Date: 20120731
Docket:
T-1872-11
T-1852-11
T-1853-11
Citation: 2012 FC 950
BETWEEN:
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MINISTER OF
NATIONAL REVENUE
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Applicant
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and
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KENNETH A.
CLARK
ISLAND
BUSINESS INITIATIVES INC.
100530
P.E.I. INC.
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Respondents
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REASONS FOR ORDER
SNIDER J.
I. INTRODUCTION
[1]
The Minister of National Revenue (the Minister) is asking
this Court to issue an Order (Compliance Order), under s. 231.7 of the Income
Tax Act, RSC 1985, c 1 (5th Supp) [ITA], that would
require three separate parties to provide certain documents and information to
the Minister. A separate application was brought by the Minister for each of
the named parties; specifically, the Minister is asking for a Compliance Order
against Mr. Kenneth A. Clark (Court File No. T‑1872‑11) (Clark),
Island Business Initiatives Inc. (Court File No. T-1852-11) (IBI) , and 100530
P.E.I. Inc. (Court File No. T-1853-11) (100530).
[2]
Each of Mr. Clark, IBI and 100530 (collectively referred to
as the Respondents) acknowledge that they have not provided all of the
information sought by the Minister. Accordingly, the only issue raised in these
applications is whether some or all of the information and documents sought by
the Minister is subject to solicitor-client privilege as contemplated by s. 232(1)
of the ITA.
[3]
For the reasons that follow, I have determined that the
information and documents are not subject to solicitor-client privilege and
that a Compliance Order should issue.
II. Background
[4]
IBI facilitates investments between potential immigrants
and businesses located on Prince Edward Island in relation to a provincial
government program called the Prince Edward Island Provincial Nominee Immigrant
Partners Program (the PNP). As an investment intermediary under the PNP, IBI
contracts with Prince Edward Island companies (Investee Companies) interested
in receiving investments from immigrant investor applicants (PNP Applicants).
In addition, IBI contracted with professional immigration consultants (PICs) to
promote such investment.
[5]
100530 is the sole shareholder of IBI and, during the
relevant period of 2007 to 2009, Mr. Clark was the sole director of both IBI
and 100530. Mr. Clark is a lawyer whose practice, since 2005, has been
restricted to “acting as in-house legal counsel to IBI”.
[6]
In 2010, the Minister began an audit of the income tax
returns of Mr. Clark, IBI and 100530 for the 2007 to 2009 period in the case of
Mr. Clark, and 2006-2009 in the case of the corporations (the Audit Period). In
connection with the audit, the Minister sought information from the three
parties. In four Requirements for Information served July 21, 2010 pursuant to
s. 231.2 of the ITA (the Information Requests), the Minister
requested information and documents consisting mainly of banking and accounting
information related to transactions involving the PNP. As result of subsequent
discussions, some of the requested information was provided. In addition, a
sealed package marked “privileged” that purports to contain electronic
accounting records was delivered to an auditor with Canada Revenue Agency
(CRA); this package has not been opened.
[7]
As of the hearing of these applications, the Minister is still
seeking the information that is now set out in each of the three Orders that
will be issued.
III. Statutory Framework
[8]
I begin with a brief overview of the statutory scheme.
[9]
Section 231.2(1) of the ITA allows the Minister to
require any person to provide any requested information or documents,
upon notice. This authority is not restricted to taxpayers; third parties may also
be served with requests for information, so long as the Minister’s purpose is
related to the administration or enforcement of the ITA, a comprehensive
tax information exchange agreement between Canada and another country or
jurisdiction, or a tax treaty with another country.
[10]
Where a person fails to comply with such a request for
information, s. 231.7 provides the Minister with a means to enforce compliance.
Specifically, s. 231.7(1) allows the Minister to seek, by way of “summary
application”, a court order requiring the person to provide the information or
document sought under s. 231.2. To issue the order – commonly referred to as a
compliance order – the judge must be satisfied that (a) the person was required
under s. 231.2 to provide the information or document and failed to do so; and
(b) “in the case of information or a document, the information
or document is not protected from disclosure by solicitor-client privilege
(within the meaning of subsection 232(1))”.
[11]
Section 232(1) defines solicitor-client privilege as
follows:
“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 the person and the person’s 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.
[12]
Under s. 231.7(2), the person must be given
notice of the application at least five clear days before it is heard.
Subsection 231.7(3) gives the judge hearing the application the discretion to
impose such conditions on the order as the judge considers appropriate.
IV. Analysis
A. Principles
[13]
The jurisprudence provides much assistance in dealing with
the question before this Court. While recognizing that the Minister must have
powerful tools to carry out income tax audits, Parliament has also signalled its
respect of the solicitor-client relationship and privilege.
[14]
There is, however, no presumption of solicitor-client
privilege; the burden is clearly on the person claiming such privilege to
establish that the privilege applies (B v Canada, [1995] 5 WWR 374 at
para 33 (BCSC), 3 BCLR (3d) 363.
[15]
As set out in Canada (Minister of National
Revenue - MNR) v Reddy, 2006 FC 277 at para 12, [2006] 3 CTC 17,[Reddy],
solicitor-client privilege only applies where four conditions are established:
(a) there must be a communication,
whether oral or written;
(b) the communication must
be of a confidential character;
(c) the
communication must be between a client or his agent and a legal advisor; and
(d) the
communication must be directly related to the seeking, formulating or giving of
legal advice.
[16]
It is also established law that solicitor-client privilege
does not attach to records of financial transactions directed through a
solicitor’s trust account, such as cheques or a statement of adjustments (see
e.g. Reddy, above at para 14; Canada (Minister of National Revenue -
MNR) v Singh Lyn Ragonetti Bindal LLP, 2005 FC 1538 at para 18, [2006] 1
CTC 113 [Singh]; and Canada (Minister of National Revenue - MNR) v
Cornfield, 2007 FC 436 at paras 19-20, 312 FTR 81). In Singh, above at paragraph 18, Justice Mosley
explained that this is so because “such records are evidence of an act or
transaction rather than communications”.
[17]
Moreover, the fact that a person involved in a transaction
is a lawyer is not determinative of a solicitor-client relationship. As
observed by Justice Farley in Confederation Treasury Services Ltd (Re),
[1997] OJ No 3598 (QL) at para 13 (Ont Ct J (Gen Div)), 49 CBR (3d) 275:
I would also note that privilege does not automatically
come into play merely because a lawyer is engaged by a client. The privilege
attaches to the request for and obtaining of legal advice. It does not attach
to communications between a client and his retained counsel when that counsel
is either not acting as a lawyer or where it is not legal advice but rather
some other form of advice or other assistance being obtained.
[18]
Finally, I note that an obligation of
confidentiality does not equate to solicitor-client privilege (Solosky
v The Queen, [1980] 1 S.C.R. 821).
B. Respondents’ Position
[19]
The Respondents assert that the following documents sought
by the Minister may be subject to either client confidentiality or
solicitor-client privilege:
a.
IBI operated bank accounts, which contain party names;
b.
IBI “petty cash” account, which contains Applicant names;
c.
Kenneth A. Clark regular law office trust account, which
contains party names;
d.
Kenneth A. Clark PEI PNP Interest Bearing Trust Account,
which contains party names;
e.
Cancelled cheques containing party names;
f.
2007-2009 Simply Accounting records for IBI and Kenneth A.
Clark Law Office containing party names; and
g.
All immigrant investor files, which contain confidential
and personal information and names.
[20]
According to the Respondents, Mr. Clark provided “certain
legal information and guidance to PNP Applicants, Investee Companies and PICs
throughout the course of their applications under the PNP”, and “certain PNP
Applicants, Investee Companies and/or PICs ... could possibly contend their
personal information is subject to solicitor-client privilege and
confidentiality in respect of the materials in their respective PNP files and
any trust account records relating to them respectively”. In particular, the
Respondents say that “the communications between the Respondents and PNP
Applicants (including their names) may be potentially covered by
solicitor-client privilege and/or subject to confidentiality”. In addition, the
Respondents submit that privilege and/or confidentiality potentially attach to
their communications with Investee Companies and PICs with respect to PNP
Applicants’ files.
[21]
While acknowledging that s. 232(1) deems that an
“accounting record” of a lawyer is not subject to solicitor-client privilege,
the Respondents submit that, following the decision in Organic Research Inc v
MNR (1990), 111 AR 336 (QB), [1991] 1 CTC 417 [Organic], the
documents sought by the Minister are nonetheless subject to privilege, as they
are accounting records of clients who are not themselves under investigation.
C. Application
of the Principles to the Facts
[22]
One of the key concerns of Mr. Clark is with respect to his
obligation of confidentiality imposed by the Model Code of Professional Conduct
adopted by the Prince Edward Island Law Society. This is a justifiable and
serious concern. However, as acknowledged by the Respondents, the duty of
confidentiality does not exempt a lawyer from the operation of a s. 231.7
compliance order. Moreover, that duty does not necessarily give rise to
privilege. The Compliance Orders will provide Mr. Clark with a complete answer
to any concerns of the Law Society.
[23]
The other key concern for the Respondents is the potential
existence of solicitor-client privilege. As I understand their position, even
the Respondents acknowledge that the claimed privilege is a remote possibility.
[24]
I acknowledge that Mr. Clark, along with IBI staff, may
have reviewed PNP Applicants’ documents and provided information regarding PNP
and Citizenship and Immigration Canada requirements to Investee Companies, PICs
and PNP Applicants who were aware that he was a lawyer. However, Mr. Clark’s
evidence is that he “[u]sually” or “often” advised an Investee Company’s
representative that he was neither their lawyer nor the Immigrant Investor’s
lawyer and that he advised the PNP Applicants with whom he met that he was not
their lawyer. The evidence satisfies me that these individuals would have
concluded that Mr. Clark acted for IBI, and not for them. Thus any
communication was not between a client and a legal advisor.
[25]
Nor is it clear that the second requirement of
solicitor-client privilege is present, as the evidence does not establish that
Mr. Clark’s communications to Investee Companies, PICs or PNP Applicants were
of a confidential character.
[26]
Even if I were to accept that Mr. Clark provided Investee
Companies, PICs and PNP Applicants with “legal information and guidance” which
constituted confidential legal advice, none of the documents sought by the
Minister contain such information. Of the classes of documents which the
Respondents submit may be subject to solicitor-client privilege, the only
category which appears likely to contain any form of legal advice is (g) – “All
immigrant investor files, which contain confidential and personal information
and names”. With respect to the other classes of documents, the only
information which the Respondents suggest may be privileged is the names of
individuals and entities. In my view, the information and documents sought by
the Minister are merely evidence of an act or transaction, not of a
“communication” that attracts solicitor-client privilege.
[27]
The decision in Organic, above, is of little
assistance to the Respondents, as the cited passage indicates only that a
lawyer’s accounting records of clients are not “an accounting record of a
lawyer” for the purposes of the statutory exception to solicitor-client
privilege. That decision does not establish that such records are
subject to privilege.
[28]
I can also make only limited use of the case law and
commentary which the Respondents cite regarding solicitor-client privilege in
the context of lawyers who act in non-legal capacities, as those materials do
not speak to the specific facts before the Court in this case.
[29]
In sum, I am not persuaded that the Respondents have
satisfied their burden to demonstrate that solicitor-client privilege applies
to the information and documents requested by the Minister.
[30]
The Respondents propose that, if this Court
determines that the Compliance Orders should issue, that they be permitted to
redact or number-code the names of the PNP Applicants and PICs. I agree with
the Minister that such condition on the disclosure is not warranted.
V. Conclusion
[31]
In conclusion, I am satisfied that:
(a)
each of the Respondents was served with the Information
Requests as required under s. 231.2(1) of the ITA;
(b)
each of the Respondents was required under section 231.2 to
provide the information and documents sought by the Minister and did not do so;
and
(c)
the information and documents sought by the Minister are
not protected from disclosure by solicitor-client privilege.
[32]
At the close of the hearing of this application, I advised
the parties that I would be allowing the Minister’s application. However, I
expressed concern that the draft Compliance Order provided by the Minister, as
part of his application, should provide more detailed guidance. The parties
agreed to work together to provide a draft Order to the Court. The parties,
unable to agree on all terms of the draft Order, submitted two draft Orders for
my consideration.
[33]
Having reviewed the two draft Orders and the comments of
counsel for both parties and given my reasons, I have concluded that the
Compliance Order attached satisfies the requirements of the ITA.
[34]
A single Compliance Order will issue; a copy is to be
placed on each of the relevant files.
“Judith A. Snider”
Ottawa, Ontario
July 31, 2012
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