In Re Goodman & Carr Et Al., [1968] CTC 484, 68 DTC 5288

LACOURCIERE, J.:—This is an application pursuant to Section 126A(4) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, for the determination of the question whether the individual and corporate clients of the solicitor involved herein have a solicitorclient privilege in respect of a large number of documents seized, packaged, sealed and now produced to me by the custodian, the Sheriff of the County of York.

The affidavit filed on behalf of the applicants shows that a Requirement was served on the solicitors on January 8, 1968, for the following information and production of documents as follows :

(a) All documentary material of any kind whatsoever passing between or recorded by any or all of the above-noted persons and companies, its or their servants, agents, solicitors, nominees or shareholders or passing between or recorded by any or all of the said persons and companies its or their servants, agents, solicitors, nominees or shareholders and yourselves related to the corporate reorganization of the said companies in the years 1960, 1961, 1962, 1963 and 1964, and in particular relating to the shareholdings in the said companies and the terms and conditions upon which any of the said shares and the voting rights attached thereto are held;

(b) Any documentary material in whatever form it may appear laying out the plan or plans of reorganization of any of the abovenoted companies for any of the years 1960, 1961, 1962, 1963 and 1964.

(c) All cancelled cheques, vouchers or receipts reflecting payment for shares or redemption of shares in any of the above-noted companies for the said years 1960, 1961, 1962, 1963 and 1964.

The solicitors immediately claimed privilege in respect of the documents, and handed them to the Sheriff as custodian pending this application.

The address of the clients was also communicated to the Department of National Revenue, and I understand that the claim for privilege has been waived with respect to some of the documents.

On hearing the application in camera, I heard representations from counsel for the applicant and the Attorney General for Canada on the background leading to the service of the requirement, and generally on the principles (as derived from the cases) to be applied in determining the question of privilege. No material was filed by the respondents. It appears from counsel’s statement that there are proceedings by way of appeal presently pending in the Exchequer Court of Canada with respect to the assessment of Oakfield Developments (Toronto) Limited (hereafter called ‘‘Oakfield’’). The approximately nineteen companies now claiming privilege had independent corporate existence before the 1960 amendment to Section 39(4) of the Income Tax Act changing the circumstances in which a corporation shall be deemed to be associated with another. The companies thereafter underwent a change in capital structure to create new classes of voting preference stock, then amalgamated into five companies and eventually, at the end of 1963, further amalgamated to form Oakfield Developments (Toronto) Limited. The Minister subsequently made an assessment of Oakfield in respect of the taxation year 1963 on the theory that the said predecessor companies were in fact then associated (and should therefore attract the higher rate of tax) notwithstanding the apparent control, inasmuch as the voting preference shares with fifty per cent control were held on an express or implied trust agreement not to vote except as directed by the common voting group.

I have set out this background which forms the basis of the respondent’s submission that there is no solicitor-client privilege if the documents or communications are exchanged in the advancement of a fraudulent or illegal act. On this motion, the question is whether an inference should be made that there was an improper arrangement because of the apparently inadequate consideration paid by the preference share group, their lack of interest in attending meetings, the simultaneous restructuring of the capital of the various companies, and other factors which are said to point in the direction of a fraudulent trust arrangement.

It was properly pointed out by the applicant that no fraud was alleged in the pleadings in the action presently under appeal in the Exchequer Court: no affidavit has been filed by the respondent.

The cases collected in Holmested & Langton, Ontario Judica- ture Act, 5th ed. at p. 1039, support the following propositions advanced by the editor :

1. In general, where fraud is charged, no privilege can be claimed for documents relating to the alleged fraud.

2. Some definite charge or allegation of fraud must be made in order to displace the privilege.

3. A mere allegation of fraud in the pleading is not sufficient : a prima facie case of fraud must be made out in fact.

In Bullivant and Others v. The Attorney-General for Victoria, [1901] A.C. 196, Lord Halsbury at p. 200 said:

I think the broad propositions may be very simply stated: for the perfect administration of justice, and for the protection of the confidence which exists between a solicitor and his client. It has been established as a principle of public policy that those confiden- tial communications shall not be subject to production. But to that, of course, this limitation has been put, and justly put, that no Court can be called upon to protect communications which are in themselves parts of a criminal or unlawful proceeding. Those are the two principles, and of course it would be possible to make both propositions absurd, as is very often the case with all propositions, by taking extreme cases on either side. If you are to say, “I will not say what these communications are because until you have actually proved me guilty of a crime they may be privileged as confidential,” the result would be that they could never be produced at all, because until the whole thing is over you cannot have the proof of guilt. On the other hand, if it is sufficient for the party demanding the production to say, as a mere surmise or conjecture, that the thing which he is so endeavouring to inquire into may have been illegal or not, the privilege in all cases disappears at once, The line which the Courts have hitherto taken, and I hope will preserve, is this — that in order to displace the prima facie right of silence by a witness who has been put in the relation of professional confidence with his client, before that confidence can be broken you must have some definite charge either by way of allegation or affidavit or what not. I do not at present go into the modes by which that can be made out, but there must be some definite charge of something which displaces the privilege.

And at p. 202 :

That being so, my Lords, it appears to me that it would be an abandonment of the principle which has been held sacred in this country if, when a person has done that which in itself may be innocent, you should simply, because you choose to suggest that it was done with the view of evading the payment of a tax, require the witness to disclose the whole of his affairs, and enable the private communications between himself and his solicitor to be displayed to the court.

In In re Missiaen et al., [1967] C.T.C. 579 at 581, Primrose, J. on a similar application said :

If I were able to come to the conclusion that there was anything fraudulent or criminal or illegal about the effort being made by the Applicants to gain some tax advantage, I would regard the claim to privilege as being avoided, see Reg. v. Cox and Railton (1884), 14 Q.B.D. 158; 54 L.J.M.C. 41 (headnote) :

All communications between a solicitor and his client are not privileged from disclosure, but only those passing between them in professional confidence and in the legitimate course of professional employment of the solicitor. Communications made to a solicitor by his client before the commission of a crime for the purpose of being guided or helped in the commission of it, are not privileged from disclosure.

On the other hand, in order to get rid of the privilege there must be something to give colour to the charge and there must be some foundation in fact to the claim. There has been nothing improper or sinister in the so-called attempt to evade tax and the assumption on which the claim of the Minister is founded, I think is not substantiated, and the common law privilege accorded correspondence and documents has not been lost. The Applicants will, therefore, be entitled to the return of these documents and I order the Sheriff to return them accordingly.

I have also read and considered the following cases cited to me dealing with this section of the Income Tax Act, namely:

In re Income Tax Act and a Solicitor, [1963] C.T.C. 1.

In re William W. Kask et al., [1966] C.T.C. 659.

Jacques Lagassé v. Deputy Attorney General of Canada, [1961] C.T.C. 105.

I would not have inspected the documents on this motion if it had not been for the suggestion that some of the documents described are not privileged on other grounds. But, having inspected them for the other purpose, I am unable to come to the conclusion that any of them disclose a ‘‘fradulent, criminal or illegal attempt” to gain some tax advantage.

There are certain documents however which in my opinion are not privileged : the law is clear that the privilege does not extend to communications between the solicitor and a third person unless such third person sought advice from the solicitor regarding the client’s affairs in existing or contemplated litigation. In Wheeler v. Le Marchant, 17 Ch.D. 675, Jessel, M.R. at p. 681 said:

The cases, no doubt, establish that such documents are protected where they have come into existence after litigation commenced or in contemplation, and when they have been made with a view to such litigation, either for the purpose of obtaining advice as to such litigation, or of obtaining evidence to be used in such litigation, or of obtaining information which might lead to the obtaining of such evidence, but it has never hitherto been decided that documents are protected merely because they are produced by a third person in answer to an inquiry made by the solicitor. It does not appear to me to be necessary, either as a result of the principle which regulates this privilege or for the convenience of mankind, so to extend the rule.

On this principle, communications passing between the account- tants and the client and the accountants and the solicitors, falling within the category described in Wheeler v. Le Marchant (supra), are not privileged, and the following documents will be delivered to the person designated by the Deputy Minister of National Revenue: Mile 6D-403.

1. Memorandum September 6, 1960, from J.E.L. (Chartered Accountant) to M. H. Okun re other land companies.

2. Memorandum September 13, 1960, from J. E. L. to M. H. Okun (privilege waived).

3. Letter September 14, 1960, J. E. Lettner (C.A.) and Memorandum attached July 25, 1960, from J. E. L. re Okun, Freedman and Liebel companies.

It was argued strenuously by Mr. Sischy with respect to the last-mentioned item that both letter and memorandum were part of a privileged communication whereby the accountant as agent for the client sought professional advice. While it is true that the accountant forwarded the memorandum to the solicitor at the client’s request, in my opinion the covering letter cannot bring within the privilege the memorandum which comes within the rule laid down in Wheeler v. Le Marchant (supra). With respect to the first two items, I cannot accept the proposition that the accountant was an agent of the client seeking professional advice : they are in my opinion unprotected documents.

In disposing of this application summarily, I am required to deliver concise reasons in which I am to describe ‘‘the nature of the documents without divulging the details thereof’’ (Section 126A(5)(b)). In view of the large number of documents involved, I think it is sufficient to indicate that the four page list now on file, prepared by the applicant, sufficiently describes the nature of the documents for the purpose of this section, and I adopt that description.

All documents therefore which I have not directed to be delivered to the Department will be resealed and returned to the solicitors, with the exception of the letter of September 28, 1960, from outside counsel to the accountant, to be held pending further argument. Notwithstanding para. 4 of the order directing the hearing, no costs may be awarded upon the disposition of this application (Section 126A(9)).