When is an accountant’s work privileged? Lessons for charities and non-profits from Alaris

Registered charities and not-for-profit organizations often involve both lawyers and accountants in compliance matters, transactions, and CRA reviews. When lawyers engage accountants to help them provide legal advice, an important question arises: will the accountant’s work be protected by lawyer-client privilege?

The Tax Court of Canada’s (“TCC”) decision in Alaris Equity Partners Inc. v. The King provides useful guidance. Although Alaris did not involve a charity, the Court’s analysis is relevant to charities and non-profits whose lawyers rely on accountants when providing legal advice.

What happened in Alaris?

The dispute in Alaris arose from transactions undertaken by Alaris Equity Partners (the “Taxpayer”) in 2006 and 2008 that involved the use of certain tax attributes. Felesky Flynn LLP (the “Tax Lawyers”) were retained as legal counsel for the 2008 transactions.

As part of their work, the Tax Lawyers retained Ernst & Young LLP (“EY”) to assist in certain due diligence activities. At issue before the TCC were 14 documents prepared in connection with that work: EY’s due diligence report to the Tax Lawyers and 13 related emails, which the TCC reviewed in sealed, unredacted form.

The legal framework

Solicitor-client or lawyer-client privilege applies to protect certain communications from disclosure to a third party (in this case, the government).

In Solosky v. The Queen, the Supreme Court of Canada established the test for privilege, requiring the party claiming it to demonstrate the communication was:

1. made for the purpose of giving or receiving legal advice;
2. intended to be kept confidential and not shared with a third party; and
3. made within the scope of ordinary legal engagement.

Privilege encompasses all communication in the solicitor-client relationship, but disclosure of facts independent of a communication may be ordered to be produced.

The TCC decision

Although the 14 documents were created by EY, not the Tax Lawyers, EY did so solely for the Tax Lawyers, and EY’s work was incorporated into the ultimate legal work product of the Tax Lawyers.

Accountants generally do not have privilege in Canada. However, an accountant’s work may be protected where the accountant is acting as an agent for the client or lawyer within the solicitor-client relationship, or where the communication furthers a function essential to the solicitor-client relationship or the continuum of legal advice.

The TCC noted that due diligence documentation is not privileged simply because it is created as part of a due diligence exercise. Rather, the analysis turns on the principal purpose of each individual document.

In considering whether the documents were protected, the TCC examined whether each satisfied one of the following criteria:

1. the accountants who created them were acting as agents of the Tax Lawyers;
2. the information in the document served a function essential to the lawyer-client privilege;
3. the document fell within the “communication continuum,” i.e., the flow of communication as a conduit of legal advice; or
4. litigation privilege applied because the document facilitated an investigation of a case for trial by counsel.

The TCC distinguished between an accountant engaged by legal counsel for specific tasks and one retained generally by a client. In this case, EY acted “solely and directly” for the Tax Lawyers and was contractually an exclusive agent of the Tax Lawyers.

The TCC reasoned that had the Tax Lawyers undertaken the due diligence, it would have been privileged, so that privilege should not be lost because it was performed by an agent. The key issue was whether EY’s work was central or essential to the legal opinion.

The TCC found that documents and communications that formed the foundation of the legal advice were privileged. These included EY’s due diligence report, information requests, emails between EY and the Tax Lawyers, and emails between the Taxpayer’s representatives and EY in respect of the legal issues. These documents and emails served as the foundation for the ultimate legal opinion and fell within the continuum of legal advice.

Not every communication met that threshold. The TCC found that emails describing the process and timing of document delivery were not privileged. Similarly, an email attaching a public document was not privileged.

Privilege depends on the purpose of the communication

The TCC’s decision reinforces that lawyer-client privilege is about substance rather than form. Privilege is not lost through delegation if the requisite elements are met and that delegation is a conduit for legal advice.

By contrast, communications are not privileged if they are merely administrative or logistical, as there is no provision of legal advice. Ultimately, privilege depends on the function and purpose of the particular communication.

Practical implications for charities and not-for-profit organizations

When legal counsel for registered charities and not-for-profit organizations needs to engage accountants in order to provide legal advice, Alaris highlights several practical considerations:

• Consider the engagement structure at the outset. Where appropriate, having legal counsel retain the accountant directly may help demonstrate the relationship between the accountant’s work and the provision of legal advice.
• Define why the accountant is being retained. The engagement documentation should accurately reflect the accountant’s role and the purpose of the work.
• Separate legal-advice work from ordinary accounting services. An accountant’s general accounting or tax advice does not become privileged simply because legal counsel is involved.
• Be deliberate about communications. Administrative emails concerning scheduling, document delivery or other logistics may not be privileged even where substantive work relating to legal advice is protected.
• Do not assume the entire engagement is privileged. As Alaris demonstrates, privilege may need to be assessed communication by communication and document by document.