Archean Energy Ltd., Applicant v. Minister of National Revenue, Respondent, 98 DTC 6456, [1998] 1 CTC 398 (Alta. Q.B.)

McMahon J.:

These applications are brought pursuant to s. 232(4) of the Income Tax Act to determine whether a solicitor client privilege attaches to certain documents in the possession of a Calgary law firm. The Minister of National Revenue has demanded the right to inspect the documents in the course of performing audits on several corporations.

S. 232(4) provides that a client or lawyer may apply to a judge for the determination of the question of whether the client has a solicitor client privilege in respect of a document or documents that have been seized and placed in custody. S. 232(5) directs what is to be done upon that determination occurring. Parliament has directed that the court give concise reasons and identify the document without divulging details.

Solicitor client privilege is defined by the Income Tax Act in these terms:

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.

There are some 19 corporations that are said to be involved in the transactions in which the Minister takes an interest. Counsel for the Minister says that the audit in question relates to a single “butterfly” transaction which involves the disposition of certain corporate property to the shareholders of that company or their successors. The law firm, by one of its solicitor’s affidavits, says that it provided the primary tax advice to all of these companies during the course of complex restructuring. All the documents are from the files of the law firm. They comprise 11 binders containing 365 individual documents and 5 legal opinions.

There is little doubt about the nature of a solicitor client privilege. It applies to all direct communication between client and solicitor relating to the provision of legal advice. It also applies to the solicitors’ work product and to his brief gathered for the purpose of giving legal advice. The principle is well stated by the Supreme Court of Canada in Descôteaux c. Mierzwinski, (1982) 141 D.L.R. (3d) 590 (S.C.C.) at p. 618:

In summary, a lawyer’s client is entitled to have all communications made with a view to obtaining legal advice kept confidential. Whether communications are made to the lawyer himself or to employees and whether they deal with matters of an administrative nature such as financial means or with the actual nature of the legal problem, all information which a person must provide in order to obtain legal advice and which is given in confidence for that purpose enjoys the privileges attached to confidentiality. This confidentiality attaches to all communications made within the framework of the solicitor client relationship, which arises as soon as the potential client takes the first steps and, consequently, even before the formal retainer is established.

Counsel also cite the Wigmore principles as set out in Strass v. Goldsack [1975] 6 W.W.R. 155 (Alta. C.A.)in respect of privileged communications. The four fundamental conditions required for the establishment of a privilege against disclosure are:

1. The communications must originate in a confidence that they will not be disclosed.

2. This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties.

3. The relation must be one which in the opinion of the community ought to be sedulously fostered.

4. The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.

It is clear that the only privilege protected by s. 232 is solicitor client privilege. Some recitation of the enormously complex facts is necessary. There are two applications. One is brought in the name of Archean Energy Ltd. (“Archean”) in respect of 365 documents. The second is brought by Titleist Energy Inc. (“Titleist”) in respect of 5 legal opinions.

Archean Energy Ltd. was incorporated on October 28, 1993. Its shareholders are Eagle Resources Ltd. (“Eagle”) and CanEagle Resources Corporation (“CanEagle”). Archean began to conduct business on April 1, 1994 with its acquisition of certain petroleum and natural gas properties and other assets from its shareholders in exchange for shares and promissory notes.

Eagle Resources Ltd. is an Alberta company controlled by the Erin Mills Investment Corporation, a sister corporation of Erin Mills Development Corporation (“EMDC”).

Talon 1 Petroleum Corporation (“Talon”) was incorporated in Ontario in 1991 and had, as its shareholders, Hillholm Inc. (“Hillholm”), Erin Mills Development Corporation and Muzzo Brothers Group Inc (“Muzzo”). In 1992 Talon was continued in the Province of Alberta under the name Eagle- Talon 1 Petroleum Corporation.

Talon entered into a joint venture arrangement with Eagle which led to the completion of an exploration and development program, following which the assets of Talon were divided amongst its three shareholders through the use of a “butterfly” transaction.

In 1994 Hillholm, EMDC and Muzzo commenced a reorganization of Talon that involved the incorporation of a series of new companies and certain asset transfers. A number of the companies were then voluntarily dissolved. The law firm that brings this application rendered an account to Eagle for the corporate restructuring and butterfly transactions through to the end of February, 1994.

On June 27, 1996 a Requirement to provide documents was served upon the law firm relating to the Talon transactions. It is that Requirement which gathered in the documents for which privilege is now claimed.

The transactions which are the subject of the Requirement occurred between December 19, 1991 and April 19, 1994.

The first issue raised by the Minister is that Archean has no right or interest in issues raised here and is the wrong party to be claiming privilege. It is said that since Archean was not incorporated until October, 1993 and did not begin to conduct business until April 1, 1994 it was not the person that had the alleged privileged communications with the law firm nor is it the party which was involved in the corporate restructuring and the butterfly transactions. The proper party would have been Eagle or Talon or Eagle- Talon 1 Petroleum Corporation. It is then argued that it is now too late for any other party to claim a privilege in respect of these documents because of s. 232(4)(a) of the Income Tax Act. That section provides:

Where a document has been seized and placed in custody under ss. 3 or is being retained under ss. 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, not 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 document to the judge at that time and place;

Counsel for the Minister concedes that if a claim to privilege had been raised by Eagle or Talon or their successor companies or shareholders, then that claim would have to stand, except for some 27 of the documents which would require specific inspection. Some of the corporate vehicles involved in the reorganization were wound up or dissolved in the course of the reorganization. Thus, to determine ownership of the privilege in any particular document is difficult.

Counsel for the applicants has filed letters from appropriate officers of a number of the other companies including Eagle and three shareholders at Talon, namely, Hillholm, EMDC and Muzzo. Each claims a privilege in the documents in issue and asks counsel to protect that privilege.

The Minister says that these parties are barred from claiming privilege by virtue of more than 14 days having passed since seizure of the documents pursuant to s. 232(4). The applicants say that these companies are so closely interconnected in respect of the butterfly transaction and the restructuring that it is sufficient that any one of them raise the privilege, at least initially. It is said that in matters this complex it is unrealistic to expect a lawyer to be able to list all potential claimants to privilege while a Minister’s officer waits to have the documents either produced or sealed in accordance with s. 232. Indeed, s. 232(3.1) appears to contemplate that the lawyer will name a “client” when the officer is about to inspect the documents. That then becomes the basis for the documents to be sealed, identified and retained pending the application being brought within 14 days.

I agree that in the circumstances of this case it would have been virtually impossible for the lawyer to attempt to identify privilege ownership in respect of each of the 365 individual documents.

While caution might have dictated that he name all those clients he could then recall, the section requires that he name only one client and that then the application be brought “on behalf of the client”. In my view, that is sufficient compliance with the intent of the section to protect the right to a judicial determination of the claim to solicitor client privilege. That is so even though there may be others who, after due consideration and review, are entitled to raise a similar claim for privilege in relation to the same documents. There can be no doubt that more than one client may have the right to claim privilege in respect to a single document.

Section 232(10) is instructive:

Where any question arises as to the course to be followed in connection with anything done or being done under this section, other than ss. (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 the judge’s opinion, is most likely to carry out the object of this section of allowing solicitor client privilege for proper purposes.

To permit a right to claim solicitor client privilege to be defeated in the manner argued by the Minister here would, in my view, not be faithful to the objective of the section which is the recognition of proper solicitor client privilege claims.

In these circumstances, the Minister concedes the claim to privilege as to all but 27 documents.

I have reviewed each of those documents. Given that the group of companies shared the law firm for tax advice purposes and so have a common interest in the privilege claim raised, it is clear that the following documents are privileged as being solicitor client communications, part of a solicitor’s brief or the solicitor’s work product. I have heard no claim to waiver or loss of privilege in respect of any these documents. Accordingly, they are privileged and they are documents numbered 17, 46, 53, 61, 71, 73, 74, 75, 77, 78, 81, 114, 118, 120, 122, 128, 181, 207, 233.

A substantial number of these documents are communications between the law firm which provided the tax advice and other law firms acting for the various clients in their corporate capacities. Such communication does not constitute waiver of privilege in the circumstances of this case. The communication was apparently made for the purpose of obtaining instructions and giving common advice to a common client or group of clients.

I have reviewed the following documents and conclude that they are not privileged. They are not solicitor client communications but are generally reports prepared by one employee of one of the companies in question to a senior employee. They are documents numbered 44, 45, 172, 198, 204, 225 and 241.

Lastly, document number 40 is a memorandum from the vice president of Eagle to one Sabre Capital Corporation. Sabre is not one of the applicants nor one of the related companies. The documents produced do not indicate that Sabre was a party to the reorganizations or the asset transactions. Accordingly, any privilege that this document might have attracted has been waived by its provision by the client to another party and it is producible.

Given the conclusion I have reached that the claim by Archean is sufficient, the issue whether other parties are barred by s. 232(4) need not be determined.

Except for the documents that are here described as producible, the others shall be returned to the law firm.

The five legal opinions addressed on the Titleist application are directed to Eagle, Talon and their shareholders. They were the subject of a Requirement to provide information served by Revenue Canada upon Titleist. No question as to the ownership of the privilege arises in respect of these opinions. The issue is whether the privilege was waived during the course of a transaction. A number of the companies, including Eagle, Talon, EMDC and Hillholm entered into a sale agreement with Titleist as purchaser in respect of certain shares in some of the related companies. The agreement provided that Eagle would deliver a legal opinion from its solicitors which would be satisfactory to the purchaser Titleist regarding the tax consequences of the reorganization. It is said that the provision of the legal opinions to Titleist as purchaser amounted to a waiver. It is argued for the Minister that the vendors and the purchaser are adverse in interest and thus the release of privileged information to a party adverse in interest is a waiver. However, the parties to a commercial transaction are not adverse in interest in the same sense that parties to litigation are. In fact, parties to a commercial transaction have a common interest in seeing the deal done. That is particularly so where the companies are related by some common shareholders or management as is said to be the case here. In any event, Eagle, the client to whom the legal opinions are primarily directed, is not a vendor as defined by the agreement. It is a reasonable inference that Eagle instructed its solicitors to provide the opinion in order to further the reorganizations and not with the intent to waive privilege. The burden of proving waiver lies upon the party who alleges it. On the facts before me I am not satisfied that waiver has been shown. These documents will be returned to the law firm.

If counsel require any further direction in respect to this matter, they may contact me.

Order accordingly.