Solicitor-Client Confidentiality and the New Legal Battle Against Recent Income Tax Act Amendments
On September 11, the Federation of Law Societies of Canada took action in the BC Supreme Court against the Mandatory Disclosure Rules in Bill C-47, which includes amendments to the Income Tax Act to expand disclosure rules relating to tax avoidance transactions and uncertain tax treatments. The Bill came into force on June 22, 2023 and it requires lawyers (among other professionals) to disclose confidential client information to the Canada Revenue Agency (CRA). The Federation argues that these provisions infringe on rights protected by the Canadian Charter of Rights and Freedoms and fundamental principles of justice.
The Federation's application seeks to exempt legal counsel from having to report transaction details for their clients that may constitute tax avoidance. The Federation, representing 14 law society members overseeing Canada's legal professionals, expressed support for the government's efforts to combat tax avoidance. However, it stressed that these efforts must respect solicitor-client confidentiality and other legal and constitutional principles. This case parallels the Federation's successful challenge to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in 2015.
The Federation argues that requiring lawyers to report client activities to a government agency creates an irreconcilable conflict with their legal and ethical duties. Penalties for noncompliance, including substantial fines and the possibility of imprisonment, force lawyers to make a difficult choice between their interests and those of their clients. This conflict undermines the lawyer's commitment to the client's cause, which the Supreme Court of Canada recognized as a fundamental principle of justice in the Federation's 2015 case. Consequently, the legislation violates section 7 of the Charter. Additionally, the obligation for legal counsel to report confidential information to the CRA infringes on the protection from unreasonable search and seizure in section 8 of the Charter.
In response to the Federation's legal challenge, the government has agreed to a 30-day injunction suspending the application of the disputed provisions to legal professionals, pending a hearing on the Federation's injunction application. The hearing on the application for an injunction is scheduled on October 20, 2023. The consent injunction expires when a decision is rendered by the Court on the injunction application or on November 20, 2023, whichever is earlier.
Stay tuned for more legal updates.
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