Cineplex Odeon Corp. v. A.G. of Canada, 94 DTC 6407, [1994] 2 CTC 293 (Ont. Ct. (G.D.))

Haley J.:— This is an application asserting privilege for certain documents that the respondent seeks to have produced under section 232 of the Income Tax Act (Canada), R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63). I have already ruled on a number of these documents by my endorsement of February 4, 1994. The basis for solicitor-client privilege found for nearly all of the documents was that correspondence and notes of meetings between Goodman & Carr, solicitors for the applicant, and Jerry Banks, an in-house solicitor for the applicant acting in his capacity as a solicitor, and Peat Marwick Thorne (Peats) or its predecessor accountants for the applicant, were furnished to or by Peats as agent for the applicant for the purpose of giving legal advice to the applicant regarding the transactions which the respondent seeks to review.

However, Peats also acted as the external auditor for the applicant sometime after the legal advice based in part on the privileged communications was given. Some of the documents found their way into the files of the audit team at Peats. The respondent now argues that the disclosure of the documents to the audit team constituted disclosure to a third party and therefore the privilege has been lost.

This becomes a very important issue because it is not uncommon, in fact it may happen in the majority of cases (though there was no evidence on the point before me) for firms of chartered accountants to act as both accountants for, and external auditors of, its client corporations. That was the case for this applicant.

Five documents received by Shelley Levine, a partner of Peats on the tax accounting team, as agent for the applicant for the purpose of the applicant's obtaining legal advice were found in the files of the tax audit team of Peats. Those documents are 18.1 and 18.16 (same as 18.12c) which are memoranda of Jerry Banks, the in-house counsel, concerning legal advice given and 18.17 and 18.19 which are copies of letters to the applicant providing legal advice about the transactions and written by Murray Perelman, a solicitor at Goodman & Carr.

Ms. Levine in her answers to undertakings given on her cross-examination on her affidavit in support of the application states the position of the applicant as follows:

Documents 18.16 (and 18.12c which is the same) and 18.1 are, as stated by Ms. Levine on page 88, in the nature of solicitor’s reporting letters. Document 18.16 summarizes and comments upon numerous aspects of the 1988 transaction and the agreements relating thereto, and dcument 18.1 summarizes and comments upon aspects of the agreements and steps relating to the 1990 transaction. Because Peat Marwick Thorne had been involved in providing accounting and tax information to Jerry Banks and Goodman and Carr in connection with these transactions, Jerry Banks provided Ms. Levine with copies for her comments, so that accurate information would be provided to Cineplex.

She subsequently provided copies of these memoranda to a member of the audit section when, as described on pages 20, 21 and 90, the tax department was asked by a member or members of the audit team about the tax impact of steps taken by Cineplex.

Neither Jerry Banks, nor any of the representatives of Cineplex who were recipients of his memoranda, instructed or requested that a copy of either memoranda be provided to the audit department. Further, Ms. Levine did not believe that the privilege Cineplex had in the document would be waived (nor did she intend that it be waived) on providing a copy to the audit department.

The applicant argues that disclosure to the audit team at Peats did not constitute disclosure to a third party to result in loss of privilege or if it did then the disclosure was inadvertent and not at the direction of the client who is the only one who can make or authorize disclosure.

The general principle of law is clear that information or advice given in confidence between accountant and client is not the subject of privilege. The only exception is where information is given to or by the accountant as agent for the client for the purpose of obtaining legal advice for the client. Such information is then the subject of solicitor-client privilege by virtue of the agency. The principle is clearly stated by Jackett P. of the Exchequer Court of Canada in Susan Hosiery Ltd. v. M.N.R., [1969] C.T.C. 353, 69 D.T.C. 5278 at page 361 (D.T.C. 5283):

(b) that, where an accountant is used as a representative, or one of a group of representatives, for the purpose of placing a factual situation or a problem before a lawyer to obtain legal advice or legal assistance, the fact that he is an accountant, or that he used his knowledge and skill as an accountant in carrying out such task, does not make the communications that he makes, or participates in making, as such a representative, any the less communications from the principal, who is the client, to the lawyer; and similarly, communications received by such a representative from a lawyer whose advice has been so sought are none the less communications from the lawyer to the client.

I am satisfied that all five documents were communicated to Shelley Levine at Peats as agent for the client in the obtaining of legal advice by the client and that they were privileged in her hands.

Peat Marwick Thorne is a large, international firm of chartered accountants. It appears from the evidence of Ms. Levine that the internal operations of the firm were organized into a number of departments or teams of chartered accountants established by specialty of function. She, for example, was part of the tax accounting team. In this instance she provided tax and accounting information concerning Cineplex to solicitors for the purpose of the client’s obtaining legal advice. An audit team at Peats did the year-end audit for the applicant. Ms. Levine was never a member of the audit team at any time relevant to this application. It also appears from Ms. Levine's evidence that separate internal files were kept for the tax accounting team and the audit team and that the applicant's files were so separated. However it is clear from Ms. Levine's cross-examination that the tax team would place relevant documents in the audit file. She says at page 90 of the transcript:

Q. Now, these documents it states here, were also provided in the audit team or found themselves in the audit file. What was the purpose for which the documents were used by the audit team?

A. To paraphrase or summarize earlier discussions, they would need to have sufficient documentation in the tax section of the audit file to be satisfied that the disclosure of the tax liabilities of Cineplex Consolidated and its annual tax expense or provision was adequate and in the course of doing that, as I also described earlier, they would call me to come over and review what they already had available to them in their audit section and it was — would be likely that I or someone in my audit tax group would have copied that particular memo or memos in order to provide full background to the various steps in the various transactions.

I am satisfied that in the ordinary course of the business of Peats Ms. Levine delivered to the audit team copies of the five documents, whether voluntarily to provide the audit trail or at the specific request of a member of the audit team.

Peats as external auditor for the applicant corporation is governed by the guidelines set out in the handbook of the Canadian Institute of Chartered Accountants. The auditor is called upon to give an objective opinion of the fairness and accuracy of the financial statements prepared by the management of the corporation. Ms. Levine agreed that the auditor must maintain an independence from the management of the corporation in performing the audit. The auditor's report is prepared for the shareholders of the corporation as opposed to the management.

If such an audit were conducted by another firm of chartered accountants there would be no question that they would be third parties in relation to the corporation and disclosures to those auditors would constitute waiver of privilege subject to certain limited exceptions which I will discuss later. Is the function of the audit by the same accounting firm sufficiently different from that of the tax team in the same firm, acting as agent for the client, that the audit team must be notionally treated as a third party for consideration of waiver of privilege?

In my view the answer is yes. If the tax team provided advice to the client or to its solicitor that advice would not be privileged. It is only in the very limited situation where the tax team provides information to the solicitor for the purpose of the client's receiving legal advice that the privilege can be maintained. This is not the creation of an accountant-client privilege but the acknowledgement of an extension of solicitor-client privilege through the principles of agency. If advice given by the tax team, which cannot be protected by the agency because it is not given for the purpose of obtaining legal advice, turns up in the auditor's file it is clearly not privileged.

The applicant argues that to make such a determination, i.e., that one unit of a firm may oe notionally a third party to some other unit of the firm, would create chaos in legal firms where disclosure of confidential client information by one solicitor to another, or to some employee of the firm would immediately destroy the privilege. I do not think the analogy is apt. The audit team of the accounting firm is placed in an anomalous position in relation to the rest of the firm. It is charged with acting independently of the client and obliged to seek all such information that will assist it in reaching its opinion on the financial statements of a corporation. A legal firm would be faced with a similar situation where one solicitor of the firm acted for one client and another solicitor of the firm for another client and those two clients were adverse in interest. Then disclosure might cause a loss of privilege. Law firms are notably careful to avoid this occurrence.

The position of the independent certified public accountant acting as auditor was considered by the Supreme Court of the United States in U.S. v. Arthur Young & Co. (1984), 84-1 U.S.T.C. 83,670 (S.C.). In that case privilege was claimed by the client in tax accrual workpapers prepared by the accounting firm in the course of its audit. In finding that there was no privilege in the workpapers the Court commented on the role of the auditor at pages 83,675-76:

No do we find persuasive the argument that a work-product immunity for accountants' tax accrual workpapers is a fitting analogue to the attorney work-product doctrine established in Hickman v. Taylor (1947), 329 U.S. 495. The Hickman work-product doctrine was founded upon the private attorney's role as the client’s confidential advisor and advocate, a loyal representative whose duty it is to present the client’s case in the most favourable possible light. An independent certified public accountant performs a different role. By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to investing public. This “public watchdog" function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. To insulate from disclosure a certified public accountant's interpretation of the client’s financial statements would be to ignore the significance of the accountant's role as a disinterested analyst charged with public obligations.

It is this difference in function and duty owed that leads me to conclude that the audit team of Peats is in a notional third party position vis-à-vis the rest of the firm. While as a consequence accounting firms may have to take steps to isolate those documents which come to it as agent of the client for the purpose of the client's obtaining legal advice I do not think that will necessarily create chaos in the accounting firm. It may instead underline the anomalous position in which an auditor is placed if he is also part of the firm rendering accounting advice to the corporate client whose financial statements are being audited.

The applicant's second argument is that Peats represented by Shelley Levine had no authority to waive any privilege in the five documents and that it is only the client who can waive the privilege. In the alternative the disclosure was inadvertent and should not be taken as a waiver.

On the evidence I accept the position that Peats had no power or right to waive the legal privilege in the five documents. I am also satisfied that when Shelley Levine gave the documents to the audit team or placed them in the audit file she did so without regard to the client’s privilege and without knowledge of it. It was inadvertent in that sense.

The Supreme Court of Canada, in Descôteaux v. Mierzwinski, [1982] 1 S.C.R. 860, 141 D.L.R. (3d) 590, did an extensive review of the law of privilege, tracing its origin in the need to protect confidences between a client and his solicitor to allow the system of giving legal advice to function effectively, and the rule of evidence which sprang from that, to the pronouncement of a substantive right to privilege. Lamer J., as he then was, delivering the unanimous judgment of the Court said at page 875 (D.L.R. 604-05):

It would, I think, be useful for us to formulate this substantive rule, as the judges formerly did with the rule of evidence; it could, in my view, be stated as follows:

1. The confidentiality of communications between solicitor and client may be raised in any circumstances where such communications are likely to be disclosed without the client’s consent.

2. Unless the law provides otherwise, when and to the extent that the legitimate exercise of a right would interfere with another person’s right to have his communications with his lawyer kept confidential, the resulting conflict should be resolved in favour of protecting the confidentiality.

3. When the law gives someone the authority to do something which, in the circumstances of the case, might interfere with that confidentiality, the decision to do so and the choice of means of exercising that authority should be determined with a view to not interfering with it except to the extent absolutely necessary in order to achieve the ends sought by the enabling legislation.

4. Acts providing otherwise in situations under paragraph 2 and enabling legislation referred to in paragraph 3 must be interpreted restrictively.

The Court considered the right to protection of confidences between a solicitor and client of highest importance as it noted at page 880 (D.L.R. 609) of the judgment:

The privilege protecting from disclosure communications between solicitor and client is a fundamental right — as fundamental as the right to counsel itself since the right can exist only imperfectly without the privilege. The courts should be astute to protect both. It also considered that loss of privilege by evidentiary rule was now limited by the considerations set out in the substantive rule enunciated. It stated at page 876 (D.L.R. 605) that before allowing evidence of confidential communications between client and solicitor to be introduced:

. . .the judge must satisfy himself, through the application of the substantive rule (No. 3), that what is being sought to be proved by the communications is important to the outcome of the case and that there is no reasonable alternative form of evidence that could be used for that purpose.

Those pronouncements surely influenced McEachern, then Chief Justice of the British Columbia Supreme Court, in Somerville Belkin Industries Ltd. v. Brocklesby Transport (1985), 65 B.C.L.R. 260, 5 C.P.C. (2d) 239 when he rejected the principles in Calcraft v. Guest, [1989] 1 Q.B. 759, [1895-99] All E.R. Rep. 346 (C.A.) and said at page 264 (C.P.C. 244):

There is a great body of confusing authority about the right of parties to use privileged documents which come into their hands accidentally or even surreptitiously: Calcraft v. Guest, [1898] 1 Q.B. 759, [1895-99] All E.R. Rep. 346 (C.A.); Ashburton v. Pape, [1913] 2 Ch. 469 (C.A.); Butler v. Bd. of Trade, [1971] 1 Ch. 680, [1970] 3 W.L.R. 822, [1970] 3 All E.R. 593.

But this is not that kind of a case for here the documents in question have not come into the hands of the party seeking production and the privilege still applies unless waived. Although there are some bizarre cases where privilege seems to have been lost through inadvertence, the modern law seems to be that privilege may be waived in civil cases only by the client, in this case the insurer or plaintiff, and then only when it is waived deliberately and knowingly and not inadvertently: S. & K. Processors Ltd. v. Campbell Ave. Herring Producers Ltd., 45 B.C.L.R. 218, [1983] 4 W.W.R. 762 (S.C.).

I regard this as a salutary rule because the consequences of inadvertence should be minimized.

In the Somerville case an adjuster was alleged to have waived the privilege on certain reports prepared for litigation by sending copies of the reports to a third party, a broker. The court held that the privilege had not been waived since the adjuster did not know he was waiving the privilege and in any event it was only the client who could do so.

Similar doubt about Calcraft v. Guest was expressed by Macdonald J. in Vancouver Hockey Club Ltd. v. National Hockey League (1987), 18 B.C.L.R. (2d) 91, 44 D.L.R. (4th) 139 (S.C.).

Granger J., in Bernardo v. Deathe, 2 W.D.C.P. (2d) 346 (Ont. Gen. Div.) commented at page 4 on the state of the law after a discussion of Calcraft v. Guest and the Somerville case:

The facts in this case are somewhat different than Somerville Belkin v. Brocklesby, supra, as the party wishing to use privileged documents in that case had not obtained copies whereas in this case, the plaintiff has already obtained copies of the documents through the inadvertence of the defendant's solicitor. It does seem to me that there appears to be a trend in the modern cases to make a distinction between advertent and inadvertent disclosure. In this case there was no conscious decision on the part of Dr. Deathe and/or his solicitor to waive the solicitor and client privilege.

The privilege was upheld.

The Alberta Court of Appeal also rejected loss of privilege through inadvertence. In Royal Bank of Canada v. Lee (1992), 127 A.R. 20, W.A.C. 236, 9 C.P.C.

(3d) 199 the Court said at page 240 (C.P.C. 204):

Counsel for the respondent ex-auditor properly argues that waiver is not the only issue. She suggests that privilege might be lost without intentional waiver, citing older Canadian authority, and English cases. They do say that, but at one time privilege was thought to be a mere rule of evidence, a ground to resist a subpoena, and not a rule of property or other substantive law. As noted, that is no longer the law in Canada. Descôteaux, supra, itself was a case on custody already lost by seizure. Therefore, older cases saying that privilege is lost when a document is dropped on the street, or when a nonparty steals it, seem very doubtful in Canada today. The recent English cases cited by both parties draw very fine distinctions as to when the equitable protection for confidences will prevail over a loss of privilege in that way. Those English cases conflict. But as Canada has abolished the old rules on loss of privilege, we need not draw those distinctions. There is no such conflict in Canada, because mere physical loss of custody does not end privilege automatically. To put it another way, privilege and confidentiality have merged in some areas in Canada, but appear distinct in England.

It would seem, therefore, that the Supreme Court of Canada in Descôteaux has established a fundamental rule of privilege which is to be interfered with as little as possible and accordingly inadvertent disclosures or disclosure without the consent of the client will not operate to waive privilege.

I find that the acts of Shelley Levine in placing the five documents into the file of the audit team were unauthorized by the client and inadvertent on her part and do not result in a waiver of privilege in the hands of the audit team.

The Court could order that the five documents be removed from the audit file and returned to the tax team file, but I will not do so as I do not think it is necessary to do more than to assert that they remain privileged until the client sees fit to waive that privilege. The question only arises because the documents that are now in the hands of the audit team form part of their documents in support of their audit. There was no evidence except for what has already been referred to that the audit team relied on any of the particular documents other than as appears in the answers to undertakings given on cross-examination of Shelley Levine page 4:

Copies of these letters (18.17 and 18.19) were contained in the audit file because the auditors required advice confirming legal matters relating to the dissolution of the Film House Group Inc. Ms. Levine is not aware of any further specific steps taken as a result of Peat Marwick Thorne reviewing these documents.

It appears from the practice in the United States outlined in an article "Lawyers' Responses to Audit Inquiries and the Attorney-Client Privilege", Arthur B. Hooker, in The Business Lawyer. Vol. 35, April 1980 at 1021 that auditors will often request privileged documents from clients or their attorneys in the course of the audit. To the extent that these disclosures are necessary to permit the independent auditor to fulfil his obligations the client will be required to waive the privilege. If such were the circumstances here one might speculate that had the five documents not been in the audit file the auditor might have asked the client directly for them, the client would have released them, and there would be no privilege as there now is. However I do not think that the Court can speculate now on what the client would have or would not have done here had that been the case and I do not think this is a case where privilege should be denied in the interests of "fairness and consistency".

I find that the five documents are privileged and need not be produced.

Order accordingly.