Pratt & Whitney Canada Inc. v. R., [1997] 2 CTC 2378, 97 DTC 613

Lamarre Proulx T.C.J.:

This concerns a motion for disclosure of a legal opinion obtained by officers of the Minister of National Revenue (“the Minister”) on an assessment under appeal.

The motion reads as follows:

THE MOTION IS FOR disclosure by the Respondent of an opinion received from the Department of Justice of Canada by the Respondent relating to the subject matter of the present appeal as well as the disclosure, by the Respondent, of all documents given to the Department of Justice of Canada and of the nature of all other steps taken by the Department of Justice of Canada in order for it to prepare such opinion.

The grounds for the motion, as stated in the notice of motion, are the following:

THE GROUNDS FOR THE MOTION ARE that the opinion, the disclosure of which is requested hereby, forms the sole basis for the reassessments which are the subject matter of this appeal and it is therefore the duty of the Minister of National Revenue to disclose to the Applicant the basis of such reassessments.

This application is further to the examination for discovery of the Minister’s officer, who in 1986 was one of the auditors assigned to preparing the applicant’s assessment. The auditor testified that he requested a legal opinion from the Department of Justice as to the effect of a general agreement entered into on October 31, 1983 between the applicant and a federal department responsible for promoting trade. This agreement is entitled: “Memorandum of Understanding between Industry, Trade and Commerce and Regional Economic Expansion and Pratt & Whitney Canada Inc.”

The following are some extracts from the testimony of the Minister’s officer regarding the legal opinion received from the Department of Justice, referred to by counsel for the applicant:

[TRANSLATION]

(At p. 15):

Mr. LEFEBVRE:

Q. Then, if we look just at the “memorandum of understanding”, well, this document you have in front of you, this is the “memorandum of understanding” you had to consider at the time the assessment was made, isn’t it?

A. No. We did not consider it.

Q. You did not consider the “memorandum of understanding” in making the assessment?

A. No.

Q. Had you never seen it?

A. We saw it.

Q. And why did you ... if you saw it ...

A. We requested a legal opinion from the Department of Justice of Canada and it told us that we did not have to consider the M.O.U. in applying the grandfather clause.

Q. So, you did consider the M.O.U. in your assessment process; and from the way you considered it, you referred it to the Department of Justice ...

A. That’s right.

(At pp. 35 and 36):

Q. Then, no matter what he gave you, it would not have changed your point of view?

A. Well, let us say, so far as we were concerned, we had received a legal opinion from the Department of Justice concerning ...

Q. Exactly. Did you make any inquiry at all - when I say inquiry, ask questions ...

A. Uh, huh.

Q. ... as to how the M.O.U. was negotiated?

A. No.

Q. No inquiry of any kind. Can I assume - if I refer you to the document, to our document No. 6 - you see there is a list of persons who were apparently involved in the negotiation of the “memorandum of understanding”.

A. Uh, huh.

Q. Did you have the opportunity, or anyone at the Department have the opportunity, to discuss with any representative of the federal government in these negotiations - to discuss ...

A. To my knowledge, I don’t know.

Q. But does this ... does your file ...

A. My file does not mention it either.

Q. It makes no mention of anyone, of any of those people?

A. Not to my knowledge. I saw none.

(At p. 41):

Mr. LEFEBVRE:

Q. Okay. And am I right in saying that the opinion was actually the basis of the assessment? The legal opinion you received, once you received the legal opinion, you said ...

A. At that point we applied the grandfather clause consistently with the legal opinion we had received.

Q. Then, would you undertake to provide us with the legal opinion so we can know precisely what the grounds for the assessment were?

Mr. COSSETTE:

A. Not necessarily. We will check, undertake to do that, but we will reserve the solicitor-client privilege.

At the start of his argument counsel for the applicant said he was well aware that this motion involved a collision between two important principles, that is, on the one hand, the taxpayer’s right to know the factual presumptions which the Minister took into account in assessing the taxpayer and, on the other, the importance of solicitor-client privilege in the administration of justice and in the social order.

Counsel for the applicant referred to the part of the notice of appeal which describes the issue before the Court in this motion, namely, to subparagraphs 3(b)(i) and 4(b) for 1985 and to subparagraphs 9(b)(i) and 10(b) for 1986:

3. In its reassessment for the Appellant’s 1985 taxation year, the Minister, inter alia

(b) computed the Appellant’s “qualified expenditure” for the purpose of the investment tax credit enacted under the provisions of subsection 127(11.1) of the Act by excluding therefrom

(i) an amount of $6,580,631 received by the Appellant as grants from the Department of Industry, Trade and Commerce and the Department of Regional Economic Expansion;

4. Is the Appellant’s position that the Minister’s adjustments as outlined in paragraph 3 are factually and legally incorrect since

(b) the amount of $6,580,631 was received by the Appellant pursuant to the terms of a written agreement entered into on or about October 31, 1983 (that is to say before May 23, 1985), which agreement is “grandfathered” by virtue of the provisions found in subsection 71(18) as introduced by Bill C-84.

9. In its reassessment for the Appellant’s 1986 taxation year, the Minister, inter alia

(b) computed the Appellant’s “qualified expenditure” for the purpose of the investment tax credit enacted under the provisions of subsection 127(11.1) of the Act by excluding therefrom

(i) an amount of $26,287,861 received by the Appellant as grants from the Department of Industry, Trade and Commerce and the Department of Regional Economic Expansion;

10. Is the Appellant’s position that the Minister’s adjustments as outlined in paragraph 9 are factually and legally incorrect since

(b) the amount of $26,287,861 was received by the Appellant pursuant to the terms of a written agreement entered into on or about October 31, 1983 (that is to say before May 23, 1985), which agreement is “grandfathered” by virtue of the provisions found in subsection 71(18) as introduced by Bill C-84.

Counsel for the applicant then turned to the Reply to the Notice of Appeal, in subparagraphs 10(a) to (f), and said that the Minister relied on the legal opinion in arriving at his presumptions of fact and so implicitly acquiesced to the derogation from the solicitor-client privilege principle.

Those subparagraphs read as follows:

a) on or about October 31, 1983, the Appellant and the Department of Industry, Trade and Commerce and Regional Economic Expansion entered into a Memorandum of Understanding (M.O.U.);

b) that M.O.U. established only a framework for future cooperation between the parties wherein the Department of Industry, Trade and Commerce and Regional Economic Expansion indicated that it would provide different types of financial assistance for various development projects being considered by the Appellant;

c) the M.O.U. was not binding on either party and did not confer a contractual obligation to perform on either party;

d) in accordance with the M.O.U., the parties were to enter into specific contracts for the provision of financial assistance in respect of specific projects of scientific research and experimental development to be conducted by the Appellant;

e) in accordance with the contracts mentioned in subparagraph d), which were all entered into after May 23, 1985, the Appellant committed itself to incur expenditures in respect of scientific research and experimental development (herein referred to as “research and development expenses”);

f) after May 23, 1985, the Appellant undertook the work contemplated under those specific contracts and incurred research and development expenses in respect of which the Appellant received or was entitled to receive, during the taxation years at issue, $6,580,631 in 1985 and $26,287,861 in 1986 as assistance from the Department of Industry, Trade and Commerce and the Department of Regional Economic Expansion (in the name of the government);

Counsel for the applicant referred to the Supreme Court of Canada’s judgment in Johnston v. Minister of National Revenue, [1948] C.T.C. 195, 3 D.T.C. 1182, and to the following remarks of Rand J., at page 203 (D.T.C. 1183):

I am consequently unable to accede to the view that the proceeding takes on a basic change where pleadings are directed. The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy. (My emphasis.)

He then referred to a judgment by Heald J. in Fratschko v. Minister of National Revenue, (sub nom. Huron Steel Fabricators (London) Ltd. v. Minister of National Revenue), [1972] C.T.C. 506, 72 D.T.C. 6426 (F.C.T.D.), and to the following passages, at page 512 (D.T.C. 6430), as a basis for arguing that the taxpayer is entitled to all the documents on which the Minister relied in arriving at his assessment:

In these cases, as in all income tax cases of this kind, the Minister has detailed the assumptions upon which he relies to defend his income tax assessments of the plaintiffs...

Counsel for the plaintiffs, in his examination for discovery of the defendant’s assessor, has sought to challenge these assumptions...

In income tax appeals, the onus is on the taxpayer to demolish the Minister’s assessments. In order to do this, he must demolish the assumptions of fact upon which the Minister’s assessments are based. And yet, in this case, the Minister refuses to produce documents upon which some of his assumptions are admittedly based.

The taxpayer is entitled to have full discovery of all documents relied on by the Minister in support of subject income tax assessments and, in my opinion, that would certainly include the income tax returns in question. (My emphasis.)

He also referred to the Quebec Court of Appeal judgment in Québec (Sous-ministre du Revenu) v. Fava, [1984] C.A. 639, which dismissed an appeal from a judgment dismissing the objection of the Quebec Deputy Minister of Revenue to the filing of an audit report. He said this report was similar to the Department of National Revenue’s T-20 report. The ground for dismissing the appeal was that the primary purpose of the document was to assist in determining the assessment, not to be submitted to legal counsel for litigation purposes.

He referred to the observations of Dickson J. in Solosky v. Canada, (sub nom. Solosky v. The Queen) [1980] 1 S.C.R. 821, 16 C.R. (3d) 294, at pages 833-34 (C.R. 305-07):

As I have indicated, the main ground upon which the appellant rests his case is solicitor-client privilege. The concept of privileged communications between a solicitor and his client has long been recognized as fundamental to the due administration of justice. As Jackett C.J. aptly stated in Re Director of Investigation and Research and Shell Canada Ltd., [1] at pp. 78-9:

... the protection, civil and criminal, afforded to the individual by our law is dependent upon his having the aid and guidance of those skilled in the law untrammelled by any apprehension that the full and frank disclosure by him of all his facts and thoughts to his legal advisor might somehow become available to third persons so as to be used against him.

The history of the privilege can be traced to the reign of Elizabeth I (see Berd v. Lovelace [2] and Dennis v. Codrington [3] ). It stemmed from respect for the “oath and honour” of the lawyer, dutybound to guard closely the secrets of his client, and was restricted in operation to an exemption from testimonial compulsion. Thereafter, in stages, privilege was extended to include communications exchanged during other litigation, those made in contemplation of litigation, and finally, any consultation for legal advice, whether litigious or not.

At p. 835:

There are exceptions to the privilege. The privilege does not apply to communications in which legal advice is neither sought nor offered, that is to say, where the lawyer is not contacted in his professional capacity. Also, where the communication is not intended to be confidential, privilege will not attach ...

He argued that by using the legal opinion as the basis for his assessment the Minister caused it to lose its confidential nature.

Counsel for the applicant also referred to what Dickson J. said in Solosky, supra, at page 840 (C.R. 311):

The result, as I see it, is that the Court is placed in the position of having to balance the public interest in maintaining the safety and security of a penal institution, its staff and its inmates, with the interest represented by insulating the solicitor-client relationship.

Counsel for the applicant said that the public interest requires that the legal opinion on which the Minister relied should not be protected by solicitor-client privilege.

Counsel for the applicant also referred to Lloyds Bank Canada v. Canada Life Assurance Co., 47 C.P.C. (2d) 157 (Ont. Gen. Div.), The Law of Evidence in Canada, Sopinka, Lederman, Bryant, Butterworths, 1992, pp. 666 to 671, [4] Nowak v. Sanyshyn, 23 O.R. (2d) 797, 9 C.P.C. 303 (H.C.), Rogers v. Bank of Montreal, [1985] 4 W.W.R. 508, 62 B.C.L.R. 387 (C.A.), Conlon v. Conlons, Ltd., [1952] 2 All E.R. 462 (U.K. C.A.), as a basis for arguing that there was an implied waiver of the privilege concerning the solicitor-client relationship by the use made of the opinion in the assessment of the applicant, which opinion, according to counsel for the applicant, is to be found in part in the Reply to the Notice of Appeal.

Counsel for the respondent, for his part, argued that solicitor-client privilege exists not only in litigious proceedings but equally in non-litigious proceedings, and that a legal opinion cannot be treated like an auditor’s report or like the income tax returns which were respectively the subject of the judgments cited above (Huron Steel Fabricators (London) and Sous- ministre du revenu du Québec v. Fava).

He referred, for the extent and purpose of the privilege, to the observations of Jackett P. in Susan Hosiery Ltd. v. Minister of National Revenue, [1969] C.T.C. 353, 69 D.T.C. 5278 (Ex. Ct.), at page 359 (D.T.C. 5281-82):

As it seems to me, there are really two quite different principles usually referred to as solicitor and client privilege, vis:

(a) all communications, verbal or written, of a confidential character, between a client and a legal adviser directly related to the seeking, formulating or giving of legal advice or legal assistance (including the legal adviser’s working papers, directly related thereto) are privileged;

and

(b) all papers and materials created or obtained specially for the lawyer’s “brief” for litigation, whether existing or contemplated, are privileged.

In considering the ambit of these principles, it is well to bear in mind the reasons for them.

In so far as the solicitor-client communications are concerned, the reason for the rule, as I understand it, is that, if a member of the public is to receive the real benefit of legal assistance that the law contemplates that he should, he and his legal adviser must be able to communicate quite freely without the inhibiting influence that would exist if what they said could be used in evidence against him so that bits and pieces of their communications could be taken out of context and used unfairly to his detriment unless their communications were at all times framed so as not only to convey their thoughts to each other but so as not to be capable of being misconstrued by others. The reason for the rule, and the rule itself, extends to the communications for the purpose of getting legal advice, to incidental materials that would tend to reveal such communications, and to the legal advice itself. It is immaterial whether they are verbal or in writing.

Counsel for the respondent referred to the views expressed by MacGui- gan and Décary JJ.A. in Buffalo v. Canada, (sub nom. Samson Indian Na- tion& Band v. Canada), [1995] 2 F.C. 762, (sub nom. Samson Indian Band & Nation v. Canada) 125 D.L.R. (4th) 294, at pages 769-73 (D.L.R. 298), to indicate that this privilege exists equally in private and public matters:

... The legal advice privilege protects all communications, written or oral, between a solicitor and a client that are directly related to the seeking, formulating or giving of legal advice; it is not necessary that the communication specifically request or offer advice, as long as it can be placed within the continuum of communication in which the solicitor tenders advice; it is not confined to telling the client the law and it includes advice as to what should be done in the relevant legal context.

The principles relating to solicitor and client privilege apply in both civil and criminal cases, and they apply regardless of whether the solicitor is in private practice or is a salaried or government solicitor.

He [the motions judge] nevertheless decided in favour of the respondents on what were, essentially, reasons of equity and openness which cannot, in our respectful view, found an order of disclosure of privileged documents.

Counsel for the respondent also drew the Court’s attention to the following comments by Dickson J. in Solosky, supra, at page 837 (C.R. 309):

As Mr. Justice Addy notes, privilege can only be claimed document by document, with each document being required to meet the criteria for the privilege - (i) a communication between solicitor and client; (ii) which entails the seeking or giving of legal advice; and (iii) which is intended to be confidential by the parties. To make the decision as to whether the privilege attaches, the letters must be read by the judge, which requires, at a minimum, that the documents be under the jurisdiction of a court. Finally, the privilege is aimed at improper use or disclosure, and not at merely opening.

Having read this, counsel for the respondent gave me in an envelope the documents described in his letter to counsel for the applicant dated July 26, 1996, reading in part as follows:

[TRANSLATION]

Similarly, I wish to advise you that we are proposing to give a copy of the following documents to the presiding judge on Tuesday, July 30, in a sealed envelope:

1. Round-trip memorandum dated June 8, 1989 from Revenue Canada, Taxation to the Department of Justice requesting an opinion, with attached documentation.

2. Opinion of the Department of Justice dated June 13, 1989.

3. Round-trip memorandum dated November 23, 1989 from Revenue Canada, Taxation to the Department of Justice requesting an opinion, with attached documentation.

4. Opinion of the Department of Justice dated December 28, 1989.

We rely in this regard on the practice followed by the courts of examining documents for which privilege is claimed without the parties present, in order to rule on the question: see in particular Samson Indian Nation and Band v. Canada, [1995] 2 F.C. 762, at p. 776 (C.A.), and Canada v. Central Cartage Co. (1987), 10 F.T.R. 225, at p. 238. See also Rule 88(d) of the Tax Court of Canada Rules (General Procedure).

I would appreciate it if you would contact me if there are any problems whatever regarding the foregoing.

Both parties agreed on this procedure, which is also set out in s. 88(d) of the Tax Court of Canada Rules (General Procedure):

88. Where the Court is satisfied by any evidence that a relevant document in a party’s possession, control or power many have been omitted from the party’s affidavit of documents, or that a claim of privilege may have been improperly made, the Court may

(d) inspect the document for the purpose of determining its relevance or the validity of a claim of privilege.

The Court accordingly accepted delivery of the documents in question in this form.

Counsel for the respondent contended that counsel for the applicant’s argument that the legal opinion was the sole basis for the assessment is not correct and that there was thus no implied waiver of the solicitor-client privilege. What is the basis of the assessment is the application of the transitional provision contained in s. 71(18) of the Act to amend the Income Tax Act and related statutes, 33-34-35 Eliz. II, c. 6, which reads as follows: 71. (18) Subsections (1) and (6), the definitions “government assistance” and “non-government assistance” in subsection 127(9) of the said Act, as enacted by subsection (13), paragraph (f) of the definition “specified percentage” in subsection 127(9) of the said Act, as enacted by subsection (12) and subsection 127(11.1) of the said Act, as enacted by subsection (16) are applicable with respect to property acquired and expenditures made after May 23, 1985, other than property acquired and expenditures made after that date under the terms of an agreement in writing entered into on or before that date.

Counsel for the respondent argued that the facts and legal conclusions are clearly set out in the Reply to the Notice of Appeal, as required by the aforementioned decisions in taxation matters, and that the legal opinions did not form the basis of the assessment. In his view, the question is whether the property acquired and expenditures made after May 23, 1985 were acquired and made under the terms of an agreement in writing entered into on or before that date, and in his Reply the Minister clearly indicated that the property was acquired and expenditures made under the terms of agreements in writing entered into after that date.

I entirely concur with this position adopted by counsel for the respondent. First, on reading the documents submitted in the manner described above, I consider that they completely meet the requirements for solicitorclient privilege laid down by the cases mentioned above, in particular Solosky, supra, in that they are communications between a solicitor and his client which involve consultation or a legal opinion and are confidential in nature. Second, I consider that the only basis for the assessments under appeal are the facts described in the Reply to the Notice of Appeal and the relevant provisions of the Income Tax Act, not the legal opinions. This is not, as counsel for the applicant maintained, a case of implied waiver of solicitor-client privilege over these opinions as the judge of the merits does not have to review the opinions in order to determine the validity of the assessments.

I must also take into account the importance of the solicitor-client privilege in a democratic society and the public interest in a government bureaucracy which consults and should be able to consult legal counsel from the Department of Justice freely.

In this regard I refer to the recent judgment in R. v. Derby Magistrates' Court, ex parte B, [1995] 4 All E.R. 526 (H.L.), at pp. 540 and 541, which explains the basis of this privilege:

The principle which runs through all these cases, and the many other cases which were cited, is that a man must be able to consult his lawyer in confidence, since otherwise he might hold back half the truth. The client must be sure that what he tells his lawyer in confidence will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.

The motion is dismissed, with costs to the respondent.

Motion dismissed.