In Re Paul Dennis Bowlen Et Al., [1971] CTC 682, [1971] DTC 5407

VERCHERE, J.:—This is an application under Section 126A of the Income Tax Act to determine whether Paul Dennis Bowlen, Hambeldon Estates Ltd., Regent Tower Estates Ltd., Tico Estates S.A., The Paul Dennis Bowlen Trust, The Arvella Bowlen Trust, Trust Corporation of Bahamas Ltd., Northern Development Explorations Ltd., Fleetway Trucking Company Ltd., Regent Drilling Company Ltd., Regent Drilling Ltd., and Regent Drilling (1966) Ltd. (herein called the applicants) have a solicitor-client privilege in respect of several files of documents seized in the possession of their solicitors and placed in custody under subsection (3). By agreement the issue here is limited to the alleged existence of fraud on the part of the applicants, of Mr. Bowlen in particular, capable of destroying the asserted privilege; accordingly, at this stage, no inspection of the documents has as yet been had by me.

The fraud asserted against the applicants is that Bowlen, by and with the companies named, made a false statement in his income tax returns for the years 1963 to 1969 inclusive and thereby committed an offence under Section 132(1) (a) of the Income Tax Act. It was contended that the affidavits of Mr. Brown, a chartered accountant who enquired into the applicants’ affairs by examining a large number of relevant documents, some of which are exhibited to his affidavits, made it appear that Bowlen’s non-disclosure in his income tax returns of his relation with Hambeldon Estates Ltd. was, as Mr. Brown stated he believed it to be, the concealment by Bowlen of the fact that the company was a personal corporation controlled by him during those years and consequently an offence under the above- mentioned section; and that a prima facie case of fraud was thus established which on the authority of In re W. B. Milner et al., [1968] C.T.C. 405, In re Modern Film Distributors Ltd. et al., [1968] C.T.C. 549 and Hechter v. M.N.R., [1971] C.T.C. 12, destroyed the claimed privilege.

Without challenging the proposition that a prima facie case of fraud will destroy the client’s privilege of non-disclosure of his communications with his solicitor, counsel for the applicant nevertheless contended that that privilege had not been destroyed in the circumstances of this case. In support of his contention, he advanced the several propositions to whose consideration I now turn.

First, it was submitted that the conduct impugned by Mr. Brown did not in law amount to an offence under Section 132(1) (a) because the provisions of Section 67(12), requiring that ‘‘the shareholder by whom a personal corporation is controlled shall file with the return of his income for each taxation year a statement of the assets, liabilities and income of the personal corporation for the year’’, do not prohibit the taxpayer from ‘‘concealing the fact’’, to use Mr. Brown’s words, that he controlled a personal corporation during the relevant time. But Section 3 and the certificate on the return require disclosure of income from all sources, and by its plain wording, Section 67(12) would seem to require the taxpayer to disclose the income and hence the existence of a personal corporation if and when such a corporation is controlled by him. Prima facie then, there would appear to be here an obligation put on the taxpayer to disclose the factual existence of any personal corporation he controls and that being so, it seems to me that I must therefore reject the suggestion that concealment of the existence of that corporation is nevertheless not prohibited.

I was referred by counsel to the Board’s decision in Grain Belt Farm Equipment Ltd. et al. v. M.N.R., [1970] Tax A.B.C. 1265. There it was held that the indication in their returns by several corporations that they were not associated was, at most, a genuine opinion that certain information sought was not applicable in their case and it was accordingly submitted that in this instance Bowlen’s conduct was obviously that and nothing more. But the two cases are far from being parallel because, as the acting chairman pointed out at page 8, if the Minister was not satisfied with the response made there, he could have sought amplification of it without delay while here, of course, no disclosure was made. The inherent proposition, namely, that the existence of room for differing opinions as regards the nature of a situation which must in some circumstances be reported will automatically excuse a failure to report it, is untenable in my opinion; and in the absence of an acceptable and sufficient explanation (which the Board had before it in the Grain Belt case, supra), I have to reject the submission based on that ruling.

It was also said that there was no proof in the material filed that Hambeldon Estates Ltd. was in fact a personal corporation within the definition contained in Section 68 of the Income Tax Act because Mr. Brown’s affidavits only deal with the question of its control and not with the source of its income nor the type of its business, as provided in subsections (b) and (ce) of that section. In my view, however, while the material filed is not as specific and direct on this point as one perhaps would wish it to be if this were a trial where the matter was in issue, it is adequate. Although Mr. Brown says that Hambeldon Estates Ltd., in addition to holding Bowlen’s assets in particular stocks and securities, was ‘to be available to carry on any other business . . . that Bowlen wished’’, there was no suggestion from the applicants that it ever- carried on any business of the sort described in subsection (c). Furthermore, in paragraph 8 of his affidavit sworn June 4, 1971, Mr. Brown describes Hambeldon Estates Ltd. as a personal corporation and it was apparently considered such by at least one of its financial advisers; see exhibit 15 to that affidavit. Finally, paragraphs 30 and 31 of a memorandum prepared in 1962 by Bowlen’s agent, see exhibit 19, indicates ‘the intended nature of its assets, liabilities and capital structure and in the absence of anything to the contrary offers a good deal of support for Mr. Brown’s assertion that Hambeldon Estates Ltd. was a personal corporation.

The remaining submission on behalf of the applicants was to ‘his effect : that as there was no evidence that Bowlen sought or obtained from his solicitors any advice on how to go about committing the fraud asserted here, but rather that he sought and obtained advice on how to minimize his tax burden, the privilege has not been abrogated. But while I agree, as Primrose, J. said in Missiaen et al. v. M.N.R., [1967] C.T.C. 579 at 580, that advice to that effect and for that purpose does not always abrogate the privilege of non-disclosure, the crux of this case seems to me to be the relationship which was actually achieved between Bowlen and his companies, or some of them, and if one of them was a personal corporation which he controlled, whether there was in what he failed to do concealment of the income of the personal corporation and the consequent disregard of the provisions of Section 67. As Mr. Jackson said, the material here shows, prima facie, a plan that could constitute an evasion of taxes and not merely their legitimate avoidance, if, as allegedly occurred here, the income of what was, in fact, a personal corporation controlled by Bowlen was wrongly concealed. There may, of course, be an explanation which is capable of justifying or excusing that concealment but none was offered here, and in the absence of it, it seems to me that the Department has made out a prima facie case against the applicants of non-compliance with Section 132(1) (a) of the Act and consequently of the existence of the asserted fraud.

In this case the corporate web seems to involve all the applicant corporations with Bowlen, and as I have found that a prima facie case of fraud has been made out, it seems right to follow the example set in the Milner and Hechter cases, supra, and remove the privilege from those communications which throw light on that relationship. There will accordingly be an order that the documents in custody be delivered by the custodian to the Vancouver Income Tax office for examination.