Alaris: Tax Court clarifies when accountants’ work for legal counsel is privileged

In Alaris Equity Partners Inc. v. The King, the Tax Court of Canada (the “TCC”) allowed a motion to compel production of certain documents that were prepared by accountants for lawyers. The TCC held that 10 documents prepared by Ernst & Young LLP (“EY”) for Felesky Flynn LLP (the “Tax Lawyers”) were subject to lawyer-client privilege, while four documents had to be produced as they did not deal with legal advice.

The decision highlights an important distinction: an accountant’s work is not privileged simply because a lawyer is involved. The purpose of the accountant’s engagement and the function of each communication are critical to determining whether privilege applies.

Key takeaways

• Privilege depends on function. Involving legal counsel does not automatically make an accountant’s work privileged.
• How the accountant is retained matters. Work performed directly for lawyers to enable them to provide legal advice may receive different treatment from ordinary accounting or tax advice.
• Privilege is assessed document by document. A privileged engagement does not necessarily make every communication arising from it privileged.
• Administrative communications can fall outside privilege. Emails concerning logistics, timing, or publicly available materials may be producible even where substantive work is protected.

Background

Alaris Equity Partners (the “Taxpayer”) was engaged in certain transactions in 2006 and 2008 that involved the use of certain tax attributes. The Tax Lawyers were retained as legal counsel for the 2008 transactions.

The Tax Lawyers retained EY directly to assist in certain due diligence activities. The 14 documents included EY’s due diligence report to the Tax Lawyers and 13 related emails, which the TCC reviewed in sealed, unredacted form.

When can an accountant’s work be privileged?

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

As set out by the Supreme Court of Canada in Solosky v. The Queen, the party claiming privilege must establish that the communication was made:

• for the purpose of giving or receiving legal advice;
• with the intent it be kept confidential and in confidence and not shared with a third party; and
• within the scope of ordinary legal engagement.

Privilege can extend beyond direct communication between a lawyer and client. However, facts that exist independently of a privileged communication may be ordered to be produced.

Why the Court found EY’s substantive work privileged

The TCC noted that while EY, not the Tax Lawyers, created all of the 14 documents, 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 have no privilege in Canada, except where:

• the accountant acts as an agent for the client or lawyer within the solicitor-client relationship; or
• the communication furthers a function essential to the solicitor-client relationship or the continuum of legal advice.

The TCC also noted that while general due diligence documentation is not inherently privileged, the focus is on the principal purpose of each document, rather than the due diligence process as a whole.

Accordingly, in order to be privileged, each document must satisfy one of the following criteria:

• the accountants who created them must be agents of the Tax Lawyers;
• the information contained in them must further a function essential to the lawyer-client privilege;
• they must fall within the “communication continuum,” i.e., the flow of communication as a conduit of legal advice; or
• they must be subject to litigation privilege due to facilitating 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.

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

Examining each document, the TCC found that 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 were privileged. These documents and emails served as the foundation for the ultimate legal opinion and fell within the continuum of legal advice.

On the other hand, 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.

Practical implications

Companies should carefully consider whether privilege applies and clearly document relationships. In Canada, there is no legal privilege for accountants providing accounting advice. Legal privilege can only apply where the accountant is acting as an agent for the lawyer or the client.

Legal privilege over an accounting firm’s work may depend on how the engagement is structured. In this case, the Tax Lawyers retained EY directly for work that the Tax Lawyers needed to render their legal opinion to the Taxpayer. Privilege is nonetheless assessed document by document to determine whether each document was essential to the rendering of legal advice.