Lawyers temporarily exempted from CRA’s mandatory disclosure requirements

Lawyers have been given a temporary reprieve from reporting under the Canada Revenue Agency’s new mandatory disclosure regime after a group of legal regulators sought to have the associated legislation declared unconstitutional.

In an application filed with the British Columbia Supreme Court, the Federation of Law Societies of Canada claimed the regime’s requirement for legal counsel to report information about clients’ activities breaches the Canadian Charter of Rights and Freedoms because of the threat to solicitor-client privilege.

The mandatory disclosure regime, which took effect June 22, dramatically lowers the threshold for what the CRA considers an “avoidance transaction,” and created a reporting obligation for taxpayers and their advisors when one of the following hallmarks is present:

• advisors or promoters are engaged on a contingent fee arrangement
• advisors or promoters receive confidentiality protection regarding the transaction
• contractual protection is provided to the taxpayer or other parties in the event a tax benefit is challenged or ultimately fails to materialize

The federal government also plans on creating a new category of “notifiable transactions,” requiring reporting of transactions identical or substantially similar to ones the CRA has previously identified as potentially abusive.

Critically for lawyers, the new rules place the onus on every advisor or promoter involved in a reportable or notifiable transaction to make their own separate disclosure to the CRA, rather than relying on a single report from the taxpayer.

During the parliamentary review process, an exemption was added to the law confirming that disclosure requirements do not apply where it is “reasonable to believe that the information is subject to solicitor-client privilege.”

However, Roy Millen, the FLSC’s lead lawyer, explained that the law forces legal counsel to choose between their own and their clients’ interests. Penalties for non-compliance by advisors could rise to as high as $110,000 plus the value of all fees charged.

“The end result is still a requirement for lawyers to report, and the concept of a lawyer reporting on their client is, in our view, in conflict with a lawyer’s duty of loyalty to their client,” said Millen, a partner with the Vancouver office of Blake Cassels and Graydon LLP.

The first mandatory disclosures will become due on Sept. 20. While taxpayers and their other advisors — including financial advisors — are still subject to the reporting requirement, lawyers will be exempted until at least Oct. 20 under the terms of an interim injunction agreed between the FLSC and Canada’s attorney general.

That’s the day a BCSC judge will hear arguments on the FLSC’s motion to extend the injunction until the court has reached a final decision on the merits of the constitutional challenge.

In a statement to Advisor.ca, CRA spokesperson Kim Thiffault noted the bill containing the mandatory disclosure regime was “rigorously reviewed from a constitutional perspective” before its passage. She added that the CRA could not comment further because the matter is before the courts.

Michael McKiernan

Michael is a freelance legal affairs reporter who has been covering law and business since 2010.