Two recent decisions advance the law of privilege. Lizotte v Aviva Insurance Company of Canada (2016 SCC 52) and MNR v Iggillis Holdings Inc. (2016 FC 1352) respectively clarify the difference between solicitor client privilege (SCP) and litigation privilege (LP), and also establish that so-called advisory common interest privilege (CIP) - privilege that protects transactional negotiations between parties with separate legal representation - does not exist in Canada. The two decisions are reminders of the scope of privilege in the tax context, and also highlight the importance of understanding the proper ambit of privilege when engaging in tax transactions or tax litigation.

In Lizotte, the SCC dealt with the line of demarcation between SCP and LP. Ultimately, the court concluded that LP is distinct from SCP and it can only be abrogated by express statutory language.

On the facts, Lizotte, assistant syndic of the Chambre de l’assurance de dommages, was conducting an inquiry into an insurance claims adjuster. Lizotte asked the insurer to provide a complete copy of a particular claim file; the insurer produced the file in part, but withheld some documents on the basis that they were covered by either SCP or LP. The syndic filed a motion for a declaratory judgment and argued that section 337 of the Act respecting the distribution of financial products and services (ADFPS) was sufficient to lift any form of privilege because it stipulated an obligation to produce “any…document” concerning the activities of a professional whose conduct was under review.

The SCC distinguished SCP and LP because the former’s purpose is to protect a relationship, but the LP’s purpose is to ensure the efficacy of the adversarial process; because SCP is permanent, but LP is temporary and lapses when the litigation ends; and because SCP is directed at communications between solicitors and clients, but LP applies to unrepresented parties and to non-confidential documents. However, SCP and LP are similar because both represent a class privilege, meaning that the privilege is not assessed on a case-by-case balancing test. Thus, like SCP, there are only a few clearly defined exceptions to LP: those relating to public safety, the innocence of the accused, and criminal communications.

Ultimately the SCC found for the insurer. The court said that LP does not have the same status as SCP, but LP is fundamental to the proper functioning of our legal system; moreover, the language of section 337 of the ADFPS was too general to justify lifting the privilege known as LP.

In Iggillis, the FC dealt with the question of whether the advisory form of CIP exists in Canada.

On the facts, two parties entered into negotiations regarding a corporate acquisition. During the process, there was legal consultation and cooperation between Iggillis’s lawyer and Abacus’s lawyer, and legal advice travelled in both directions between the two. The flow of legal advice culminated in the so-called Abacus memo, which was primarily the work of Abacus, but included contributions from Iggillis’s lawyer.

The CRA took the view that the transactions related to the sale of the corporations were entered into in order to maximize shareholder benefits by avoiding the payment of tax on the sale of the corporate partner’s assets. The CRA asked Iggillis to disclose the Abacus memo; Iggillis claimed privilege.

The FCA distinguished between litigation CIP and advisory CIP: the court accepted that litigation CIP has some traction in protecting communications that occur during litigation, but rejected any application of advisory CIP. The court explained that advisory CIP is incompatible with SCP: advisory CIP undermines the administration of justice by expanding the quantity of evidence denied to the courts. Thus, allowing an advisory CIP results in increased potential for abuse. Moreover, the court said that acceptance of advisory CIP would threaten the principle of legal equality because CIP only benefits a small subset of users of advisory legal services. Furthermore, the FCA considered policy rationales proposed by Iggillis and Abacus and rejected as entirely speculative the proposition that CIP is beneficial because it enables commercial transactions. 

Iggillis has serious consequence for tax advisors, requiring that the scope of what is understood as attracting privilege be reconsidered.  One solution might be to obtain client consent to formally establish a solicitor client relationship with all parties, effectively setting up a joint client relationship.

Iggillis filed leave to appeal in early January 2017. Thus, there may be further judicial consideration of advisory CIP.

Authors: Kathryn Walker and Robert G. Kreklewetz

Millar and Kreklewetz LLP

A version of this article appeared in the February 2017 issue of Canadian Tax Highlights.