Federation of Law Societies of Canada Constitutional Challenge to Mandatory Reporting Provisions in the Income Tax Act
Amendments to the Income Tax Act (“ITA”) expanding existing mandatory disclosure obligations, creating a new category of notifiable transactions, and deleting a provision that relieved parties from the disclosure obligation when it had been fulfilled by another party to the transaction, received Royal Assent at the end of June, 2023. Backed by significant financial penalties, the provisions require legal counsel acting as advisors and promoters to report to the Canada Revenue Agency on certain tax planning transactions. While information reasonably believed to be protected by solicitor-client privilege is exempt from disclosure, legal professionals are required to disclose other confidential information.
The Federation raised concerns about the amendments with government officials and in proceedings before Parliament prior to adoption of the provisions. In submissions to the House of Commons Standing Committee on Finance and the Standing Senate Committee on National Finance, and in meetings with officials of the Ministers of Finance and Justice, the Federation argued that the provisions threaten solicitor-client privilege and the independence of the legal profession, and undermine legal and ethical duties legal counsel owe their clients, including the duty of commitment to the client’s cause.
The Federation filed a petition challenging the constitutional validity of the amended mandatory disclosure provisions in the Supreme Court of British Columbia on September 11, 2023. In the Federation’s view, the amendments infringe the Canadian Charter of Rights and Freedoms and principles of fundamental justice that exist for the benefit of the people of Canada. The provisions, which require taxpayers, advisors, and promoters, including legal counsel, to report to the CRA on certain tax planning transactions, compel legal counsel to disclose confidential and potentially privileged client information to the government and undermine the duty of loyalty owed by members of the legal profession to their clients.
In what appears to have no justification other than an attempt to avoid the Federation’s argument under s. 7 of the Charter, the government amended the ITA to exclude the new mandatory disclosure provisions from the ITA’s General Offence Provision. This amendment became law on June 20, 2024, and is deemed to have come into force in June, 2023, when the amendments to the ITA were made expanding the mandatory disclosure obligations. In response, the Federation filed an amended petition on April 22, 2025, which is available here.
Lawyers and other members of the legal profession owe a duty of commitment to their client’s cause and are also bound by rules of professional conduct to maintain the confidentiality of information received from their clients. These principles are essential to the proper functioning of Canada’s justice system. They ensure that individuals receive legal advice informed by full and candid disclosure to their legal counsel that is uninfluenced by counsel’s own self-interest. The new provisions, which include significant financial penalties for failure to file the required disclosure returns, force legal counsel to choose between their own interests and those of their clients, undermining these important ethical duties and placing legal counsel in an irreconcilable conflict of interest. In its petition to the BC court, the Federation argues that the recent amendments to the ITA violate sections 7 and 8 of the Charter and undermine the duty of commitment to the client’s cause. The case raises many of the same issues that were at play in the Federation’s successful challenge to the application of provisions in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and related regulations to members of the legal profession. That case resulted in a 2015 decision from the Supreme Court of Canada (Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC) recognizing the duty of commitment to the client’s cause as a principle of fundamental justice. The Court held that the legislation violated both section 7 and section 8 of the Charter in its operations as against lawyers and was therefore unconstitutional.
On September 14, 2023, the Federation filed an application for an injunction, requesting the suspension of the impugned provisions as applied to legal counsel until the outcome of the substantive case. The application was granted on November 24, 2023, with the court’s reasons available here.
A date for the hearing on the merits of the Federation’s petition has not been set.