In RICHARD A. KANAN CORPORATION v R, 2011 TCC 211, an informal procedure case, the Court was asked “how much information can the Minister, or the Court, require a taxpayer to produce in support of his or her expenses, if that information is subject to solicitor-client privilege?” (¶ 1).
The appellant was attempting to deduct legal expenses paid pursuant to invoices from a law firm that read “For Legal Services Rendered” without any other detail. The CRA demanded the detail; the appellant took the position that the information sought was privileged and should not be produced. The Court responded as follows:
[20] The Appellant, like every taxpayer, has the burden of proving the deductibility of its expenses, and it is no answer to say, “that information is covered by solicitor-client privilege”. There is no question that taxpayers have the right to keep confidential all communications covered by solicitor-client privilege. However, taxpayers who fail to provide adequate support to demonstrate the deductibility of their expenses risk the denial of those deductions.
[21] The question of what constitutes adequate proof of the deductibility of legal expenses will depend on the facts of each case. The Respondent suggested that I should be satisfied with nothing less than the “specific legal advice” given by Olson Lemons to the Appellant. I disagree. Adequate support to demonstrate the deductibility of these expenses might take the form of a detailed invoice, an engagement letter, or a reporting letter. Indeed, these documents might even be redacted to hide some irrelevant detail and still contain enough information to allow the Court to classify the expenses following the procedure described in International Colin Energy. The Court will require descriptions of the tasks undertaken by the lawyers, and the amounts charged for those tasks. In most cases, the Court will not, and should not, require the Appellant to reveal items such as complete legal advice memoranda, unexecuted drafts of contracts, or details of its discussions with counsel in order to be satisfied that the amounts charged by the lawyer are deductible business expenses.
The appellant, then, would be required to produce some evidence. Was the appellant required to provide the lawyer’s entire file? The Crown argued that, by putting the expenses in issue, the appellant had implicitly waived privilege so that the appellant should be required to produce the entire file, but the Court rejected that notion:
[26] In the context of litigation before this Court, the Appellant has initiated the litigation by appealing its assessment. Its Notice of Appeal raises the issue of its legal expenses. However, if the Appellant is required to reveal privileged information, it is forced to do so because of the Minister’s assumptions listed in the Reply to the Notice of Appeal. Unlike Campbell, and other cases in which an implied waiver has been found,[7] the Appellant in this context has no choice but to put its legal advice in issue. In fact, the litigation arises because the Minister questions the nature of that advice.
[27] Moreover, fairness and consistency would not operate to find an implied waiver in these circumstances. I accept that, in general, it is problematic to allow a litigant to pick and choose the privileged information to be disclosed. However, in this context it is both fair and reasonable to expect a taxpayer to reveal enough information to satisfy the Court and CRA as to the nature of the legal expense, while keeping the specifics of the lawyer’s advice confidential.
[28] To find otherwise would create an unreasonable and unacceptable rule. Taxpayers would effectively have the choice of foregoing a proper deduction for legal expenses or revealing to CRA the entirety of their lawyer’s files. Such a rule would be inconsistent with the status accorded to solicitor-client privilege as a substantive and fundamental civil right, and a privilege which must be as close to absolute as possible.
