Date: 20080212
Docket: T-699-06
Citation: 2008 FC 177
Ottawa, Ontario, February 12,
2008
PRESENT: The Honourable Mr. Justice Phelan
BETWEEN:
HARI S. NESATHURAI AND
1322901
ONTARIO LIMITED
Applicants
and
THE
MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
I. INTRODUCTION
[1]
This
is an application by a tax lawyer and the corporation responsible for the
management aspects of his law practice to cancel or vary Requests for
Information (RFIs) issued by the Minister of National Revenue (MNR) under s.
289(1) of the Excise Tax Act (ETA).
[2]
In
Canada (Minister of National Revenue – M.N.R.) v. Welton Parent Inc.,
2006 FC 67, another case involving a challenge to RFIs in which Mr. Nesathurai
was also involved, Justice Gauthier held that similar, if not identical,
records to the ones at issue in this case were covered by solicitor-client
privilege. Welton Parent Inc. was the actuarial company retained by Nesathurai.
The RFIs are now directed at Nesathurai and his management company rather than
the actuarial firm.
II. BACKGROUND
[3]
The
Applicant, 1322901 Ontario Ltd. (the management company), applied for a GST
refund. This request triggered a desk audit which turned into a more complete
audit.
[4]
Canada
Customs and Revenue Agency (now known as CRA) requested a number of documents
from Nesathurai’s accountant. In response, the Applicants supplied certain
information but redacted Nesathurai’s client information.
[5]
On
June 15, 2004, the Minister issued RFIs (the 2004 RFIs) to the Applicants
requesting:
·
all
electronic records created, maintained or updated using the PC Law software
program;
·
all
billings to clients in the relevant years (2001-2003);
·
all
bank statements and cancelled cheques for all bank accounts; and
·
income
statements for the relevant years.
[6]
The
Applicants asserted a claim of privilege in respect of electronic and billing
records as they pertained to clients and the advice they were seeking and had
been given. Nesathurai forwarded his personal bank records as covered by the
RFIs but the Applicants otherwise maintained that all other business records
had previously been provided. The correspondence in regards to the 2004 RFIs
seems to have ended in December 2004.
[7]
On
February 28, 2006, the Minister issued a second set of RFIs (the 2006 RFIs) on
the grounds that the response to the 2004 RFIs was not responsive. In large
measure, the 2006 RFIs mirrored the ones from 2004.
[8]
Nesathurai
had sought the advice of the Law Society of Upper Canada before first asserting
the clients’ privilege. He had also received instructions from the clients to
assert this privilege.
[9]
The
Minister’s actions in issuing the sets of RFIs must be viewed in context.
Nesathurai is a lawyer practising in the tax field. He (along with other
lawyers) had been “promoting” to employers tax-advantageous offshore “health
and welfare trusts” for the benefit of their employees.
[10]
In
the Welton Parent case, CRA was aware that Welton Parent had provided
valuations for these trusts to three lawyers, including Nesathurai. In fact,
Welton Parent’s work was to communicate with the lawyers, not the
employer-clients. CRA issued RFIs which had as their aim to obtain information
concerning the lawyer’s clients by means of obtaining Welton Parent’s records.
[11]
Justice
Gauthier found, among other matters, that the information sought in respect of
the lawyers’ clients was covered by solicitor-client privilege. Following the Welton
Parent decision, CRA issued the 2006 RFIs against Nesathurai and the
management company. The client information sought, if not precisely the same as
in Welton Parent (because of issues of timing), was of exactly the same
nature and type.
[12]
The
Applicants, in this judicial review, raise a number of issues beyond that of
solicitor-client privilege. These include whether the RFIs were issued for a
proper purpose; the significance of a two-year delay in responding to the
Applicants’ submissions; whether the Minister can continually issue RFIs; the
obligation on CRA officials to review the materials filed with them; and the
delay in payment of the GST refund.
[13]
This
judicial review can be resolved to the greatest extent by the conclusion as to
whether the information outstanding is subject to solicitor-client privilege.
III. ANALYSIS
[14]
On
the principal issue of solicitor-client privilege, it is my view that the
principle of issue estoppel ought to be applied.
[15]
Issue
estoppel is available where (1) the same question has been decided in another
proceeding, (2) the judgment said to create the estoppel is final, and (3) the
parties to the judgment and their privies are the same parties or their privies
to the proceedings in which the estoppel is being raised.
[16]
In
addition to determining whether the three conditions have been met, the Court
must exercise its discretion as to whether issue estoppel ought to be applied.
[17]
The
critical issue is whether the same question in this case has been decided in
Justice Gauthier’s judgment. As to the other two conditions, I note that
Justice Gauthier’s judgment has not been appealed. Furthermore, there is sufficient
connection between the Applicants (particularly Nesathurai) and Welton Parent
Inc. to make them privies. I base this conclusion on the fact that Welton
Parent Inc. was retained by Nesathurai to provide expert actuarial assistance
on a specific issue that Nesathurai, as counsel, was advising upon in a broader
context. Welton Parent Inc. was provided with client information for the
purpose of assisting counsel and Welton Parent Inc. brought its litigation to
protect solicitor-client privilege on behalf of Nesathurai as instructed by
Nesathurai’s clients.
[18]
The
facts leading to Justice Gauthier’s conclusion are summarized as follows:
·
CRA was conducting audits for the
taxation years of 1997 to 2003 inclusive of various unnamed Canadian employers
who claimed expenses for salaries and wages incurred in respect of
contributions to what they claim to be offshore "health and welfare
trusts" (Plans) for the benefit of their employees;
·
CRA found an actuarial valuation
prepared by Welton Parent Inc. and was aware that Welton Parent Inc. was
providing such valuations to three lawyers in Ottawa, including Nesathurai;
·
the lawyers
were retained by the unnamed taxpayers to provide
legal advice;
·
Welton Parent Inc. did not deal
directly with the clients, but was retained by the lawyers to perform actuarial
valuations of the liabilities and funding requirements of their Plans and to
make recommendations based on each employer's ability to pay;
·
Welton Parent Inc. was not serving
as a channel of communication between the three lawyers involved and their
clients and it never communicated with anybody other than the lawyers;
·
the RFI
originally authorized by Justice Gauthier sought from Welton Parent Inc. the
names of the unnamed employers contained in its files;
·
when the RFI was
delivered to Welton Parent Inc., it immediately contacted the three lawyers, who
in turn sought to obtain instructions from the unnamed employers as to whether
or not they were authorized to waive solicitor-client privilege, with respect
to their names and the other information in the files of Welton Parent Inc.;
and
·
the lawyers
were instructed to file the motion to preserve privilege and they did so
through Welton Parent Inc.
[19]
Justice
Gauthier then reviewed in detail the legislation and authorities on the issue
of solicitor-client privilege, particularly as it applied to bills of accounts.
On the facts before her, Justice Gauthier concluded that the disclosure of the
names and addresses of employers would disclose sufficient information about
the legal advice itself. This finding turned on the circumstances of the work
being done and the type of Plans being established by counsel.
[20]
In
the case at bar, the only difference in the information sought is the source,
not the contents. In Justice Gauthier’s case, the information had been supplied
to Welton Parent Inc. by counsel and CRA had pursued the agent of counsel for
that information. Here, CRA went directly to counsel for the same information.
[21]
This
change in the person subject to the RFI does not change the legal quality of
the information itself – it remains covered by solicitor-client privilege.
[22]
Although
it is not absolutely clear that the same clients who were being audited in Welton
Parent (for the taxation years 1997-2003) would necessarily be the same
clients affected by the audit in this case (for the taxation years 2001-2003),
it is evident that there is significant overlap and that the nature of the
information and the legal relationships are the same.
[23]
I
do not see a conflict between Justice Gauthier’s decision and that of Justice
Snider in Canada (Minister of National Revenue – M.N.R.) v. Cornfield,
2007 FC 436, that accounting records are not subject to solicitor-client
privilege. The distinction between the cases is on the facts. Accounting records
may, but do not necessarily, contain solicitor-client information – it depends
on the contents of the records or other circumstances relevant to disclosure of
a privilege.
[24]
Having
concluded that issue estoppel arises in this case, the Court must consider
whether the application of the principle would work an injustice. In my view,
it would not. Indeed, to not allow the principle to operate would create an
injustice.
[25]
The
Court is struck by the proximity of time of the Welton Parent decision
denying information from Nesathurai’s agent for actuarial advice and the RFIs
which seek to obtain essentially the same type of information from the
principal.
[26]
Most
importantly, the clients were entitled to have their information protected. In
the event of doubt, the Court should err on the side of protecting the
privilege.
[27]
Even
if issue estoppel did not apply, on the facts of this case, I would have
concluded that the privilege exists for largely the same reasons as Justice
Gauthier.
[28]
I
would note, however, that the procedure followed by CRA did not permit a Court
review of the documents by way of a confidential proceeding where the records
are sealed before this Court.
[29]
As
to the other issues in this matter, I do not intend to deal with them as I have
concluded that the RFIs cover solicitor-client information and I am not
prepared to sever the offending parts of the RFI. However, I would note that I
fail to see how it can be legitimate for CRA to demand documents which the
Applicants say have been produced or do not exist just because CRA does not
think the response is complete. The Minister has other remedies in such
instances.
IV. CONCLUSION
[30]
I
will grant this judicial review and quash the RFIs without prejudice to the
Respondent to serve new RFIs without the requirement to produce privileged
materials. If there is anything to be seriously re-litigated, it can be done
without the distraction of the issue of privilege.
[31]
I
am not prepared to order solicitor-client costs at this juncture, although it
is arguably appropriate given the timing of the RFIs and the other concerns
noted above.
JUDGMENT
THIS COURT
ORDERS AND ADJUDGES that this
application for judicial review is granted and the RFIs quashed without
prejudice to the Respondent to serve new RFIs without the requirement to
produce privileged materials.
“Michael
L. Phelan”
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