Could solicitor-client privilege be a hallmark of a reportable transaction under proposed s. 273.3 of the Income Tax Act?


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Under proposed 237.3 of the Income Tax Act, a “reportable transaction” is an avoidance transaction that has two of three “hallmarks” (fee hallmark, confidential protection hallmark, or contractual protection hallmark). For a brief summary of proposed s. 237.3, see “Tax Avoidance Transaction Reporting” by Brian Carr and Zahra Nurmohamed in Resource Sector Taxation (vol. VIII, no. 1).

Following release of the draft legislation, many tax advisors were concerned that the definition of “confidential protection” was too broad. In response, the recent Technical Notes on proposed s. 237.3 released by the Department of Finance offer the following interpretation:

Based on the definition “confidential protection”, the circumstances described in paragraph (b) of the definition “reportable transaction” would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if an advisor or promoter in respect of the transaction or series obtains or obtained anything that would prohibit the disclosure to any person or to the Minister of details or the structure of the avoidance transaction or series that includes the avoidance transaction under which a tax benefit could result. This is in contrast to a situation in which a client of an advisor benefits from the existence of solicitor-client privilege in respect of information regarding the avoidance transaction or series of transactions, and which would not give rise to a “hallmark” in respect of the avoidance transaction or series. See the explanatory notes accompanying new subsection 237.3(11) for further details about solicitor-client privilege in the context of new section 237.3.

It appears that the Department of Finance believes that the existence of solicitor-client privilege is not “confidential protection” for the purposes of s. 237.3, though a literal reading of the definition of “confidential protection” does not appear to draw this distinction.

Are the Technical Notes on this issue sufficient comfort for tax advisors? Is this the last statement from the Department of Finance on the subject? Stay tuned for further developments.