One way CPAs leak confidential information to the CRA
Accountants that unthinkingly send the Agency tax appeal invoices may improperly reveal solicitor-client communications and more, says tax litigator Peter Aprile
Peter Aprile is a partner, specializing in tax dispute resolution and litigation, at Counter Tax Litigators.
GENERALLY speaking, taxpayers can deduct fees and costs paid to prevent a potential assessment or dispute a reassessment under paragraph 60(o)(i) of the Income Tax Act R.S.C. 1985, c. 1 (the “ITA”). We encourage our clients to deduct these fees and costs.
The Canada Revenue Agency (the “Agency”) may request supporting documents to confirm that the fees and costs are deductible. In many cases, accountants unthinkingly send the Agency detailed invoices that reveal sensitive information and solicitor-client communications.
It appears that many accountants fail to appreciate that tax appeal legal invoices and lawyers’ accounting records (“Tax Appeal Invoices”) constitute solicitor-client communications. Also, it appears that many accountants fail to appreciate that — if law firm retains an accountant to act as its agent to provide a taxpayer with legal advice — the accountant’s invoices and records are protected under solicitor-client privilege, too. The Agency has no legal right to compel any taxpayer to provide Tax Appeal Invoices (or any other solicitor-client information), and disclosing this information to the Agency carries significant risks.
Tax Appeal Invoices – risks & balance
Tax Appeal Invoices reveal the scope of work, opinion, and exposure details, and tax appeal strategy. Accountants who carelessly disclose sensitive client information expose themselves to professional liability claims, and expose clients to significant negative consequences. For example, accountants who disclose sensitive client information may unwittingly give the Agency an “audit roadmap” and increase audit exposure, or hand the government key information in the middle of a tax appeal. At worst, careless disclosure may provide the government with the opportunity to argue that the taxpayer’s decision to disclose constitutes an implicit waiver giving the government the opportunity to access the underlying information and documents.
It is imperative that accountants ensure that they understand the risks, and take appropriate steps to help taxpayers balance: (1) the Agency’s right to verify that the tax appeal fees are deductible; and (2) the need to protect sensitive information to avoid significant negative consequences. Moreover, it is important that taxpayers and accountants remain vigilant outside the tax appeal arena and long after the tax appeal is complete.
The Agency’s attempts to demand legal invoices & gain solicitor-client information
Accountants are the first line of defence against improper Agency audit actions and requests. It is important that accountants appreciate that — although the Agency can ask or attempt to demand that taxpayers provide information — there are limits to the Agency’s ability to compel information under ITA. Simply put, it is important that taxpayers and accountants understand the distinction between: (1) the information that the Agency is entitled to demand and compel; and (2) the information that taxpayers can (and should) refuse to disclose (“Disclosure Rights”).
To understand Disclosure Rights, accountants must understand the applicable legislation and seek legal expertise to understand alternate interpretations and the caselaw. This way, accountants can confirm that the Agency’s demand is correct and enforceable in law before improperly (and in some cases without client knowledge) disclosing solicitor-client communications. For example, the Agency customarily demands that taxpayers provide legal invoices and lawyers’ accounting records. Anecdotal evidence suggests that, in most cases, accountants simply hand over the information. In other cases, the Agency cites subsection 232(1) of the ITA to justify its position and gain access to legal invoices and lawyers’ accounting records. In particular, the Agency routinely asserts that subsection 232(1) of the ITA creates an exception to the general rule that all client-lawyer communications are confidential (the “232(1) Exception”).
The Agency has no legal basis to compel taxpayers to disclose legal invoices
The Agency is not entitled to any solicitor-client communications. In Canada v. Chambre des notaires du Québec (2016 SCC 20) and Canada v. Thompson (2016 SCC 21) the Supreme Court of Canada held that the 232(1) Exception is invalid and the Agency cannot use the 232(1) Exception to bypass the solicitor-client privilege that attaches to Tax Appeal Invoices.
In Chambre, the SCC held that the 232(1) Exception violated the Charter, section 8, because it constituted an unreasonable seizure; the 232(1) Exception does not allow the taxpayer, who is the holder of the privilege, the right to know that the Agency sought to compel the information or documents (at paragraph 6). Also, the SCC held that the Charter, section 1, could not save subsection 232(1). In Thompson, the SCC applied the reasoning in Chambre and reiterated that solicitor-client privilege is a “right that belongs to, and can only be waived by, a client of a legal professional” (at paragraph 39).
Simply put, any Agency attempt to rely on the 232(1) Exception — or any other section or authority — to compel a taxpayer to disclose solicitor-client communications (including legal invoices and lawyers’ accounting records) has no legal basis. Moreover, neither the Agency – nor any other third party – can gain access to solicitor-client communications unless the taxpayer herself (as opposed to the accountant or any other representative) agrees to waive solicitor-client privilege.
Balancing the desire to deduct Tax Appeal Invoices & protecting sensitive information
Accountants, taxpayers, and lawyers need to communicate and exercise caution to take appropriate steps to protect all sensitive information. In particular, we suggest the following five tips to help all parties work together to balance competing interests and put taxpayers in the right position.
Pro Tip #1 – The right invoice content & structure
Good professionals use invoicing as an opportunity to provide clients with a ‘work complete’ summary and an important communication tool. It is another opportunity to explain the nature and value of the work, and how every client dollar is contributing to the client’s goal. To deliver transparency and communicate clearly, professional invoices should include separate invoice matter headings, detail tasks in separate line items, and explain the way that the work is connected to the overall strategy.
However, professionals should ensure that these sensitive details are not part of the invoice. Instead, professional invoices should follow a simple structure and limit content, e.g., a generic one-page invoice (marked page 1/1), a generic description of services and, where appropriate, a reference to paragraph 60(o)(i) of the ITA. This way, sensitive details and dockets are clearly separate and apart, and do not form any part of the invoice.
Pro Tip #2 – Don’t hesitate, call
The Agency auditors, in the normal course, contact taxpayers and accountants to request supporting documents including Tax Appeal Invoices. In many cases, clients and accountants do not contact the lawyer that undertook the work to advise the lawyer that the Agency has initiated the audit related, in whole or in part, to the Tax Appeal Invoices. This is a mistake.
Accountants and clients should — before releasing any information — call the lawyer and provide the lawyer with the opportunity to: (1) review the file and Tax Appeal Invoices; (2) highlight potential exposure points; (3) explain the solicitor-client privilege, and the protections (including that only the client herself has the authority to agree to waive privilege); and (4) help guide the disclosure.
It is unclear why clients and accountants do not call the lawyer that undertook the work. Our experience is that some people do not contact the lawyer that issued the Tax Appeal Invoice because they do not understand their rights or appreciate the risk. Also, taxpayers and accountants might avoid contacting the lawyer to avoid incurring legal fees. Again, this is likely a “penny wise, pound foolish” mistake. And, with respect, any lawyer that is unwilling to provide a little free time and guidance to help a past client protect solicitor-client privilege is [reader, please fill in this blank as you see fit].
Pro Tip #3 – Understand & quantify the exposure
Taxpayers, accountants, and lawyers should work together to identify all elements, information, risks, probabilities, and costs (including the amount at stake if the Agency denies the expense) related the release of the Tax Appeal Invoices. This way, the parties can think clearly, devise the best strategy and choose the best route based on a rigorous analysis as opposed to reactionary responses to Agency demands for information.
Pro Tip #4 – Use alternate evidence to protect information & satisfy the Agency
As discussed, we ensure that our invoice content and structure is optimised to provide evidence to support that the legal fees are deductible. Also, we provide our clients and accountants with carefully crafted submissions designed to: (1) remind the Auditor that Tax Appeal Invoices contain solicitor-client information that the Agency cannot compel; and (2) limit the taxpayer’s exposure to any negative consequences. In particular, we argue that our submissions and invoice summary are sufficient to support the deduction under the ITA. In most cases, the Agency accepts the submissions and allows the deduction. In other cases, we have supplied the Agency with the generic one-page invoice — refused to provide any other information — and favourably resolved the matter at the audit or objection stage. If interested, readers can download our sample submissions below.
Pro Tip #5 – Know when to walk away
In some cases, the Tax Appeal Invoice is not the “right invoice” (see Pro Tip #1), or we are concerned that the information contained therein will lead to an audit or strategic exposure. In these cases, taxpayers and accountants might choose not to supply the Auditor with any evidence to support the expense. The Auditor is likely to deny the deduction. However, the taxpayer can choose to file a simple notice of objection, and present argument or other evidence (e.g., lawyer’s letter or affidavit) to support the deductibility of the Tax Appeal Invoice to the Agency Appeals Officer at the Objection Stage.
If the Appeals Officer adopts the same position, the taxpayer can work with the Appeals Officer to identify alternate support, rethink whether she is willing to disclose the Tax Appeal Invoice or choose to abandon the objection without any negative consequence.
Stop the leak
We hope that this article helps taxpayers and accountants take more caution in dealing with Agency audits related to Tax Appeal Invoices and other sensitive information. In particular, we hope that accountants — the important first line in audit defence — work to understand Disclosure Rights, the risks of releasing sensitive information, and remember that solicitor-client privilege belongs to the taxpayer.
Taxpayers and accountants faced with an audit request to provide the Agency with Tax Appeal Invoices should stop, breathe, and think (and call the lawyer that issued the invoice) before releasing any information. This way, accountants can stop carelessly leaking sensitive information to the Agency, providing the Agency “audit roadmaps” and strategy insight, and avoid professional liability claims.
Peter Aprile is a partner, specializing in tax dispute resolution and litigation, at Counter Tax Litigators. This article first appeared on the Counter Tax Litigators blog. Top image: iStock. Author photo courtesy Counter Tax Law.