Background
In March 2022, the Canada Revenue Agency launched audits of a group of related taxpayers — including several holding companies and individual members of the Bleeman and Hofstedter families — for the 2019 and 2020 taxation years, to verify compliance with worldwide income reporting obligations under the Income Tax Act. As part of those audits, the CRA issued a Requirement for Information (RFI) to KPMG Canada LLP on April 25, 2024, demanding documents and information relating to valuation, tax planning, and professional services KPMG had provided to those taxpayers between 2016 and 2020.
KPMG did not comply by the specified deadlines. Instead, it took the position that a third party had asserted solicitor-client privilege or other privilege over all responsive documents, and in February 2025 provided the CRA with a privilege log listing 924 documents. KPMG itself took no position on the validity of those privilege claims, maintaining that the privileges belonged to its clients and could only be waived by them. Ninety documents from the log were subsequently produced directly by some of the taxpayers, leaving the bulk in dispute.
The Minister applied to the Federal Court under s. 231.7 of the Income Tax Act for an order compelling production. In May 2026, the Court issued an interim order (2026 FC 610) giving any person asserting privilege 30 days to seek intervener status and make submissions. No one did so.
The Court’s Holding
Justice Fothergill granted the Minister’s application and ordered KPMG to produce the outstanding required material within 30 days. The Court found that the privilege log did not contain sufficient information or particulars to support the claims of privilege asserted over the listed documents. Because the parties claiming privilege bore the burden of proving that disclosure would reveal privileged legal advice — and none of them came forward despite the interim order’s invitation — that burden remained unmet.
The Court also declined to exercise its discretionary power to receive the 924 documents in a sealed envelope for in camera review. That power is to be used sparingly and only where prima facie grounds for privilege are established on affidavit evidence. Here, given the sheer volume of documents, the nature of the dispute, and the complete absence of supporting evidence — particularly any evidence explaining how communications with an accountant fell within the scope of solicitor-client privilege — an in camera review was not warranted.
On costs, the Court declined to award any against KPMG. It accepted that KPMG was an unwilling participant that had acted appropriately toward its clients, the Minister, and the Court throughout the proceedings, and that costs are not ordinarily imposed on a respondent in such circumstances.
Key Takeaways
- A privilege log, standing alone, is not sufficient to sustain a claim of privilege; the asserting party must provide enough particulars on affidavit to make out a prima facie case that each document contains privileged legal advice.
- Where privilege is claimed over communications involving third parties such as accountants, there must be evidence explaining how the relationship or circumstances bring those communications within the scope of solicitor-client privilege.
- Courts will not conduct in camera review of a large volume of potentially privileged documents as a matter of course; that remedy requires an initial evidentiary foundation and is reserved for cases where circumstances compel it.
- An accountant or other third-party record-holder who takes no position on privilege claims and cooperates with the court process will not ordinarily be ordered to pay costs, even when production is ultimately compelled.
Why It Matters
This decision reinforces the practical limits of privilege assertions made by clients through their professional service providers in the context of CRA enforcement proceedings. A bare privilege log — without affidavit evidence explaining why each document qualifies — will not shield documents from a court-ordered production requirement under s. 231.7 of the Income Tax Act. Taxpayers and their advisers must be prepared to substantiate privilege claims with specificity, particularly when the communications involve non-lawyers such as accountants.
The ruling also clarifies the procedural obligations of third-party record-holders like accounting firms caught between client confidentiality duties and statutory disclosure obligations. KPMG’s approach — neutrally presenting the privilege log to the court and offering to abide by its ruling — was endorsed as appropriate conduct, and the no-costs outcome provides some reassurance to professional firms placed in that difficult position.