Zein v. The Queen, 91 DTC 5052, [1991] 1 CTC 413 (BCSC)

Arkell, J. [Orally]:—Two petitions have been filed 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"). The action numbers are A902493, which has been referred to as the Zein petition, and the other relates to action number A902494, with regard to the Balaclava petition. Both petitions are seeking an order for solicitor and client privilege in respect of certain documents relating to three companies, Balaclava Enterprises Ltd., Pinetree Software Canada Ltd. and AG Nineteen Holdings Limited. Pinetree was a public company. It is now bankrupt, and AG was a private subsidiary of Pinetree and it has been indicated that it may now be in receivership. The law firm of Ladner Downs were solicitors for all three companies at various times related to the issuance of preferred shares by Balaclava to AG and in relation to the tax consequences on a deemed dividend or dividends between those companies and also involving Pinetree as the public company.

Paragraph 232(1)(e) of the Income Tax Act has a definition regarding solicitor-client privilege and it states this:

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 him and his 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.

While I am dealing with the applicable sections of the Income Tax Act, I will also touch upon subsection 232(5), which sets out the procedure to be followed in the disposition of an application under this section. First of all, of course, it states that it will be held in camera. It also states that the judge may, if he considers it necessary to determine the question, inspect the document or documents as in this case and, if he does so, he shall ensure that it is repackaged and resealed. It also indicates that the judge shall decide the matter summarily and he shall at the same time, in addition to giving his opinion as to whether the solicitor-client privilege applies deliver concise reasons in which he shall identify the document without divulging the details thereof.

In addition to the statutory definition of solicitor-client privilege as contained in the Income Tax Act, it is necessary, particularly in this case, to consider and review the issue of common law privilege between solicitor and client, as stated in the text of Wigmore on Evidence and also in Cross on Evidence. As stated in Wigmore in the McNaughton edition, 1961, volume 8 at page 554. It states this:

The essentials of solicitor-client privilege at common law are as follows:

1) Where legal advice of any kind is sought,

2) From a professional legal advisor in his capacity as such,

3) The communications relating to that purpose,

4) Made in confidence,

5) By the client,

6) Are at his instance permanently protected,

7) From disclosure by himself or by the legal advisor,

8) Except the protection be waived.

Cross on Evidence, 6th edition, 1985, page 388, states:

In civil and criminal cases, confidential communications passing between a client and his legal advisor need not be given in evidence by the client and, without the client's consent, may not be given in evidence by the legal advisor in a judicial proceeding if made either:

(1) to enable the client to obtain, or the advisor to give, legal advice; or

(2) with reference to litigation that is actually taking place or was in the contemplation of the client.

The leading decision in Canada is that of Descoteaux v. Mierzwinski, [1982] 1 S.C.R. 860; 141 D.L.R. (3rd) 590, where at D.L.R. pages 604-605 Mr. Justice Lamer, as he then was, now the Chief Justice, stated this:

It is quite apparent that the court in that case applied a standard that has nothing to do with the rule of evidence, the privilege, since there was never any question of testimony before a tribunal or court. The court in fact in my view applied a substantive rule without actually formulating it and consequently recognized implicitly that the right to confidentiality which had long ago given rise to rule of evidence had also since given rise to substantive rule. It would, I think, be useful for us to formulate this substantive rule as the judges formally 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 or 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 decision of the Supreme Court in Solosky v. The Queen, [1980] 1 S.C.R. 821; 105 D.L.R. (3rd) 745 is also important but it related in particular to an application with regard to the criminal law.

The question of the common law privilege between solicitor and client has been reviewed by a number of judges in British Columbia.

In Re Evans (1968), 68 D.T.C. 5277; 70 D.L.R. (2d) 226, a decision of Mr. Justice Dryer, and he also followed that with a further opinion in In Re Modern Film Distributors, [1968] C.T.C. 549; 68 D.T.C. 5349 Mr. Justice Dryer, who in my opinion was one of the leading jurists on the question of evidence in this province, in In Re Evans said this at D.T.C. page 5278 (D.L.R. 228):

It seems clear on the authorities that pre-existing documents, i.e., documents which were not ‘created as communications to the solicitor, such as deeds or agreements, even though they may have been submitted to the solicitor by the client to obtain his advice, are not privileged from production by the solicitorclient relationship and, if they are not to be produced, some other privilege of the client must be relied on. Wigmore 3d Ed. para. 2307. No such other privilege has been argued. Communications between solicitor and client in respect of such documents would, of course, be privileged.

And in his decision in 1968 in In Re Modern Film Distributors Ltd., supra, he said this at 552 (D.T.C. 5351) regarding the solicitor-client privilege:

I suggest that such a claim should only be made in respect of documents which may be covered by the privilege relating to solicitor-client communications, including that relating to the privacy of the solicitor’s preparation.

More recently, in 1990 in British Columbia the common law principle relating to solicitor-client privileges was reviewed by Mr. Justice Hollinrake with regard to paragraph 444.1(3)(c) of the Criminal Code and again in May, specifically, May 16, 1990, Mr. Justice Spencer, again with regard to a section of the Criminal Code, section 488, made this particular comment:

First; that the solicitor-client privilege applies only to communications between them for the purpose of obtaining legal advice. It does not apply to the acts of a solicitor carried out pursuant to instructions. Therefore, if the client's files contain copies of documentary activities performed by the solicitor, they will be not subject to the privilege. Second, the ruling shows that the burden of proving that the privilege exists lies on the claimants. Third, the Crown may show that the privilege has been displaced by showing a prima facie case of criminal activity by the solicitor.

Those comments, of course, are a specific reference to the Criminal Code and specifically in that case to section 488 of the Criminal Code.

Mr. Justice Spencer's decision is of some assistance in the two decisions that have been referred to that dealt specifically with section 232 of the Income Tax Act, the decisions of Judge Drake, as he then was, now Mr. Justice Tyrwhitt- Drake, in Cox v. A.-G. Canada, [1988] 2 C.T.C. 365 ; 88 D.T.C. 6494 and that of Mr. Justice Coultas in Heath v. Canada, [1990] 2 C.T.C. 28; 90 D.T.C. 6009. Both of those decisions, which are in contradiction of one another, were with regard to the trust account ledgers of the solicitors involved in both of those cases. They are both restrictive as to their consideration of the exception in Section 232 relating specifically to solicitors’ trust accounts, and neither of them specifically reviewed the general principles of the common law privilege.

Mr. Justice Coultas specifically, in his decision in the Heath case, supra, at page 40 (D.T.C. 6017) said: "Therefore, it is not necessary to consider the issue of common law privilege in these circumstances." He also, in that case, disagreed with the decision of Mr. Justice Tyrwhitt-Drake and referred specifically to the decisions of Mr. Justice Dryer in In Re Evans, supra, and In Re Modern Film Distributors, supra.

Considering the principles that I have just referred to as set out in Wigmore and in Cross and more specifically in the decision of the Supreme Court of Canada in Descoteaux, supra, I have attempted to apply those general principles of the common law relating to the solicitor-client privilege in reviewing each of the documents that are in question in these two applications. I have gone through each document and considered it in light of these various principles.

Specifically with regard to what has been referred to as Exhibit B of the Zein affidavit of August 30, 1990, which is in the petition numbered 93, the documents that are numbered from 1, 1A, 1B, 1C and 2, in my opinion are all subject to the solicitor-client privilege. They relate to advice and opinions on confidential legal matters between solicitor-and-solicitor and solicitor-client.

The documents numbered 3, 4 and 4A are all obviously working papers and notes in handwriting in relation to the solicitor- client privilege and are privileged.

The documents numbered 5 and 6 are accounting records for services and billing instructions but, in reviewing them, it's obvious that they also fall within the privilege claimed.

With regard to Exhibit H in the Zein affidavit with regard to the Balaclava petition, which is number 94, the first item, which was number 1, was a memo. It was obviously the formulation of legal advice regarding both the companies, Pinetree and Balaclava. Similarly, items 2 and 2A are letters from solicitor to client and are with regard to specific legal advice. Items 3, 4 and 5 are obviously all working papers with regard to the formulation of legal advice and would fall within the solicitor-client privilege. Items 6 and 7 memos, confidential in nature, regarding legal advice to the client or clients. 8 is correspondence to a client regarding advice and a confidential agreement. 9 and 10 were solicitors' correspondence regarding this transaction, all of which, again, in my opinion, are privileged.

11 and 12 are handwritten memos and legal advice. 13 is correspondence to client regarding his legal position. Again, all of those, 11, 12 and 13 are privileged.

14 is an in-office memo, again, with regard to confidential legal information. 15 and 16 are typewritten memos regarding opinion and advice to the client. Those also, all of those items that I have referred to, fall under the solicitorclient privilege.

The items after that, 17, 18 and 19, are handwritten notes of working papers, obviously privileged.

20 is a typed memo, in-office, to the client, privileged.

21 and 22 are handwritten notes regarding the opinions previously expressed. 23 is a typed review, an opinion to the office and client. Again, all of those are privileged.

24 to 26 are, again, handwritten working papers. All of these documents, in my opinion, fall within the solicitor and client privilege relating to documents, either as communications from lawyer to client, advice and opinions or requests for instructions that would fall under draft documents and working papers relating to confidential legal matters as to formulating legal advice or, of course, relating to accounting records of privileged documents.

Therefore, I have concluded that the clients in this case have a solicitorclient privilege in respect of all of the documents. The documents will all be repackaged and resealed and will be released to the lawyers acting on behalf [of] the clients through counsel who have appeared today.

Motion granted.