Articles October 2004

Two recent cases are instructive regarding the omnipotence of the CCRA in civil matters.

With regards to business records, in the Kitsch decision, the Federal Court of Appeal rejected the argument that accountants and their clients have a class privilege over communications similar to solicitor - client privilege. In a nutshell, the Federal Court of Appeal concluded that taxpayers do not hire accountants for the same reasons they hire lawyers and that the court would not accord the accountant-client relationship the same level of privacy found in the solicitor-client relationship. The documents had to be produced. Now, before all the lawyers in Victoria pat themselves on the back, they should read the Tower decision.

In the Tower decision, the Federal Court of Appeal upheld the right of the CCRA to impose criminal penalties against taxpayers who refuse to answer questions posed in an audit. The Federal Court of Appeal reasoned that in a self-assessing tax system, the government has a broad power to compel people to explain their activities. As in Kitsch, the scrutinised tax planning was provided by an accountant. However, I doubt that the Tower decision would have been different if a lawyer had provided the advice.

Solicitor – client privilege could apply to prevent the taxman from getting at communications between a lawyer and a client, but it would likely not prevent the taxman from demanding that the taxpayer explain a particular peccadillo. The fact that civil tax law works under the principle of “guilty until proven innocent” means that the CCRA takes assessment positions that taxpayers must disprove. Typically, in tax matters, documents are the best evidence available. In other words, you may be forced to disclose privileged documents to defeat an audit.

So the answer to the first question posed above is “yes.” CCRA auditors are allowed to act very aggressively in an audit.

So what can you do? Two tenets resonate in the tax business: hire the right advisors and let the advisors do the talking.

First, when tax planning, remember that your accountant and lawyer know the rules and you should structure your relationship with them to maximize privilege. Typically, a tax lawyer relies on a client’s accountant to know that client’s day to day business dealings. A good accountant will be aware of planning opportunities when they arise and will refer clients to a tax lawyer where appropriate. A properly structured relationship should keep planning documents out of the hands of the CCRA in an audit.

Second, in an audit, resist the urge to blather. Your first call in an audit must be to the person who does your books or taxes. Let that professional control the audit. CCRA auditors seem to be trained to ask inocuous sounding, but damning questions and they speak a strange language where words like “avoidance” and “minimize” and “benefit” and “arm’s-length” have ominous meanings.

If the auditor does something like demand that you give written answers to a series of written questions, or gives you a letter proposing that you give all of your money to the CCRA, please understand that the audit is not going well. It may be time to get a tax lawyer involved.

The reality is that the CCRA has broad powers to scrutinize your business affairs. The right of solicitor – client privilege gives you an opportunity to wisely manage your relationship with the CCRA. However, this right is not a license for laziness. Even with privilege, someone has to talk to the taxman.

-- J. Andre Rachert

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