In re Cotrono, 82 DTC 6068, [1982] CTC 67 (FCTD)

Mahoney, J:—This is an application, pursuant to paragraph 232(4)(c) of the Income Tax Act, for a determination whether or not the applicants have a solicitor-client privilege in respect of certain documents. The respondent seized them from the files of the applicants’ solicitor and says that the communications contained therein may have been in furtherance of a fraud of which the solicitor was entirely unaware. The fraud alleged is that Vincent J Cotroneo and a number of others, not party to this application, and not including Francis Cotroneo, made false and deceptive statements in their 1979 and 1980 income tax returns. The applicants’ attack was directed entirely to the sufficiency of the proof in fact of a prima facie case of fraud.

The attack on the sufficiency of the respondent’s proof is founded on the decision in /n re Romeo’s Place Victoria Ltd et al, [1981] CTC 380; 81 DTC 5295. There Mr Justice Collier held that, this sort of proceeding being final in nature, the affidavits filed had to meet the requirements of Rule 332(1).

RULE 332. (1) Affidavits shall be confined to such facts as the witness is able of his own knowledge to prove, except on interlocutory motions on which statements as to his belief with the grounds thereof may be admitted.

He found inadmissible those portions of the affidavit supporting the allegation of fraud, sworn by an officer of the Department of National Revenue, “which indicate his information is based not on personal knowledge, but from enquiries or information and belief”.

I have perused the affidavit filed in that proceeding. There were no exhibits. The officer merely deposed to what he had learned or been told in the course of his investigation and as to the conclusions he had drawn from that information. The counterpart affidavit of Wlademir W Liachomsky filed here in is a very different document. In support of the conclusions of fact to which he deposes, Liachomsky identifies 50 exhibits, including photocopies of income tax returns, bank statements, land registry documents and correspondence, running to several hundred pages.

Counsel was invited, and declined, to make a case for any claim of privilege on behalf of Francis Cotroneo apart from his joint claim with Vincent J Cotroneo. I therefore proceed on the basis that the claim of privilege as to all documents is vitiated if the evidence establishes a prima facie case of fraud on the part of Vincent J Cotroneo.

There are two general areas urged by the respondent as establishing a prima facie case of fraud: (1) transactions starting with M & M Currency Exchange Ltd and proceeding through a complex of corporations, incorporated in a number of domestic and foreign jurisdictions, and (2) statements of net worth as at December 31, 1976 and 1980, given by Vincent J Cotroneo and his wife in response to a demand under paragraph 231(3)(a) of the Act. In determining whether a prima facie case of fraud on the part of Vincent J Cotroneo has been established, I have considered the documentary evidence exhibited to Liachomsky’s affidavit. I have not given weight to conclusions which the deponent has drawn from that evidence although I agree with many of them. Such statements of conclusions are argumentative, not factual. With one exception, I have not taken account of facts alleged on information and belief. That exception is instances where Liachomsky, who is an officer of the Department of National Revenue, deposes that he has caused searches of the department’s records to be made and has been advised and believes that no income tax returns have been filed. In any case, while facts of that nature fill in the canvas, they are not essential to an appreciation of the picture. I have accepted the copies of the documents produced as exhibits as both true copies and as admissible evidence of the truth of their contents even though their authenticity, if challenged, could not be proved by the deponent.

The evidence certainly establishes a prima facie case of fraud on the part of M & M Currency Exchange Ltd, hereafter “M & M”. For its fiscal year ended June 30, 1980, it filed a “nil” return under the Income Tax Act stating that it had been inactive. Suffice it to say, between July 11, 1979, and June 30, 1980, $7,064,072.46 had been deposited and $7,064,070.97 had been withdrawn from a bank account operated in its name, omitting the “Ltd”, by the directing mind of one of its shareholders and a professional advisor to Vincent J Cotroneo and others said to have taken part in the alleged fraud.

Vincent J Cotroneo was the owner of one of the two issued shares of M & M between February 1 and June 1, 1980. Some of the money that passed through M & M’s bank account found its way, via an assortment of trust accounts, to be lent to a numbered Ontario company to permit it to purchase land in Ontario. Vincent J Cotroneo owns 50% of the shares of that Ontario company. It is, I think, unnecessary to say more of the M & M rooted transactions. They are numerous and complex.

As to the statements of net worth, the acquisition of a residential property in New York was omitted. The applicants have filed an affidavit, sworn by a Buffalo attorney, stating that Vincent J Cotroneo is not the beneficial owner of that property but invoking solicitor-client privilege in declining to identify the beneficial owner. Under the circumstances, I expressly decline to consider whether, in this proceeding, evidence rebutting a prima facie case of fraud may be acted on by the Court. The circumstances here are such that, in the absence of identification of the beneficial owner, the explanation is entirely insufficient. If the beneficial owner is among the individuals menti- oned in Liachomsky’s affidavit, that fact might well tend to confirm rather than rebut.

I find that a prima facie case of fraud on the part of Vincent J Cotroneo has been made out and that applicants’ claim of solicitor-client privilege cannot be sustained regardless of the contents of the documents. The documents which were delivered to the Court for inspection if necessary, will be returned to the custodian to be delivered by him to the person designated pursuant to subparagraph 232(5)(b)(ii) of the Act.