Federation of Law Societies challenges mandatory reporting obligations under the Income Tax Act

The Federation of Law Societies of Canada has commenced an action in the BC Supreme Court, challenging the constitutionality of recent amendments to the Income Tax Act.

The Federation is challenging certain provisions of the act, which mandate legal counsel to disclose confidential client information to the Canada Revenue Agency (CRA). In a recent statement, the Federation alleged that the impugned provisions of the Income Tax Act infringe on rights under the Canadian Charter of Rights and Freedoms and principles of fundamental justice that exist for the benefit of the people of Canada.

Federation president Jill Perry emphasized the importance of upholding the constitutional protections that guarantee legal advisors' independence and integrity. "Canadians place a high value on their constitutional protections, including those that ensure that legal advisors are not required by the State to choose between their personal interests and their legal and ethical duties toward their clients," Perry stated.

On September 11, the Federation initiated legal action by filing an application in the BC Supreme Court, challenging the constitutionality of recent amendments to the mandatory reporting obligations in the act to members of the legal profession. The application seeks to exempt legal counsel from the obligation of taxpayers, promoters, and advisors, including legal counsel, to provide details to the CRA of transactions that may constitute tax avoidance.

The Federation represents 14 law society members, collectively regulating Canada's 141,000 lawyers, 3,825 Quebec notaries, and Ontario's 10,600 paralegals in the public interest. The Federation expressed support for the government's attempts to crack down on tax avoidance activities but emphasized that the means chosen must respect important legal and constitutional principles.

The case raises many of the same issues in the Federation's successful challenge to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in 2015.

The Federation said that requiring legal counsel to report to a government agency on their clients' activities causes an irreconcilable conflict with the legal and ethical duties lawyers and other legal professionals owe their clients. Backed by penalties that include hefty fines and the possibility of imprisonment for noncompliance, the legislation forces legal counsel to choose between their interests and those of their clients. This conflict undermines the duty of commitment to the client's cause, a duty found by the Supreme Court of Canada in the Federation's 2015 case to be a principle of fundamental justice. As a result, the legislation violates section 7 of the Charter. The obligation for legal counsel to report confidential information to the CRA also violates 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 members of the legal profession, pending a hearing on the Federation's injunction application.