Tower v. Canada (Minister of National Revenue), 2002 FCT 929

                                                                                                                                           Date: 20020903

                                                                                                                                      Docket: T-1554-01

                                                                                                                Neutral citation: 2002 FCT 929

BETWEEN:

                                                 LESLIE TOWER, ROBERT TOWER

                                                                and BRUCE KITSCH

                                                                                                                                                      Applicants

                                                                              - and -

                                          THE MINISTER OF NATIONAL REVENUE

                                                          and BDO DUNWOODY LLP

                                                                                                                                               Respondents

                                                            REASONS FOR ORDER

KELEN J.:

• [2]                 The issues in this application are (a) whether the documents and information in the possession of the applicants' accountants (the respondent BDO Dunwoody LLP) are subject to a privilege protecting them from disclosure, and (b) whether the Requirements are within the legal scope of subsection 231.2(1) of the Income Tax Act (the "Act").
• [3]                 The applicants decided to emigrate from Canada and cease being Canadian residents for income tax purposes. They seek an Order from this Court that they are not obligated to provide the Minister of National Revenue with the information set out in the Requirements. The respondent BDO Dunwoody supports the applicants.

FACTS

• [4]                 In 1997, the applicants formed the intention to emigrate from Canada and give up their Canadian residency. They communicated this intention to their accountants, BDO Dunwoody in Kelowna, and were referred to Mr. Jas Butalia, an international tax advisor at the Calgary office of BDO Dunwoody.
• [5]                 With Mr. Butalia's advice, the applicants entered into certain investment arrangements with the CIBC bank, which resulted in each applicant filing their 1997 and 1998 tax returns and deducting interest payable to CIBC as a result of each having borrowed between $77 million and $141 million from the bank. The respondent Minister characterizes this transaction as a "Departure Trade" - a transaction whereby a person:
• ·                        borrows funds from a bank;

• ·                        loans the funds back to the bank (a "loan-back");
• ·                        pays the interest owing on the original loan in their last year of residency;
• ·                        receives an interest deduction on their taxation year which off-sets their income;

·            does not receive an interest payment from the bank on the loan-back until the following year when the person is no longer a resident and not taxable on it.

[10]            By letters dated May 12, 2000, the Minister requested from the applicants information regarding the 1997 and 1998 tax deductions. By letters dated September 20, 2000, BDO Dunwoody responded on behalf of the applicants. Certain information requested in the May 12^th letters was not supplied by BDO Dunwoody.

[11]            By letters dated May 11, 2001, the Minister set out his position as to why the applicants should not be allowed the deductions taken for the CIBC loans in the 1997 taxation year. Subsequently, the applicants were reassessed by the Minister and the interest deductions disallowed for the 1997 and 1998 taxation years.

[12]            On July 11, 2001, the Minister prepared a 'Requirement to Provide Information' pursuant to paragraphs 231.2(1) of the Act. The Requirement was served on BDO Dunwoody's Kelowna BC office. The three-page Requirement requests a broad range of documents, including:

[...all documents in your possession for the period January 1, 1997 to July 10, 2001, relating to [the applicants], and any corporation the shares of which were owned by any of them, directly or indirectly at any time [...], including but not limited to:

1)              All Working Paper files...]

All tax files and planning documents relating to, but not limited to, the taxpayers listed above.

All correspondence files including:

i) all correspondence in any form, including electronic, to or from any of the taxpayers above,

[...]

7)              The reasons each individual sought financing through BDO as opposed to a lending institution.

8)              The reason financing was required by each individual....]

[13]            On July 18, 2001, a second Requirement was prepared and subsequently served on BDO Dunwoody's Calgary office. This document is similar to the first Requirement.

[14]            The Requirements called for BDO Dunwoody to provide documents and information to the Minister, pertaining to the applicants' CIBC interest deductions and other business and tax matters related to the 1997 and subsequent taxation years. Both Requirements' due dates have been extended indefinitely pending the outcome of this matter.

[15]            On August 7, 2001, the applicants filed Notices of Objection to the 1997 reassessment. The Minister assigned the Objections to the Appeals Branch. Submissions have been made by counsel for the applicants. It is expected that the Tax Court of Canada will eventually be seized with the reassessments of the applicants. In the meantime, the Minister has issued the Requirements to Provide Information.

RELEVANT LEGISLATION

[16]            The relevant section of the Income Tax Act are as follows:

ANALYSIS WITH RESPECT TO PRIVILEGE

[17]            The applicants submit that their communications with their accountants should be protected by either a "class privilege", by virtue of the relationship akin to that between a solicitor and client, or by virtue of a "case-by-case privilege" if the party seeking the privilege meets the four-part test of Wigmore (Wigmore, Evidence in Trials at Common Law, vol. 8, McNaughton Revision, para. 2285).The Respondent BDO Dunwoody takes no position on whether a privilege applies.

[18]            Privilege was discussed by by Lamer C.J. (as he then was) in R. v. Gruenke [Man. C.A. Indexed as: R. v. Fosty], [1991] 3 S.C.R. 263, [1991] S.C.J. No. 80 (S.C.C.). Part of this discussion is useful to clarify the issue here:

¶ ¶ 26 Before delving into an analysis of the issues raised by this appeal, I think it is important to clarify the terminology being used in this case. The parties have tended to distinguish between two categories: a "blanket", prima facie, common law, or "class" privilege on the one hand, and a "case-by-case" privilege on the other. The first four terms are used to refer to a privilege which was recognized at common law and one for which there is a prima facie presumption of inadmissibility (once it has been established that the relationship fits within the class) unless the party urging admission can show why the communications should not be privileged (i.e., why they should be admitted into evidence as an exception to the general rule). Such communications are excluded not because the evidence is not relevant, but rather because, there are overriding policy reasons to exclude this relevant evidence. Solicitor-client communications appear to fall within this first category (see: [1991] 2 S.C.R. 353=">Geffen v. Goodman Estate, [1991] 2 S.C.R. 353 and [1980] 1 S.C.R. 821">Solosky v. The Queen, [1980] 1 S.C.R. 821). The term "case-by-case" privilege is used to refer to communications for which there is a prima facie assumption that they are not privileged (i.e., are admissible). The case-by-case analysis has generally involved an application of the "Wigmore test" (see above), which is a set of criteria for determining whether communications should be privileged (and therefore not admitted) in particular cases. In other words, the case-by-case analysis requires that the policy reasons for excluding otherwise relevant evidence be weighed in each particular case.

Proposed Accountant-Client Class Privilege

[19]           There is a high threshold for finding a class privilege. Solicitor-client privilege, the standard to which the applicant seeks to draw an analogy, is ensconced in the common law and is a fundamental and necessary aspect of the dealings between lawyers and their clients.

[20]           BDO Dunwoody has a "client confidentiality policy", which reads, in part:

Client Confidentiality

[...]

All information concerning the affairs of any client of the Firm must be held under strict confidence and will not be released or disclosed to any other party outside the office unless required by law or other specific written request by the client, and in all cases, it can be released only by a Partner.

[21]            It is well established that accountants and their clients do not have a class privilege with respect to income tax litigation. The Federal Court of Appeal in Baron v. Canada, [1991] 1 F.C. 688 (F.C.A.), varied at [1993] 1 S.C.R. 416 (but not on this point) stated:

¶ ¶ 64 As far as the claim for accountant/client privilege is concerned, a claim based on a number of provisions of Quebec law, the Trial Judge said [at pages 292-293]:

Even if I accept that the law of Quebec provides for an accountant-client privilege in the context of litigation, I am not persuaded that such a rule has been adopted with respect to federal income tax litigation. If such a rule were intended to apply one would expect to find it expressly so provided in either the Canada Evidence Act [R.S.C., 1985, c. C-5] or the Income Tax Act.

and again [at pages 293-294]:

It is not at all strange that solicitor-client communications are privileged in so far as compellable evidence before the courts is concerned, while those between an accountant and client are not. The purpose of the solicitor-client privilege is to ensure free and uninhibited communications between a solicitor and his client so that the rendering of effective legal assistance can be given. This privilege preserves the basic right of individuals to prosecute actions and to prepare defences. As Mr. Justice Lamer indicated, in Descôteaux et al. v. Mierzwinski, [1982] 1 S.C.R. 860">[1982] 1 S.C.R. 860; (1982), 141 D.L.R. (3d) 590; 70 C.C.C. (2d) 385; 28 C.R. (3d) 289;1 C.R.R. 318; 44 N.R. 462 at page 883 S.C.R., the privilege is recognized because it is necessary for the proper administration of justice. I do not think there is an overriding policy consideration, of this nature, in the case of accountant-client communication. An accountant may, as a matter of professional ethics, be required to keep communications and other information concerning his or her client confidential. But this is not founded upon a need to ensure an effective system of the administration of justice.

¶ ¶ 65 We could see nothing to criticize in her treatment of either matter and accordingly did not require to hear from the respondents.

[emphasis added]

[22]            Further, in 1997 this Court in Vancouver Trade Mart Inc. (Trustee of) v. Canada (Minister of National Revenue - M.N.R.), [1997] F.C.J. No. 1467 (F.C.T.D.) reiterated that communications between an accountant and his client are not privileged unless the communication was directed by a lawyer:

¶ ¶ 35 Jackett P. [in In Susan Hosiery Ltd. v. Minister of National Revenue, (1969) 69 D.T.C. 5278 (ex. ct.), following a discourse on the nature of solicitor client privilege] then went on to examine the application of the solicitor/client privilege to "accountant's materials". At 5283, he put it as follows:

Applying these principles, as I understand them, to materials prepared by accountants, in a general way, it seems to me

(a) that no communication, statement or other material made or prepared by an accountant as such for a business man falls within the privilege unless it was prepared by the accountant as a result of a request by the business man's lawyer to be used in connection with litigation, existing or apprehended; and

(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 uses 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.

[emphasis mine]

[23]            Counsel for the applicants rely upon R. v. McClure, [2001] S.C.J. No. 13, 2001 SCC 14">2001 SCC 14 (S.C.C.) to show that there can be identified a new "class privilege" on a principled basis if the privilege is essential to the effective operation of the legal system. Major J. wrote:

¶ ¶ 28 For a relationship to be protected by a class privilege, thereby warranting a prima facie presumption of inadmissibility, the relationship must fall within a traditionally protected class. Solicitor-client privilege, because of its unique position in our legal fabric, is the most notable example of a class privilege. Other examples of class privileges are spousal privilege (now codified in s. 4(3) of the Canada Evidence Act, R.S.C. 1985, c. C-5) and informer privilege (which is a subset of public interest immunity).

¶ ¶ 29 Other confidential relationships are not protected by a class privilege, but may be protected on a case-by-case basis. Examples of such relationships include doctor-patient, psychologist-patient, journalist-informant and religious communications. The Wigmore test, containing four criteria, has come to govern the circumstances under which privilege is extended to certain communications that are not traditionally-recognized class privileges (Wigmore, supra, at p. 527):

(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.

[emphasis mine]

[24]             Therefore McLure does not extend the protection of a class privilege, however, leaves open the possibility of a case-by-case privilege following the Wigmore test.

[25]            The applicants submit that tax advice from an accountant with respect to the Income Tax Act is no different than tax advice from a lawyer and, accordingly, ought to be accorded the same class privilege. I cannot agree for the reasons referred to by Mr. Justice Lamer (as he then was) in Descôteaux, supra. Privilege for lawyer-client communications is necessary for the proper administration of justice as it preserves the basic right of individuals to prosecute actions and to prepare defences. None of this applies to a client's communications with an accountant because the accountant does not represent the client with respect to the administration of justice.

[26]            Therefore, no class privilege attaches to the material set out in the Requirements.

Case-by-Case Privilege

[27]            I deal next with the alternative claim of "case-by-case privilege" as set out in Wigmore, based on the analogy of advice from a tax accountant as being akin to advice from a tax lawyer, and entitled to similar protection. The Wigmore test was set out by Lamer C.J. in R. v. Gruenke, supra.:

¶ ¶ 22 Given that the Wigmore criteria play a central role in this case, I will set out the "test" below for ease of reference (Wigmore, Evidence in Trials at Common Law, vol. 8, McNaughton Revision, para. 2285):

(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.

[28]            In my view, the applicants fail the Wigmore test. The relationship between a client and his tax accountant is not one which in the opinion of the community ought to be sedulously fostered. The Income Tax Act is complicated and individuals rely upon their accountants to prepare their returns and to deal with the tax department about their returns. The records which a client provides his accountants are his income tax records, and must be produced upon demand so that the tax department can verify or question an individual's tax return. Clients understand that information must be produced to the tax department upon demand.

[29]            Moreover, the "community" of North America is currently experiencing a crisis of confidence in the accounting of financial information with respect to many public companies, and public outrage over accounting misdeeds (such as with Enron Corporation and Worldcom Inc.). Such events, and the resulting outcry, are illustrative of the view of the "community" that a client-accountant privilege is not to be "sedulously fostered" as per Wigmore.

ANALYSIS WITH RESPECT TO THE LEGAL SCOPE OF THE REQUIREMENTS

[30]            The applicants and the respondent BDO Dunwoody challenge the legal scope of the Requirements as being too broadly drawn and authorizing "an exploratory sortie" or "fishing expedition" into the applicants' affairs beyond the subject of the Minister's "genuine and serious inquiry" with respect to the loans from the CIBC and the deduction of the interest costs of these loans in the applicants' last two tax years prior to leaving Canada. Moreover, the Requirements demand that BDO Dunwoody not only provide documents and information with respect to the applicants, but "subjective" explanations as to the purpose and intention of the applicants with respect to the loan transactions and their decision to emigrate from Canada. In the applicants' submission, this is beyond the scope of the Requirements.

[31]            The case law is clear that the Requirements under subsection 231.2(1) of the Income Tax Act cannot be construed, as the Supreme Court of Canada held in [1984] 1 S.C.R. 614">Richardson v. Minister of National Revenue, [1984] 1 S.C.R. 614, to "authorize an exploratory sortie into any taxpayer's affairs and require anyone having anything to contribute to the exploration to participate". The Court stated that it would be necessary for the Minister to suspect a taxpayer's non-compliance with the Act and to require information which had a bearing on the taxpayer's tax liability.

Evidence from the Minister's Representative

[32]            The Minister's representative, Mr. S.M. Marischuk, deposed at paragraph 13 of his affidavit that the applicants are the subject of audits to determine their correct tax liability. He testified that the Requirements relate to this general audit, as well as the only "serious and genuine inquiry" identified to date: whether the applicants are entitled to the interest expense deduction on the loan transactions, which the Minister characterizes as a "Departure Trade".

Test of Relevancy and Reasonableness under Subsection 231.2(1)

[33]            In AGT Limited v. The Attorney General of Canada (1997) 97 D.T.C. 5189, [1997] F.C.J. No. 398 (F.C.A.), the Federal Court of Appeal held that the requirement to provide information under subsection 231.2(1) is drafted in broad language but has been "reduced through the rules of interpretation" to situations where the information sought by the Minister is relevant to the tax liability of a specific person and the tax liability of such person is the subject of a "genuine and serious inquiry". The Court found that it is often impossible to determine whether an impropriety has occurred in the preparation of a tax return without studying the process by which a suspected business or person has made and implemented a decision. The Court held at page 5193:

"....[I]nvestigatory mechanisms which force corporations and other businesses to divulge what they and only they can know about their internal affairs are part of the state's interest in the enforcement of the Act. While an individual or a corporation's interest in having business strategies kept in confidence is recognized, the balancing [sic] no doubt favours the state..."

[34]            The Court of Appeal further stated that the Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them.

[35]            In the case at bar, the general tax liability of the applicants is the subject of an audit. This is a genuine and serious inquiry as required in AGT, supra.

[36]            Under the Act, the Minister is entitled to require the production of "information" for the purpose of studying "the process by which a suspected corporation or business has made and implemented its decision". The applicants seek to restrict the Requirements to only information relevant to the loans from the CIBC to the applicants at the end of the 1997 tax year. I cannot unduly restrict the Minister's right to require the production of information to only these loans. These loans triggered a concern with verifying the general tax liability of the applicants. The tax liability of the applicants is the subject of a genuine and serious audit and the Requirements thereby meet the test of relevancy and reasonableness.

[37]            When the applicants decided to emigrate from Canada and undertake sophisticated multi-million dollar loans to obtain income tax deductions to off-set off capital gains on leaving Canada, it is reasonable to expect that the Minister may audit the applicants not only with respect to the loan transactions, but also with respect to their total income tax liability.

Subjective Information

[38]            The applicants and BDO Dunwoody object to the parts of the Requirements that BDO Dunwoody create and produce documents and information which does not exist. The Requirements ask individuals at BDO prepare new documents with their subjective understanding of the intention of the applicants and BDO.

[39]            The broad powers of subsection 231.2(1) require the production of documents and information in existence. It is not framed so broadly that accountants can be required to respond to written interrogatories. This subsection does not authorize the Minister to demand responses to written interrogatories. If subsection 231.2(1) of the Act were intended to be so broad as to provide the Minister with the option to conduct a written examination for discovery, Parliament would have so provided. Accordingly, the parts of the Requirements which require the creation of responses to questions are outside the legal scope of subsection 231.2(1) of the Act, and will be set aside.

[40]            In R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, [1990] S.C.J. No. 25 (S.C.C.), the Supreme Court considered the nature of the Requirement to Provide Information. That Court's findings were summarize by the Federal Court of Appeal in Bisaillon v. Canada, [1999] F.C.J. No. 1477 (F.C.A.) at paragraph 3, as follows:

(a) the Act is essentially a regulatory measure;

(b) s. 231(3) (the predecessor of s. 231.2(1)) is not criminal or quasi-criminal law;

[...]

(f) in a taxation system based on the principle of self-reporting and self-assessment, the Minister of National Revenue has to have broad powers to audit taxpayers' returns and inspect records which may have been used to prepare those returns;

(g) the Minister of National Revenue must be able to exercise these powers whether or not he has reasonable grounds to believe that a particular taxpayer has breached the Act;

(h) s. 231(3) provides the least intrusive means by which effective monitoring of compliance with the Act can be carried out; and

(i) the taxpayer's privacy interest with regard to documents which may be relevant in income tax returns is relatively low in relation to the Minister.

[41]            Implicit in the Supreme Court's decision is the concept that a Requirement to Provide Information under the Act only applies to documents and other records already in existence.

[42]            Any ambiguity as to the information subject to a Requirement under subsection 231.2(1) shall be resolved in favour of the taxpayer. See Seaspan International Ltd. v. Canada, [2002] F.C.J. No. 911(F.C.T.D.) as per Blais J.:

¶ ¶ 40 [... The Supreme Court of Canada has already repeated many times that any ambiguities found in the taxing statutes shall be resolved in favour of the taxpayer as per Mr. Justice Estey in Johns-Manville Canada Inc. v. The Queen, 85 D.T.C. 5373 (SCC) at 5384 where he stated:

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual, ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

¶ ¶ 41 In addition, Justice Sopinka of the Supreme Court of Canada held in Fries v. The Queen, 90 D.T.C. 6662 (SCC) said that:

We are not satisfied that the payments by way of strike pay in this case come within the definition of 'income... from a source' within the meaning of s. 3 of the Income Tax Act. In these circumstances the benefit of the doubt must go to the taxpayers.

[43]            Therefore, the scope of the Minister's power in a Requirement to Provide Information under 231.2(1) extends to documents and records already in existence. The power does not provide the Minister with the right to conduct a written examination for discovery.

Right to Redaction to Expunge Names of Any Person Unrelated to the Applicants

[44]            If any of the documents or information to be produced under the Requirements refer to a client of BDO Dunwoody unrelated to the applicants, BDO Dunwoody has the right to redact the documents to expunge that person's name before the document or information is submitted.

DISPOSITION

[45]            For these reasons, this application is allowed in part. The parts of the Requirements which demand responses to written interrogatories, and which require the creation of new documents by BDO Dunwoody, are outside the legal scope of subsection 231.2(1) of the Income Tax Act and are set aside. The remainder of the Requirements are within the legal scope of the subsection and must be complied with. In view of the divided success, there is no order as to costs.

             (signed) Michael A. Kelen             _________________________

                      JUDGE

OTTAWA, ONTARIO

September 3, 2002

                                                    FEDERAL COURT OF CANADA

                                                                 TRIAL DIVISION

                              NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                T-1554-01

STYLE OF CAUSE: LESLIE TOWER ET AL V. THE MINISTER OF

NATIONAL REVENUE ET AL

PLACE OF HEARING:         Vancouver, British Columbia

DATE OF HEARING:           July 30, 2002

REASONS FOR ORDER OF THE HONOURABLE MR. JUSTICE KELEN

DATED:                                   September 3, 2002

APPEARANCES:                   

Mr. Joel Nitikman                       FOR APPLICANT

Mr. Robert Carvalho                  FOR RESPONDENT

Mr. Ron Wilhelm

Ms. Joanne Swystun                   FOR RESPONDENT

SOLICITORS OF RECORD:

Fraser Milner Casgrain FOR APPLICANT

Vancouver, BC

Morris Rosenberg                       FOR RESPONDENT

Deputy Attorney General of Canada      (Department of Justice)

Stikeman Elliot              FOR RESPONDENT

Toronto, Ontario                        (BDO Dunwoody LLP)

FEDERAL COURT OF CANADA

            Date: 20020903

            Docket: T-1554-01

BETWEEN:

LESLIE TOWER, ROBERT TOWER

and BRUCE KITSCH

     Applicants

- and -

THE MINISTER OF NATIONAL REVENUE

and BDO DUNWOODY LLP

            Respondents

REASONS FOR ORDER