MNR v. Canadian Bio-Mass Research Inc., 89 DTC 5123, [1989] 1 CTC 289 (FCTD)

Muldoon, J.:—The applicant herein, Roger Lawrence, one of the respondents above named, applies pursuant to subsection 232(4) of the Income Tax Act, above cited, [the Act], for an order under subparagraph 232(5)(b)(i) of the Act to release certain seized documents as being impressed with a solicitor-client privilege. Appended to his affidavit, sworn December 6, 1988, and filed herein is a copy of the warrant issued in these proceedings by Madam Justice Reed, of this Court, at Ottawa, Ontario on October 7, 1988. This warrant is the second one authorizing search and seizure of documents in the premises of Roger Lawrence. The first was directed to office premises, but when the informant, Maurice Kin Chung Ma attended there he found the office to be vacant and so he made a further application for a warrant to search for and seize documents in Roger Lawrence's residential premises. The application was granted.

The terms of the second warrant, which was executed, are important. It runs as follows:

WHEREAS it appears on the oath of Maurice Kin Chung Ma, of the City of Vancouver, in the Province of British Columbia, an officer of the Department of National Revenue, Taxation, that there are reasonable grounds for believing that:

(a) THAT Roger Lawrence has committed an offence as defined by Section 239 of the Income Tax Act by participating in a scheme to inflate Scientific Research Expenditures claimed by Canadian Bio-Mass Research Inc., Coastal Natural Research Inc., and Pacific Western Research Inc., thereby wilfully evading or attempting to evade compliance with this Act for the 1984 and 1985 taxation years and payment of Part VIII tax for the 1985 taxation year for these companies;

(b) THAT Michael Richards has committed an offence as defined by Section 239 of the Income Tax Act by making, or participating in, assenting to or acquiescing in the making of false or deceptive statements in his T1 return of income for the 1985 taxation year by understating his net income by $2,639,062.00 thereby wilfully evading or attempting to evade compliance with this Act;

(c) THAT Dara Wilder has committed an offence as defined by Section 239 of the Income Tax Act by wilfully evading or attempting to evade the payment of taxes imposed by this Act for his 1985 taxation year in that he benefitted or directed that other persons benefit from the appropriation of Scientific Research Tax Credit funds pertaining to Canadian Bio-Mass Research Inc. and Coastal Natural Resources Research Inc. and failed to report these benefits;

(d) THAT Ronald Johnson has committed an offence as defined by Section 239 of the Income Tax Act by wilfully evading or attempting to evade the payment of taxes imposed by this Act for the 1984 and 1985 taxation years in that he benefitted or directed that other persons benefit from the appropriation of Scientific Research Tax Credit funds pertaining to Pacific Western Research Inc. and failed to report these benefits;

(e) THAT Roger Lawrence has committed an offence as defined by Section 239 of the Income Tax Act by making, or participating in, assenting to or acquiescing in the making of false or deceptive statements in his T1 returns of income by claiming amounts designated under Section 194 of the Income Tax Act totalling $550,000.00 for the 1984 taxation year, and by understating his net income by approximately $2.3 million for the 1984 and 1985 taxation years thereby wilfully evading or attempting to evade compliance with this Act;

(f) THAT Michael Vaz has committed an offence as defined by Section 239 of the Income Tax Act by making, or participating in, assenting to or acquiescing in the making of false or deceptive statements in his T1 returns of income for the 1984 and or 1985 taxation years by understating his net income by about $2.3 million thereby wilfully evading or attempting to evade compliance with this Act;

(g) the documents or things described in Appendix A to this Warrant may afford evidence of the commission of the offences set out in paragraphs (a) through (f) above, and are likely to be found; and

(h) the building, receptacle or place that is likely to contain the said documents or things, or some part of them, is:

the residence of Roger Lawrence, Barrister and Solicitor, at 1075 Millstream Road, in the Corporation of the District of West Vancouver, in the Province of British Columbia.

THIS IS THEREFORE to authorize you to enter the said premises between the hours of 6:00 a.m. and 9:00 p.m. during the fifteen (15) day period from and including the 11th day of October, 1988 to and including the 25th day of October, 1988, and thereafter to search for the said documents or things, to seize them, and to bring them or a report in respect thereof, before me or some other Judge of this Court if I am unable to act.

Appendix A

The following books, records and documents or things belonging to or pertaining to Roger Lawrence, Lawrence & Company, Roger Lawrence Enterprises Ltd. (now Cheshire International Service Ltd.), Mid-Pacific Services Inc., International Technical Research Consultants Ltd., All Strong Limited, Bloomax Limited, Prosperous Nation Limited, Divimet Investments Limited, Wellstone Development Ltd., Gemming Ltd. and Gold Pool Co. Ltd. and pertaining to the period January 1, 1984 to December 31, 1986:

(a) banking records or copies thereof, including trust accounts, cancelled cheques, deposit slips, memoranda, and monthly statements;

(b) originals or copies of accounting records, including correspondence, invoices, expense vouchers, agreements, contracts, memoranda, and working papers;

(c) books of original entry or copies thereof, including general ledgers, subsidiary ledgers, sales journals, purchase journals, receipts journals, disbursements journals, and general journals;

(d) originals or copies of computer or word processor storage media, which contain or have stored in them any type or kind of information or data, referred to in subparagraphs (a) to (c) above, including discs, diskettes, tapes or files , program and system documentation, manuals, operating instructions, software, including any system or application software and documentation required to access and reproduce any data contained in the foregoing storage media, and any related supporting documentation; and

all or some part of which books, records, documents or things, as well as affording evidence of the said offences, are required for the determination of:

taxable income and tax payable required to be reported pursuant to the provisions of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended, by Michael Richards for the taxation year 1985, by Dara Wilder for the taxation years 1984 and 1985, by Ronald Johnson for the taxation years 1984 and 1985, by Roger Lawrence for the taxation years 1983, 1984 and 1985, and by Michael Vaz for the taxation years 1984 and 1985.

It is to be noted that the applicant, Roger Lawrence, is alleged not only to be a participant in a scheme to inflate the expenditures of his corporate corespondents and thereby to evade compliance with the Act, in paragraph (a) of the warrant, but he is also alleged personally to be a principal in the making of false or deceptive statements in his own personal income tax returns, in paragraph (e) of the warrant. He seeks a determination of solicitor-client privilege on behalf of his clients, but he does not allege that such privilege permeates the documents by virtue of any such relationship he himself has, as client, with some other solicitor. Here are the operative and innocuous paragraphs of the affidavit of Roger Lawrence:

1. That I am a member in good standing of the Law Society of British Columbia.

2. That I carried on the practice of law from June of 1980 to December of 1986 in the City of Vancouver, Province of British Columbia.

3. That I did not practice law in 1987 but was reinstated as a member of the Law Society of British Columbia in January of 1988.

4. That while carrying on the practice of law I was retained by various clients for the purpose of giving legal advice. That attached hereto and marked Exhibit "A" to this my affidavit is a list of some of the clients for whom I provided legal advice.

5. That on October 12, 1988 the officers of the Department of National Revenue attended at my personal residence at 1075 Millstream Road pursuant to a warrant to enter and search issued under the authority of section 231.3 of the Income Tax Act. That attached hereto and marked Exhibit "B" to this my affidavit is a true copy of the warrant to enter and search.

6. That the officers of the Department of National Revenue seized, inter alia, information, documents, computer records, and files pertaining to the clients set out in Schedule "A" to this my affidavit.

7. That the files, computer records, documents and information seized by the officers of the Department of National Revenue which relate to the clients set out in Schedule "A" to this my affidavit were prepared during the course of and pursuant to my retainer as counsel for the purpose of giving legal advice and were intended to be confidential.

9. That the cheque stubs seized by the Minister pertain to the trust accounts kept by your deponent on behalf of certain of the clients referred to in Schedule "A".

10. That I make this affidavit in support of a claim of privilege on behalf of those clients described n Exhibit "A" to this my affidavit with respect to the documents pertaining to the said clients seized by officers of the Department of National Revenue on October 12, 1988.

In Schedule ”A”/Exhibit "A" annexed to the above recited affidavit, 11 persons, firms or corporations are listed. Of these, Pacific Natural Resources Inc. and Coastal Natural Resources Research Inc. are fellow respondents of the applicant Lawrence, as is disclosed in the style of cause, and the latter is an alleged beneficiary of the offence levied against him in paragraph (c) of the warrant. Of the remaining nine clients, none is specifically named in the style of cause, or the warrant or its appendix.

The schedule attached to the Court's order dated December 8, 1988, lists the material in which no privilege is claimed. That in which privilege is claimed comprises documents lodged in various places or containers described in a memorandum from Mr. Lawrence's solicitors, which counsel produced at the hearing. Counsel also tendered a memorandum of argument and a blue-covered book of jurisprudential authorities. Some of this jurisprudence addresses that which both counsel agreed is the first order of adjudication herein: Does the material disclose a prima facie case of attempted fraud, fraud or other wrongdoing? If not, then one will examine the particular documents individually for solicitor-client privilege.

A finding of such a prima facie case will vitiate the claim of privilege. Such a preliminary conclusion is based upon these two judgments at least: In re W.B. Milner, Atkins & Durbrow (Erie) Ltd., et al., [1968] C.T.C. 405: 68 D.T.C. 5261 (S.C.B.C.), and In re Goodman & Carr et al. v. M.N.R. [No. 1], [1968] C.T.C. 484; 68 D.T.C. 5289 (S.C.O.) in both of which is mentioned the decision in Bullivant et al. v. The Attorney-General of Victoria, [1901] A.C. 196. In this latter judgment, Lord Halisbury is reported at page 200, thus:

. . . this limitation has been put, and justly put, that no Court can be called upon to protect communications which are in themselves parts of a criminal or unlawful proceeding. . . . in order to displace the prima facie right of silence by a witness who has been put in the relation of professional confidence with his client, before that confidence can be broken you must have some definite charge either by way of allegation or affidavit or what not. I do not at present go into the modes by which that can be made out, but there must be some definite charge of something which displaces the privilege.

Applying the notion of ejusdem generis to Lord Halisbury’s “allegation or affidavit or what not", it would be natural to receive viva voce testimony. In that regard the Minister’s counsel called the informant, Mr. Ma, to testify orally. The witness is a registered industrial accountant, employed in the federal Department of National Revenue, Taxation, as a senior special investigator. He has been investigating the applicant Roger Lawrence and certain of his co-respondents for many months. His first information in these matters was sworn on May 1, 1987, as is shown in Exhibit B, page 105 of 503, or page 77 of 263. The offences alleged against Mr. Lawrence, on Mr. Ma's information, are stated earlier above, in paragraphs (a) and (e).

Exhibit E, page 478 of 503, is a photocopy of an agreement, dated August 15, 1984, between the applicant here Roger E. Lawrence and three others Michael B. Richards, Victor J. Attrill and Michael L. Vaz, all of Vancouver. The agreement is brief; it runs:

We, the undersigned, acting as a group acknowledge that we are engaged in the sale of SRTC' Notes of Pacific Western Research Inc. and 7892345 Holdings Inc. [later called Coastal Natural Resource Research Inc.] and do hereby collectively agree to divide the proceeds due to the group equally between the four parties of the group or at their individual direction. i.e.

We further appoint Lawrence and Company, Barristers and Solicitors of Vancouver, B.C. to receive in trust on our behalf all monies due. These funds then to be divided amongst the four parties as described above by way of Cashiers Cheque or Bank Draft on closing of the sale or sales of said SRTC Notes or Notes.

Proceeds shall be recognised as /z (one-half) of the cash value received by either of the two companies known respectively as Pacific Western Research Inc. and 7892345 Holdings Inc. [or Coastal Natural Resource Research Inc.]

The clear implication of the second paragraph in Exhibit E is that Roger Lawrence would become a personal beneficiary of money deposited in trust in his own trust account.

Exhibit F is a National Bank of Canada cashier's order dated at Hong Kong on September 13, 1984, in the amount of HK$27,741,875.00 in favour of International Technical Research Consultant’s Ltd. (hereinafter ITRC). And who comprises ITRC? According to Exhibit G (p. 480 of 503), two of its authorized signing officers (upon comparison with the signatures identified in Exhibit E) are Victor J. Attrill and Michael L. Vaz. Exhibit G is a photocopy of a letter, undated, addressed to the manager of the "Hongkong Bank”, signed by the said Attrill and Vaz as "authorized signatures" of ITRC and it directs, in its original typed version:

Re: Disbursement directions of $1,600,000.00 USD from the Account of ITRC

This direction to serve to cancel any previous instruction given by the undersigned in the matter of the disbursement of One Million Six Hundred Thousand US Dollars ($1,600,000.00 USD) currently held to the credit of the Account of ITRC and instruct you now to disburse the aforementioned sum as follows:

To	DIVIMET Ltd.	$415,000.00 USD
	BLOOMAX Ltd.	$415,000.00 USD
	ALL STRONG Ltd.	$385,000.00 USD
	PROSPEROUS NATION Ltd.	$385,000.00 USD

Exhibit H is a list of corporations bearing the names of the above- mentioned corporations, and two additional ones. To the left of the column of typewritten corporate names are handwritten or printed names, thus:

The applicant's first name is Roger, and his three partners indicated in Exhibit E are: Michael B. Richards, Michael L. Vaz and Victor J. Attri//.

Exhibit I (p. 482 of 503) is a copy of a Hong Kong solicitor’s letter, that of Hwang Sok Inn, addressed to Mr. Lawrence. She wrote, on December 17, 1985, in part, thus:

Regarding other documentation I would require HKD50,000 to cover disbursements and costs incurred in Hong Kong and otherwise.

Also as ITRC is out of funds now, would you please notify Mike Vaz, Victor Attrill and Mike Richards including yourself to let me have HKD15,000 each to cover management fees of the same including office accommodation and other miscellaneous expenses.

Incidentally would Pan Asia expenses regarding the documents be taken from ITRC. Please confirm by telex.

[Emphasis not in original text.]

Exhibit J is a copy of what appears to be solicitors’ instructions for the execution of various documents. Some signing instructions are directed to the applicant’s partners in regard to documents for Prosperous Nation Co. Ltd., Rich Nation Co. Ltd., Rich Progress Co. Ltd. and Bloomax Ltd. among others. The instruction “to be signed by Roger Lawrence" is followed by these two items:

1. Instrument of Transfer and Bought & Sold Note of All-Strong Ltd.

2. Instrument of Transfer and Bought & Sold Note of Wellstone Development Ltd.

Exhibits K and L show the sums of money in term deposits of Hong Kong and U.S. dollars deposited to the credit of All Strong Ltd.

Exhibit M is a copy of the bank statement of All Strong Ltd. from the Hongkong and Shanghai Banking Corporation for part of June and July, 1985. Of interest in exhibit M (P. 486 of 503) is the withdrawal for "Premier Visa payment", $4,256.87, citing Visa number 4966040099045007. Exhibit O is a credit card statement with the Hongkong Bank which specifically links Mr. Lawrence's name with the above-numbered Premier Visa account. Exhibit N further links Mr. Lawrence, by his signature to money dealings and deposits on behalf of All Strong Ltd. It was addressed in March, 1985 to the Manager of All Strong in Hong Kong with the final request to confirm the proposed actions "by signing and return the duplicate of this letter”. The signature is that of Roger Lawrence.

Exhibit P consists of copies of six letters, all purporting to be headed All Strong Ltd., all addressed to Mr. Eden Cheng, manager of the Hongkong Bank in Hong Kong, requesting (instructing) transfer of large sums of Canadian dollars either to Roger Lawrence's trust account, or to himself personally at the same branch of the Toronto-Dominion Bank in Vancouver. According to Mr. Ma, he personally saw and examined the Toronto- Dominion trust account and personal or general account statements of Mr. Lawrence and he testified that the sums were duly deposited. Of the six letters, one dated June 12, 1985, instructs that $250,000 (Cdn.) is to Mr. Lawrence's account in trust for Wellstone Developments Ltd., and another dated September 20, 1985, instructs that $1.5 million (Cdn.) be transferred from All Strong's account into the account of Pan Asia Research Inc. in the Canadian Imperial Bank of Commerce in Hong Kong. Virtually all of the above-mentioned exhibits were found in Mr. Vaz's residence, upon the execution of a search warrant which was not contested.

Mr. Ma further testifed that all four partners reported commissions and fee charges received from ITRC, but in addition Victor Attrill and another partner reported further income in the amount of $2.3 million and $2.6 million respectively from Hong Kong. Roger Lawrence reported no such sum from any source in Hong Kong even though he was a quarter partner. The total income which he reported (p. 20 of 503) falls far short of the sums reported by his partners. (Transcript: p. 35.)

Mr. Ma was cross-examined with vigour and skill by the applicant's counsel. He was not shaken from having achieved the purpose which the Minister's counsel intended when he called Mr. Ma to testify. Indeed the testimony recorded between pages 35 and 43 of the transcript is weighty in tipping the balance. The exercise in eliciting testimony was performed with Mr. Ma and the documents in order to determine if there be a prima facie case of fraud or other illegal conduct on the part of Mr. Lawrence or his client or clients, for if the documents were created in furtherance thereof their contents cannot be excluded as privileged.

The applicant’s counsel argued strongly and well, but he kept on insisting that there are no documents which show conclusively that All Strong Ltd. was a corporate manifestation and extension of Mr. Lawrence's mind, will and estate and no such documents to show that All Strong Ltd. was his instrument for obfuscating, hiding and failing to report income. Of course there is no such document exhibited. In that regard, the Court is bound to state that if the documents tendered here were the only evidence to support a charge of a criminal or quasi-criminal offence and all reasonable inference were to be excluded, there would have been a failure of proof beyond any reasonable doubt. But the present proceedings are not those of the prosecution of an alleged crime. They are, as counsel himself for Mr. Lawrence suggested, quite akin to a preliminary enquiry in the matter of an offence which is not a summary proceeding.

Now, even where proof of guilt beyond a reasonable doubt is required for a conviction, it can be made, and a conviction supported, on specific evidence and reasonable inferences drawn therefrom by the trier(s) of fact. This is no prosecution, but there are reasonable inferences to be drawn from the documents and from Mr. Ma's testimony. There is a reasonable inference suggesting, nay compelling, the conclusion that All Strong Ltd. was in fact the corporate alter ego of Mr. Lawrence. There is a further inference leading to the conclusion that Mr. Lawrence did not report all of his income and that he co-operated with one of his partners in the non-reporting of that person's income. There is a further inference on the evidence tendered before this Court, but not discussed above, that Mr. Lawrence, as solicitor for the corporations under investigation gave false and misleading certificates about alleged scientific research projects which did not qualify as such under the Act. Funds were put through the trust account which were incorrectly claimed as research expenditures. These are inferences reasonably drawn from the evidence. They do not constitute a finding of guilt on the part of Mr. Lawrence, but they taint his assertion of privilege.

To follow the analogy further, when a provincial judge or magistrate at a preliminary enquiry is satisfied that there is sufficient evidence to put the accused on trial, he makes a committal for trial. That sufficiency of evidence is such that in the absence of a credible explanation by or on behalf of the accused, a reasonable and properly instructed jury could upon it hear and infer enough to convict the accused. Obviously, admissible evidence does not exclude reasonable inference. The test is described with clarity by Mr. Justice Ritchie for the bare majority of the Supreme Court of Canada in United States of America v. Shephard, [1977] 2 S.C.R. 1067 at 1080, and again by Mr. Justice Estey for the then unanimous Court in Dubois v. The Queen, [1986] 1 S.C.R. 366. Obviously, also, the enquiry does not purport to decide guilt or otherwise, and, of course the accused in a preliminary enquiry and the applicant Lawrence in the case at bar are not obliged to make any explanation and submit to cross-examination if they choose not to do so.

This Court's conclusion is formulated on the evidence tendered, both documentary and testimonial, the reasonable inferences which are drawn therefrom and the jurisprudence. The Court concludes that there arises herein a prima facie case of fraud and other illegal conduct in the nonreporting of income on the part of Mr. Lawrence and his partner and in the purposely giving of misleading certificates of qualifications on behalf of the relevant corporations for scientific research. These conclusions are not verdicts of guilt for the applicant Lawrence and his co-respondent may yet express reasonable and credible explanations or, at least, raise a reasonable doubt. Such possibilities do not concern the Court on this enquiry. What does concern the Court here is that the above-expressed conclusion or finding vitiates Mr. Lawrence's claim of solicitor-client privilege. Accordingly, his application to have such privilege determined and declared is dismissed.

This judge therefore, in compliance with clause 232(5)(b)(ii)(A) of the Act, orders that the custodian, Charles E. Stinson, Assistant Administrator (Local Offices) of this Court, shall deliver all the seized documents and material still in the Court's custody after compliance with this judge's order dated December 8, 1988, to the officer (defined in paragraph 232(1)(d) of the Act) or some other person, if any, designated by the Deputy Minister of National Revenue for Taxation.

Given the factual considerations and jurisprudence to be pondered (as has been the case herein) possibly followed by an inspection of each document contained in several boxes of seized documents, the provisions of paragraph 232(5)(b) to the effect that "the judge shall decide the matter summarily . . . and . . . at the same time, deliver concise reasons .. . ." evince invincible idealism, which may seem to be moderated only by the provision of subsection 232(8). In accordance with subsection 232(9) of the Income Tax Act no costs are awarded upon this disposition.

Application dismissed.