- examine the property of the taxpayer or any other person;
- inspect, audit, or examine any document of any other person;
- enter any premises to examine documents or property; and
- require any person to provide any information or document.
However, the CRA cannot use these powers when pursuing a criminal investigation or considering prosecution for tax evasion. This is because when the CRA’s enquiry shifts from a civil tax audit to a criminal investigation, it will engage the protections granted by the Canadian Charter of Rights and Freedoms (Constitution Act, 1982). The Charter affords everyone in Canada with various protections when faced with criminal prosecution, including tax fraud prosecution.
Pro tax tips – the CRA cannot seize documents subject to solicitor-client privilege
In general terms, solicitor-client privilege is a person’s right to refuse to disclose a communication that the person had with his or her lawyer in professional confidence. Section 232 of the Income Tax Act sets out a procedure for claiming solicitor-client privilege when the CRA attempts to seize documents under a search warrant. Unfortunately, a taxpayer’s communications with an accountant remain unprotected in any event. To protect that information, a taxpayer should always approach a Canadian tax lawyer first because the tax lawyer can retain the accountant on his/her behalf and extend the privilege.
Can the CRA use its civil tax audit power to gather evidence in a criminal investigation
No, the CRA can only use its tax audit power during civil tax audits or verifications. It cannot use these powers when pursuing a criminal investigation or considering prosecution for tax evasion.
What information is not subject to a search warrant?
Information protected under the solicitor-client privilege is not subject to a search warrant. Therefore, it’s highly recommended for a taxpayer to retain a Canadian tax lawyer in case of a potential criminal investigation. Our top tax lawyers can extend the privilege to accountants by retaining an accountant on behalf of the taxpayer.
What is the effect of the lawsuit brought by the Federation of law societies?
The legal challenged has pressured the government to agree to a 30-day injunction suspending the application of the amended provision of the Income Tax Act to members of the legal profession.
The information provided in this article is general in nature. Only as of the posting date is it current. It hasn’t been updated and might not be relevant. It should not be relied upon because it does not provide legal advice. Every tax situation is different from the ones discussed in the article because of its unique circumstances. Consult a Canadian tax lawyer if you have specific legal questions.