A necessary privilege

In Canada, lawyers have the legal right to keep tax consultations confidential. CPAs, who do a lot of tax work, do not. Is this fair to clients?

When Peter Vial looks back to the early 2000s, he recalls his delight as New Zealand’s professional tax accountants asserted and were finally granted the right (in 2005) to have their clients claim adviser-taxpayer confidentiality. The Inland Revenue was lukewarm, the nation’s legislature unsure of its necessity and the legal fraternity simply aghast that another profession might be infringing on its sacrosanct 400-year-old common law solicitor-client privilege. Nine years on and Vial, general manager tax at New Zealand Institute of Chartered Accountants, remains somewhat bemused by the plight of jurisdictions around the world as they struggle to negotiate some form of legislated or regulatory right for taxpayers to access confidential tax advice from qualified tax accountants.

One jurisdiction well behind the curve in persuading the powers-that-be of the need for this privilege has been Canada. Currently, the Canada Revenue Agency (CRA) is barred from demanding taxpayer information only when the taxpayer employs a lawyer as tax adviser — and claims solicitor-client privilege.

CPA Canada is entering its third year of crafting a carefully considered position with respect to taxpayer confidentiality rights. Its strategy is to embrace the CRA as a partner in helping to enshrine tax adviser-client confidentiality in legislative statute.

The CPA Canada initiative is based on the assertion that access to confidentiality should be a basic right available to all taxpayers when they employ a qualified tax professional. If a new statute is adopted, the belief is that the public interest will be better served because this protection will ensure Canada’s self-assessment tax system performs with far better efficiency, accuracy and fairness.

For Gabe Hayos, FCPA, CPA, CPA Canada’s vice-president taxation and lead in kick-starting this proposal, it all boiled down to a self-reporting system that offers much greater parity between the rights of the individual and those of the government. "The CRA’s legitimate concern is that it have access to information to ensure taxpayers are complying with the law," he says. "But the CRA is used to an unfettered access, and we think there has to be some balance between the information it gets — and it should be factual information it gets — and other more subjective information, which should, in our view, be kept confidential, with certain exemptions."

Notions of instituting access to confidentiality are based, in part, on the CRA’s Taxpayer Bill of Rights. Right No. 15 assures the taxpayer that "you can choose a person to represent you and to get advice about your tax and benefit affairs." "This right — the right to sound advice — is important to both taxpayers and CRA," says Wallace Howick, FCPA, FCA, a former secretary to the CPA Canada-Canadian Bar Association Joint Committee on Taxation and special adviser to CPA Canada regarding confidentiality of advice reform legislation. "Fulsome exercise of this right provides taxpayers with the information to act knowledgeably and responsibly. At the same time," he explains, "exercise of this right by taxpayers is important to the CRA as it positively influences taxpayer behaviour and would reduce the cost of administering the system."

It is well established in public policy that taxpayers who seek advice from lawyers are assured of having an open and candid discussion concerning their financial dealings. "Access to confidential advice for some and no such access for others is unfair, particularly given CRA’s commitment to fairness," Howick says. "The very meaning of a proffered right such as right No. 15, which, in its application, produces different results for different taxpayers, is undermined by those inconsistent results."

How, wonders Hayos, can a professional tax adviser, of any stripe, offer the best counsel regarding a taxpayer’s affairs — and it is the taxpayer who would assert or decline confidentiality, not the adviser — if the adviser is not privy to all the objective and subjective facts of the taxpayer’s situation? "The [CRA will] actually have better compliance if it knows that people can have that kind of conversation," he says. "And this is what the CRA needs to be convinced of."

Hayos adds that the preponderance of tax advice in Canada is provided by professional accountants. "As a result," he says, "the uneven access to confidential advice is systemically unfair and, in some ways, visited most profoundly on individuals and small businesses, and particularly on those outside major urban centres."

Furthermore, Howick points to the Supreme Court of the United Kingdom, where in a recent case (Prudential v. Special Commissioner of Income Tax [2013]), the court connected the importance of confidential tax advice to the public interest and the current inconsistency of that access:
"[T]he relevant public interest is the rule of law which depends on each citizen being able without inhibition to find out what his legal position is. ... It is perhaps particularly significant in the area of tax law where the citizen is brought up against the power of the state and the law is often technically complex. ... Once it is appreciated ... that legal privilege is the client’s privilege ... and that it depends on the public interest in promoting his access to legal advice in absolute confidence and that it is not dependent on the status of the advisor... it must follow there can be no principled reason for distinguishing between tax advice of the solicitors and barristers on the one hand and the accountants on the other."

While the UK Supreme Court in Prudential declined to extend common law privilege to taxpayers who seek advice from professional accountants, it did signal that a right by statute would be the most appropriate way to redress inconsistent access to confidential advice.

This was the course offered to legislators by tax accountants in New Zealand when they began to argue for the right to what they term "nondisclosure." "It was a process of engaging with the Inland Revenue because no one wants the tools they’re used to employing suddenly being removed from their toolbox," Vial says. "There was noise and there was resistance, but there was also an education process for all sides. The more that revenue saw that [it] could encourage compliance by having a system that is fair, consistent and cohesive, the more [it] saw the system was going to work." Vial is convinced that a greater willingness from taxpayers to be transparent with their tax accountants is sure to produce a better understanding by the adviser of the client’s tax position. Mistakes and omissions on tax returns are costly for both the taxpayer and the government, he says. "Although we haven’t yet compiled the numbers from New Zealand, common sense says cost efficiency in the process is an important factor. Look," he says, "you want the taxpayers to seek sound advice, you want them to comply. And to do so, you want frank interchanges between the client and adviser about how the laws apply consistent with that advice."

Though there are differences between the New Zealand system and the legislative framework proposed by CPA Canada, their objectives are very similar. The primary goal is to balance the CRA’s need for access to information in order to verify compliance and taxpayers’ need for advice about their legal rights and responsibilities. To achieve this balance, CPA Canada envisions attaching certain restrictions to the new confidentiality rights proposed in what it calls "eligible tax advice."

Crucially, any subjective opinion offered by the tax adviser — based on his or her understanding of the tax laws — is to be exempt from disclosure to the CRA. "This is not about concealing information from the CRA," Hayos says. "Access to factual information is something to which the CRA is entitled so it can verify compliance. Verification does not require subjective views, either of the taxpayer or the adviser. There should be a free flow of conversation there," he adds. "The taxpayer ultimately makes the decision on what to do and the adviser gives full and frank advice. The facts remain open to CRA scrutiny. And it’s our view that this puts confidence in the system when both are assured that the advice is confidential."

Unlike the blanket protection of lawyer-client privilege, the CPA Canada framework would not provide confidentiality rights for advice pertaining to tax shelters (defined at S. 237.1 in the Income Tax Act), tax avoidance arrangements (S.237.3) or alleged fraud or gross.

The approach that CPA Canada is proposing should make its discussions with CRA much more constructive. William Dobson, CPA, CA, a retired 14-year veteran of CRA’s compliance program and former special adviser to its director general, advises that CPA Canada continue to be cognizant of CRA’s position as it builds its case for an expanded form of adviser-client confidentiality. "From my personal perspective, CPA Canada has the best opportunity for success if the design of taxpayer confidentiality rights is done collaboratively," he says. "It is a self-assessment system that requires the cooperation of CRA and the stakeholders that CPA Canada represents." Currently on contract with CPA Canada, Dobson has encouraged Hayos to include the CRA in the building of the proposal’s framework. "My sense in the discussions with the CRA is for CPA Canada to ask, ‘OK, do you believe our limitations are sufficient for CRA to properly meet its responsibilities?’ " he says — and then hope the CRA does not demand concessions that make the entire exercise a waste of time. "The belief at the CRA is that we have to have a strong, functioning tax system, and part of that system is [its] present audit powers," he says. "And [CRA] should not be obstructed from doing the job that legislation requires it to do. However, that view has to be balanced with ensuring that the taxpayer is treated fairly and has adequate protection to balance the powers of the CRA."

For Dobson, a major hurdle to overcome is a 2004 Federal Court of Appeal decision (Tower v. M.N.R.), where the court was rather emphatic in its views on privilege:
"Further, the taxpayers did not show that the tax accountant-client relationship is one that in the opinion of the community ought to be sedulously fostered to the degree that would attract privilege. ... While confidentiality may be preferred, the tax accountant-client relationship is in no way as fundamental to society and the administration of justice as the solicitor-client relationship."

Included in the Federal Court of Appeal’s ruling was that the appellant’s accounting firm be compelled to not only hand over all its files relating to the client, but also produce new documents and answer any questions the CRA thought still outstanding. In essence, the Tower ruling determined that the CRA be unrestricted in its power to ferret out whatever information it deemed relevant to its audit investigations. "The accountant-client relationship with respect to tax is every bit as fundamental as the lawyer-client relationship," Dobson says. "The UK Supreme Court quote clearly supports this view."

With this broad judicial precedent, Dobson believes it to be only human nature that the CRA might balk at sudden restrictions to its auditors’ access. "I think it would be a hard thing for auditors to accept," he says. "Certainly, there’s a culture there. The system, for as long as we can remember it, has had an adversarial nature to it," he admits. "For auditors who have had experience with this adversarial component, there’s going be — if this limited confidentiality becomes a fact — a great deal of skepticism and trepidation about whether it will actually work. Putting on my CRA hat," he says, "an honest answer would be, whatever CPA Canada proposes, it should make adequate provision for the CRA to administer the tax system efficiently and effectively." To exacerbate any existing difficulties in what many perceive as a combative relationship between government and taxpayer is the last thing the new proposal hopes to achieve.

With the courts unwilling to extend common law privilege to accountants, CPA Canada’s strategy is to find a political solution through legislation. But to make its case for limited confidentiality, it feels it should have the CRA onside to argue against any contrary political machinations from the Ministry of Finance. "There has to be a political imperative to effect change," says Paul Paton, former professor of law and director of the Ethics Across the Professions Initiative at the University of the Pacific’s McGeorge School of Law in Sacramento, Calif., and as of July, dean of the faculty of law at the University of Alberta. "It’s tough, complex and difficult. And political solutions are not often attached to complex and difficult circumstances." Yet, Paton believes there is a compelling argument for Parliament to consider Canada’s competitiveness and the impact of international harmonization of similar tax systems. There is precedent not only from New Zealand but also from other tax systems. "In New Zealand, Australia, to a degree in the US and a certain extent in the UK, there has been either legislation, regulation or administrative practice made to ensure taxpayer protection and fairness," he says. The Australian Taxation Office has begun its move toward statutory nonlawyer, tax adviser-client protection by agreeing to an accountant’s concession where certain advice will remain confidential. "In the US," he explains, "the IRS has made a similar decision where it asserts it can go after whatever it wants, but as an administrative practice, it has said, ‘We are going to voluntarily stop short of that because we believe it’s going to lead to more efficiency in the IRS’s operations.’ " So, despite the courts and regulators having the power to demand all objective and subjective fact documents, these jurisdictions have voluntarily constrained themselves. In 2013, the UK Supreme Court spoke to the untenable differential treatment accorded taxpayers who chose lawyers for tax advice and those who chose accountants — the minority finding "no principled reason for distinguishing between [tax] advice of solicitors and barristers on the one hand and accountants on the other." (But again, the court deferred to Parliament to enact change.)

Vial has tried in vain to find contentious examples of assertion of nondisclosure rights from New Zealand taxpayers for this article. "There are numerous cases that have been filed over the years, but none that you could hope to categorize as substantive," he assures. "They were more about fine-tuning the process than concerns over whether Inland Revenue auditors were finding it more difficult to complete their work."

For Hayos, if the CRA’s promise that the taxpayer has fair and equal rights under right No. 15 of the Taxpayer Bill of Rights is to be anything more than hollow rhetoric, the client’s access to confidential tax advice should not be restricted to a single profession and its common law legal privilege. "There’s an odd disconnect," he says. "The majority of tax advice is provided by accountants, whereas tax lawyers provide more advice at the dispute, appeals, litigation stages — places taxpayers should be less likely to find themselves if they felt confident in proffering private and accurate disclosure of their tax-related lives to their accountants. We feel our counsel has value; and although we don’t use the word ‘privilege’ in our framework — it’s fraught and weighted with legalese — we do believe we should be able to communicate and advise with the privilege of confidentiality. All taxpayers have the same statutory obligations. All taxpayers should have the same or similar right to confidential advice from the qualified adviser of their choice."

Robert Colapinto is a Toronto-based freelance writer.