Why use "Y"/"N" instead of a bit field in Microsoft SQL Server?

Welcome to brownfield. You've inherited an app designed by old-schoolers. It's not a design pattern (at least not a design pattern with something good going for it), it's a vestige of coders who cut their teeth on databases with limited data types. Short of refactoring the DB and lots of code, grit your teeth and gut your way through it (and watch your case)!

I've seen this practice in older database schemas quite often. One advantage I've seen is that using CHAR(1) fields provides support for more than Y/N options, like "Yes", "No", "Maybe".

Other posters have mentioned that Oracle might have been used. The schema I referred to was in-fact deployed on Oracle and SQL Server. It limited the usage of data types to a common subset available on both platforms.

They did diverge in a few places between Oracle and SQL Server but for the most part they used a common schema between the databases to minimize the development work needed to support both DBs.

Other platforms (e.g. Oracle) do not have a bit SQL type. In which case, it's a choice between NUMBER(1) and a single character field. Maybe they started on a different platform or wanted cross platform compatibility.