In Re Atkins & Durbrow (Erie) Ltd. Et Al., [1968] CTC 405

DOHM, J.:—This is an application under Section 126A of the Income Tax Act for a decision as to whether a claimed solicitorclient privilege exists in respect of some 67 documents seized by the Department from two solicitors’ offices in Canada pursuant to an application by the Deputy Minister of National Revenue.

The documents in question are sufficiently described in the affidavit of Robert Mc-Coll sworn July 12, 1968 and filed herein. I believe this statement sufficiently identifies the documents.

The individual taxpayer William Binney Milner apparently controls through himself or nominees many private companies one of which, Atkins & Durbrow (Erie) Ltd., was re-assessed for corporation taxes allegedly due for the years 1959 to 1963 (inclusive) by notices dated July 21, 1965 in the amount of $374,000.

A Writ of Extent was issued on March 15, 1966 and the company Atkins & Durbrow (Erie) Ltd. by its officer Mr. Schroeder (Treasurer) claimed to have become aware of its insolvency as of the date of the Writ of Extent. Mr. Schroeder according to the material filed is a Milner nominee partner in ‘Val & Co.’’ along with the individual taxpayer William B. Milner and the partnership Val & Co. as of August 11, 1966 held all but eight of the 1,000,000 common shares of Atkins & Durbrow (Erie) Ltd. Milner was also vice-president of Atkins & Durbrow (Erie) Ltd., his wife being president as at the date of the bankruptcy proceeding under Section 120. These facts would lead me for the purposes of this application to infer that Milner would have knowledge of the insolvency as alleged as of March 15, 1966.

After the Writ of Extent negotiations took place between the Department and the representatives of Atkins & Durbrow (Erie) Ltd. The proposal submitted by the Company was turned down by the Department by letter dated April 12, 1966. The following day cheques totalling over $200,000 were issued by the company Atkins & Durbrow (Erie) Ltd. to other companies Atkins & Durbrow Ltd., Bushland Products Limited and Acadia Securities Ltd. (all controlled directly or indirectly by Mr. Milner).

As a result of these facts and his investigations, Hugh Charles MeNeill, an officer in the Income Tax Department, has sworn an affidavit dated June 10, 1968 in which he swears that he has reasonable grounds for believing and does believe

that Atkins & Durbrow (Erie) Ltd. and William Binney Milner have committed an offence under the Section 132 of the Income Tax Act and Amendments thereto by wilfully attempting to evade the payment of taxes imposed under this Act in the following manner :

i. By giving fraudulent preferences to Atkins & Durbrow Ltd., and Bushland Products Limited, corporations controlled by William Binney Milner, during the period of insolvency.

ii. By giving fraudulent preferences to Acadia Securities Limited,

a personal corporation of William Binney Milner and Charity Milner, during the period of insolvency.

iii. By providing funds to Bushland Products Limited in such a

manner as to enable that corporation to assume the debts of Shelley Lake Sawmills Ltd. (now Eagle Lake Sawmills Limited), and Eagle Lake Sawmills Limited (now E. L. Investments Limited), thus removing a receivable from the assets available for distribution to the preferred creditors.

This sworn allegation of fraud is the basis for Mr. Owen’s argument that what might otherwise have been considered privileged documents because of a “solicitor-client” relationship, no longer can be considered as such. Mr. Owen has stated that there is no allegation of fraud made against any solicitors in this matter.

As I understood the argument of counsel for the Department, he submitted that the mere allegation of fraud would be sufficient to discharge the privilege. He relied on dicta which appears in Bullwant v. A.-G. of Victoria, [1901] A.C. 196. I expressed to counsel on the hearing my doubt about the mere allegation of fraud being sufficient to set aside the privilege and I find on the more recent authority of O’Rourke v. Darbyshire, [1920] A.C. 581, that Mr. McEachern’s submission that a prima facie case of fraud must be made out before the privilege can be discharged is the test which I should apply.

Counsel for the taxpayers submitted that there is no prima facie case of fraud and secondly that any allegation of fraud has been rebutted by Mr. McColl’s affidavit in which he states that the monies were drawn under some re-negotiations to put Atkins & Durbrow (Erie) Ltd. in a position to pay its taxes. This explanation may very well be correct. However it is not my function on this application to decide that point.

This brings me to the crux of the matter: is there a prima facie case of fraud on the material before the Court? Being mindful of the usual necessity of preserving the privilege I have studied Mr. MeNeill’s affidavit. He has pledged his oath that ‘“he has reasonable grounds for believing and does believe’’ as a result of his investigations that the company Atkins & Durbrow (Erie) Ltd. and William Binney Milner have committed the offence of wilfully attempting to evade the payment of taxes imposed under the Income Tax Act. He then gives particulars as to how this was done — namely what clearly appear to be fraudulent preferences to other companies controlled by the personal taxpayer. He also gives dates and exact amounts and payees of the cheques. These sworn facts and the inferences go beyond mere conjecture and give credence to the sworn allegation of fraudulent misconduct. The specific particulars given by Mr. McNeill remove this from the realm of a ‘‘fishing expedition”. I am of the opinion that Mr. McNeill’s careful affidavit can be relied upon and that it makes out a prima facie case of fraud in fact.

Counsel for the taxpayers contended that only a certain few of the documents have any bearing on the company Atkins & Durbrow (Erie) Ltd. and Mr. Milner. I have looked at these documents as well as the others. So as not to divulge the contents of any of the documents I merely state that I do not agree with this submission In view of the tangled corporate web woven and carried on by Mr. Milner it would take a team of accountants to determine the specific relevancy of some of the documents.

In view of my finding of a prima facie case of fraud involving Mr. Milner personally I am of the opinion that all of the documents are not privileged. I have caused them to be sealed and delivered to Mr. Tuttle in a folder. I order that they be delivered by Mr. Tuttle, the Sheriff’s officer, (from whose custody I received them) to Mr. Hugh Charles MeNeill, Taxation Officer at the Vancouver Income Tax Office.