CRA Appeal Refused by Supreme Court of Canada

On October 25, 2018, the Supreme Court of Canada notified the public that it declined to hear the Canadian Government’s appeal of a lower court decision limiting the Government’s powers to request documents from taxpayers. Implicit in the Supreme Court’s refusal is an acknowledgment that the lower court’s decision affirming the principle of Common Interest Privilege (“CIP”) is correct and precedential.

MNR v. Iggillis Holdings Inc. et al. (2016 FC 1352) raised the issue of whether solicitor-client privilege continues to apply to a legal opinion that is disclosed to a person who is not the client of the lawyer who wrote the opinion but who is involved in common transactions with the client of that lawyer. For context, solicitor-client privilege applies to communications between lawyers and their clients.  This privilege is waived if the privileged communications are disclosed to third parties. An exception to this waiver is CIP, which allows for the disclosure of privileged communications without loss of that privilege. The CIP doctrine protects communications made between lawyers when all members of the community share a “common legal interest” in the shared communication.  This can be broken down further into litigation CIP and advisory CIP, with the latter being relevant in the IGGillis context.

Abacus Capital Corporations Mergers and Acquisitions (“Abacus”) provides tax advice in relation to corporate transactions. In this instance, Abacus structured a series of transactions which resulted in an Abacus entity acquiring the shares of the corporations that had been held by IGGillis Holdings Inc. and Ian Gillis (“IGGillis”).

Abacus and IGGillis were represented by their own respective lawyers. The tax plan memorandum (“tax memo”) behind the share acquisition was prepared through input by lawyers on both sides of the transaction. The tax memo described a number of discrete steps or transactions that would be necessary for the purchase and sale of IGGllis shares to Abacus. Each step comprised a diagram visually explaining the transaction. Each diagram was accompanied by a detailed description of the tax consequences in reference to relevant statutory and jurisprudential principles that were said to apply. The tax memo was sent to Abacus and IGGillis. IGGillis was not the client of Abacus counsel and Abacus was not the client of IGGillis counsel.

Following the completion of the transactions, the Canadian Government served requirements under subsection 231.2(1) of the Income Tax Act to produce the tax memo. Abacus and IGGillis refused to produce the tax memo. Abacus and IGGillis claimed CIP to protect the solicitor-client privileged tax memo which had been prepared during the negotiation of a commercial transaction and that pertained to a common legal interest of the contracting parties to enable the completion of the sale.

Upon application by the Canadian Government, the Federal Court ordered the tax memo to be produced to the Government. The Government had submitted that two parties mandating their lawyers to work together on behalf of both clients to find a “business solution” to their mutual advantage renders the fruit of their labour a mere business record if the consequences of implementing their legal advice are specific to the issue of tax savings.  The Court disagreed with this submission and found that the tax memo was legal advice to a client which fell within the ambit of solicitor-client privilege.  However, the Court found that privilege had been waived when the tax memo was circulated amongst the various Abacus and IGGillis parties and that CIP could not apply as an exception to that waiver because Advisory CIP was not considered to be a valid constituent form of solicitor-client privilege and therefore had no application to the facts in IGGillis.  The taxpayers appealed this decision to the Federal Court of Appeal (the “FCA”).

In a decision widely heralded as the most important Canadian decision on CIP, the FCA allowed the taxpayers’ appeal and ruled that the parties were not required to produce the tax memo to the Government (IGGillis Holdings Inc. et al. v. MNR 2018 FCA 51). The FCA rejected the two principal reasons the Federal Court had relied on in ordering the production of the tax memo.  First, the FCA disagreed with the lower court’s finding that advisory or transactional CIP had the adverse affect of limiting relevant evidence before the Court when deciding on these issues.  The FCA rejected this finding because the tax memo was a series of opinions on the application of the law, and those opinions would ordinarily be inadmissible at trial in any event.

Second, the FCA found that that the lower court relied heavily on an article by an American academic (“End the Experiment: The Attorney-Client Privilege Should Not Protect Communications in the Allied Lawyer Setting” (2011) 95 Marq. L. Rev. 475) and the Ambac decision (Ambac Assurance Corp. v. Countrywide Home Loans Inc., 36 N.Y.S. 3d 838 (Ct. App., 2016) from the New York Court of Appeals.  Both the article and the Ambac decision reject the application of CIP in commercial transactions. The FCA found this to be a serious error by virtue of the following analytical framework. Requirements issued by the Government do not apply to a document that is protected from disclosure by solicitor-client privilege as defined in subsection 232(1) of the Income Tax Act. That subsection indicates that solicitor-client privilege will arise as a provincial matter, so in this case the only relevant provinces for the purposes of the definition of solicitor-client privilege were Alberta and British Columbia.

Therefore, the question became whether a Superior Court in Alberta or British Columbia would find that the tax memo was protected from disclosure by solicitor-client privilege. To the FCA, the question was not whether the New York Court of Appeals or the court of any other state in the United States (including the court in Ambac) would find that the tax memo was protected from disclosure by solicitor-client privilege.  Ultimately the FCA found that the tax memo would be privileged in those provinces and that, based on decisions by the courts in Alberta and British Columbia, solicitor-client privilege is not waived when an opinion provided by a lawyer to one party is disclosed, on a confidential basis, to other parties with sufficient common interest in the same transactions.

The FCA importantly noted that sharing of opinions may well lead to efficiencies in completing complicated transactions and that clients may well be better served by this collaborative approach, as the application of the Income Tax Act will be of interest to all of the parties to the series of transactions. The ultimate conclusion of the FCA is that common interest privilege “is strongly implanted in Canadian law and indeed around the common-law world”.

The Canadian Government appealed this decision to the Supreme Court of Canada. The Supreme Court refused to grant leave and the matter is now closed. The main takeaway is that the FCA’s decision is now precedential, which provides significant certainty to parties – who wish to share privileged communications with other parties to a transaction – that those communications will likely be protected by CIP. Thus Canadian law is now settled on CIP, which should be a relief to advisors and transactional parties alike.