Judge's gavel with magnifying glass on black.

A judge has ruled that lawyers will not have to comply with the Canada Revenue Agency’s new mandatory disclosure regime until a court rules on a constitutional challenge against the regime.

The Federation of Law Societies of Canada, an association of legal regulators from every province and territory, claims that provisions in the regime requiring legal counsel to report information about their clients’ activities are in breach of the Canadian Charter of Rights and Freedoms because of the threat they pose to solicitor-client privilege.

An interim injunction exempting legal professionals from the law on a temporary basis has been in place since the FLSC launched its challenge, and British Columbia Supreme Court Justice Lisa Warren agreed with the FLSC that an extension is warranted until the end of the case.

If the new rules are ultimately found unconstitutional, Justice Warren explained in the Nov. 24 decision, lawyers who made disclosures in the meantime could cause irreparable harm to individual clients, thus undermining public confidence in the legal profession. By contrast, she concluded the exemption would have “minimal” impact on the administration of the Income Tax Act, considering other advisors and taxpayers themselves would still be required to comply.

Tax lawyer Jack Silverson, a partner in the Toronto office of Osler Hoskin & Harcourt LLP, was not involved in the legal case, but he and his colleagues in the tax law bar are closely following its progress.

“It’s obviously just a first step, but I’m pleased that the injunction was issued so that the court can consider the broader issue,” he said.

As well as dramatically lowering the threshold for what the CRA considers a reportable transaction, the new regime created a brand new category of “notifiable transactions,” requiring reporting of transactions identical or substantially similar to ones the CRA has previously identified as potentially abusive.

The point of contention for lawyers is the onus on every advisor or promoter involved in a reportable or notifiable transaction to make their own separate disclosure to the CRA, rather than relying on a single report from the taxpayer. Penalties for non-compliance could rise as high as $110,000 plus the value of all fees charged.

“Now the lawyer is potentially subject to penalties as well, so they have an independent decision to make that may be at odds with their client,” Silverson said. “It’s a very awkward position to put the lawyer in.”

Silverson said he remains “guardedly optimistic” about the FLSC’s chances of victory in court and the prospect of a permanent exemption for lawyers from the mandatory disclosure rules.

However, it could be some time before a final determination is reached. In 2010, when the same parties last clashed in court over the constitutionality of reporting requirements applicable to lawyers in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, they agreed to a similar exemption for lawyers pending a final ruling.

More than five years passed before a majority of the Supreme Court of Canada eventually upheld lower court rulings concluding that the requirements breached sections 7 and 8 of the Charter by impinging on a lawyer’s duty of commitment to their client’s cause.