1013808 Ontario Inc. v. The Queen, 94 DTC 6352, [1994] 1 CTC 401 (Ont. Ct. (G.D.))

Platana, J.:—This is an application pursuant to section 232 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), to determine whether certain documents seized from the offices of Walter C. Wieckowski, a solicitor, by persons authorized to seize same under the provisions of the said Act, are subject to solictor-client privilege and need not be turned over to the Minister of National Revenue.

A preliminary issue was raised as to the validity of the notice served and whether it is "reasonable" within the meaning of paragraph 231.2(1)(b). That section reads:

Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,

(b) any document.

The notice in question is contained in a letter dated November 25, 1993, from the Director of Taxation, Thunder Bay district office, to the solicitor:

Dear Mr. Wieckowski:

For purposes related to the administration or enforcement of the Income Tax Act, pursuant to the provisions of paragraph 231.2(1 )(b) of the said Act, I hereby require from you, within 24 hours of receipt of this notice:

1013808 ONTARIO INC. MINUTE BOOK AND SHARE REGISTER.

If this notice is not complied with, within 24 hours of receipt, you will be liable for prosecution without further notice ....

Upon receipt of this letter, the solicitor replied to Revenue Canada the following day claiming solicitor-client privilege. The documents in question have now been sealed and deposited with the Court.

One of the issues raised by the solicitor in his response is that he was not advised "who you are trying to administer and enforce the Act against". The solicitor also stated that "since (the company) was just incorporated and its year end has not yet been established . . . no taxes could possibly be owed by this company”.

No issue as to the timing of the notice was raised by the solicitor in that response.

Dealing initially with the response of the solicitor that the company has just been incorporated and no year end had been established, counsel for the respondent has referred me to James Richardson and Sons Ltd. v. M.N.R., [1984] 1 S.C.R. 614, [1984] C.T.C. 345, 84 D.T.C. 6325 as authority that it is not necessary that the person from whom the information is sought be one whose liability to tax is under investigation. By extension, it therefore appears to be irrelevant whether any taxes could or could not possibly be owed by the company and is further irrelevant whether any year end has yet been established.

The position of the applicant is that the notice of November 25, is not “reasonable” within the meaning of the Act. In that regard counsel for the applicant has referred me to the decision in Joseph v. M.N.R., [1985] 2 C.T.C. 164, 85 D.T.C. 5391 (Ont. S.C.). The notice in that case read at page 165 (D.T.C. 5392):

I require from you, without delay, production of books and records as follows:

All books, letters, accounts, invoices, statements (financial or otherwise) or other documents pertaining or relating to the above-noted parties. . . .

In considering the aspect of “reasonable notice”, Galligan, J., determined at page 169 (D.T.C. 5395):

In my view, a “reasonable time” is not "without delay” or "immediately". . . . A reasonable time contemplates some delay.

In Canada v. McKinley Transport Ltd., [1990] 1 S.C.R. 627, [1990] 2 C.T.C. 103, 90 D.T.C. 6243 at pages 645 (C.T.C. 112, D.T.C. 6249), Wilson, J., indicates:

Since individuals have different expectations of privacy in different contexts and with regard to different kinds of information and documents, it follows that the standard of review of what is "reasonable" in a given context must be flexible if it is to be realistic and meaningful.

Clearly, each case must be determined on its own facts including a review of all circumstances. These circumstances include the person who is the subject of the notice, the time given and the nature of the documents requested. In this case, it is significant to note that the documents specified in the notice are records which are required to be kept by the Business Corporations Act, R.S.O. 1990,

c. B-18, sections 140 and 141. They are not documents which are required to be kept by a solicitor but rather by the company. They are not documents which require a solicitor to search through his files and then review the documents in order to determine whether solicitor-client privilege applies. In my view, the listing of specific documents of this nature clearly take these circumstances outside of the "fishing expedition" which courts are frequently faced with and which clearly would require a different application of what constitutes reasonable notice.

In the circumstances of this case a distinction can be made between the facts in the Joseph case. The general principle formulated by Galligan, J., of seven to ten days in my view is appropriately applied to circumstances where the request is for non-specific documents of a nature which are not required to be kept by statute.

In all of the circumstances in this case I determine that the notice was reasonable and the application fails on the first ground. The question then arises as to whether the documents are subject to solicitor-client privilege. A consideration of what constitutes solicitor-client was engaged in by Teitelbaum, J., in Gregory v. Canada, [1992] 2 C.T.C. 250, 92 D.T.C. 6518 (F.C.T.D.). At page 258 (D.T.C. 6523) of that report he indicates [quoting Jackett, P. in Susan Hosiery Ltd. v. M.N.R., [1969] C.T.C. 353, 69 D.T.C. 5278 (Ex. Ct.) at page 359 (D.T.C. 5281)]:

As it seems to me, there are really two quite different principles usually referred to as solicitor and client privileged, viz:

(a) all communications, verbal or written, of a confidential character, between a client and a legal advisor directly related to the seeking, formulating or giving of legal advice or legal assistance (including the legal advisor’s working papers, directly related thereto) are privileged; and

(b) all papers and materials created or obtained specifically for the lawyer’s “brief” for litigation, whether existing or contemplated, are privileged.

To be privileged, documents therefore must relate to matters in which a solicitor’s professional advice is sought in his capacity as solicitor, and not merely documents required to be kept by law and in the solicitor’s possession in his/her Capacity as a repository or holder of the documents. The mere keeping of such records cannot be considered part of a solicitor's work. They are, rather, documents relating to corporate business of the nature determined by Galligan, J., in Playfair Developments Ltd. v. D./M.N.R., [1985] 1 C.T.C. 302, 85 D.T.C. 5155 (Ont. S.C.), to be not privileged.

The final issue raised in the application is whether the notice given to the solicitor was for the purpose related to the administration and enforcement of the Income Tax Act. The only evidence before me as to the purpose for the notice being given is contained in the letter sent to the solicitor by the Department. That letter states that the documents are required for the purposes related to the administration or enforcement of the Income Tax Act. There is no other evidence before me on this point. As indicated in James Richardson and Sons Ltd., supra, at page 623 (C.T.C. 350, D.T.C. 6329):

[T]he test of whether the Minister is acting for a purpose specified in the Act is an objective one and has to be decided on the proper interpretation of the subsection and its application to the circumstances disclosed.

Since there is only the evidence contained in the letter, I can only come to the conclusion that the notice was indeed related to the administration and enforcement of the Act.

Since I have determined that the documents are not subject to solicitor-client privilege, they should be turned over to the respondents by delivering same to Wolf Stockhecke, Director, Taxation, Thunder Bay District Office, Revenue Canada.

In accordance with the provisions of the Act there shall be no order as to the costs of these proceedings.

Order accordingly.

Attorney General of Canada on behalf of Her Majesty The Queen in

[Indexed as: Avalon Developments Ltd., Canada v.]

British Columbia Supreme Court (Col I ver, J.), November 23, 1993 (Court File No. C934463 Vancouver Registry), on an application to set aside a jeopardy collection order.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

M was a director of several companies including the three respondents known as the Molnar group. Seven of those companies (not including the three respondents) were substantial tax debtors whose total unpaid tax obligations exceeded $500,000. A Revenue Canada collections investigation officer, S, investigated the financial statements of the debtor companies and discovered that each of the companies had transferred its surplus funds to another company in the group. S therefore concluded that each of the companies had been deliberately stripped of assets by way of inter-company loans in order to prevent Revenue Canada from collecting on any of the tax debts owed by the debtor companies. Subsequently, based on S's affidavit, Revenue Canada brought an ex parte application for a determination that delay would jeopardize the collection of tax from the three respondents. The order was granted on August 9, 1993. On this motion, brought in September 1993, the respondents applied to set aside the ex parte order. In his affidavit in support of the motion to set aside, M rejected the notion of asset dissipation or removal, deposing to the retention of assets in excess of the amount of the outstanding taxes, but making no comment as to why any of the listed companies had failed to pay its obligation which, in the case of each, existed at the time of the inter-company transfer. The respondents made two arguments. First, they contended that the “jeopardy” provisions of subsections 225.2(2) and (3) apply only to a taxpayer, not to a third party garnishee who is alleged to be indebted to the taxpayer. Second, they argued that “jeopardy” provisions of subsections 225.2(2) and (3) could not be invoked until the Minister had issued a third party demand under subsection 224(1) and, if there was no compliance, the third party's liability had thereby been established pursuant to subsection 224(4).

HELD:

Since subsection 225.2(2) refers to an amount assessed “in respect of a taxpayer”, collection, without notice or delay can, in addition to being sought from the taxpayer, be immediately sought from a third party. Accordingly the "jeopardy" provisions of the Act apply to a third party garnishee. Furthermore, once the Court is satisfied that delay would jeopardize the Minister’s ability to collect “an amount assessed in respect of a taxpayer”, any of the actions enumerated in paragraphs 225.1 (1 )(a) to (g) could be taken forthwith (and simultaneously), as was done here. Application dismissed.

Bruce J. Harwood for the petitioner.

Craig C. Sturrock for the respondents.

Collver, J.:—The respondents, Avalon Developments Ltd., Molnar Construction Ltd., and 942 Holdings Ltd., have applied to set aside an order which I made on August 9, 1993, under the provisions of section 225.2 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). I made the order on an ex parte application, having determined that delay would jeopardize collection of tax. The order authorizes the taking of collection action fort with, notwithstanding the statutory restriction on such action during the 90 days following the mailing of a notice of assessment by Revenue Canada.

Before I discuss the two bases upon which the respondents challenge the validity of my order of August 9, 1993, I should mention some of the information and considerations which satisfied me that the order was justified.

In an affidavit filed in support of the petition, Ronald K. Schramm, a Revenue Canada collections investigation officer, detailed the corporate activities of Andre Molnar, a well-known British Columbia entrepreneur. Mr. Molnar is a director of a number of companies (including the three respondents) described by Mr. Schramm as the “Molnar Group of Companies". Seven of those companies (not including the three respondents) are substantial tax debtors, and their total unpaid tax obligations currently exceed $500,000.

Mr. Schramm's investigations, which included examination of the financial statements of the debtor companies, revealed that during the past few years each of the companies, apparently at the end of a development project, has transferred its surplus funds to another company in the Molnar Group. These "advances" from or to affiliated companies are described as “non-interest bearing, and have no specific terms of repayment". Millions of dollars have been transferred in this fashion—with the financial statements of each company reflecting the rather loose repayment arrangements I have described.

When, on July 19, 1993, Revenue Canada made a demand on eight Molnar companies for payment of delinquent taxes, Andre Molnar, signing as "President and C.E.O.” of Molnar Group Inc., replied:

We advise you that at the present time there are no funds available to these companies. We will forward payment for each account as funds for the company become available.

This, apparently, was the response which prompted Mr. Schramm to depose:

From my investigations conducted in respect to the taxpayer companies above referred to as well as the respondents, Avalon Developments and Molnar Construction Ltd., I believe that each of these companies has been deliberately stripped of assets by way of inter-company loans in order to prevent Revenue Canada from collecting on any of the tax debts owed by the taxpayer companies.

However, in a responding affidavit filed in support of the application to have my August 9, 1993 order set aside, Mr. Molnar rejected the notion of asset dissipation or removal, deposing to the retention of assets in excess of the amount of the outstanding taxes, but making no comment as to why any of the listed companies has failed to pay its tax obligation which, in the case of each, existed at the time of the inter-company transfer.

In oral reasons, pronounced at the end of the August 9, 1993 hearing, I characterized the various advances as "maneuverings". I do not, upon reflection, resile from that.

Having been told, for example, that the respondent, 942 Holdings Ltd., had received advances totalling almost $2,000,000 from the respondent, Molnar Construction Ltd. (which, previously, had received advances from related tax delinquents), and that the respondent, 942 Holdings Ltd. had title to the only tangible asset Mr. Schramm was able to identify, I commented:

Now, the overwhelming conclusion that I draw from reading Mr. Schramm's detailed affidavit is that the Molnar group of companies must be called to account for the pattern of transfers of monies from associated companies to either of the respondents, Avalon Developments Ltd., Molnar Construction Ltd., or 942 Holdings Ltd., over the course of the past two or three years, in light of the resulting claimed inability of the companies from whom those advances had been obtained to pay their tax obligations.

Before I turn to the bases upon which revocation of my order is sought, I will summarize the applicable statutory provisions.

Subsection 225.1(1) of the Act stipulates that when a taxpayer is liable for payment of an amount assessed, legal proceedings, including attachment, cannot

e brought before the expiration of 90 days, or until judgment if the assessment is appealed.

However, subsection 225.2(2) of the Act, pursuant to which the Minister petitioned here, authorizes collection action forthwith, if a judge is satisfied that collection of an amount assessed in respect of a taxpayer would be jeopardized by a delay in collection.

Furthermore, subsection 225.2(3) provides that an authorization may be granted under subsection 225.2(2) in respect of an amount assessed in respect of a taxpayer, notwithstanding that a notice of assessment has not been sent to the taxpayer, where the judge is satisfied that the receipt of the notice of assessment would likely further jeopardize collection.

As to garnishment, subsection 224(1) provides for third party attachment of an amount payable to the tax debtor, and subsection 224(4) stipulates that failure to comply with such a payment requirement invokes liability on the garnishee to pay an amount equal to the amount otherwise payable to the tax debtor. Subsection 227(10) provides that the Minister may assess any person for any amounts payable under subsection 224(4).

Counsel for the respondents first contends that the "jeopardy" provisions of subsections 225.2(2) and (3) apply only to a taxpayer, not to a third party garnishee who is alleged to be indebted to the taxpayer.

However, I accept the petitioner's submission that since subsection 225.2(2) refers to an amount assessed "in respect of a taxpayer”, collection, without notice or delay can, in addition to being sought from the taxpayer, be immediately sought from a third party. I am, therefore, satisfied that the "jeopardy" provisions of the Act apply to a third party garnishee.

Counsel for the respondents further contends that since the third party has no pre-existing liability to the Minister, the "jeopardy" provisions of subsections 225.2(2) and (3) cannot be invoked until the Minister has issued a third party demand under subsection 224(1) and, if there is no compliance, the third party's liability has thereby been established pursuant to subsection 224(4).

With respect, that approach would render subsections 225.2(2) and (3) toothless with respect to these respondents, as third parties. I accept the petitioner’s submission that once the court, is satisfied that delay would jeopardize the Minister’s ability to collect "an amount assessed in respect of a taxpayer", any of the actions enumerated in paragraphs 225.1 (1)(a) to (g) can be taken forthwith (and simultaneously), which is what happened here.

For the above reasons, I am not prepared to set aside my order of August 9, 1993.

Application dismissed.