Kevin Radke and K.J.R. Development Group Ltd. v. Minister of National Revenue, [1996] 3 CTC 86

Thackray J.: — The petitioners ask for an order pursuant to section 232(4) of the Income Tax Act that they have solicitor-client privilege over the file of Douglas W. Welder. Mr. Welder is a barrister and solicitor who acted on behalf of the petitioners regarding some commercial transactions. He was served with a Requirement Letter pursuant to section 231.2 of the Act.

The Requirement Letter obliged Mr. Welder to produce all information and documents relating to the petitioners and their dealings with certain individuals and companies. On behalf of the petitioners Mr. Welder claimed solicitor-client privilege over these documents, placed certain documents in a package and delivered them for deposit with the court. Subsequently, he delivered further documents directly to me.

Section 232 of the Act provides that the hearing to determine if solicitor-client privilege exists is to be heard in camera and shall be decided summarily. If privilege is found the documents shall be released to the lawyer. If privilege is not found then the judge shall make an order providing for the review of the documents by the Department of National Revenue and “shall, at the same time, deliver concise reasons in which the judge shall identify the document without divulging the details thereof.”

The same section provides that “if the judge considers it necessary to determine the question, inspect the document .” This two step procedure was carried out by Mr. Justice Mahoney in Cotroneo, Re (sub nom. Cotroneo v. Deputy A.-G. (Canada)), [1982] C.T.C. 131, 82 D.T.C. 6115 (F.C.T.D.).

It is agreed that the joint venture agreement exhibited in the affidavit evidence was drawn and executed in 1992. It provides that it is effective May 1, 1989. The Department alleges that the petitioners created a false joint venture between K.J.R. Development Group Ltd. and Imperial-Pacific Investment Corp. (Rhoda Walker) in order to split K.J.R.’s profits with Imperial and thus reduce its taxes. This is the fraud that is alleged.

The parties agree that oral and written communications between a solicitor and his clients are privileged. Also agreed is that the work product of the solicitor including working papers and drafts of documents would, ordinarily, be privileged. However, communications and the resultant work product made in order to facilitate the commission of a crime or fraud, regardless of whether or not the lawyer is acting in good faith, are not privileged: Descôteaux v. Mierzwinkski, [1982] 1 S.C.R. 860, 141 D.L.R. (3d) 590.

The parties agree that the Department, in order to circumscribe solicitor-client privilege, must establish a prima facie case of fraud based on admissible evidence. They further agree that a mere allegation of fraud in a pleading is not sufficient to displace the privilege; that a mere suspicion of fraud is not enough and that evidence of a plan of tax avoidance would not be sufficient. Therefore, the Department is required to make out a prima facie case of a fraudulent plan to commit a tax evasion.

On the basis of Romeo’s Place Victoria Ltd., Re, [1981] C.T.C. 380, 81 D.T.C. 5295 (F.C.T.D.) counsel for the petitioners submits that there is insufficient admissible evidence to establish prima facie case of fraud. In that case Mr. Justice Collier said at page 383 (D.T.C. 5297):

I have no qualms in holding, quite apart from Rule 331(2), that where fraud is asserted in order to try and circumscribe solicitor-client privilege, a prima facie case must be made from first hand knowledge, and not on information and belief. An allegation of fraud is a serious matter. In an ordinary civil case, where fraud is alleged, the quality of proof required is greater than in other types of civil cases. The standard is not the criminal one. The ordinary civil standard of balance of probabilities remains. But there are degrees of probability of proof within the standard.

Collier J. said that the alleged prima facie case was dealt with in two paragraphs in the affidavit evidence. In the first the deponent said that “As a result of my enquiries, I know that” a certain delivery practice was followed by the taxpayer. He therefore came to certain conclusions about the disclosure of income.

In the second paragraph the deponent said that he “examined certain documents and records” and as a result came to conclusions regarding revenues. Nowhere in the affidavit were the documents and records identified.

Without any further reasons as to his conclusion, Mr. Justice Collier than pronounced that no prima facie case of fraud had been made out.

In the matter of an application by Cotroneo, Re (sub nom. Cotroneo v. Deputy A.-G. (Canada), [1982] C.T.C. 67, 82 D.T.C. 6068 (F.C.T.D.) Mr. Justice Mahoney commented upon Romeo's Place. He reviewed the affidavit in Romeo's Place and noted that there were no exhibits. Rather, the “officer merely deposed to what he had learned or been told in the course of his investigation and as to the conclusions he had drawn from that information.” This, he held, was in “counterpart” to the affidavit before him wherein there were may exhibits including tax returns, bank statements, land registry documents and correspondence.

What Mr. Justice Mahoney seems to indicate is that the affidavit in Romeo’s Place was of no value in that it was entirely hearsay without supporting documentation and breached Rule 332(1) of the Federal Court. That Rule provides that affidavits must be confined to such facts as the witness is able of his own knowledge to prove.

I must therefore consider the affidavit evidence in the case at bar. The main affidavit relied upon by the Department is that of Mr. Paul Brisson, an officer in the Special Investigations Section, sworn on February 16, 1996. Mr. Brisson deposed that in K.J.R.’s tax return for 1990 no mention is made of any joint venture with Imperial or Rhoda Walker. The tax returns covering the calendar year 1990 are annexed as exhibits.

Mr. Brisson says the same for the year 1991 and attaches the 1991 K.J.R. return as a exhibit. He notes that it is only for the years subsequent to 1991 that K.J.R. indicates a splitting of profits and exhibits the 1992 and 1993 return in support.

Mr. Brisson then traces the history of Imperial (formerly Petro-Nim) and identifies a lawyer from whom he received information to his regard. He than details that he searched the Department’s records and determined the tax status of Petro-Nim prior to 1992. Through documents attached as exhibits he shows that the petitioner Kelvin Radke had some responsibility for the affairs of Imperial.

Annual Reports for Imperial are exhibited which list Rhoda Walker as the director. Petro Nim/Imperial income tax returns for the years 1989 to 1992 are exhibited, all of which are. signed by Rhoda Walker.

Mr. Brisson deposes that on December 8, 1994 he spoke with Rhoda Walker. She informed him that she had given $25,000 to Kevin Radke “to help him out in his business in Kelowna. She stated the reason she gave him the money was that his mother Lila Radke had been excluded from her share of an inheritance in a previous year. She stated she could not remember anything about being a partner in any joint venture or any joint venture agreement.”

On January 18, 1995 Mr. Brisson spoke with Donald Danard, a partner in a joint venture between K.J.R. and Circle Development which had been started in May 1989. He was told that the joint venture agreement was drawn by Mr. Douglas Welder, that there were no other joint venture partners and that he had never heard of Rhoda Walker or Imperial. A copy of the joint venture agreement was exhibited to Mr. Brisson’s affidavit.

Mr. Brisson deposed that he was informed by Mr. Welder that he did draw the above noted joint venture agreement on the instructions of Kevin Radke and Mr. Danard’s accountant. Further that in 1990 Mission Creek Resources Inc. and K.J.R. formed a joint venture but that Rhoda Walker was not mentioned as a joint venture partner.

The joint venture agreement between K.J.R. and Mission Creek together with a modification agreement are exhibited to the affidavit. The land to be developed in that agreement is, in part, the same land as described in the K.J.R. and Rhoda Walker joint venture agreement.

Mr. Welder further informed Mr. Brisson that he prepared the K.J.R. and Walker joint venture agreement in the summer of 1992 on instructions of Kevin Radke. A copy of the agreement is annexed to the affidavit of Mr. Brisson. Mr. Brisson deposed that Mr. Welder informed him that he never spoke to Rhoda Walker in preparing the agreement.

On March 27, 1995 Mr. Brisson attended at the office of Mr. S. Jennens, accountant for K.J.R. Mr. Brisson examined books and records of K.J.R. which, according to Mr. Brisson, showed no capital contributions from Rhoda Walker, contained no record of a $25,000 deposit to K.J.R. from May 1989 to March 31, 1992, and gave no indication of any K.J.R./Imperial Joint venture until the summer of 1992.

In a supplementary affidavit Mr. Brisson deposed that Rhoda Walker did not report any income from any joint venture with the petitioners in her 1989, 1990 or 1991 T1 tax returns. He exhibited her returns for those years. Further, that she did not report any such income in her 1992 or 1993 T1 returns which were electronically filed. Printouts of the information from these returns are exhibited.

The Brisson affidavit is a far cry from the affidavit that was before Mr. Justice Collier in Romeo's Place. It identifies sources, it quotes sources and it exhibits relevant documents. It contains admissible evidence upon which I can make a decision as to whether a tax fraud has been established on a prima facie basis. I distinguish Romeo’s Place in the same manner and on the same basis as was done by Mahoney J. in Cotroneo.

However, there are affidavits filed on behalf of the petitioners that should be considered. Mr. Stuart Jennens has been accountant for the petitioners “at all material times” and accountant for Rhoda Walker and Imperial since 1991. He deposes that in late 1991 either Kevin Radke or his bookkeeper advised him that Rhoda Walker was entitled to 50% of K.J.R.’s profits from any projects undertaken by K.J.R.

Mr. Jennens, after certain discussions, wrote to Mr. Welder on April 20, 1992 and provided instructions as to the preparation of a joint venture agreement. He instructed Mr. Welder “that the agreement should be dated May 1, 1989” because he understood that was the date of “KJR’s real estate development business which had been funded with monies provided by Rhoda Walker.” Mr. Jennens further 'deposes that he was responsible for advising Mr. Radke as to how the oral agreement which he believed existed between Mr. Radke and Ms. Walker should be structured. He saw nothing improper in what he proposed.

I do not find this affidavit to be of much assistance. The basis for Mr. Jennens’ professional advice was the information which was supplied to him by Mr. Radke.

Mr. Welder confirms in an affidavit that he had a meeting with Mr. Brisson. He reveals that Mission Creek was his company and that through this company he “would put up most of the money” for the joint venture with K.J.R. Mr. Welder states that he “did not know Rhoda Walker and had never met Rhoda Walker”. However, he deposes that he told Mr. Brisson that he understood that K.J.R. “had some form of partner” but he never did “know if there was a partner.”

This affidavit does not in any way detract from the evidence of Mr. Brisson. Indeed, it is supportive. The more significant affidavit is that of Ms. Rhoda Walker. She states that she is the aunt of Lila Radke, Mr. Kevin Radke’s mother. In 1988 Mr. Radke told her that he was starting a real estate development business but that he was short of money. She then deposes as follows:

I offered to give Kelvin Radke $25,000 because I felt that Lila Radke had bee excluded from her share of a family inheritance. Kevin Radke declined to accept any money from me as a gift, but finally agreed to accept money from me on the condition that any profits derived from his real estate development ventures would be split equally with me.

Ms. Walker states that during 1988 and 1989 she gave Mr. Radke “approximately $25,000 in cash in various instalments on the basis we had agreed.” She further deposes that the joint venture agreement was designed “to record our previous oral agreement” and that the commencement date of May 1, 1989 “was the date of commencement of Mr. Radke’s real estate business funded with the monies provided by me.”

Ms. Walker denies that she told Mr. Brisson that she did not remember a joint venture agreement. Rather, she says that she always had a clear recollection of the agreement but deferred Mr. Brisson’s question by advising him that she “would have to check this information or confirm it.”

There is a difference between what Ms. Walker and Mr. Brisson recall of the conversation on this one point. However, it is common ground that Ms. Walker did not acknowledge to Mr. Brisson that she knew of the existence of a joint venture agreement. Nor, apparently, did she tell him about her investment of money in Mr. Radke’s business. This might be understandable in that the conversation was by telephone and initiated by Mr. Brisson. Ms. Walker had no way of confirming the authority of Mr. Brisson to be asking questions about her business affairs.

Nevertheless, the evidence of Ms. Walker does little to alter any of the evidence put forth in Mr. Brisson’s affidavit. The evidence contained in the Brisson affidavit takes the case beyond mere conjecture or a simple bald assertion. This is the onus on the Department: see Dixon v. Canada (Deputy Attorney General) (sub nom. Dixon v. Minister of National Revenue), [1992] 1 C.T.C. 109, 91 D.T.C. 5584 (Ont. S.C.)

I have reminded myself, as I did in British Columbia (Minister of Environment, Lands & Parks) v. British Columbia (Information & Privacy Commissioner) (1995), 16 B.C.L.R. (3d) 64 (S.C.) of the sanctity that must be afforded to solicitor-client privilege. It is more than a rule of evidence. Lamer J. in Descôteaux v. Mierzwinski at page 873 (D.L.R. 603) said:

Although the right to confidentiality first took the form of a rule of evidence, it is now recognized as having a much broader scope, as can be seen from the manner in which this Court dealt with the issues raised in Solosky.

In Solosky v. Canada (sub nom. Solosky v. The Queen), [1980] S.C.R. 821, 16 C.R. (3d) 294, at page 839 (C.R. 310) Dickson J. put it this way:

... the right to communicate in confidence with one’s legal adviser is a fundamental civil and legal right, founded upon the unique relationship of solicitor and client ...

While keeping this clearly in mind I must also emphasize, as did Henry J. in Dixon, supra, that I am not trying his case. My jurisdiction is to determine if there is, on the admissible evidence, a prima facie case of fraud to displace the privilege claimed.

I have concluded, on a balance of probabilities, that a prima facie cause of fraud has been established.

I have come to that conclusion without reference to or relying upon any of the documents provided to the court by the solicitor. I am now going to refer to the documents. The solicitor’s file that was sealed and available to the Court at the commencement of this hearing is composed for the most part of corporate documents that might have no relevance to the matter at hand. However, there is an unsigned joint venture agreement between K.J.R. and Walker in the file. There is also a Statement of Account that could be relevant.

The unsigned joint venture agreement which I mentioned above has a “feature” different from the finalized agreement which was produced as an exhibit to the Brisson affidavit. That “feature” in its unexplained state would, if taken into account, mitigate against maintaining privilege over relevant contents of the solicitor’s file.

Because of a feature of the file that I will explain to counsel in the resumption of this hearing, I was of the opinion that there was further solicitor’s material not made available to the Court. I contacted Mr. Welder and he forwarded further documents. These comprise notes, draft agreements and Mr. Jennens’ letter to Mr. Welder of April 20, 1992.

Subject to hearing further from counsel, the document which I have particularized shall not be protected by privilege and will be made available to the Department.

I request of counsel that they appear before me at 9 a.m. on a day to be arranged through the Trial Co-ordinator. At that time we will further discuss the contents of the solicitor’s file and I will make a final determination as to the documents to be produced.

Petition was dismissed.