Injunctive relief on new tax mandatory disclosure rules
BC Supreme Court has granted an injunction suspending their application to legal counsel pending the outcome of a constitutional challenge.
Last week, the Supreme Court of British Columbia granted an injunction temporarily exempting legal professionals from applying new mandatory disclosure rules of the Income Tax Act that expand the number of business transactions that must be reported to the Canada Revenue Agency (CRA).
The court found that the balance of convenience favours granting such relief, pending the determination of an application by the Federation of Law Societies of Canada challenging the constitutionality of ss. 237.3 and 237.4 of the ITA. The Federation is seeking a declaration that they are of no force or effect regarding legal professionals on the grounds that they infringe on sections 7 and 8 of the Canadian Charter of Rights and Freedoms. As such, the Federation is arguing that they undermine the legal advisor's duty to advocate for the client's cause.
The contested provisions took effect on June 22, introducing a new category of "notifiable transactions," defined in a government guidance document as "transactions that the CRA has found to be abusive, and transactions identified as transactions of interest (i.e., where more information is required to determine if a transaction is abusive)."
The Canadian Bar Association is seeking leave to intervene in the matter.
In its reasons for judgment, the Supreme Court of British Columbia held that the Federation met the legal test for the granting of injunctive relief, particularly that irreparable harm would otherwise result.
The court noted two reasons for this. First, clients would suffer irreversible harm due to the breach of professional secrecy if the contested provisions were later deemed unconstitutional. What's more, anticipating such a scenario would deter clients from freely consulting with their lawyers until a final determination of the constitutional challenge.
The court also agreed with the Federation that reporting confidential and privileged information, in compliance with potentially unconstitutional legislation, "would irrevocably damage the solicitor-client relationship and harm the public interest by undermining the public's confidence in an independent bar."
The court ruled that the government had not demonstrated any urgency in expanding the scope of the reporting requirements to make disclosure by legal professionals mandatory.