Errico, B.C.S.C.J.:—This is a motion directed to be heard at a pre-trial conference. It is for a declaration of the priorities to funds held by the petitioner as receiver-manager of Esket Wood Products Ltd. (Esket). The petitioner is also the trustee in bankruptcy of Esket under a Receiving Order made April 18, 1989. The appointment of the petitioner as Receiver-Manager was made by Starline Lumber Inc. (Starline), under its fixed debenture of certain of the assets of Esket by an appointment dated April 19, 1989 and accepted by the petitioner on April 24, 1989.
The disputed funds are claimed by the Attorney General of Canada on behalf of Her Majesty the Queen in Right of Canada for source and payroll deductions made by Esket for employees' income tax, unemployment insurance and Canada Pension Plan contributions and not remitted. These deductions were not kept separate by Esket and can neither be traced nor identified.
All Nations Trust Company (Antco) claims under its floating debenture over certain of the assets of Esket not secured by Starline's fixed debenture. Antco has never appointed a receiver under its debenture.
On March 16, 1989, Antco sent a representative to the sawmill site of Esket to attempt to seize and remove the inventory but were denied access by security personnel retained by Starline. It is not clear how Starline had any authority to do so, the receiver not being appointed until April 24, 1989. However, there is no suggestion that the actions of Starline prior to the receiving order affects the issues of priorities between the Crown and Antco.
As all of the interests arose before April 25, 1989, I do not think it necessary to consider what effect, if any, the provisions of the Personal Property Security Act, S.B.C. 1989, c. 36 have.
The first question I address is when, if ever, did the floating debenture of Antco crystallize and attach to the assets of Esket. Counsel for Antco acknowledges that an act of default under the debenture does not of itself convert the floating charge into a fixed charge. He submits that the actions of March 16, 1989 in attempting to seize inventory effectively crystallized the debenture. I do not think so, The evidence of what occurred is very sketchy, but nothing was done that would clearly indicate that Antco had taken steps to realize on its security. In Devlin and Multiply Development Corporation Ltd. v. Hean, [1982] 41 B.C.L.R. 206, Bouck, J. comments on the characteristics of a floating charge in the following passage on page 219:
However, an act of default by itself does not convert a floating charge into a fixed security. Something more must be done by the lender. One reason for this is because third parties who deal with the company must have some kind of notice the company can no longer sell its goods or operate in the usual course. A floating charge debenture registered with the registrar of companies under s. 75 of the Company Act, R.S.B.C. 1979, c. 59, gives the lender certain priorities. Others who contract with the company can look to the debenture and ascertain whether the company is free to do business with them or is restricted by any section of the loan agreement.
Where the lender has not taken any of the contractual steps to secure his charge, then these third parties are free to deal with the company as the rightful owner of its goods and assets in confidence and they are not specifically encumbered.
The actions of Antco were not of the sort that would give notice to any third party that they could not deal with Esket in the normal course of business.
If, however, Esket has ceased to carry on business, did that of itself result in the automatic crystallization of the debenture without further action by Antco? There appears to be little or no current judicial discussion of this in British Columbia or in Canada. However, in Re Woodroffes (Musical Instruments) Ltd., [1985] 2 All E.R. at 908 Nourse, J. considered the question closely and concluded that the automatic crystallization of a floating debenture takes place on the company ceasing to carry on business. Nourse, J. at page 913 says:
The question whether the cessation of the company's business causes an automatic crystallization of a floating charge is one of general importance on which there appears to be no decision directly on point. Such authorities as there are disclose a uniform assumption in favour of crystallization. There is a valuable discussion of them in Picarda Law Relating to Receivers and Managers pp 16-18. One of the questions there raised is whether there is any distinction for this purpose between a company ceasing to carry on business on the one hand and ceasing to be a going concern on the other. My own impression is that these phrases are used interchangeably in the authorities (see e.g., the judgment of Fletcher Moulton LJ in Evans v Rival Granite Quarries Ltd. [1910] 2 KB 979 hereafter cited), but, whether that be right or wrong, I think it clear that the material event is a cessation of business and not, if that is something different, ceasing to be a going concern.
Counsel for the bank started with Lord Macnaghten’s description of a floating charge in Governments Stock and Other Securities Investment Co Ltd v Manila Rly Co [1897] AC 81 at 86, where his Lordship said:
It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes.
In Illingworth v Holdsworth [1904] AC 355 at 358 Lord Macnaghten returned to the subject and spoke of a floating charge as being—
ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.
Counsel for the bank and counsel for Mrs. Woodroffe submit that if the company ceased business before September 1 that was an event which caused the bank's charge to settle and fasten on all assets of the company.
I was referred to the following further authorities on this question: Hubbuck v Helms (1887) 56 LJ Ch 536, Robson v Smith [1985] 2 Ch 118, Re Victoria Steamboats Ltd. [1897] 1 Ch 158, Davey & Co v Williamson & Sons Ltd. [1898] 2 QB 194, Re Yorkshire Woolcombers Association Ltd. [1903] 2 Ch 284 (Illingworth's case in the Court of Appeal), Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367, Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, and Re Crompton & Co Ltd [1914] 1 Ch 954. It is unnecessary for me to examine any of those cases in detail, or to quote extracts from the judgments of the many learned judges who decided them. They all, to a greater or lesser extent, assume that crystallization takes place on a cessation of business. Perhaps the assumption appears most authoritatively in the judgment of Fletcher Moulton LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 at 993. That was one of the latest of the cases to which I was referred. I would think that by that time the assumption had become well established.
Although the general body of informed opinion is of the view that automatic crystallization is undesirable (see in particular the report of the Review Committee on Insolvency Law and Practice (Cmnd 8558 (1982) paras 1570-1582), I have not been referred to any case in which the assumption in favour of automatic crystallisation on cessation of business has been questioned. On that state of the authorities it would be very difficult for me to question it, even if I could see a good ground for doing so. On the contrary, it seems to me that it is in accordance with the essential nature of a floating charge. The thinking behind the creation of such charges has always been a recognition that a fixed charge on the whole undertaking and assets of the company would paralyse it and prevent it from carrying on its business: see eg Re Florence Land and Public Works Co (1878) 10 Ch D 530 at 541 per Jessel MR. On the other hand it is a mistake to think that the chargee has no remedy while the charge is still floating. He can always intervene and obtain an injunction to prevent the company from dealing with its assets otherwise than in the ordinary course of its business. That no doubt is one reason why it is preferable to describe the charge as" hovering”, a word which can bear an undertone of menace, rather than as "dormant". A cessation of business necessarily puts an end to the company's dealings with its assets. That which kept the charge hovering has now been released and the force of gravity causes it to settle and fasten on the subject of the charge within its reach and grasp. The paralysis, while it may still be unwelcome, can no longer be resisted.
I do not think that this conclusion is contrary to the proposition that a default under the debenture is not sufficient to crystallize it. The cases which discuss that principle discuss the incongruity of a debenture-holder on the one hand claiming a priority over other creditors, and on the other, allowing the company to carry on business. In Devlin and Multiply Development Corporation Ltd. v. Hean, supra, Bouck, J. at page 220 says:
A lender may commence an action and be content to obtain judgment for the debt without seizing the assets. He may not wish to shut down the operation of the company by the imposition of a receiver on his behalf. Until the receiver takes over the company, others who deal with it are entitled to conclude the floating charge has not become fixed. Berger J. in R. v. Consol. Churchill Copper Corp., [1978] 5 W.W.R. 652 at 660-61, 30 C.B.R. (N.S.) 27, 90 D.L.R. (3d) 357 (B.C.S.C.), came to a similar conclusion:
But in order to convert the floating charge into a fixed charge, the debentureholder must terminate the licence as to the whole of the company’s business. Brameda had to do the one thing or the other. The debenture-holder cannot have it both ways: he must intervene, or he must leave the company to carry on business.
And at page 666:
But in order to terminate the company's licence to carry on business, the debenture-holder must in fact intervene. . . . While the security may become enforceable on default, still the debenture-holder must intervene to enforce his security before it crystallizes."
[Emphasis added.]
The concern that others should not be left in doubt whether they are free to do business with the company ceases when the company ceases to carry on business. This is recognized in the analysis of Nourse, J. in Re Woodroffes which I find very persuasive. I have concluded therefore that if Esket ceased to carry on business Antco's debenture automatically crystallized and attached to the assets charged under the debenture.
The fact that Esket ceased to carry on business was not questioned at the hearing of the motion. It was only raised by counsel for the petitioner and the Attorney General of Canada when I invited written submissions on the decision in Re Woodroffes. Counsel for Antco requests that if I am not satisfied on the material presently filed that Esket had ceased carrying on businessthat I adjourn the motion to allow for the evidence to be adduced. In the circumstances I do not think that necessary as I find that it has been established that Esket ceased to carry on business prior to April 18, 1989. The affidavit of John Berwick, the senior manager of the petitioner, exhibits both the receiving order made April 18, 1989 and the appointment by Starline of the petitioner as Receiver-Manager dated April 19, 1989 and accepted April 24, 1989. The receiving order cites, inter alia:
AND IT APPEARING to the Court that the following acts of bankruptcy have been committed namely:
(ii) it has ceased to carry on its business operations since January 15, 1989.
The appointment recites inter alia that Starline's debenture had become enforceable by reason that the company had ceased to carry on business. In the absence of any suggestion that Esket was carrying on business until the pronouncement of the receiving order on April 18, 1989, I am satisfied that Esket did cease to carry on business prior to that date. Accordingly I find that Antco's debenture crystallized prior to the date of the receiving order.
I turn next to the statutory trust under which the Attorney General claims on behalf of Her Majesty the Queen. Subsections 227 (4) and (5) of the Income Tax Act read as follows:
227.(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.
(5) Notwithstanding any provision of the Bankruptcy Act, in the event of any liquidation, assignment, receivership or bankruptcy of or by a person, an amount equal to any amount
(a) deemed by subsection (4) to be held in trust for Her Majesty, or
(b) deducted or withheld under an Act of a province with which the Minister of Finance has entered into an agreement for the collection of taxes payable to the province under that Act that is deemed under that Act to be held in trust for Her Majesty in right of the province
shall be deemed to be separate from and form no part of the estate in liquidation, assignment, receivership or bankruptcy, whether or not that amount has in fact been kept separate and apart from the person's own moneys or from the assets of the estate.
The relevant portions of the Unemployment Insurance Act and the Canada Pension Plan are similar.
In Manitoba (Minister of Labour) v. M.N.R. and Coopers & Lybrand Ltd. (Receiver of Omega Autobody Ltd.) (1989), 75 C.B.R. 185, the Manitoba Court of Appeal considered when these statutory trusts were impressed upon the property of the trustee in the absence of the funds being kept separate and apart or being otherwise traceable. In that case, the issues of priorities were between certain provincial statutory trusts and the statutory trusts arising out of the Income Tax Act, the Unemployment Insurance Act and the Canada Pension Plan. At page 194, Philip, J.A. for the majority says as follows as regards these federal statutory trusts:
Section 227 (4) appears to meet the requirements of certainty of intention to create a trust and of the object or beneficiary of the trust. If the person making the deductions under the Income Tax Act keeps them separate and apart, it would appear that an effective trust has been created. However, if liquidation, assignment, bankruptcy or receivership has not occurred (and note that s. 71(3) of the Unemployment Insurance Act does not refer to an act of receivership, an omission that has resulted in conflicting decisions of the court in the past), the problem of identifying or tracing the property that is the subject of the deemed trust arises. In the event of liquidation, assignment, bankruptcy, or receivership, the requirement upon the beneficiary of the trust to identify or trace the property subject to the trust is eliminated; on the happening of any of those events the enactment deems the trust property to be separate from and form no part of the estate in liquidation, assignment, bankruptcy or receivership.
On page 195 he continued:
There has been an absence of unanimity in the decisions as to the effect of those trusts in the event of bankruptcy; that uncertainty is not a concern in this appeal. This is not a bankruptcy case.
What, then, is the effect of the deemed trust created under s. 227(4) and (5) of the Income Tax Act in the face of the trust created under s. 3(4) of the Payment of Wages Act? There is no evidence that deductions required to be made under the federal statutes were kept by Omega in a separate account or were traceable. Prior to liquidation, assignment, bankruptcy or receivership, the trust was not impressed upon Omega's property (as is the case under s. 3(4), nor was property to discharge the trust obligation deemed to have been set apart.
It is s. 227(5) that removes the requirement of tracing the trust property, and deems the trust property to be separate and apart. It is that subsection that makes the deemed trust effective upon the property of a person who is required to make deductions.
In my view, the question of priority is to be determined, not by reference to the time the individual trusts are created but,rather, by reference to the time when the particular trust is impressed upon the property of the trustee. That time, with respect to the trust created under s. 227(4) and (5), was the date of the appointment of the receiver, namely, 9th October 1985. I repeat the words of s. 227(5): "in the event of any liquidation, assignment, receivership or bankruptcy of or by a person, an amount equal to the amount deemed by subsection (4) to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment, receivership, or bankruptcy”. That is the only interpretation that the words can bear.
In Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd. and Her Majesty the Queen, [1980] 1 S.C.R., 1182, Pigeon, J. for the majority, in considering whether income tax deductions withheld prior to the making of a receiving order took priority over a floating charge, referred to the decision of the Ontario Court of Appeal in Re Deslauriers Construction Products Ltd., [1973] O.R. 599. The Deslauriers decision dealt with the then provisions of the Canada Pension Plan. At page 1197, Pigeon, J. states:
The majority opinion in the Court of Appeal was based on the overruling of the Craftsmen's case by the Ontario Court of Appeal in Re Deslauriers Construction Products Ltd. That case, like Craftsmen's, dealt with the Canada Pension Plan, 1964-65 (Can.) c. 51 (now R.S.C. 1970, c. C-5). The relevant provisions are subss. 24(3) and (4) as follows:
(3) Where an employer has deducted an amount from the remuneration of an employee as or on account of any contribution required to be made by the employee but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.
(4) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (3) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer's own moneys or from the assets of the estate.
It will be noted that after providing in subs. 24(3) as in subs. 227(4) of the Income Tax Act, that the employer who has deducted an amount" shall be deemed to hold the amount so deducted in trust for Her Majesty”, subs. 24(4) goes on to provide that "In the event of any liquidation" an equal amount “ shall be deemed to be separate from . . . the estate in liquidation . . . whether or not that amount has in fact been kept separate". It is clear from the following passage of the judgment delivered by Gale C.J.O. (at pages 601-602) that the claim for the Pension Plan deductions was upheld in Deslauriers by reason only of those words which are not in the Income Tax Act:
On the facts of the instant case again, only notional deductions appearing on the payroll records had been made as the company could meet only its net payroll and its operational expenses.
On behalf of the Attorney-General it was submitted that, while the Minister would have no claim such as is asserted in this case under s-s. (3) if s. 24 ended there, none the less, in the light of s-s. (4), the Minister did have the right to receive out of the realization of the assets a sum representing the amount which was deducted from the employees' salaries, totalling $1,068.82. We agree with that interpretation of s-s.(4). It seems to us that s-s(4), and particularly the concluding six words thereof, were inserted in the Act specifically for the purpose of taking the moneys equivalent to the deductions out of the estate of the bankrupt by the creation of a trust and making those moneys the property of the Minister.
We agree with Mr. Olsson on behalf of the Attorney-General that the word "deemed" in the fourth line of s-s.(4) must be used in the sense of a conclusive rather than a rebuttable presumption since the contrary case, where the amount has not in fact been kept separate and apart, is specifically dealt with in the concluding part of that very subsection.
I find the reasoning in Deslauriers wholly persuasive and would note that in 1956, (c. 39, s. 27) Parliament repealed subs. (6) of s. 123 of the Income Tax Act, R.S.C. 1952, c. 148, whereby a first charge was created on the property of an employer for income tax deductions. I must therefore hold that the claim for the income tax deductions on wages paid by the employer itself before the receiving order cannot be supported.
It would appear from these passages that the Income Tax Act, which at that time did not contain a provision similar to the then subsection 23(4) of the Canada Pension Plan, or of the current provisions of subsection 227(5) of the present Income Tax Act, would not support the existence of a trust where there was no property allocated to it.
I find, then, that absent any event which would trigger the provisions of subsection 227(5) of the Income Tax Act and the similar provisions of the Unemployment Insurance Act and Canada Pension Plan, no trust was impressed upon the property of Esket in favour of Her Majesty the Queen in Right of Canada.
It follows that if the debenture of Antco was crystallized and became a fixed charge on the assets of Esket prior to the triggering event under subsection 227(5) of the Income Tax Act and the similar provisions of the other relevant statutes, Antco would take priority.
The receiving order was clearly such a triggering event as was the appointment of the receiver under the Starline debenture, butthose events were subsequent to the crystallization of Antco's debenture. Counsel for the Attorney General submits however that even if the Antco debenture crystallized, the very crystallization itself falls within the triggering events of subsection 227(5) of the Income Tax Act and the similar provisions of the Unemployment Insurance Act and the Canada Pension Plan, and that if the rights of the Crown and Antco arise by the same event, the Crown by ancient prerogative takes priority.
Prior to April 18, 1989, there was no assignment, receivership or bankruptcy of Esket. Was the automatic crystallization of the Antco debenture a liquidation of Esket? In Dauphin Plans Credit Union Ltd. v. Xyloid Industries Ltd. and Her Majesty the Queen, supra, Pigeon, J. considered the words in the then Unemployment Insurance Act" in the event of any liquidation, assignment, or bankruptcy of an employer" where there had been a receiver appointed under a debenture. In that Act no reference was made to receivership as in subsection 227(5) of the present Income Tax Act. At page 1200, Pigeon, J. said:
With respect, I am unable to agree. We are not concerned with a situation where the receivership does not end up in a liquidation, just as when considering a distribution in bankruptcy one is not concerned with the situation where the receiving order is discharged. We are here dealing with a receivership which was completed by the sale and distribution of all the assets of the employer company.
Further at page 1201, he says:
It seems to me that it would not make sense to hold that, because the assets of a company were realized by a receiver appointed at the request of a creditor rather than by a liquidator or a trustee in bankruptcy appointed by a court, the claim for wages should fail. It appears to me that there is no reason not to give the word "liquidation" its wide meaning in usual language. I would follow the reasoning made by Middleton J.A. in Davey v Gibson, at page 381:
The argument before us turned rather upon a discussion of the question whether the Act should be strictly or liberally construed. It is not, in my view, necessary to enter upon any such discussion.
The term “gone into liquidation” is not anywhere defined; the language is more or less colloquial, for there is not, at the present time, any legal proceeding known as liquidation. At one time there was, but it has long since been obsolete. The technical term used in the Companies Act is “wind-up,” although the officer appointed to conduct the winding-up is designated a liquidator.
If one searches dictionaries, it is not hard to find a definition of liquidation wide enough to include bankruptcy. In the Century Dictionary this is given: "Liquidation : the act or operation of winding-up the affairs of a firm or company by getting in the assets, settling with its debtors and creditors, and apportioning the amount of each partner's or shareholder's profit or loss, etc." In the Oxford Dictionary is the following: Liquidate: Law and commerce: To ascertain and set out clearly the liabilities of (a company or firm) and to arrange the apportioning of the assets; to wind up.” In Corpus Juris, that mine of information, is this definition: "Liquidation, a word of French origin, is not a technical term, and, therefore, can have no fixed legal meaning: but it has a fairly defined legal meaning, and it is said to be a term of jurisprudence, of finance, and of commerce. It is defined as the act of settling, adjusting debts, or ascertaining their amounts or balance due; settlement or adjustment of an unsettled account Applied to a partnership or company, the act or operation of winding up the affairs of a firm or company by getting in the assets, settling with its debtors and creditors, and appropriating the amount of profit or loss. . . .
In the Dauphin Plains decision Estey, J., dissenting in part, but not on this point, said as regards the use of the word liquidation” in the then legislation, at page 1210:
The term as employed in our law generally, whether or not it be qualified by the presence of the words "assignment" or" bankruptcy”, relates either to the realization of assets to pay debts or to the total disposition of the undertaking of an entity including not only the realization of assets to pay debts but for the distribution of any net surplus to the owners of the entity prior to its termination. Where the term is used as in the pension and unemployment statutes with reference to the liquidation "of an employer", it is clear, in my view, that the term carries its broad and general meaning, that is the process of disposing of an undertaking and terminating the existence of the entity.
I do not think that the automatic crystallization of the Esket debenture without more is a liquidation of the company. There is nothing at the time of such crystallization that relates to the realization of assets to pay debts or to the total disposition of the entity to realize assets to pay debts, or to distribute any surplus. In my view the effect of the automatic crystallization was simply the creation of a fixed security from a floating charge and nothing more. I find then that none of the events referred to in subsection 227(5) of the Income Tax Act or the similar provisions of the Unemployment Insurance Act and Canada Pension Plan occurred until the receiving order of April 18, 1989.
As a result there will be a declaration that the debenture of Antco takes priority over the claims of Her Majesty the Queen in Right of Canada on those assets secured by the Antco debenture.
The petitioner asked for costs of $1,000 to be paid from the estate. Counsel for Antco does not take exception to this although he questions the necessity for counsel appearing and making full submissions. In the circumstances I make the order for costs that is sought by the petitioner.
Order accordingly.
James Dawson Dixon and Euroclean Canada Inc. v. Deputy
[Indexed as: Dixon (J.D.) v. M.N.R.]
Supreme Court of Ontario (Henry, J.), June 23, 1989 (Court No. RE 2511/88)
Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,
The applicants brought the present motion to determine whether they had a solicitor-client privilege in respect of certain disputed documents seized by the respondent pursuant to search warrants issued against the applicants. The respondent alleged that the applicants, a corporation and its president, made false returns, evaded the payment of tax, and understated income in their returns in the 1983, 1984, and additionally in the president's case, 1985 taxation years, in connection with transactions relating to the sale of real property. There were two main issues: (1) whether the respondent had established a prima facie case of fraud which displaced the claimed privilege, and whether the documents in question lost any privilege by reason of their connection or relevance to the alleged fraud; and (2) whether certain of the documents, which contained statements of account for legal fees and disbursements were privileged, and if so, whether the privilege was displaced by association with the alleged fraud.
HELD:
It was well-established that solicitor-client privilege does not attach to documents exchanged in the advancement of a fraudulent or illegal act or purpose where (1) the allegation or charge of fraud is made, (2) a prima facie case of fraud is made out on the facts, and (3) the prima facie case is established on the balance of probabilities and not on the basis of mere conjecture. In the light of all the evidence available to the court, the Crown succeeded in establishing a sufficiently strong prima facie case, in fact and in law, that the applicant president engineered a scheme to evade tax and that the applicant corporation was or was deemed to be a party to that scheme. Consequently, such of the disputed documents that related to that scheme or were exchanged in the course of furthering that scheme which might otherwise be privileged, were divested of solicitor-client privilege. The documents in question were ruled on accordingly. The documents in respect of the statement of account were ordinarily privileged. Paragraph 232(1)(e) of the Income Tax Act did not displace the privilege. The statement of account was a form of report to the client, and as such was a privileged communication; it was not a solicitor’s accounting record within the meaning of paragraph 232(1)(e). The applicants discharged the onus of showing that the privilege had not been displaced by reason of the document being created or exchanged in furtherance of the alleged fraud, or reflecting advice or legal services in furtherance thereof. Order accordingly.
Joanne E. Swystun for the applicants.
Charlotte A. Bell for the respondent.
Cases referred to:
Solosky v. The Queen, [1980] 1 S.C.R. 821, 105 D.L.R. (3d) 745;
In re Goodman and Carry. M.N.R. (No. 1), [1968] C.T.C 484, 68 D.T.C. 5288;
In re Romeo's Place Victoria Ltd., [1981] C.T.C. 380, 35 D.T.C. 5295;
In re Hoyle Industries, [1980] C.T.C. 501, 35 D.T.C. 6363 (F.C.T.D.);
In re Milner, Atkins & Durbrow (Erie) Ltd., [1968] C.T.C. 405, 22 D.T.C. 5261;
O'Rourke v. Darbishire, [1920] A.C. 581;
The Queen v. Parker CarWash Systems Limited (1977), 31 D.T.C. 5327;
Mintz v. Mintz (1983), 38 C.P.C. 125;
Re Cox v. The Attorney-General of Canada, [1988] 2 C.T.C. 365, 88 D.T.C. 6494 (B.C.S.C.);
Mutual Life Assurance Company of Canada v. The Deputy Attorney General of Canada, [1984] C.T.C. 155, 84 D.T.C. 6177;
Re Evans (1968), 22 D.T.C. 5277.
Henry, J. [Orally]:—On November 22, 1988, officers of the Department of National Revenue, Taxation, pursuant to search warrants issued by this Court, attempted to seize certain documents upon the premises of two law firms in Kitchener, Ontario, pertaining to the affairs of the applicant taxpayers, James Dawson Dixon and Euroclean Canada Inc.
The solicitors claimed solicitor-client privilege attached to the documents in question, which were promptly sealed and delivered to the custody of the Sheriff, in accordance with subsection 232(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
The present application is brought pursuant to subsection 232(4) of the Act by the two taxpayers, for the purpose of determining whether the applicants have a solicitor-client privilege in respect of the disputed documents. That is the primary issue before me.
There is a second issue, concerning which my jurisdiction is disputed— whether the seizure of certain documents exceeded the authority conferred by the warrant.
Facts Alleged
This matter is in the process of inquiry only; no charge has yet been laid, nor has a civil action been commenced in the Court. There is no dispute, however, that, in the present state of the law, the applicants may claim privilege well before trial; see e.g., Solosky v. The Queen, [1980] 1 S.C.R. 821, 105 D.L.R.
(3d) 745 per Dickson, J. at page 833.
In the case at bar, the procedure is prescribed by section 232 of the Act which provides that the application authorized by subsection 232(4) shall be heard in camera and shall be disposed of summarily by the judge.
The facts as known to the present, are alleged in the affidavit evidence of Thomas Wilson, an officer of the Department of National Revenue, Taxation, who swears that he has personal knowledge of the facts deposed to. He swore the information on October 31, 1988, upon which the warrant was authorized, and deposes that he believes the contents to be true and correct; he further deposes to facts he personally discovered in the course of his investigation of the applicants' affairs for income tax purposes.
The information alleges reasonable and probable grounds to believe that the following offences have been committed by the applicant taxpayers.
That Euroclean Canada Inc. and its President, James Dawson Dixon, have committed an offence as defined by paragraph 239(1)(a) of the Income Tax Act by making false or deceptive statements in the T2 Returns of Income filed by Euroclean Canada Inc. for the taxation years 1983, and 1984;
That Euroclean Canada Inc. and James Dawson Dixon being an officer, director or agent of the said Euroclean Canada Inc., have committed an offence as defined by paragraph 239(1)(d) of the Income Tax Act by wilfully evading the payment of taxes imposed by the Income Tax Act upon Euroclean Canada Inc., for the taxation years 1983, and 1984, by understating its taxable income for the said taxation years;
That James Dawson Dixon has committed an offence as defined by Section 239(1)(a) of the Income Tax Act by making false or deceptive statements in his T1 Returns of Income filed for the taxation years 1983, 1984, and 1985;
That James Dawson Dixon has committed an offence as defined by Section 239(1)(d) of the Income Tax Act by wilfully evading the payment of taxes imposed by the Income Tax Act upon James Dawson Dixon for the taxation years 1983, 1984, and 1985, by understating his taxable income for the said taxation years;
The following facts are disclosed by the evidence or otherwise are common ground.
(a) Three corporate entities are involved in transactions which form the basis of the allegations of conduct of the applicants contrary to the Income Tax Act:
(i) The applicant taxpayer Euroclean is a wholly-owned subsidiary of A.B. Electrolux, in Sweden, and has its head office in Cambridge Ontario. Euroclean owned a warehouse property at 842 Victoria Street in Kitchener. The applicant James Dixon was, at the relevant times, the president of Euroclean and was working on a plan to consolidate the operations of Euroclean in Cambridge; part of the consolidation plan was to sell the Victoria Street Building and move the operation to Cambridge.
(ii) Lodi Developers Limited is an Ontario Corporation incorporated February 26, 1979. The shareholders are James Dixon and Lois Cybalski (wife of Jerry Cybalski) each of whom owns 50 per cent of the shares. James Dixon is president and Jerry Cybalski is secretary treasurer.
(iii) 571813 Ontario Limited was incorporated on November 30, 1983 and Robert A. Sutherland, a solicitor, held all the shares, totalling 100, in trust from that date to January 17, 1985. The shareholders' register shows two lots of 50 shares each, so held in trust, and that on January 17, 1985 they were transferred, 50 to James Dixon and 50 to Jerry Cybalski. No trust agreement setting out the terms of the trust contemporaneously with incorporation is found either in the corporate minutes or the shareholders' register, but the shares were transferred to Dixon and Cybalski pursuant to a meeting of the Board of Directors of 571813 Ontario Limited held on January 17, 1985. Mr. Sutherland, as President and Secretary of the Company, chaired the meeting, which resolved that:
Pursuant to a Declaration of Trust dated November 30, 1983, and an Authorization and Direction dated January 17, 1985, the following transfers of shares in the capital stock of the corporation are hereby approved and consented to. . .
The transfer is reflected in the shareholders' register as of that date.
The "authorization and direction” referred to in the Board's minutes, as I infer, consists of two unsigned documents (marked as copies) purporting to be directed to Sutherland by Dixon and Cybalski, respectively, under date of January 17, 1985, each in the following terms:
Pursuant to the declaration of Trust dated the 30th day of November, 1983, the undersigned hereby authorizes and directs you to transfer the share certificate standing in the name of Robert A. Sutherland to the undersigned, as beneficial owner thereof.
There are two other documents headed Declaration of Trust. The first, dated November 30, 1983, relates to Cybalski, and is unsigned and marked "Copy"; it reads:
The undersigned, Robert A. Sutherland, hereby acknowledges that the 50 common shares held by him and registered in his name in 571813 Ontario Limited is hereby held by him in trust for Jerry Cybalski, as beneficial owner, and further agrees to transfer the share certificate at any time, upon the request of the said Jerry Cybalski.
The second, dated March 16, 1984, in identical terms declares the trust in favour of Dixon. This document is apparently an original and is signed by Mr. Sutherland.
It is important to the Department's investigation to determine when Mr. Dixon's interest in the 50 shares of the company was created. I can say at this stage that on the evidence there is a clear inference that it came into existence under a trust arrangement made at the time of incorporation, on November 30, 1983. Mr. Sutherland was present at the formal meeting of the Board on January 17, 1985, when the transfer was authorized and it must be inferred that the Board was satisfied that the beneficial interest of Mr. Dixon was created on November 30, 1983 and it was so recorded in the minutes. The fact that the trust was reiterated on March 16, 1984 does not negative this conclusion, as it is quite consistent with the reaffirmation of a trust which commenced on November 30, 1983. I find therefore that Dixon had an undisclosed beneficial interest in the 50 shares of the company as of the date of incorporation, on November 30, 1983.
(b) Having identified the corporate entities involved in the transactions under investigation, I continue with the history. By letter dated February 13, 1984, Mr. Sutherland presented an offer to Euroclean Canada Inc.:
On behalf of clients of mine who do not wish their identities to be known at the present time. . .
to purchase the Victoria Street property. The offer was dated February 20, 1984 and the offered price was $775,000. The offer was conditional upon the execution of a lease back to Euroclean prior to closing, for a term of five years. While the basic terms of the lease were included in the appendix to the offer, after a counter- proposal the agreement of purchase and sale was concluded on March 5, 1984. It was provided that, if the parties did not before closing agree on mutually satisfactory terms of the final lease agreement, the agreement of purchase and sale was void. The agreement was signed by Mr. Sutherland in trust, and by Mr. Dixon as President and Mr. J. K. Hunter, as Vice-President, on behalf of Euroclean; closing was to be April 30, 1984.
(c) On or before March 7, Lodi Developers Limited retained W.H. Reimer, A.A.C.I., Canada Trust Realtor, I.C.I. Appraisal Division, to do an appraisal of the property as at March 1, 1984. Mr. Reimer, according to the report presented to Lodi on March 7, was under the impression that the proposed purchaser was Lodi. He appraised the market value at $1.5 Million. On this basis, the sale price agreed by the parties was approximately 50 per cent of fair market value. The Department's appraisal is $1.1 Million, and it was also the opinion of the manager of the Toronto Dominion Bank which arranged financing for the purchaser that the sale price was unrealistic; he appears to have had access to the appraisal of Mr. Reimer.
(d) On March 12, the Board of Directors of Euroclean met in New York. Mr. Dixon, as President, made the presentation in support of the sale, in accordance with the agreement of purchase and sale. The Board ratified the agreement. The President (Dixon) and the Vice-President (Hunter) were authorized to execute the necessary documentation on behalf of Euroclean, to carry out the agreement and to execute the lease back of the land and building:
including those terms and conditions referred to in the said agreement as they, in their discretion, deem necessary or advisable.
It is to be noted here that as indicated above, if the officers of Euroclean, Dixon and Hunter, did not finally agree on the terms of the lease, the sale would be aborted. There is nothing in the material at present disclosed to indicate that the Board was made aware that the sale was at other than fair market value. The Board agreed, however, that "on completion of the sale, the property was to be vacated as rapidly as possible, and the operation transferred and consolidated in Cambridge", the possibility of extricating itself from the lease being clearly in contemplation.
(e) On March 14, the purchaser, 571813 Ontario Limited, applied to the Toronto- Dominion Bank in Kitchener for mortgage financing. The loan was approved on March 16. It is clear from the memorandum of the bank’s manager and loan officer that they considered the purchase price unrealistic, that is, low, but concluded that Euroclean intended to confer a benefit on Dixon.
Although the shareholders of the company are described as Jerry Cybalski and Ingrid Dixon, the latter was never a shareholder. It is obvious that the bank officials viewed Dixon as a principal of the company as is indicated from the following extract from the report on the application for mortgage financing:
Because of the more than $10 Million product turnaround in 1983 we have no doubt that Euroclean also gave Mr. Dixon the. opportunity to purchase the Victoria Street building at drastically low market levels. As you can see, there are no real estate fees involved and we believe this is a tremendous opportunity for Mr. Dixon. For the last several years Mr. Dixon has been sharing his real estate deals with Mr. Jerry Cybalski who does a great deal of the legwork for Mr. Dixon so that the latter gentleman can concentrate on running the Canadian operations for Euroclean Canada Inc.
Basically, we don't think that the $775M price is realistic but represents a reward to Mr. Dixon for generating a substantial turnaround in the Euroclean Canada Inc.'s operations. As such, we don't think that the purchase price should be used as a benchmark and we should be obligated to stick to the 75% guideline and recommend the $700M C.R.E.I.L. as presented.
(f) In response to a request from the Department, Mr. Dixon provided the signed Declaration of Trust dated March 16, 1984 to which I have earlier referred.
(g) The lease agreement was concluded between the parties on March 20, 1984 and the transaction of purchase and sale closed on March 30, 1984. By that date it is clear that Mr. Dixon was, either under the trust arrangement at the time of incorporation or under the Declaration of March 16, 1984, or both, the beneficial owner of 50 shares in 571813 Ontario Limited, the purchaser. He was, before the sale closed, entitled to call for delivery of the shares which, in the result, he apparently did not do until February, 1985 when the formal transfer was made and recorded in the shareholders' register.
First Issue — Fraud
The first issue to be decided on this application is whether solicitor-client privilege attaches to the disputed documents now placed by the sheriff before the Court and which to this point I have not examined. There are seven files containing the disputed documents for which privilege has been claimed by the applicants; I have as yet not viewed any of these documents because counsel for the respondent asserts, on the basis of the evidence as I have outlined it above, that any privilege that may otherwise attach has been negatived or displaced because they relate to a fraudulent scheme of tax evasion to which both Dixon and Euroclean were parties.
There is no dispute between counsel, and the law is well established, that solicitor-client privilege does not attach to documents exchanged in the advancement of a fraudulent or illegal act or purpose, provided:
(a) a definite charge or allegation of fraud is made;
(b) a prima facie case of fraud is made out on the facts;
(c) the respondent discharges the onus of showing a prima facie case not by mere allegations of fraud but by evidence that establishes a prima facie case of fraud on the balance of probabilities and not on the basis of mere conjecture.
See: In re Goodman and Carr v. M.N.R. [No. 1], [1968] C.T.C. 484; 68 D.T.C. 5288 (Ont. H.C.); In re Romeo's Place Victoria Ltd., [1981] C.T.C. 380, 35 D.T.C. 5295 (F.C.T.D.); In re Hoyle Industries, [1980] C.T.C. 501; 35 D.T.C. 6363 (F.C.T.D.); In re Milner, Atkins & Durbrow (Erie) Ltd. (1968), 22 D.T.C. 5261 (B.C.S.C.)
Counsel therefore have asked me to determine this issue as a preliminary to the consideration of any of the disputed documents. Mrs. Swystun submits that as in any case where fraud is alleged, the Court should require the respondent to discharge the onus in the higher range of probability than the ordinary civil onus that applies to demonstrating a prima facie case in the absence of an allegation of fraud. However, in interlocutory proceedings to determine the privileged status of documents seized it is sufficient for the Crown to show a prima facie case of fraud, that is, on evidence that takes the case beyond mere conjecture or a simple bald assertion in an affidavit. I think that at this stage the onus is no higher than that. See O’Rourke v. Darbishire, [1920] A.C. 581 (H.L.) cited /n re Milner, supra.
The Crown's position is set out as follows in Ms. Bell's factum:
5. The Respondent submits that on the evidence found in the affidavit of Thomas Wilson, a prima facie case has been made that James Dixon was a shareholder of 571813 Ontario Limited at the time that the company was negotiating to purchase the Victoria Street Property from Euroclean Canada Inc., the company of which James Dixon was president.
6. The property was sold for considerably less than market value and consequently the transaction is deemed to be non-arm's length and a taxable benefit was conferred on James Dixon by Euroclean Canada Inc.
7. Neither Euroclean Canada Inc. nor James Dixon reported the benefit to Revenue Canada, resulting in the allegation that both parties have [been] [sic] made false declarations.
8. The Respondent therefore submits that solicitor and client privilege does not extend to any documents describing the shareholdings of 571813 Ontario Ltd., any documents describing the circumstances and particulars of sale of the Victoria Street property, nor to any advice or opinions or memoranda which would tend to establish the date of James Dixon's shareholdings of 571813 Ontario Ltd., or his involvement on behalf of Euroclean Canada Inc. in the sale of the Victoria Street property.
I agree with this.
As to Dixon:
On an objective and common sense view of all the evidence, I find that the respondent makes out a strong prima facie case that Dixon, from the outset, engineered the sale by Euroclean of the Victoria Street property to 571813 Ontario Limited at a price significantly below fair market value. This had the effect of conferring a direct benefit on the purchaser company. At all material times, I infer that Dixon had a beneficial interest in 50 per cent of the shares, and that an indirect benefit, taxable as income to him, was conferred on him by virtue of paragraph 6(1)(a) and subsection 56(2) of the Income Tax Act. These provisions are as follows:
6.(1)
(a) Value of benefits.—the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
(i) derived from his employer's contributions to or under aregistered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,
(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust, or
(iii) that was a benefit in relation to the use of an automobile, except to the extent that it related to the operation of the automobile;
56(2) Indirect payments. — A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
If this benefit had been transferred to Mr. Dixon direct by Euroclean, it would have been taxable in his hands as a benefit given by virtue of his office or employment, as president. He by then had knowledge of the extent of the windfall, as president of Lodi, who had received the appraisal report prior to the decision of the Board of Euroclean to ratify the contract of purchase and sale. That knowledge by him is imputed to Euroclean by virtue of his role as president. A fair reading of the minutes of the meeting of the Euroclean board, reflects that he had no difficulty in persuading the directors to accept his recommendation. The only rational conclusion is that in law the benefit was one falling within paragraph 6(1)(a). It is also clear that he, by exercising his influence over the board, caused the benefit to be conferred by Euroclean on his company, 571813 Ontario Limited which, under subsection 56(2) is an indirect benefit on which he is liable to tax. His obligation was therefore to declare the extent of the benefit for the taxation year in question under paragraph 239(1(d), which he failed to do. In my opinion, the respondent makes a strong prima fade case for making false or deceptive statements in his returns for the taxation year in question, and for wilful evasion of tax under paragraph 239(1)(d).
I have carefully considered Ms. Swystun's submission that the benefit or windfall was not conferred by Euroclean on Dixon, directly or indirectly, in respect of his office or employment. As she puts it, there is no evidence that Euroclean intended to confer a benefit on him in that capacity. Indeed, she submits that the evidence goes no farther than to disclose a normal transaction of sale of the Victoria Street property in the normal course of business as part of the consolidation plan. I agree that this is an alternative inference that one might make, but I do not, on all the evidence, consider it appropriate to do so. Euroclean is deemed to have the knowledge that Dixon had, as its president, which at the time of the board's meeting included knowledge of the undervaluation of the asset as expressed in the price. The only reasonable conclusion is that Euroclean is deemed to confer the benefit indirectly on him, through 571813 Ontario Limited because of his performance as president and the confidence the directors had in him. This conclusion is fortified by the impression received by the bank's officials as reflected in their report upon their decision to authorize the mortgage loan to Dixon's company. The application was made by Dixon and Cybalski together, the bank's officials were clearly under the impression that Dixon was a principal of the numbered company, that it had been incorporated for the purpose of purchasing the Victoria Street property, that both Dixon and Cybalski would be personal guarantors and that the significant undervaluation of the property reflected in the price (which they questioned) was intended as a means of rewarding Dixon for his performance as president of Euroclean. It is self-evident that, on reading the bank's credit report, the understanding or impression of the officials could only have originated with Dixon himself.
Ms. Swystun's position primarily depends upon her submission that Dixon did not come on the scene until after the deal had been arranged; he had no beneficial interest in the shares until the declaration of trust on March 16, 1984; he did not formally become a shareholder until February, 1985, long after closing. I do not agree. At all material times, as I find, Dixon had a beneficial interest in the shares; in the context of this case, the time of formal transfer is immaterial: that was a matter that under the trust declaration was within his control and, by postponing that act until January 1985, he could not, in my opinion, distance himself from the company so as to cover up the relationship that existed.
I have also not overlooked Ms. Swystun's further submission that the evidence of fraud must do more than tip the scale of probability and that the Crown has not discharged the onus. I do not agree. In my opinion, the evidence is sufficient to discharge the onus required in respect of an allegation of fraud, with respect to Dixon and also with respect to Euroclean.
As to Euroclean:
As to the allegation of fraud against Euroclean, the allegation is, as in the case of Dixon, that the company failed to report properly the proceeds of the sale as income as required by paragraph 239(1)(a) and wilfully evaded tax contrary to paragraph 239(1)(d) of the Income Tax Act.
The basis for tax liability on the part of Euroclean, as Ms.Bell submits, is found in paragraph 69(1)(b) of the Income Tax Act which provides that where the sale is at less than fair market value, in a non-arm's length transaction, the vendor is deemed to have received, as capital income or gain, the full amount of fair market value. Euroclean did not report this deemed gain allegedly in breach of the foregoing provisions.
69.(1) Inadequate considerations. — Except as expressly otherwise provided in this Act,
b) where a taxpayer has disposed of anything
(i) to a person with whom he was not dealing at arm’s length for no proceeds or for proceeds less than the fair market value thereof at the time he so disposed of it, or
(ii) to any person by way of gift inter vivos,
he shall be deemed to have received proceeds of disposition therefor equal to that fair market value;
It is the Crown's position that the transaction of purchase and sale of the Victoria Street property was not at arm's length, although not between related persons". Subsection 251.(1) of the Act provides:
251.(1) Arm's length. — For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm's length;
and
(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.
Ms. Bell agrees that the parties are not related persons, so that the question whether the parties were at arm's length is one of fact, under paragraph 251(1)(b).
I have no hesitation in finding, on the evidence as a whole, that the parties to the transaction of purchase and sale were not dealing at arm's length. For one thing, the sale was at a price significantly below fair market value. For another, the whole arrangement was engineered by Dixon, who on the one hand was able to exert his influence over the Euroclean board, his knowledge of the undervaluation being imputed to the company, and on the other as a principal of the purchaser, albeit with an equitable interest in 50 per cent of the shares, he was able to deal with Euroclean on behalf of the numbered company as purchaser. In my opinion, Dixon was the guiding mind, common to both vendor and purchaser, he had de facto control over both, and this gave to the vendor and purchaser a common purpose which must be imputed to both corporations, to accomplish the sale at an artificially low price. These factors as I see it lead inexorably to the conclusion that, for the purposes of section 69, the parties were not dealing at arm's length.
In these circumstances, Euroclean is deemed to have received full fair market value and is liable to tax on that income or gain. In these circumstances, Dixon, as president, and the guiding mind of the transaction, with full knowledge of the circumstances, was obliged to report in Euroclean's tax return the gain it was deemed to receive. He did not do so, and his default will render the corporation indictable. See R. v. Parker Car Wash Systems Ltd. (1977), 31 D.T.C. 5327 and authorities there cited per Hughes, J. (Ont. H.C.).
I have considered Ms. Swystun's submissions in reaching this conclusion; they are principally as follows:
(a) Under the Parker Car Wash decision, it is important to consider the authority of a corporate officer to do the act that subjects the company to criminal liability; Dixon did not, on the evidence, have authority to sell the land to the purchaser. I do not agree. It is a clear inference that Dixon had de facto authority and the necessary influence to assert it. In fact, he had the prior approval of the Chairman of the Board and the Board formally ratified the agreement that he had made. He had both de facto authority and sufficient control over the disposal of the Victoria Street property (which was ratified) for the purposes of imposing liability on the corporation.
(b) Second, she submits that the evidence does not support the conclusion that the parties were not dealing at arm's length; so far as Euroclean is concerned, it was dealing in the normal way with an independent purchaser and independently agreed to the sale at the price offered. Again, I do not agree. The nexus between the parties that removes the transaction from one at arm's length is the knowledge of Dixon of his role in the purchaser company, which knowledge is imputed to Euroclean. Dixon was in fact dealing for both parties and in that sense they have a common interest in the undervalued sale. This is so even if the Euroclean Board were in fact unaware of Dixon's dual role. In these circumstances, subsection 69(1) applies. It is my understanding that Ms. Swystun agrees that if the parties are found not to be dealing at arm's length, this result occurs.
I add that it may seem strange that assuming the Board to have been misled by Dixon as a result of which the company sold the property at much less than fair market value, Euroclean, as a"victim", should be held liable. This result is of course artificial, and is imposed by the statute. The key point is that because of his dual role, whether communicated to the directors or not, the two companies were deemed to be acting in concert, for mutual benefit, at an undervalued price, and so were not dealing at arm's length. The statute in these circumstances requires the company to declare the benefit and pay tax on it as described.
Conclusion
In light of all the evidence at present available to me, viewed on a ractical and common sense basis, I conclude that the Crown makes out a sufficiently strong prima facie case, in fact and in law, that Dixon engineered a scheme to evade tax by a sale of property to the purchaser, in which he had an interest, at less than fair market value, and that Euroclean was or was deemed to be a party to that scheme.
As a result, such of the disputed documents as relate to that scheme or were exchanged in the course of furthering that scheme which might otherwise be privileged, are divested of solicitor-client privilege by reason of their relevance to the alleged fraud. This ruling I endorsed on the application record on June 5, 1989.
I emphasize that I am not trying this case. The sole objective, at this stage, is to determine if there is, on the evidence in the investigation, a sufficient prima facie case of fraud at this stage to displace the privilege claimed. In my opinion, there is.
The next step is to consider the documents to determine if they have lost any privilege by reason of their connection or relevance to the alleged fraud.
The Disputed Documents
I proceeded then to examine the documents for which privilege is claimed with a view to determining:
(a) whether each document falls within a class to which solicitor-client privilege attaches; and if so,
(b) whether the privilege has been displaced by reason of the document being created or exchanged in furtherance of the fraudulent purpose which I have found to exist;
(c) whether any of the said documents, in any event, fall outside the authority of the search warrant and therefore should be returned to the solicitors from which they were taken; while these were tentatively identified, my jurisdiction to dispose of them is challenged as I have said at the outset.
Counsel commendably did a prodigious amount of work in organizing and describing all the documents. Because this preliminary work was of great assistance to the Court, and gives a ready means of recording the disposition of each document, I have placed the two lists prepared by Ms. Swystun and her covering letter of explanation in the Appendix. [NOTE—For purposes of general release of my decision I have here replaced the Appendix with the final Order to which is attached List #1 which we used as the working list and upon which the individual dispositions were recorded as explained hereunder. Thus proliferation of lengthy lists of documents for reporting purposes is avoided. The Appendix also includes Ms. Sywstun’s covering letter.]
I then examined each document in turn, in the presence of both counsel, in chambers and in camera I permitted Ms. Bell to have her "client" present (the investigating officer) to assist her, and permitted Ms. Swystun to have her law clerk to assist her.
I ruled on each document as it was examined and briefly explained my decision as I did so. It is self-evident that while Ms. Swystun, who was familiar with each document, could state her position, Ms. Bell was at a disadvantage, having no access to it. This problem was overcome in a practical way — Ms. Swystun stated the general nature of the document and the reason for her claim to privilege, and the contents so far as it was proper to disclose them; Ms. Bell then responded as best she could, quite effectively as it turned out.
In most cases the decision was almost self-evident, as could be seen from the descriptions in the List (see Appendix). They generally fall into the following categories when related to the definition of solicitor-client privilege set out in paragraph 232(1)(e) of the Income Tax Act, infra:
(a) communications of a confidential character between the client and legal adviser relating to the seeking, formulating or giving of legal advice;
(b) correspondence between solicitor and client, including the solicitor's letters reporting;
(c) communications between the solicitor and a third party where they are
(i) communications relating to existing or contemplated litigation of the client, or
(ii) communications where the third party is acting as agent of the client;
(d) memoranda or opinions prepared by the solicitor (either as work product or for delivery to the client);
(e) papers and materials created or obtained for the solicitor's brief for litigation, whether existing or contemplated;
(f) documents prepared by the solicitor for his own use in the course of performing his professional services to the client, including his notes, summaries, interoffice memoranda, memoranda to file and list for closing a sale;
(g) billing records relating to professional services rendered by the solicitor in advising the client and the trust account ledger;
(h) unexecuted and draft agreements;
(i) documents which are irrelevant or beyond the authority of the warrant.
A final important category consists of documents otherwise privileged which I decided had been divested of the privilege because they related in my opinion to the advancement of the fraudulent or illegal act or purpose. Most documents that fall into this category ante-dated the closing of the transaction of purchase and sale of the Victoria Street property. I included however later documents which related to the aftermath of the transaction, i.e., the “cleanup” phase. I also included documents which, in my opinion related to any attempt to “cover up" the impugned transaction. I did not however include documents which emerged once the Department's challenge was disclosed and which could fairly be said to be created or exchanged for the purpose of advising the clients as to their rights, obligations and liability and as to defences available.
Issue re Statement of Account for Legal Services
An issue arose as to documents labelled 3.6(a) to 3.6(d) which was a letter from Sutherland, Hagarty to their client Euroclean, dated June 8, 1988. It enclosed a statement of account for fees and disbursements relating to services for the period October 1986 to June 1988, well after the closing of the impugned Victoria Street transaction.
The documents consisted of a covering letter to the client, a standard block recital in narrative form of the services rendered, and a computer docket printout itemizing each service charged for, with the name of the solicitor, date, billable time and the charge for that item. The print-out gives virtually no information about the type of service rendered on each occasion, but the block narrative is descriptive in general terms of the services rendered during the period.
Ms. Swystun claimed privilege for the documents in this group as a communication by the solicitor to his client respecting legal services and advice intended to be confidential. Counsel then argued the question, first, whether the privilege attached to the documents and second, if so, whether it was displaced by association with the alleged fraud.
Ms. Bell submitted that there is no privilege by reason of the following definition of the Income Tax Act provided in paragraph 232(1)(e):
232.(1) Definitions. — In this section,
(e) "solicitor-client privilege”. —"solicitor-client privilege” means the right, if any, that a person has in a superior court in the province where the matter arises to refuse to disclose an oral or documentary communication on the ground that the communication is one passing between him and his lawyer in professional confidence, except that for the purposes of this section an accounting record of a lawyer, including any supporting voucher or cheque, shall be deemed not to be such a communication.
Ms. Bell referred to three judicial decisions in support of the absence of privilege. In re Romeo's Place Victoria Ltd., supra, Collins, J. in the Federal Court-Trial Division, held that a solicitor's trust account record of a client's transactions is, in ordinary circumstances, privileged, in the absence of fraud. However, the exception in paragraph 232(1)(e) above excluded the trust account records from the normal solicitor-client privilege because trust account records are undoubtedly accounting records of a lawyer.”
In Mintz v. Mintz (1983), 38 C.P.C. 125 (Ontario H.C.) at the trial of a divorce action the wife was awarded costs against the husband, to be taxed on a solicitor and client basis by way of complete indemnification for her costs. The wife submitted a bill for taxation at $165,000. Prior to taxation, the husband sought production of her solicitor’s dockets, correspondence between the wife and her solicitor’s fees and disbursements, the bill sent to her by the solicitor and the cheques given in payment. The wife claimed privilege for the documents. The issue came before Trainor, J. by way of stated case. He ordered the documents produced.
It is significant that Trainor, J. took a different position with respect to the pre-trial period and the taxation of costs after trial. At page 132, he states principle thus:
Ordinarily, a solicitor cannot be compelled to disclose communications, whether written or oral, passing directly or indirectly, between him and his client, or between him and a person who is communicating with him professionally with a view to becoming his client, for the purpose of giving or receiving legal, professional advice, if they are legitimate communications in the sense they are not made in furtherance of fraud or crime.
Halsbury's Laws of England (4th ed.), vol. 44, p. 52, para. 74
Four preconditions suggested by Wigmore [Wigmore on Evidence (McNaughton Rev. 1961), vol. 8, para. 2285] with respect to privilege generally are:
(1) The communications must originate in a confidence that they will not be disclosed.
(2) The element of confidentiality must be essential to the maintenance of the relationship.
(3) The relationship must be one that, in the opinion of the community, ought to be sedulously fostered.
(4) The injury that would inure to the relationship by the disclosure of the communications must be greater than the benefit gained through the correct disposal of the litigation.
The solicitor-and-client relationship clearly meets these standards prior to a trial taking place.
Where the issue after trial was the quantum of the wife's legal costs, the husband was entitled to know the basis of the claim in detail. Trainor J. expressed the view that at the trial much of the pre-existing privilege was lost or displaced by disclosure; and also that the greater good in Wigmore's fourth precondition should at that stage prevail. (I note that this case was not affected by any statutory exception as in the Income Tax Act.)
Ms. Bell cites, thirdly, Re Cox v. The Attorney-General of Canada, [1988] 2 C.T.C. 365; D.T.C. 6494 (B.C.S.C.) per Tyrwhitt Drake, J., which, she submits, ought not to be followed. This was an income tax matter to which paragraph 232(1)(e) applied, and the document for which privilege was claimed was the solicitors trust account ledger. The judge reviewed the authorities and declined to follow Re Romeo's Place concluding that the judgment was delivered per incuriam. Simply put, he held that the trust account records are much more than records of the lawyer; they are the records of the client's account and are privileged. The accounting records of a lawyer to which the statutory exception refers are records relating to his own business. This decision Ms. Bell asks me not to follow, as being bad law.
Ms. Bell further submits that even apart from the Income Tax Act provision, the account is not privileged; she however concedes that the explanation of the account may be privileged. Ms. Swystun referred me to Mutual Life Assurance Company of Canada v. The Deputy Attorney General of Canada, [1984] C.T.C. 155; 38 D.T.C. 6177 (Ont. H.C.) which was an application under the Income Tax Act section 232 to determine the question of solicitor-client privilege. One of the documents in issue was the statement of account sent by the solicitors to the client, Mutual Life. Southey, J. sets out the contents of the document, which appear to be much like the document before me. He considered the effect of paragraph 232(1)(e) with its exception. He clearly was of the opinion that, absent that exception, the privilege would ordinarily attach. He decided that the exception did not apply, as the statement of account was not part of the accounting records of the lawyer. See also, Re Evans (1968), 22 D.T.C. 5277.
Having considered the foregoing submissions and authorities, I have no hesitation in concluding that the statement of account in documents 3.6(a) to 3.6(d) constitutes a communication by the solicitor to the client that is ordinarily privileged. Paragraph 232(1)(e) does not displace the privilege; the exception simply does not refer to this type of document. In this respect, it is my opinion that the rationale in Evans, Mutual Life and Cox is sound, and ought to be followed and applied.
I add that if one looks at the document as a form of report to the client of what the solicitor has done, which it is, it becomes self-evident that it must be a privileged communication. The extent of the detail reported is immaterial— the more detail reported, the easier it is to perceive the principle, but it is only a matter of degree. It is not an accounting record of the solicitor's within the meaning of paragraph 232(1)(e).
The onus is on Ms. Swystun to show that the privilege has not been displaced by reason of the document being created or exchanged in furtherance of the alleged fraud, or reflecting advice or other legal services in furtherance thereof. The onus is discharged; the account refers only to advice and services that post-dated the period of the alleged fraud and does not relate to any subsequent furtherance of the alleged fraud such as a "cover-up". The privilege therefore is not displaced.
Disposition
For clarity I have indicated my disposition of each document on the list in the Appendix as follows, by the following symbols:
P. means the document is privileged and is to be returned to the solicitors;
N.P. means not privileged; in most but not all cases the original privilege has been displaced by association with the alleged fraud. In some cases it was waived. These documents are to be delivered by the Sheriff to the Departmental investigator, Mr. Tom Wilson, C.M.A., Revenue Canada, Taxation, 166 Frederick Street, Kitchener, Ontario NZG 4N1;
D. means, are for further determination as irrelevant, or beyond the authority of the warrant; this is a holding category to be retained by the court until a further motion is made by Ms. Swystun for their return;
R. means the documents are to be returned to the solicitors by agreement between counsel.
The remaining issues were ultimately resolved by counsel.
An order will therefore issue directing the Sheriff to deliver the documents in the categories P., N.P. and R. as indicated. Documents in category D. will remain in the custody of the court pending further disposition. The remainder of the application is adjourned to a date to be fixed; costs may also be spoken to at that time.
NOTE — The formal order disposing of the documents, which includes the working list as I have said earlier, forms part of the Appendix.)
Order
Having reviewed the documents contained in the seven files which were seized from Sutherland, Hagarty, Mark & Somerville and Cowling & Henderson on November 22, 1988, which documents have been more particularly identified in the List attached hereto, and having previously made an order dated July 21, 1989, for the return or release, as the case may be, of all of the documents in the said files but for the documents which were itemized in paragraph 5 of the said order, and having been advised by counsel for the applicants and counsel for the respondent that an agreement has been reached regarding the release or return, as the case may be, of the documents itemized in the said paragraph 5:
1. THIS COURT ORDERS THAT the following documents are documents in respect of which the Applicants, or either of them, have waived the claim of solicitor-client privilege and which shall be released to Thomas Wilson C.M.A., of Revenue Canada, Taxation, 166 Frederick Street, Kitchener, Ontario N2G 4N1 or such other person as is designated by the Deputy Minister of National Revenue for Taxation:
1.2, 1.3, 1.16a, 1.16b, 1.23, 1.24, 1.25, 1.26, 1.30,1.31, 2.3, 3.35, 3.49a, 3.49b, 3.59, 4.14b, 4.40, 6.48.
2. THIS COURT ORDERS THAT the following documents shall be returned to the Applicants’ solicitors, which documents the Respondent has agreed can be returned and has undertaken not to reseize:
1.6, 2.6a, 3.36, 3.60, 4.1, 4.47, 4.52, 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 6.7, 6.12, 6.13, 6.14, 6.15, 6.16, 6,17, 6,18, 6.23, 6.26, 6.27, 6.28, 6.29, 6.30, 6.31, 6.32, 6.33, 6.34a, 6.34b, 6.35, 6.49, 6.50, 6.51, 6.54, 6.55, 7.20 last page.
3. THIS COURT ORDERS THAT the Sheriff of the Judicial District of York shall deal with the documents referred to in paragraphs 1 and 2 above in accordance with those paragraphs, in the presence of a representative of each party.
Order accordingly.