Preliminary matters
With the consent of both sides, I have approved this matter for the commercial list.
Mr. Campbell acknowledges that if the applicants fail on this motion, they must arrange for delivery up for inspection by the tax department of all documents retained by their lawyer, Jonathan Lisus, on July 15, 1993 at the offices of their former legal counsel, Diamond, Fairbairn pursuant to subsection 232(3.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
Mr. Campbell also advised that the applicants consented to deleting the names of all respondents, save for the Attorney General of Canada, from the title of proceedings.
Can the applicants shield the documents from immediate inspection?
With these preliminaries out of the way, we can concentrate on the significant question of this motion. The applicants had 14 days to make an application pursuant to subsection 232(4) to initiate the determination of the question of whether any of the documents are protected by solicitor-client privilege. Subsection 232(4) provides:
232(4) Application to judge.—Where a document has been seized and placed in custody under subsection (3) or is being retained under subsection (3.1), the client, or the lawyer on behalf of the client, may
(a) within 14 days after the day the document was so placed in custody or commenced to be so retained apply, on three clear days notice of motion to the Deputy Attorney General of Canada, to a judge for an order
(i) fixing a day, no later than 21 days after the date of the order, and place for the determination of the question whether the client has a solicitor-client privilege in respect of the document, and
(ii) requiring the production of the documents to the judge at that time and place;
(b) serve a copy of the order on the Deputy Attorney General of Canada and, where applicable, on the custodian within 6 days of the day on which it was made and, within the same time, pay to the custodian the estimated expenses of transporting the document to and from the place of hearing and of safeguarding it; and
(c) if he has proceeded as authorized by paragraph (b), apply at the appointed time and place for an order determining the question.
The documents from the Diamond firm were seized on July 15, 1993 but no independent application required was made in time. If this were the bare bones of this question, Mr. Campbell does not dispute that the applicants would be dead in the water. However, there is a history to this which requires examination. It is this history which the applicants say permits them to ask this court to grant leave to amend a previous application to include these later documents. The respondents acknowledged that they would suffer no prejudice by such an amendment but only that they strictly rely on the technical aspects of the limitation period invoked in subsection 232(4).
It was agreed by both sides that the applicants had been dealing with two law firms with respect to the transaction in question — Lang Michener as well as the Diamond firm. The two law firms were notified by the Tax Department at about the same time. Dealing with respect to the documents at the Lang firm proceeded more quickly and a subsection 232(4) application was made on a timely basis. However action with respect to the Diamond firm documents proceeded on a more leisurely basis so that the seizure was not effected until several months after.
It was Mr. Lisus' evidence (with his affidavit not being tested by cross- examination) that he intended to amend the application concerning the Lang firm documents to include any Diamond firm documents which he considered after inspection would be within the scope of solicitor-client privilege. Not only would this procedure appear functionally logical but it would also permit the claim for privilege to be heard together as to both the Lang and Diamond firm documents on the previously arranged Lang firm documents date of August 20, 1993. A draft amended notice of application and application record was prepared on July 19, 1993. Immediately after the seizure of the Diamond firm documents and prior to the draft material bein prepared, Mr. Lisus did a very reasonable thing -- he consulted counsel for the other side concerning his proposed course of action. I am of the view that the paragraphs of his affidavit concerning this should be set out in full but deleting the name of the Department of Justice lawyer:
27. On or about July 16, 1993 I called the solicitor of record on the application, Mr. X, at the Department of Justice to discuss this proposed way of advancing the claim for privilege in respect of the Diamond, Fairbairn documents. When I called Mr. X I found that he was on vacation. In his absence, I spoke to a colleague of Mr. X and reviewed with him, in general terms, the way I proposed to deal with the matter. I did not review with him at that time the specific date on which the claim of privilege in relation to the Diamond, Fairbairn documents were made. Mr. X's colleague indicated that, while he thought in principle that it was reasonable to deal with the Lang Michener and Diamond, Fairbairn documents at one hearing and to proceed by way of amendment to the original application, he stated that Mr. X had carriage of the matter and suggested that I contact Mr. X on his return from vacation.
28. I telephone Mr. X on August 3, 1993, the date I understood him to be returning from vacation, to propose that the claim for privilege in relation to the Diamond, Fairbairn and Lang Michener documents be heard together on August 20, 1993 and that we make an arrangement whereby we could waive our claim of privilege in respect to some of the Diamond, Fairbairn documents sealed on July 15, 1993 and arrange for the delivery to the Department of National Revenue of those documents.
29. In the conversation I told him that I thought it best to deal with the Diamond, Fairbairn and Lang Michener documents in one hearing, and he agreed with this proposal.
Mr. Gluch acknowledged in this hearing that Mr. X's colleague was in charge of the file while Mr. X was away on vacation. I find it an inescapable conclusion that his colleague would have known Mr. X's vacation schedule, a schedule which had him back in the office after the ostensible 14 day limitation period of any separate application.
One would have thought that this course of conduct by counsel in the Department of Justice would have operated as a functional waiver of the 14 day period. I am still of that view. In any event, I will proceed to discuss the other aspects of this matter.
However it appears that some time soon after Mr. X's return and his subsequent dealings with Mr. Lisus (which dealings appear to be coordinate with Mr. Lisus' being able to proceed with the claim for solicitor-client privilege as to certain of the Diamond firm documents, with the balance to be turned over to the Tax Department forthwith), Mr. X had a change of heart. He initiated a counter application on August 9, 1993 to require a turnover of all Diamond firm documents notwithstanding that he knew that Mr. Lisus was asserting there was privilege concerning some after his previous review of the files. I find this change of heart rather amazing and quite disappointing.
Is there judicial discretion concerning this part of the Income Tax Act?
Clearly the respondents do not advance the proposition that sections 231 and 232 are intended to act as a procedural trap for bona fide claimants. The notification served upon the Lang and Diamond firms authorized a seizure within the meaning of section 8 of the Charter of Rights and Freedoms. The applicants have an expectation of privacy in the documents identified in the notification and over which privilege has been claimed: see R. v. McKinlay Transport Ltd., [1990] 2 C.T.C. 103, 90 D.T.C. 6088. This privacy interest in privileged document is protected by section 8 which is an entrenched constitutional provision. Thus it is not vulnerable to encroachment by legislative enactments in the same way as common law protections: see Baron v. Canada, [1993] 1 S.C.R. 416, [1993] 1 C.T.C. 111, 93 D.T.C. 5018, at page 435 (S.C.R.); McKinlay, supra. It seems to me that it is within the principles enunciated in both these cases that the judiciary retain a residual discretion notwithstanding the presence of mandatory language in the Income Tax Act. Even still subsection 232(10) further confirms the existence of the judiciary's discretion in regard to these seizure sections:
232(10) Where any question arises as to the course to be followed in connection with anything done or being done under this section, other than subsection (2), (3) or (3.1), and there is no direction in this section with respect thereto, a judge may give such direction with regard thereto as, in his opinion, is most likely to carry out the object of this section of allowing solicitor-client privilege for proper purposes.
A judicial discretion in this regard should be guided by the rule that legislation which authorizes an interference with solicitor-client privilege must be interpreted restrictively: see Descoteaux et al. v. Mierzwinski and A. G. (Que.) et al. (1982), 141 D.L.R. (3d) 590, at page 595.
Amendment of original application to include diamond firm documents
An application of this nature arising in Ontario is brought, as this one was, in the Ontario Court (General Division) as the superior court having jurisdiction in the province where the matter arises: paragragn 232(1 )(a). Thus such an application is governed by the Ontario Rules of Civil Procedure. R.26.01 provides that the court has a general power to amend pleadings in an action.
R.26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
[Emphasis added.]
The “shall” imports the concept of manditoriness. While an application is not an action it is an originating process in the same way as an action: R.1.03. Pursuant to R.14.09:
R.14.09 An originating process that is not a pleading may be struck out or amended in the same way as a pleading.
R.5.03(4) Enables the court to add any person to a proceeding, notwithstanding the expiry of a limitation period, if their presence is necessary to enable the court to adjudicate effectively and completely on the issues in the pleadings. In this regard the applicants are permitted to add an additional related party. Further one should not lose sight of R.1.04(1 ):
R.1.04 These rules shall be liberally construed to provide the just, most expeditious and least expensive determination of every civil proceeding.
The Court has a general discretion to permit the amendment of a pleading and the addition of a party notwithstanding the expiry of a limitation period if special circumstances exist and no prejudice is created by the amendment. See Basarsky v. Quinlin (1971), 24 D.L.R. (3d) 72 (S.C.C.); Fagan v. Emery Investments Ltd. (1986), 64 O.R. (2d) 615 (C.A.); Schachar v. Bailey (1989), 69 O.R. (2d) 726 (H.C.J.); Gracey v. Thomson Newspaper Corp. (1991), 1 C.P.C. (3d) 21 (Ont. Gen. Div.). The respondents acknowledge there is no prejudice to them outside the limitation period question. This is a single investigation by the Tax Department. The notifications relate to the same transactions. Both sides were proceeding along on a reasonable and cooperative manner. They did this until the respondents suddenly and without warning changed course 180 degrees and, rather than proceeding in parallel in the dynamic tension required of litigation, attempted to ram and sink the applicants’ ship. This was without even a whisper of a warning shot across the bow. I acknowledge that a caution is not required in ordinary circumstances but in my view it is required where the other side has been following a discussed course of action. International law has stern sanctions against pirates posing as peaceful merchantmen before suddenly hoisting the Jolly Roger. The delay was minimal, incurred in good faith and not for any tactical ulterior motive. There was never any intention to abandon or waive privilege. I have no difficulty in determining that special circumstances exist here for the exercise of my discretion generally and in respect of subsection 232(10) in relation to the nature of the interest affected by the Court's role as a “balance wheel” in the application and administration of the Income Tax Act.
Mr. Campbell further submitted that the rights of a client ought not be jeopardized by the inadvertence or omissions of his solicitor and that in such circumstances the Court ought to exercise its discretion in favour of affording the adjudication of a litigant’s claim on the merits. Citing Re: Palermo Bakery Ltd. v. Dominion of Canada General Insurance Company et al. (1976), 12 O.R. (2d) 50 (H.C.J.) and Gary D. Watson, "Amendment of Proceedings After Limitation Periods", The Canadian Law Review, 1975 Vol. Ill page 237 at pages 276-79, he maintained that this was particularly true when the omission occurred in good faith and the reservation of the litigant's rights can be achieved through the amendment of a proper commenced proceeding without prejudicing the rights of the respondent. Mr. Gluch objects on the basis that the triggering event — the seizure of the Diamond firm documents on July 15, 1993 — which allowed the applicants to make an application under subsection 232(4) did not take place until after the Lang firm documents application had been made. I do not see this as an insurmountable hurdle, particularly in light of R.1.04(1) and the general principle that matters should be dealt with on their merits rather than trapped by legislative procedural snares. It must be recognized that the Diamond firm application could be made when those documents were seized and they could nave been seized at the same time as those of the Lang firm. There was no magic to the timing; it was merely a matter of chance that there was not a contemporaneous seizure or that the Diamond firm seizure did not precede that at the Lang firm by a day or a month. This is not an artificial amendment — it is a logical graft.
Conclusion
There is then to be an order allowing amendment of the Lang firm document application as follows:
D. 792459 Ontario Ltd. is added as a party applicant;
E. the documents in question as to the privilege are to include the Diamond firm documents as now held by McCarthy Tétrault;
F. the hearing relating to the determination of solicitor-client privilege will take place before me in the commercial list at a time and date to be arranged with the Court Office on a day in January 1994 when I I am sitting;
G. the superfluous respondents are deleted with only the Attorney General of Canada remaining in the title of proceedings.
Costs
It is only because of the provision of subsection 232(9) that there are no costs awarded:
232(9) No costs may be awarded upon the disposition of any application under this section.
I do however commend counsel for their finely tuned and presented arguments.
Application allowed.
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