Errico,
B.C.S.C.J.:—This
is
a
motion
directed
to
be
heard
at
a
pre-trial
conference.
It
is
for
a
declaration
of
the
priorities
to
funds
held
by
the
petitioner
as
receiver-manager
of
Esket
Wood
Products
Ltd.
(Esket).
The
petitioner
is
also
the
trustee
in
bankruptcy
of
Esket
under
a
Receiving
Order
made
April
18,
1989.
The
appointment
of
the
petitioner
as
Receiver-Manager
was
made
by
Starline
Lumber
Inc.
(Starline),
under
its
fixed
debenture
of
certain
of
the
assets
of
Esket
by
an
appointment
dated
April
19,
1989
and
accepted
by
the
petitioner
on
April
24,
1989.
The
disputed
funds
are
claimed
by
the
Attorney
General
of
Canada
on
behalf
of
Her
Majesty
the
Queen
in
Right
of
Canada
for
source
and
payroll
deductions
made
by
Esket
for
employees'
income
tax,
unemployment
insurance
and
Canada
Pension
Plan
contributions
and
not
remitted.
These
deductions
were
not
kept
separate
by
Esket
and
can
neither
be
traced
nor
identified.
All
Nations
Trust
Company
(Antco)
claims
under
its
floating
debenture
over
certain
of
the
assets
of
Esket
not
secured
by
Starline's
fixed
debenture.
Antco
has
never
appointed
a
receiver
under
its
debenture.
On
March
16,
1989,
Antco
sent
a
representative
to
the
sawmill
site
of
Esket
to
attempt
to
seize
and
remove
the
inventory
but
were
denied
access
by
security
personnel
retained
by
Starline.
It
is
not
clear
how
Starline
had
any
authority
to
do
so,
the
receiver
not
being
appointed
until
April
24,
1989.
However,
there
is
no
suggestion
that
the
actions
of
Starline
prior
to
the
receiving
order
affects
the
issues
of
priorities
between
the
Crown
and
Antco.
As
all
of
the
interests
arose
before
April
25,
1989,
I
do
not
think
it
necessary
to
consider
what
effect,
if
any,
the
provisions
of
the
Personal
Property
Security
Act,
S.B.C.
1989,
c.
36
have.
The
first
question
I
address
is
when,
if
ever,
did
the
floating
debenture
of
Antco
crystallize
and
attach
to
the
assets
of
Esket.
Counsel
for
Antco
acknowledges
that
an
act
of
default
under
the
debenture
does
not
of
itself
convert
the
floating
charge
into
a
fixed
charge.
He
submits
that
the
actions
of
March
16,
1989
in
attempting
to
seize
inventory
effectively
crystallized
the
debenture.
I
do
not
think
so,
The
evidence
of
what
occurred
is
very
sketchy,
but
nothing
was
done
that
would
clearly
indicate
that
Antco
had
taken
steps
to
realize
on
its
security.
In
Devlin
and
Multiply
Development
Corporation
Ltd.
v.
Hean,
[1982]
41
B.C.L.R.
206,
Bouck,
J.
comments
on
the
characteristics
of
a
floating
charge
in
the
following
passage
on
page
219:
However,
an
act
of
default
by
itself
does
not
convert
a
floating
charge
into
a
fixed
security.
Something
more
must
be
done
by
the
lender.
One
reason
for
this
is
because
third
parties
who
deal
with
the
company
must
have
some
kind
of
notice
the
company
can
no
longer
sell
its
goods
or
operate
in
the
usual
course.
A
floating
charge
debenture
registered
with
the
registrar
of
companies
under
s.
75
of
the
Company
Act,
R.S.B.C.
1979,
c.
59,
gives
the
lender
certain
priorities.
Others
who
contract
with
the
company
can
look
to
the
debenture
and
ascertain
whether
the
company
is
free
to
do
business
with
them
or
is
restricted
by
any
section
of
the
loan
agreement.
Where
the
lender
has
not
taken
any
of
the
contractual
steps
to
secure
his
charge,
then
these
third
parties
are
free
to
deal
with
the
company
as
the
rightful
owner
of
its
goods
and
assets
in
confidence
and
they
are
not
specifically
encumbered.
The
actions
of
Antco
were
not
of
the
sort
that
would
give
notice
to
any
third
party
that
they
could
not
deal
with
Esket
in
the
normal
course
of
business.
If,
however,
Esket
has
ceased
to
carry
on
business,
did
that
of
itself
result
in
the
automatic
crystallization
of
the
debenture
without
further
action
by
Antco?
There
appears
to
be
little
or
no
current
judicial
discussion
of
this
in
British
Columbia
or
in
Canada.
However,
in
Re
Woodroffes
(Musical
Instruments)
Ltd.,
[1985]
2
All
E.R.
at
908
Nourse,
J.
considered
the
question
closely
and
concluded
that
the
automatic
crystallization
of
a
floating
debenture
takes
place
on
the
company
ceasing
to
carry
on
business.
Nourse,
J.
at
page
913
says:
The
question
whether
the
cessation
of
the
company's
business
causes
an
automatic
crystallization
of
a
floating
charge
is
one
of
general
importance
on
which
there
appears
to
be
no
decision
directly
on
point.
Such
authorities
as
there
are
disclose
a
uniform
assumption
in
favour
of
crystallization.
There
is
a
valuable
discussion
of
them
in
Picarda
Law
Relating
to
Receivers
and
Managers
pp
16-18.
One
of
the
questions
there
raised
is
whether
there
is
any
distinction
for
this
purpose
between
a
company
ceasing
to
carry
on
business
on
the
one
hand
and
ceasing
to
be
a
going
concern
on
the
other.
My
own
impression
is
that
these
phrases
are
used
interchangeably
in
the
authorities
(see
e.g.,
the
judgment
of
Fletcher
Moulton
LJ
in
Evans
v
Rival
Granite
Quarries
Ltd.
[1910]
2
KB
979
hereafter
cited),
but,
whether
that
be
right
or
wrong,
I
think
it
clear
that
the
material
event
is
a
cessation
of
business
and
not,
if
that
is
something
different,
ceasing
to
be
a
going
concern.
Counsel
for
the
bank
started
with
Lord
Macnaghten’s
description
of
a
floating
charge
in
Governments
Stock
and
Other
Securities
Investment
Co
Ltd
v
Manila
Rly
Co
[1897]
AC
81
at
86,
where
his
Lordship
said:
It
is
of
the
essence
of
such
a
charge
that
it
remains
dormant
until
the
undertaking
charged
ceases
to
be
a
going
concern,
or
until
the
person
in
whose
favour
the
charge
is
created
intervenes.
In
Illingworth
v
Holdsworth
[1904]
AC
355
at
358
Lord
Macnaghten
returned
to
the
subject
and
spoke
of
a
floating
charge
as
being—
ambulatory
and
shifting
in
its
nature,
hovering
over
and
so
to
speak
floating
with
the
property
which
it
is
intended
to
affect
until
some
event
occurs
or
some
act
is
done
which
causes
it
to
settle
and
fasten
on
the
subject
of
the
charge
within
its
reach
and
grasp.
Counsel
for
the
bank
and
counsel
for
Mrs.
Woodroffe
submit
that
if
the
company
ceased
business
before
September
1
that
was
an
event
which
caused
the
bank's
charge
to
settle
and
fasten
on
all
assets
of
the
company.
I
was
referred
to
the
following
further
authorities
on
this
question:
Hubbuck
v
Helms
(1887)
56
LJ
Ch
536,
Robson
v
Smith
[1985]
2
Ch
118,
Re
Victoria
Steamboats
Ltd.
[1897]
1
Ch
158,
Davey
&
Co
v
Williamson
&
Sons
Ltd.
[1898]
2
QB
194,
Re
Yorkshire
Woolcombers
Association
Ltd.
[1903]
2
Ch
284
(Illingworth's
case
in
the
Court
of
Appeal),
Edward
Nelson
&
Co
Ltd
v
Faber
&
Co
[1903]
2
KB
367,
Evans
v
Rival
Granite
Quarries
Ltd
[1910]
2
KB
979,
and
Re
Crompton
&
Co
Ltd
[1914]
1
Ch
954.
It
is
unnecessary
for
me
to
examine
any
of
those
cases
in
detail,
or
to
quote
extracts
from
the
judgments
of
the
many
learned
judges
who
decided
them.
They
all,
to
a
greater
or
lesser
extent,
assume
that
crystallization
takes
place
on
a
cessation
of
business.
Perhaps
the
assumption
appears
most
authoritatively
in
the
judgment
of
Fletcher
Moulton
LJ
in
Evans
v
Rival
Granite
Quarries
Ltd
[1910]
2
KB
979
at
993.
That
was
one
of
the
latest
of
the
cases
to
which
I
was
referred.
I
would
think
that
by
that
time
the
assumption
had
become
well
established.
Although
the
general
body
of
informed
opinion
is
of
the
view
that
automatic
crystallization
is
undesirable
(see
in
particular
the
report
of
the
Review
Committee
on
Insolvency
Law
and
Practice
(Cmnd
8558
(1982)
paras
1570-1582),
I
have
not
been
referred
to
any
case
in
which
the
assumption
in
favour
of
automatic
crystallisation
on
cessation
of
business
has
been
questioned.
On
that
state
of
the
authorities
it
would
be
very
difficult
for
me
to
question
it,
even
if
I
could
see
a
good
ground
for
doing
so.
On
the
contrary,
it
seems
to
me
that
it
is
in
accordance
with
the
essential
nature
of
a
floating
charge.
The
thinking
behind
the
creation
of
such
charges
has
always
been
a
recognition
that
a
fixed
charge
on
the
whole
undertaking
and
assets
of
the
company
would
paralyse
it
and
prevent
it
from
carrying
on
its
business:
see
eg
Re
Florence
Land
and
Public
Works
Co
(1878)
10
Ch
D
530
at
541
per
Jessel
MR.
On
the
other
hand
it
is
a
mistake
to
think
that
the
chargee
has
no
remedy
while
the
charge
is
still
floating.
He
can
always
intervene
and
obtain
an
injunction
to
prevent
the
company
from
dealing
with
its
assets
otherwise
than
in
the
ordinary
course
of
its
business.
That
no
doubt
is
one
reason
why
it
is
preferable
to
describe
the
charge
as"
hovering”,
a
word
which
can
bear
an
undertone
of
menace,
rather
than
as
"dormant".
A
cessation
of
business
necessarily
puts
an
end
to
the
company's
dealings
with
its
assets.
That
which
kept
the
charge
hovering
has
now
been
released
and
the
force
of
gravity
causes
it
to
settle
and
fasten
on
the
subject
of
the
charge
within
its
reach
and
grasp.
The
paralysis,
while
it
may
still
be
unwelcome,
can
no
longer
be
resisted.
I
do
not
think
that
this
conclusion
is
contrary
to
the
proposition
that
a
default
under
the
debenture
is
not
sufficient
to
crystallize
it.
The
cases
which
discuss
that
principle
discuss
the
incongruity
of
a
debenture-holder
on
the
one
hand
claiming
a
priority
over
other
creditors,
and
on
the
other,
allowing
the
company
to
carry
on
business.
In
Devlin
and
Multiply
Development
Corporation
Ltd.
v.
Hean,
supra,
Bouck,
J.
at
page
220
says:
A
lender
may
commence
an
action
and
be
content
to
obtain
judgment
for
the
debt
without
seizing
the
assets.
He
may
not
wish
to
shut
down
the
operation
of
the
company
by
the
imposition
of
a
receiver
on
his
behalf.
Until
the
receiver
takes
over
the
company,
others
who
deal
with
it
are
entitled
to
conclude
the
floating
charge
has
not
become
fixed.
Berger
J.
in
R.
v.
Consol.
Churchill
Copper
Corp.,
[1978]
5
W.W.R.
652
at
660-61,
30
C.B.R.
(N.S.)
27,
90
D.L.R.
(3d)
357
(B.C.S.C.),
came
to
a
similar
conclusion:
But
in
order
to
convert
the
floating
charge
into
a
fixed
charge,
the
debentureholder
must
terminate
the
licence
as
to
the
whole
of
the
company’s
business.
Brameda
had
to
do
the
one
thing
or
the
other.
The
debenture-holder
cannot
have
it
both
ways:
he
must
intervene,
or
he
must
leave
the
company
to
carry
on
business.
And
at
page
666:
But
in
order
to
terminate
the
company's
licence
to
carry
on
business,
the
debenture-holder
must
in
fact
intervene.
.
.
.
While
the
security
may
become
enforceable
on
default,
still
the
debenture-holder
must
intervene
to
enforce
his
security
before
it
crystallizes."
[Emphasis
added.]
The
concern
that
others
should
not
be
left
in
doubt
whether
they
are
free
to
do
business
with
the
company
ceases
when
the
company
ceases
to
carry
on
business.
This
is
recognized
in
the
analysis
of
Nourse,
J.
in
Re
Woodroffes
which
I
find
very
persuasive.
I
have
concluded
therefore
that
if
Esket
ceased
to
carry
on
business
Antco's
debenture
automatically
crystallized
and
attached
to
the
assets
charged
under
the
debenture.
The
fact
that
Esket
ceased
to
carry
on
business
was
not
questioned
at
the
hearing
of
the
motion.
It
was
only
raised
by
counsel
for
the
petitioner
and
the
Attorney
General
of
Canada
when
I
invited
written
submissions
on
the
decision
in
Re
Woodroffes.
Counsel
for
Antco
requests
that
if
I
am
not
satisfied
on
the
material
presently
filed
that
Esket
had
ceased
carrying
on
businessthat
I
adjourn
the
motion
to
allow
for
the
evidence
to
be
adduced.
In
the
circumstances
I
do
not
think
that
necessary
as
I
find
that
it
has
been
established
that
Esket
ceased
to
carry
on
business
prior
to
April
18,
1989.
The
affidavit
of
John
Berwick,
the
senior
manager
of
the
petitioner,
exhibits
both
the
receiving
order
made
April
18,
1989
and
the
appointment
by
Starline
of
the
petitioner
as
Receiver-Manager
dated
April
19,
1989
and
accepted
April
24,
1989.
The
receiving
order
cites,
inter
alia:
AND
IT
APPEARING
to
the
Court
that
the
following
acts
of
bankruptcy
have
been
committed
namely:
(ii)
it
has
ceased
to
carry
on
its
business
operations
since
January
15,
1989.
The
appointment
recites
inter
alia
that
Starline's
debenture
had
become
enforceable
by
reason
that
the
company
had
ceased
to
carry
on
business.
In
the
absence
of
any
suggestion
that
Esket
was
carrying
on
business
until
the
pronouncement
of
the
receiving
order
on
April
18,
1989,
I
am
satisfied
that
Esket
did
cease
to
carry
on
business
prior
to
that
date.
Accordingly
I
find
that
Antco's
debenture
crystallized
prior
to
the
date
of
the
receiving
order.
I
turn
next
to
the
statutory
trust
under
which
the
Attorney
General
claims
on
behalf
of
Her
Majesty
the
Queen.
Subsections
227
(4)
and
(5)
of
the
Income
Tax
Act
read
as
follows:
227.(4)
Every
person
who
deducts
or
withholds
any
amount
under
this
Act
shall
be
deemed
to
hold
the
amount
so
deducted
or
withheld
in
trust
for
Her
Majesty.
(5)
Notwithstanding
any
provision
of
the
Bankruptcy
Act,
in
the
event
of
any
liquidation,
assignment,
receivership
or
bankruptcy
of
or
by
a
person,
an
amount
equal
to
any
amount
(a)
deemed
by
subsection
(4)
to
be
held
in
trust
for
Her
Majesty,
or
(b)
deducted
or
withheld
under
an
Act
of
a
province
with
which
the
Minister
of
Finance
has
entered
into
an
agreement
for
the
collection
of
taxes
payable
to
the
province
under
that
Act
that
is
deemed
under
that
Act
to
be
held
in
trust
for
Her
Majesty
in
right
of
the
province
shall
be
deemed
to
be
separate
from
and
form
no
part
of
the
estate
in
liquidation,
assignment,
receivership
or
bankruptcy,
whether
or
not
that
amount
has
in
fact
been
kept
separate
and
apart
from
the
person's
own
moneys
or
from
the
assets
of
the
estate.
The
relevant
portions
of
the
Unemployment
Insurance
Act
and
the
Canada
Pension
Plan
are
similar.
In
Manitoba
(Minister
of
Labour)
v.
M.N.R.
and
Coopers
&
Lybrand
Ltd.
(Receiver
of
Omega
Autobody
Ltd.)
(1989),
75
C.B.R.
185,
the
Manitoba
Court
of
Appeal
considered
when
these
statutory
trusts
were
impressed
upon
the
property
of
the
trustee
in
the
absence
of
the
funds
being
kept
separate
and
apart
or
being
otherwise
traceable.
In
that
case,
the
issues
of
priorities
were
between
certain
provincial
statutory
trusts
and
the
statutory
trusts
arising
out
of
the
Income
Tax
Act,
the
Unemployment
Insurance
Act
and
the
Canada
Pension
Plan.
At
page
194,
Philip,
J.A.
for
the
majority
says
as
follows
as
regards
these
federal
statutory
trusts:
Section
227
(4)
appears
to
meet
the
requirements
of
certainty
of
intention
to
create
a
trust
and
of
the
object
or
beneficiary
of
the
trust.
If
the
person
making
the
deductions
under
the
Income
Tax
Act
keeps
them
separate
and
apart,
it
would
appear
that
an
effective
trust
has
been
created.
However,
if
liquidation,
assignment,
bankruptcy
or
receivership
has
not
occurred
(and
note
that
s.
71(3)
of
the
Unemployment
Insurance
Act
does
not
refer
to
an
act
of
receivership,
an
omission
that
has
resulted
in
conflicting
decisions
of
the
court
in
the
past),
the
problem
of
identifying
or
tracing
the
property
that
is
the
subject
of
the
deemed
trust
arises.
In
the
event
of
liquidation,
assignment,
bankruptcy,
or
receivership,
the
requirement
upon
the
beneficiary
of
the
trust
to
identify
or
trace
the
property
subject
to
the
trust
is
eliminated;
on
the
happening
of
any
of
those
events
the
enactment
deems
the
trust
property
to
be
separate
from
and
form
no
part
of
the
estate
in
liquidation,
assignment,
bankruptcy
or
receivership.
On
page
195
he
continued:
There
has
been
an
absence
of
unanimity
in
the
decisions
as
to
the
effect
of
those
trusts
in
the
event
of
bankruptcy;
that
uncertainty
is
not
a
concern
in
this
appeal.
This
is
not
a
bankruptcy
case.
What,
then,
is
the
effect
of
the
deemed
trust
created
under
s.
227(4)
and
(5)
of
the
Income
Tax
Act
in
the
face
of
the
trust
created
under
s.
3(4)
of
the
Payment
of
Wages
Act?
There
is
no
evidence
that
deductions
required
to
be
made
under
the
federal
statutes
were
kept
by
Omega
in
a
separate
account
or
were
traceable.
Prior
to
liquidation,
assignment,
bankruptcy
or
receivership,
the
trust
was
not
impressed
upon
Omega's
property
(as
is
the
case
under
s.
3(4),
nor
was
property
to
discharge
the
trust
obligation
deemed
to
have
been
set
apart.
It
is
s.
227(5)
that
removes
the
requirement
of
tracing
the
trust
property,
and
deems
the
trust
property
to
be
separate
and
apart.
It
is
that
subsection
that
makes
the
deemed
trust
effective
upon
the
property
of
a
person
who
is
required
to
make
deductions.
In
my
view,
the
question
of
priority
is
to
be
determined,
not
by
reference
to
the
time
the
individual
trusts
are
created
but,rather,
by
reference
to
the
time
when
the
particular
trust
is
impressed
upon
the
property
of
the
trustee.
That
time,
with
respect
to
the
trust
created
under
s.
227(4)
and
(5),
was
the
date
of
the
appointment
of
the
receiver,
namely,
9th
October
1985.
I
repeat
the
words
of
s.
227(5):
"in
the
event
of
any
liquidation,
assignment,
receivership
or
bankruptcy
of
or
by
a
person,
an
amount
equal
to
the
amount
deemed
by
subsection
(4)
to
be
held
in
trust
for
Her
Majesty
shall
be
deemed
to
be
separate
from
and
form
no
part
of
the
estate
in
liquidation,
assignment,
receivership,
or
bankruptcy”.
That
is
the
only
interpretation
that
the
words
can
bear.
In
Dauphin
Plains
Credit
Union
Ltd.
v.
Xyloid
Industries
Ltd.
and
Her
Majesty
the
Queen,
[1980]
1
S.C.R.,
1182,
Pigeon,
J.
for
the
majority,
in
considering
whether
income
tax
deductions
withheld
prior
to
the
making
of
a
receiving
order
took
priority
over
a
floating
charge,
referred
to
the
decision
of
the
Ontario
Court
of
Appeal
in
Re
Deslauriers
Construction
Products
Ltd.,
[1973]
O.R.
599.
The
Deslauriers
decision
dealt
with
the
then
provisions
of
the
Canada
Pension
Plan.
At
page
1197,
Pigeon,
J.
states:
The
majority
opinion
in
the
Court
of
Appeal
was
based
on
the
overruling
of
the
Craftsmen's
case
by
the
Ontario
Court
of
Appeal
in
Re
Deslauriers
Construction
Products
Ltd.
That
case,
like
Craftsmen's,
dealt
with
the
Canada
Pension
Plan,
1964-65
(Can.)
c.
51
(now
R.S.C.
1970,
c.
C-5).
The
relevant
provisions
are
subss.
24(3)
and
(4)
as
follows:
(3)
Where
an
employer
has
deducted
an
amount
from
the
remuneration
of
an
employee
as
or
on
account
of
any
contribution
required
to
be
made
by
the
employee
but
has
not
remitted
such
amount
to
the
Receiver
General,
the
employer
shall
keep
such
amount
separate
and
apart
from
his
own
moneys
and
shall
be
deemed
to
hold
the
amount
so
deducted
in
trust
for
Her
Majesty.
(4)
In
the
event
of
any
liquidation,
assignment
or
bankruptcy
of
an
employer,
an
amount
equal
to
the
amount
that
by
subsection
(3)
is
deemed
to
be
held
in
trust
for
Her
Majesty
shall
be
deemed
to
be
separate
from
and
form
no
part
of
the
estate
in
liquidation,
assignment
or
bankruptcy,
whether
or
not
that
amount
has
in
fact
been
kept
separate
and
apart
from
the
employer's
own
moneys
or
from
the
assets
of
the
estate.
It
will
be
noted
that
after
providing
in
subs.
24(3)
as
in
subs.
227(4)
of
the
Income
Tax
Act,
that
the
employer
who
has
deducted
an
amount"
shall
be
deemed
to
hold
the
amount
so
deducted
in
trust
for
Her
Majesty”,
subs.
24(4)
goes
on
to
provide
that
"In
the
event
of
any
liquidation"
an
equal
amount
“
shall
be
deemed
to
be
separate
from
.
.
.
the
estate
in
liquidation
.
.
.
whether
or
not
that
amount
has
in
fact
been
kept
separate".
It
is
clear
from
the
following
passage
of
the
judgment
delivered
by
Gale
C.J.O.
(at
pages
601-602)
that
the
claim
for
the
Pension
Plan
deductions
was
upheld
in
Deslauriers
by
reason
only
of
those
words
which
are
not
in
the
Income
Tax
Act:
On
the
facts
of
the
instant
case
again,
only
notional
deductions
appearing
on
the
payroll
records
had
been
made
as
the
company
could
meet
only
its
net
payroll
and
its
operational
expenses.
On
behalf
of
the
Attorney-General
it
was
submitted
that,
while
the
Minister
would
have
no
claim
such
as
is
asserted
in
this
case
under
s-s.
(3)
if
s.
24
ended
there,
none
the
less,
in
the
light
of
s-s.
(4),
the
Minister
did
have
the
right
to
receive
out
of
the
realization
of
the
assets
a
sum
representing
the
amount
which
was
deducted
from
the
employees'
salaries,
totalling
$1,068.82.
We
agree
with
that
interpretation
of
s-s.(4).
It
seems
to
us
that
s-s(4),
and
particularly
the
concluding
six
words
thereof,
were
inserted
in
the
Act
specifically
for
the
purpose
of
taking
the
moneys
equivalent
to
the
deductions
out
of
the
estate
of
the
bankrupt
by
the
creation
of
a
trust
and
making
those
moneys
the
property
of
the
Minister.
We
agree
with
Mr.
Olsson
on
behalf
of
the
Attorney-General
that
the
word
"deemed"
in
the
fourth
line
of
s-s.(4)
must
be
used
in
the
sense
of
a
conclusive
rather
than
a
rebuttable
presumption
since
the
contrary
case,
where
the
amount
has
not
in
fact
been
kept
separate
and
apart,
is
specifically
dealt
with
in
the
concluding
part
of
that
very
subsection.
I
find
the
reasoning
in
Deslauriers
wholly
persuasive
and
would
note
that
in
1956,
(c.
39,
s.
27)
Parliament
repealed
subs.
(6)
of
s.
123
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
whereby
a
first
charge
was
created
on
the
property
of
an
employer
for
income
tax
deductions.
I
must
therefore
hold
that
the
claim
for
the
income
tax
deductions
on
wages
paid
by
the
employer
itself
before
the
receiving
order
cannot
be
supported.
It
would
appear
from
these
passages
that
the
Income
Tax
Act,
which
at
that
time
did
not
contain
a
provision
similar
to
the
then
subsection
23(4)
of
the
Canada
Pension
Plan,
or
of
the
current
provisions
of
subsection
227(5)
of
the
present
Income
Tax
Act,
would
not
support
the
existence
of
a
trust
where
there
was
no
property
allocated
to
it.
I
find,
then,
that
absent
any
event
which
would
trigger
the
provisions
of
subsection
227(5)
of
the
Income
Tax
Act
and
the
similar
provisions
of
the
Unemployment
Insurance
Act
and
Canada
Pension
Plan,
no
trust
was
impressed
upon
the
property
of
Esket
in
favour
of
Her
Majesty
the
Queen
in
Right
of
Canada.
It
follows
that
if
the
debenture
of
Antco
was
crystallized
and
became
a
fixed
charge
on
the
assets
of
Esket
prior
to
the
triggering
event
under
subsection
227(5)
of
the
Income
Tax
Act
and
the
similar
provisions
of
the
other
relevant
statutes,
Antco
would
take
priority.
The
receiving
order
was
clearly
such
a
triggering
event
as
was
the
appointment
of
the
receiver
under
the
Starline
debenture,
butthose
events
were
subsequent
to
the
crystallization
of
Antco's
debenture.
Counsel
for
the
Attorney
General
submits
however
that
even
if
the
Antco
debenture
crystallized,
the
very
crystallization
itself
falls
within
the
triggering
events
of
subsection
227(5)
of
the
Income
Tax
Act
and
the
similar
provisions
of
the
Unemployment
Insurance
Act
and
the
Canada
Pension
Plan,
and
that
if
the
rights
of
the
Crown
and
Antco
arise
by
the
same
event,
the
Crown
by
ancient
prerogative
takes
priority.
Prior
to
April
18,
1989,
there
was
no
assignment,
receivership
or
bankruptcy
of
Esket.
Was
the
automatic
crystallization
of
the
Antco
debenture
a
liquidation
of
Esket?
In
Dauphin
Plans
Credit
Union
Ltd.
v.
Xyloid
Industries
Ltd.
and
Her
Majesty
the
Queen,
supra,
Pigeon,
J.
considered
the
words
in
the
then
Unemployment
Insurance
Act"
in
the
event
of
any
liquidation,
assignment,
or
bankruptcy
of
an
employer"
where
there
had
been
a
receiver
appointed
under
a
debenture.
In
that
Act
no
reference
was
made
to
receivership
as
in
subsection
227(5)
of
the
present
Income
Tax
Act.
At
page
1200,
Pigeon,
J.
said:
With
respect,
I
am
unable
to
agree.
We
are
not
concerned
with
a
situation
where
the
receivership
does
not
end
up
in
a
liquidation,
just
as
when
considering
a
distribution
in
bankruptcy
one
is
not
concerned
with
the
situation
where
the
receiving
order
is
discharged.
We
are
here
dealing
with
a
receivership
which
was
completed
by
the
sale
and
distribution
of
all
the
assets
of
the
employer
company.
Further
at
page
1201,
he
says:
It
seems
to
me
that
it
would
not
make
sense
to
hold
that,
because
the
assets
of
a
company
were
realized
by
a
receiver
appointed
at
the
request
of
a
creditor
rather
than
by
a
liquidator
or
a
trustee
in
bankruptcy
appointed
by
a
court,
the
claim
for
wages
should
fail.
It
appears
to
me
that
there
is
no
reason
not
to
give
the
word
"liquidation"
its
wide
meaning
in
usual
language.
I
would
follow
the
reasoning
made
by
Middleton
J.A.
in
Davey
v
Gibson,
at
page
381:
The
argument
before
us
turned
rather
upon
a
discussion
of
the
question
whether
the
Act
should
be
strictly
or
liberally
construed.
It
is
not,
in
my
view,
necessary
to
enter
upon
any
such
discussion.
The
term
“gone
into
liquidation”
is
not
anywhere
defined;
the
language
is
more
or
less
colloquial,
for
there
is
not,
at
the
present
time,
any
legal
proceeding
known
as
liquidation.
At
one
time
there
was,
but
it
has
long
since
been
obsolete.
The
technical
term
used
in
the
Companies
Act
is
“wind-up,”
although
the
officer
appointed
to
conduct
the
winding-up
is
designated
a
liquidator.
If
one
searches
dictionaries,
it
is
not
hard
to
find
a
definition
of
liquidation
wide
enough
to
include
bankruptcy.
In
the
Century
Dictionary
this
is
given:
"Liquidation
:
the
act
or
operation
of
winding-up
the
affairs
of
a
firm
or
company
by
getting
in
the
assets,
settling
with
its
debtors
and
creditors,
and
apportioning
the
amount
of
each
partner's
or
shareholder's
profit
or
loss,
etc."
In
the
Oxford
Dictionary
is
the
following:
Liquidate:
Law
and
commerce:
To
ascertain
and
set
out
clearly
the
liabilities
of
(a
company
or
firm)
and
to
arrange
the
apportioning
of
the
assets;
to
wind
up.”
In
Corpus
Juris,
that
mine
of
information,
is
this
definition:
"Liquidation,
a
word
of
French
origin,
is
not
a
technical
term,
and,
therefore,
can
have
no
fixed
legal
meaning:
but
it
has
a
fairly
defined
legal
meaning,
and
it
is
said
to
be
a
term
of
jurisprudence,
of
finance,
and
of
commerce.
It
is
defined
as
the
act
of
settling,
adjusting
debts,
or
ascertaining
their
amounts
or
balance
due;
settlement
or
adjustment
of
an
unsettled
account
Applied
to
a
partnership
or
company,
the
act
or
operation
of
winding
up
the
affairs
of
a
firm
or
company
by
getting
in
the
assets,
settling
with
its
debtors
and
creditors,
and
appropriating
the
amount
of
profit
or
loss.
.
.
.
In
the
Dauphin
Plains
decision
Estey,
J.,
dissenting
in
part,
but
not
on
this
point,
said
as
regards
the
use
of
the
word
liquidation”
in
the
then
legislation,
at
page
1210:
The
term
as
employed
in
our
law
generally,
whether
or
not
it
be
qualified
by
the
presence
of
the
words
"assignment"
or"
bankruptcy”,
relates
either
to
the
realization
of
assets
to
pay
debts
or
to
the
total
disposition
of
the
undertaking
of
an
entity
including
not
only
the
realization
of
assets
to
pay
debts
but
for
the
distribution
of
any
net
surplus
to
the
owners
of
the
entity
prior
to
its
termination.
Where
the
term
is
used
as
in
the
pension
and
unemployment
statutes
with
reference
to
the
liquidation
"of
an
employer",
it
is
clear,
in
my
view,
that
the
term
carries
its
broad
and
general
meaning,
that
is
the
process
of
disposing
of
an
undertaking
and
terminating
the
existence
of
the
entity.
I
do
not
think
that
the
automatic
crystallization
of
the
Esket
debenture
without
more
is
a
liquidation
of
the
company.
There
is
nothing
at
the
time
of
such
crystallization
that
relates
to
the
realization
of
assets
to
pay
debts
or
to
the
total
disposition
of
the
entity
to
realize
assets
to
pay
debts,
or
to
distribute
any
surplus.
In
my
view
the
effect
of
the
automatic
crystallization
was
simply
the
creation
of
a
fixed
security
from
a
floating
charge
and
nothing
more.
I
find
then
that
none
of
the
events
referred
to
in
subsection
227(5)
of
the
Income
Tax
Act
or
the
similar
provisions
of
the
Unemployment
Insurance
Act
and
Canada
Pension
Plan
occurred
until
the
receiving
order
of
April
18,
1989.
As
a
result
there
will
be
a
declaration
that
the
debenture
of
Antco
takes
priority
over
the
claims
of
Her
Majesty
the
Queen
in
Right
of
Canada
on
those
assets
secured
by
the
Antco
debenture.
The
petitioner
asked
for
costs
of
$1,000
to
be
paid
from
the
estate.
Counsel
for
Antco
does
not
take
exception
to
this
although
he
questions
the
necessity
for
counsel
appearing
and
making
full
submissions.
In
the
circumstances
I
make
the
order
for
costs
that
is
sought
by
the
petitioner.
Order
accordingly.
James
Dawson
Dixon
and
Euroclean
Canada
Inc.
v.
Deputy
[Indexed
as:
Dixon
(J.D.)
v.
M.N.R.]
Supreme
Court
of
Ontario
(Henry,
J.),
June
23,
1989
(Court
No.
RE
2511/88)
Income
tax—Federal—Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
The
applicants
brought
the
present
motion
to
determine
whether
they
had
a
solicitor-client
privilege
in
respect
of
certain
disputed
documents
seized
by
the
respondent
pursuant
to
search
warrants
issued
against
the
applicants.
The
respondent
alleged
that
the
applicants,
a
corporation
and
its
president,
made
false
returns,
evaded
the
payment
of
tax,
and
understated
income
in
their
returns
in
the
1983,
1984,
and
additionally
in
the
president's
case,
1985
taxation
years,
in
connection
with
transactions
relating
to
the
sale
of
real
property.
There
were
two
main
issues:
(1)
whether
the
respondent
had
established
a
prima
facie
case
of
fraud
which
displaced
the
claimed
privilege,
and
whether
the
documents
in
question
lost
any
privilege
by
reason
of
their
connection
or
relevance
to
the
alleged
fraud;
and
(2)
whether
certain
of
the
documents,
which
contained
statements
of
account
for
legal
fees
and
disbursements
were
privileged,
and
if
so,
whether
the
privilege
was
displaced
by
association
with
the
alleged
fraud.
HELD:
It
was
well-established
that
solicitor-client
privilege
does
not
attach
to
documents
exchanged
in
the
advancement
of
a
fraudulent
or
illegal
act
or
purpose
where
(1)
the
allegation
or
charge
of
fraud
is
made,
(2)
a
prima
facie
case
of
fraud
is
made
out
on
the
facts,
and
(3)
the
prima
facie
case
is
established
on
the
balance
of
probabilities
and
not
on
the
basis
of
mere
conjecture.
In
the
light
of
all
the
evidence
available
to
the
court,
the
Crown
succeeded
in
establishing
a
sufficiently
strong
prima
facie
case,
in
fact
and
in
law,
that
the
applicant
president
engineered
a
scheme
to
evade
tax
and
that
the
applicant
corporation
was
or
was
deemed
to
be
a
party
to
that
scheme.
Consequently,
such
of
the
disputed
documents
that
related
to
that
scheme
or
were
exchanged
in
the
course
of
furthering
that
scheme
which
might
otherwise
be
privileged,
were
divested
of
solicitor-client
privilege.
The
documents
in
question
were
ruled
on
accordingly.
The
documents
in
respect
of
the
statement
of
account
were
ordinarily
privileged.
Paragraph
232(1)(e)
of
the
Income
Tax
Act
did
not
displace
the
privilege.
The
statement
of
account
was
a
form
of
report
to
the
client,
and
as
such
was
a
privileged
communication;
it
was
not
a
solicitor’s
accounting
record
within
the
meaning
of
paragraph
232(1)(e).
The
applicants
discharged
the
onus
of
showing
that
the
privilege
had
not
been
displaced
by
reason
of
the
document
being
created
or
exchanged
in
furtherance
of
the
alleged
fraud,
or
reflecting
advice
or
legal
services
in
furtherance
thereof.
Order
accordingly.
Joanne
E.
Swystun
for
the
applicants.
Charlotte
A.
Bell
for
the
respondent.
Cases
referred
to:
Solosky
v.
The
Queen,
[1980]
1
S.C.R.
821,
105
D.L.R.
(3d)
745;
In
re
Goodman
and
Carry.
M.N.R.
(No.
1),
[1968]
C.T.C
484,
68
D.T.C.
5288;
In
re
Romeo's
Place
Victoria
Ltd.,
[1981]
C.T.C.
380,
35
D.T.C.
5295;
In
re
Hoyle
Industries,
[1980]
C.T.C.
501,
35
D.T.C.
6363
(F.C.T.D.);
In
re
Milner,
Atkins
&
Durbrow
(Erie)
Ltd.,
[1968]
C.T.C.
405,
22
D.T.C.
5261;
O'Rourke
v.
Darbishire,
[1920]
A.C.
581;
The
Queen
v.
Parker
CarWash
Systems
Limited
(1977),
31
D.T.C.
5327;
Mintz
v.
Mintz
(1983),
38
C.P.C.
125;
Re
Cox
v.
The
Attorney-General
of
Canada,
[1988]
2
C.T.C.
365,
88
D.T.C.
6494
(B.C.S.C.);
Mutual
Life
Assurance
Company
of
Canada
v.
The
Deputy
Attorney
General
of
Canada,
[1984]
C.T.C.
155,
84
D.T.C.
6177;
Re
Evans
(1968),
22
D.T.C.
5277.
Henry,
J.
[Orally]:—On
November
22,
1988,
officers
of
the
Department
of
National
Revenue,
Taxation,
pursuant
to
search
warrants
issued
by
this
Court,
attempted
to
seize
certain
documents
upon
the
premises
of
two
law
firms
in
Kitchener,
Ontario,
pertaining
to
the
affairs
of
the
applicant
taxpayers,
James
Dawson
Dixon
and
Euroclean
Canada
Inc.
The
solicitors
claimed
solicitor-client
privilege
attached
to
the
documents
in
question,
which
were
promptly
sealed
and
delivered
to
the
custody
of
the
Sheriff,
in
accordance
with
subsection
232(3)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
present
application
is
brought
pursuant
to
subsection
232(4)
of
the
Act
by
the
two
taxpayers,
for
the
purpose
of
determining
whether
the
applicants
have
a
solicitor-client
privilege
in
respect
of
the
disputed
documents.
That
is
the
primary
issue
before
me.
There
is
a
second
issue,
concerning
which
my
jurisdiction
is
disputed—
whether
the
seizure
of
certain
documents
exceeded
the
authority
conferred
by
the
warrant.
Facts
Alleged
This
matter
is
in
the
process
of
inquiry
only;
no
charge
has
yet
been
laid,
nor
has
a
civil
action
been
commenced
in
the
Court.
There
is
no
dispute,
however,
that,
in
the
present
state
of
the
law,
the
applicants
may
claim
privilege
well
before
trial;
see
e.g.,
Solosky
v.
The
Queen,
[1980]
1
S.C.R.
821,
105
D.L.R.
(3d)
745
per
Dickson,
J.
at
page
833.
In
the
case
at
bar,
the
procedure
is
prescribed
by
section
232
of
the
Act
which
provides
that
the
application
authorized
by
subsection
232(4)
shall
be
heard
in
camera
and
shall
be
disposed
of
summarily
by
the
judge.
The
facts
as
known
to
the
present,
are
alleged
in
the
affidavit
evidence
of
Thomas
Wilson,
an
officer
of
the
Department
of
National
Revenue,
Taxation,
who
swears
that
he
has
personal
knowledge
of
the
facts
deposed
to.
He
swore
the
information
on
October
31,
1988,
upon
which
the
warrant
was
authorized,
and
deposes
that
he
believes
the
contents
to
be
true
and
correct;
he
further
deposes
to
facts
he
personally
discovered
in
the
course
of
his
investigation
of
the
applicants'
affairs
for
income
tax
purposes.
The
information
alleges
reasonable
and
probable
grounds
to
believe
that
the
following
offences
have
been
committed
by
the
applicant
taxpayers.
That
Euroclean
Canada
Inc.
and
its
President,
James
Dawson
Dixon,
have
committed
an
offence
as
defined
by
paragraph
239(1)(a)
of
the
Income
Tax
Act
by
making
false
or
deceptive
statements
in
the
T2
Returns
of
Income
filed
by
Euroclean
Canada
Inc.
for
the
taxation
years
1983,
and
1984;
That
Euroclean
Canada
Inc.
and
James
Dawson
Dixon
being
an
officer,
director
or
agent
of
the
said
Euroclean
Canada
Inc.,
have
committed
an
offence
as
defined
by
paragraph
239(1)(d)
of
the
Income
Tax
Act
by
wilfully
evading
the
payment
of
taxes
imposed
by
the
Income
Tax
Act
upon
Euroclean
Canada
Inc.,
for
the
taxation
years
1983,
and
1984,
by
understating
its
taxable
income
for
the
said
taxation
years;
That
James
Dawson
Dixon
has
committed
an
offence
as
defined
by
Section
239(1)(a)
of
the
Income
Tax
Act
by
making
false
or
deceptive
statements
in
his
T1
Returns
of
Income
filed
for
the
taxation
years
1983,
1984,
and
1985;
That
James
Dawson
Dixon
has
committed
an
offence
as
defined
by
Section
239(1)(d)
of
the
Income
Tax
Act
by
wilfully
evading
the
payment
of
taxes
imposed
by
the
Income
Tax
Act
upon
James
Dawson
Dixon
for
the
taxation
years
1983,
1984,
and
1985,
by
understating
his
taxable
income
for
the
said
taxation
years;
The
following
facts
are
disclosed
by
the
evidence
or
otherwise
are
common
ground.
(a)
Three
corporate
entities
are
involved
in
transactions
which
form
the
basis
of
the
allegations
of
conduct
of
the
applicants
contrary
to
the
Income
Tax
Act:
(i)
The
applicant
taxpayer
Euroclean
is
a
wholly-owned
subsidiary
of
A.B.
Electrolux,
in
Sweden,
and
has
its
head
office
in
Cambridge
Ontario.
Euroclean
owned
a
warehouse
property
at
842
Victoria
Street
in
Kitchener.
The
applicant
James
Dixon
was,
at
the
relevant
times,
the
president
of
Euroclean
and
was
working
on
a
plan
to
consolidate
the
operations
of
Euroclean
in
Cambridge;
part
of
the
consolidation
plan
was
to
sell
the
Victoria
Street
Building
and
move
the
operation
to
Cambridge.
(ii)
Lodi
Developers
Limited
is
an
Ontario
Corporation
incorporated
February
26,
1979.
The
shareholders
are
James
Dixon
and
Lois
Cybalski
(wife
of
Jerry
Cybalski)
each
of
whom
owns
50
per
cent
of
the
shares.
James
Dixon
is
president
and
Jerry
Cybalski
is
secretary
treasurer.
(iii)
571813
Ontario
Limited
was
incorporated
on
November
30,
1983
and
Robert
A.
Sutherland,
a
solicitor,
held
all
the
shares,
totalling
100,
in
trust
from
that
date
to
January
17,
1985.
The
shareholders'
register
shows
two
lots
of
50
shares
each,
so
held
in
trust,
and
that
on
January
17,
1985
they
were
transferred,
50
to
James
Dixon
and
50
to
Jerry
Cybalski.
No
trust
agreement
setting
out
the
terms
of
the
trust
contemporaneously
with
incorporation
is
found
either
in
the
corporate
minutes
or
the
shareholders'
register,
but
the
shares
were
transferred
to
Dixon
and
Cybalski
pursuant
to
a
meeting
of
the
Board
of
Directors
of
571813
Ontario
Limited
held
on
January
17,
1985.
Mr.
Sutherland,
as
President
and
Secretary
of
the
Company,
chaired
the
meeting,
which
resolved
that:
Pursuant
to
a
Declaration
of
Trust
dated
November
30,
1983,
and
an
Authorization
and
Direction
dated
January
17,
1985,
the
following
transfers
of
shares
in
the
capital
stock
of
the
corporation
are
hereby
approved
and
consented
to.
.
.
The
transfer
is
reflected
in
the
shareholders'
register
as
of
that
date.
The
"authorization
and
direction”
referred
to
in
the
Board's
minutes,
as
I
infer,
consists
of
two
unsigned
documents
(marked
as
copies)
purporting
to
be
directed
to
Sutherland
by
Dixon
and
Cybalski,
respectively,
under
date
of
January
17,
1985,
each
in
the
following
terms:
Pursuant
to
the
declaration
of
Trust
dated
the
30th
day
of
November,
1983,
the
undersigned
hereby
authorizes
and
directs
you
to
transfer
the
share
certificate
standing
in
the
name
of
Robert
A.
Sutherland
to
the
undersigned,
as
beneficial
owner
thereof.
There
are
two
other
documents
headed
Declaration
of
Trust.
The
first,
dated
November
30,
1983,
relates
to
Cybalski,
and
is
unsigned
and
marked
"Copy";
it
reads:
The
undersigned,
Robert
A.
Sutherland,
hereby
acknowledges
that
the
50
common
shares
held
by
him
and
registered
in
his
name
in
571813
Ontario
Limited
is
hereby
held
by
him
in
trust
for
Jerry
Cybalski,
as
beneficial
owner,
and
further
agrees
to
transfer
the
share
certificate
at
any
time,
upon
the
request
of
the
said
Jerry
Cybalski.
The
second,
dated
March
16,
1984,
in
identical
terms
declares
the
trust
in
favour
of
Dixon.
This
document
is
apparently
an
original
and
is
signed
by
Mr.
Sutherland.
It
is
important
to
the
Department's
investigation
to
determine
when
Mr.
Dixon's
interest
in
the
50
shares
of
the
company
was
created.
I
can
say
at
this
stage
that
on
the
evidence
there
is
a
clear
inference
that
it
came
into
existence
under
a
trust
arrangement
made
at
the
time
of
incorporation,
on
November
30,
1983.
Mr.
Sutherland
was
present
at
the
formal
meeting
of
the
Board
on
January
17,
1985,
when
the
transfer
was
authorized
and
it
must
be
inferred
that
the
Board
was
satisfied
that
the
beneficial
interest
of
Mr.
Dixon
was
created
on
November
30,
1983
and
it
was
so
recorded
in
the
minutes.
The
fact
that
the
trust
was
reiterated
on
March
16,
1984
does
not
negative
this
conclusion,
as
it
is
quite
consistent
with
the
reaffirmation
of
a
trust
which
commenced
on
November
30,
1983.
I
find
therefore
that
Dixon
had
an
undisclosed
beneficial
interest
in
the
50
shares
of
the
company
as
of
the
date
of
incorporation,
on
November
30,
1983.
(b)
Having
identified
the
corporate
entities
involved
in
the
transactions
under
investigation,
I
continue
with
the
history.
By
letter
dated
February
13,
1984,
Mr.
Sutherland
presented
an
offer
to
Euroclean
Canada
Inc.:
On
behalf
of
clients
of
mine
who
do
not
wish
their
identities
to
be
known
at
the
present
time.
.
.
to
purchase
the
Victoria
Street
property.
The
offer
was
dated
February
20,
1984
and
the
offered
price
was
$775,000.
The
offer
was
conditional
upon
the
execution
of
a
lease
back
to
Euroclean
prior
to
closing,
for
a
term
of
five
years.
While
the
basic
terms
of
the
lease
were
included
in
the
appendix
to
the
offer,
after
a
counter-
proposal
the
agreement
of
purchase
and
sale
was
concluded
on
March
5,
1984.
It
was
provided
that,
if
the
parties
did
not
before
closing
agree
on
mutually
satisfactory
terms
of
the
final
lease
agreement,
the
agreement
of
purchase
and
sale
was
void.
The
agreement
was
signed
by
Mr.
Sutherland
in
trust,
and
by
Mr.
Dixon
as
President
and
Mr.
J.
K.
Hunter,
as
Vice-President,
on
behalf
of
Euroclean;
closing
was
to
be
April
30,
1984.
(c)
On
or
before
March
7,
Lodi
Developers
Limited
retained
W.H.
Reimer,
A.A.C.I.,
Canada
Trust
Realtor,
I.C.I.
Appraisal
Division,
to
do
an
appraisal
of
the
property
as
at
March
1,
1984.
Mr.
Reimer,
according
to
the
report
presented
to
Lodi
on
March
7,
was
under
the
impression
that
the
proposed
purchaser
was
Lodi.
He
appraised
the
market
value
at
$1.5
Million.
On
this
basis,
the
sale
price
agreed
by
the
parties
was
approximately
50
per
cent
of
fair
market
value.
The
Department's
appraisal
is
$1.1
Million,
and
it
was
also
the
opinion
of
the
manager
of
the
Toronto
Dominion
Bank
which
arranged
financing
for
the
purchaser
that
the
sale
price
was
unrealistic;
he
appears
to
have
had
access
to
the
appraisal
of
Mr.
Reimer.
(d)
On
March
12,
the
Board
of
Directors
of
Euroclean
met
in
New
York.
Mr.
Dixon,
as
President,
made
the
presentation
in
support
of
the
sale,
in
accordance
with
the
agreement
of
purchase
and
sale.
The
Board
ratified
the
agreement.
The
President
(Dixon)
and
the
Vice-President
(Hunter)
were
authorized
to
execute
the
necessary
documentation
on
behalf
of
Euroclean,
to
carry
out
the
agreement
and
to
execute
the
lease
back
of
the
land
and
building:
including
those
terms
and
conditions
referred
to
in
the
said
agreement
as
they,
in
their
discretion,
deem
necessary
or
advisable.
It
is
to
be
noted
here
that
as
indicated
above,
if
the
officers
of
Euroclean,
Dixon
and
Hunter,
did
not
finally
agree
on
the
terms
of
the
lease,
the
sale
would
be
aborted.
There
is
nothing
in
the
material
at
present
disclosed
to
indicate
that
the
Board
was
made
aware
that
the
sale
was
at
other
than
fair
market
value.
The
Board
agreed,
however,
that
"on
completion
of
the
sale,
the
property
was
to
be
vacated
as
rapidly
as
possible,
and
the
operation
transferred
and
consolidated
in
Cambridge",
the
possibility
of
extricating
itself
from
the
lease
being
clearly
in
contemplation.
(e)
On
March
14,
the
purchaser,
571813
Ontario
Limited,
applied
to
the
Toronto-
Dominion
Bank
in
Kitchener
for
mortgage
financing.
The
loan
was
approved
on
March
16.
It
is
clear
from
the
memorandum
of
the
bank’s
manager
and
loan
officer
that
they
considered
the
purchase
price
unrealistic,
that
is,
low,
but
concluded
that
Euroclean
intended
to
confer
a
benefit
on
Dixon.
Although
the
shareholders
of
the
company
are
described
as
Jerry
Cybalski
and
Ingrid
Dixon,
the
latter
was
never
a
shareholder.
It
is
obvious
that
the
bank
officials
viewed
Dixon
as
a
principal
of
the
company
as
is
indicated
from
the
following
extract
from
the
report
on
the
application
for
mortgage
financing:
Because
of
the
more
than
$10
Million
product
turnaround
in
1983
we
have
no
doubt
that
Euroclean
also
gave
Mr.
Dixon
the.
opportunity
to
purchase
the
Victoria
Street
building
at
drastically
low
market
levels.
As
you
can
see,
there
are
no
real
estate
fees
involved
and
we
believe
this
is
a
tremendous
opportunity
for
Mr.
Dixon.
For
the
last
several
years
Mr.
Dixon
has
been
sharing
his
real
estate
deals
with
Mr.
Jerry
Cybalski
who
does
a
great
deal
of
the
legwork
for
Mr.
Dixon
so
that
the
latter
gentleman
can
concentrate
on
running
the
Canadian
operations
for
Euroclean
Canada
Inc.
Basically,
we
don't
think
that
the
$775M
price
is
realistic
but
represents
a
reward
to
Mr.
Dixon
for
generating
a
substantial
turnaround
in
the
Euroclean
Canada
Inc.'s
operations.
As
such,
we
don't
think
that
the
purchase
price
should
be
used
as
a
benchmark
and
we
should
be
obligated
to
stick
to
the
75%
guideline
and
recommend
the
$700M
C.R.E.I.L.
as
presented.
(f)
In
response
to
a
request
from
the
Department,
Mr.
Dixon
provided
the
signed
Declaration
of
Trust
dated
March
16,
1984
to
which
I
have
earlier
referred.
(g)
The
lease
agreement
was
concluded
between
the
parties
on
March
20,
1984
and
the
transaction
of
purchase
and
sale
closed
on
March
30,
1984.
By
that
date
it
is
clear
that
Mr.
Dixon
was,
either
under
the
trust
arrangement
at
the
time
of
incorporation
or
under
the
Declaration
of
March
16,
1984,
or
both,
the
beneficial
owner
of
50
shares
in
571813
Ontario
Limited,
the
purchaser.
He
was,
before
the
sale
closed,
entitled
to
call
for
delivery
of
the
shares
which,
in
the
result,
he
apparently
did
not
do
until
February,
1985
when
the
formal
transfer
was
made
and
recorded
in
the
shareholders'
register.
First
Issue
—
Fraud
The
first
issue
to
be
decided
on
this
application
is
whether
solicitor-client
privilege
attaches
to
the
disputed
documents
now
placed
by
the
sheriff
before
the
Court
and
which
to
this
point
I
have
not
examined.
There
are
seven
files
containing
the
disputed
documents
for
which
privilege
has
been
claimed
by
the
applicants;
I
have
as
yet
not
viewed
any
of
these
documents
because
counsel
for
the
respondent
asserts,
on
the
basis
of
the
evidence
as
I
have
outlined
it
above,
that
any
privilege
that
may
otherwise
attach
has
been
negatived
or
displaced
because
they
relate
to
a
fraudulent
scheme
of
tax
evasion
to
which
both
Dixon
and
Euroclean
were
parties.
There
is
no
dispute
between
counsel,
and
the
law
is
well
established,
that
solicitor-client
privilege
does
not
attach
to
documents
exchanged
in
the
advancement
of
a
fraudulent
or
illegal
act
or
purpose,
provided:
(a)
a
definite
charge
or
allegation
of
fraud
is
made;
(b)
a
prima
facie
case
of
fraud
is
made
out
on
the
facts;
(c)
the
respondent
discharges
the
onus
of
showing
a
prima
facie
case
not
by
mere
allegations
of
fraud
but
by
evidence
that
establishes
a
prima
facie
case
of
fraud
on
the
balance
of
probabilities
and
not
on
the
basis
of
mere
conjecture.
See:
In
re
Goodman
and
Carr
v.
M.N.R.
[No.
1],
[1968]
C.T.C.
484;
68
D.T.C.
5288
(Ont.
H.C.);
In
re
Romeo's
Place
Victoria
Ltd.,
[1981]
C.T.C.
380,
35
D.T.C.
5295
(F.C.T.D.);
In
re
Hoyle
Industries,
[1980]
C.T.C.
501;
35
D.T.C.
6363
(F.C.T.D.);
In
re
Milner,
Atkins
&
Durbrow
(Erie)
Ltd.
(1968),
22
D.T.C.
5261
(B.C.S.C.)
Counsel
therefore
have
asked
me
to
determine
this
issue
as
a
preliminary
to
the
consideration
of
any
of
the
disputed
documents.
Mrs.
Swystun
submits
that
as
in
any
case
where
fraud
is
alleged,
the
Court
should
require
the
respondent
to
discharge
the
onus
in
the
higher
range
of
probability
than
the
ordinary
civil
onus
that
applies
to
demonstrating
a
prima
facie
case
in
the
absence
of
an
allegation
of
fraud.
However,
in
interlocutory
proceedings
to
determine
the
privileged
status
of
documents
seized
it
is
sufficient
for
the
Crown
to
show
a
prima
facie
case
of
fraud,
that
is,
on
evidence
that
takes
the
case
beyond
mere
conjecture
or
a
simple
bald
assertion
in
an
affidavit.
I
think
that
at
this
stage
the
onus
is
no
higher
than
that.
See
O’Rourke
v.
Darbishire,
[1920]
A.C.
581
(H.L.)
cited
/n
re
Milner,
supra.
The
Crown's
position
is
set
out
as
follows
in
Ms.
Bell's
factum:
5.
The
Respondent
submits
that
on
the
evidence
found
in
the
affidavit
of
Thomas
Wilson,
a
prima
facie
case
has
been
made
that
James
Dixon
was
a
shareholder
of
571813
Ontario
Limited
at
the
time
that
the
company
was
negotiating
to
purchase
the
Victoria
Street
Property
from
Euroclean
Canada
Inc.,
the
company
of
which
James
Dixon
was
president.
6.
The
property
was
sold
for
considerably
less
than
market
value
and
consequently
the
transaction
is
deemed
to
be
non-arm's
length
and
a
taxable
benefit
was
conferred
on
James
Dixon
by
Euroclean
Canada
Inc.
7.
Neither
Euroclean
Canada
Inc.
nor
James
Dixon
reported
the
benefit
to
Revenue
Canada,
resulting
in
the
allegation
that
both
parties
have
[been]
[sic]
made
false
declarations.
8.
The
Respondent
therefore
submits
that
solicitor
and
client
privilege
does
not
extend
to
any
documents
describing
the
shareholdings
of
571813
Ontario
Ltd.,
any
documents
describing
the
circumstances
and
particulars
of
sale
of
the
Victoria
Street
property,
nor
to
any
advice
or
opinions
or
memoranda
which
would
tend
to
establish
the
date
of
James
Dixon's
shareholdings
of
571813
Ontario
Ltd.,
or
his
involvement
on
behalf
of
Euroclean
Canada
Inc.
in
the
sale
of
the
Victoria
Street
property.
I
agree
with
this.
As
to
Dixon:
On
an
objective
and
common
sense
view
of
all
the
evidence,
I
find
that
the
respondent
makes
out
a
strong
prima
facie
case
that
Dixon,
from
the
outset,
engineered
the
sale
by
Euroclean
of
the
Victoria
Street
property
to
571813
Ontario
Limited
at
a
price
significantly
below
fair
market
value.
This
had
the
effect
of
conferring
a
direct
benefit
on
the
purchaser
company.
At
all
material
times,
I
infer
that
Dixon
had
a
beneficial
interest
in
50
per
cent
of
the
shares,
and
that
an
indirect
benefit,
taxable
as
income
to
him,
was
conferred
on
him
by
virtue
of
paragraph
6(1)(a)
and
subsection
56(2)
of
the
Income
Tax
Act.
These
provisions
are
as
follows:
6.(1)
(a)
Value
of
benefits.—the
value
of
board,
lodging
and
other
benefits
of
any
kind
whatever
received
or
enjoyed
by
him
in
the
year
in
respect
of,
in
the
course
of,
or
by
virtue
of
an
office
or
employment,
except
any
benefit
(i)
derived
from
his
employer's
contributions
to
or
under
aregistered
pension
fund
or
plan,
group
sickness
or
accident
insurance
plan,
private
health
services
plan,
supplementary
unemployment
benefit
plan,
deferred
profit
sharing
plan
or
group
term
life
insurance
policy,
(ii)
under
a
retirement
compensation
arrangement,
an
employee
benefit
plan
or
an
employee
trust,
or
(iii)
that
was
a
benefit
in
relation
to
the
use
of
an
automobile,
except
to
the
extent
that
it
related
to
the
operation
of
the
automobile;
56(2)
Indirect
payments.
—
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
person
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
(other
than
by
an
assignment
of
any
portion
of
a
retirement
pension
pursuant
to
section
64.1
of
the
Canada
Pension
Plan
or
a
comparable
provision
of
a
provincial
pension
plan
as
defined
in
section
3
of
that
Act
or
of
a
prescribed
provincial
pension
plan)
shall
be
included
in
computing
the
taxpayer's
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
him.
If
this
benefit
had
been
transferred
to
Mr.
Dixon
direct
by
Euroclean,
it
would
have
been
taxable
in
his
hands
as
a
benefit
given
by
virtue
of
his
office
or
employment,
as
president.
He
by
then
had
knowledge
of
the
extent
of
the
windfall,
as
president
of
Lodi,
who
had
received
the
appraisal
report
prior
to
the
decision
of
the
Board
of
Euroclean
to
ratify
the
contract
of
purchase
and
sale.
That
knowledge
by
him
is
imputed
to
Euroclean
by
virtue
of
his
role
as
president.
A
fair
reading
of
the
minutes
of
the
meeting
of
the
Euroclean
board,
reflects
that
he
had
no
difficulty
in
persuading
the
directors
to
accept
his
recommendation.
The
only
rational
conclusion
is
that
in
law
the
benefit
was
one
falling
within
paragraph
6(1)(a).
It
is
also
clear
that
he,
by
exercising
his
influence
over
the
board,
caused
the
benefit
to
be
conferred
by
Euroclean
on
his
company,
571813
Ontario
Limited
which,
under
subsection
56(2)
is
an
indirect
benefit
on
which
he
is
liable
to
tax.
His
obligation
was
therefore
to
declare
the
extent
of
the
benefit
for
the
taxation
year
in
question
under
paragraph
239(1(d),
which
he
failed
to
do.
In
my
opinion,
the
respondent
makes
a
strong
prima
fade
case
for
making
false
or
deceptive
statements
in
his
returns
for
the
taxation
year
in
question,
and
for
wilful
evasion
of
tax
under
paragraph
239(1)(d).
I
have
carefully
considered
Ms.
Swystun's
submission
that
the
benefit
or
windfall
was
not
conferred
by
Euroclean
on
Dixon,
directly
or
indirectly,
in
respect
of
his
office
or
employment.
As
she
puts
it,
there
is
no
evidence
that
Euroclean
intended
to
confer
a
benefit
on
him
in
that
capacity.
Indeed,
she
submits
that
the
evidence
goes
no
farther
than
to
disclose
a
normal
transaction
of
sale
of
the
Victoria
Street
property
in
the
normal
course
of
business
as
part
of
the
consolidation
plan.
I
agree
that
this
is
an
alternative
inference
that
one
might
make,
but
I
do
not,
on
all
the
evidence,
consider
it
appropriate
to
do
so.
Euroclean
is
deemed
to
have
the
knowledge
that
Dixon
had,
as
its
president,
which
at
the
time
of
the
board's
meeting
included
knowledge
of
the
undervaluation
of
the
asset
as
expressed
in
the
price.
The
only
reasonable
conclusion
is
that
Euroclean
is
deemed
to
confer
the
benefit
indirectly
on
him,
through
571813
Ontario
Limited
because
of
his
performance
as
president
and
the
confidence
the
directors
had
in
him.
This
conclusion
is
fortified
by
the
impression
received
by
the
bank's
officials
as
reflected
in
their
report
upon
their
decision
to
authorize
the
mortgage
loan
to
Dixon's
company.
The
application
was
made
by
Dixon
and
Cybalski
together,
the
bank's
officials
were
clearly
under
the
impression
that
Dixon
was
a
principal
of
the
numbered
company,
that
it
had
been
incorporated
for
the
purpose
of
purchasing
the
Victoria
Street
property,
that
both
Dixon
and
Cybalski
would
be
personal
guarantors
and
that
the
significant
undervaluation
of
the
property
reflected
in
the
price
(which
they
questioned)
was
intended
as
a
means
of
rewarding
Dixon
for
his
performance
as
president
of
Euroclean.
It
is
self-evident
that,
on
reading
the
bank's
credit
report,
the
understanding
or
impression
of
the
officials
could
only
have
originated
with
Dixon
himself.
Ms.
Swystun's
position
primarily
depends
upon
her
submission
that
Dixon
did
not
come
on
the
scene
until
after
the
deal
had
been
arranged;
he
had
no
beneficial
interest
in
the
shares
until
the
declaration
of
trust
on
March
16,
1984;
he
did
not
formally
become
a
shareholder
until
February,
1985,
long
after
closing.
I
do
not
agree.
At
all
material
times,
as
I
find,
Dixon
had
a
beneficial
interest
in
the
shares;
in
the
context
of
this
case,
the
time
of
formal
transfer
is
immaterial:
that
was
a
matter
that
under
the
trust
declaration
was
within
his
control
and,
by
postponing
that
act
until
January
1985,
he
could
not,
in
my
opinion,
distance
himself
from
the
company
so
as
to
cover
up
the
relationship
that
existed.
I
have
also
not
overlooked
Ms.
Swystun's
further
submission
that
the
evidence
of
fraud
must
do
more
than
tip
the
scale
of
probability
and
that
the
Crown
has
not
discharged
the
onus.
I
do
not
agree.
In
my
opinion,
the
evidence
is
sufficient
to
discharge
the
onus
required
in
respect
of
an
allegation
of
fraud,
with
respect
to
Dixon
and
also
with
respect
to
Euroclean.
As
to
Euroclean:
As
to
the
allegation
of
fraud
against
Euroclean,
the
allegation
is,
as
in
the
case
of
Dixon,
that
the
company
failed
to
report
properly
the
proceeds
of
the
sale
as
income
as
required
by
paragraph
239(1)(a)
and
wilfully
evaded
tax
contrary
to
paragraph
239(1)(d)
of
the
Income
Tax
Act.
The
basis
for
tax
liability
on
the
part
of
Euroclean,
as
Ms.Bell
submits,
is
found
in
paragraph
69(1)(b)
of
the
Income
Tax
Act
which
provides
that
where
the
sale
is
at
less
than
fair
market
value,
in
a
non-arm's
length
transaction,
the
vendor
is
deemed
to
have
received,
as
capital
income
or
gain,
the
full
amount
of
fair
market
value.
Euroclean
did
not
report
this
deemed
gain
allegedly
in
breach
of
the
foregoing
provisions.
69.(1)
Inadequate
considerations.
—
Except
as
expressly
otherwise
provided
in
this
Act,
b)
where
a
taxpayer
has
disposed
of
anything
(i)
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length
for
no
proceeds
or
for
proceeds
less
than
the
fair
market
value
thereof
at
the
time
he
so
disposed
of
it,
or
(ii)
to
any
person
by
way
of
gift
inter
vivos,
he
shall
be
deemed
to
have
received
proceeds
of
disposition
therefor
equal
to
that
fair
market
value;
It
is
the
Crown's
position
that
the
transaction
of
purchase
and
sale
of
the
Victoria
Street
property
was
not
at
arm's
length,
although
not
between
related
persons".
Subsection
251.(1)
of
the
Act
provides:
251.(1)
Arm's
length.
—
For
the
purposes
of
this
Act,
(a)
related
persons
shall
be
deemed
not
to
deal
with
each
other
at
arm's
length;
and
(b)
it
is
a
question
of
fact
whether
persons
not
related
to
each
other
were
at
a
particular
time
dealing
with
each
other
at
arm's
length.
Ms.
Bell
agrees
that
the
parties
are
not
related
persons,
so
that
the
question
whether
the
parties
were
at
arm's
length
is
one
of
fact,
under
paragraph
251(1)(b).
I
have
no
hesitation
in
finding,
on
the
evidence
as
a
whole,
that
the
parties
to
the
transaction
of
purchase
and
sale
were
not
dealing
at
arm's
length.
For
one
thing,
the
sale
was
at
a
price
significantly
below
fair
market
value.
For
another,
the
whole
arrangement
was
engineered
by
Dixon,
who
on
the
one
hand
was
able
to
exert
his
influence
over
the
Euroclean
board,
his
knowledge
of
the
undervaluation
being
imputed
to
the
company,
and
on
the
other
as
a
principal
of
the
purchaser,
albeit
with
an
equitable
interest
in
50
per
cent
of
the
shares,
he
was
able
to
deal
with
Euroclean
on
behalf
of
the
numbered
company
as
purchaser.
In
my
opinion,
Dixon
was
the
guiding
mind,
common
to
both
vendor
and
purchaser,
he
had
de
facto
control
over
both,
and
this
gave
to
the
vendor
and
purchaser
a
common
purpose
which
must
be
imputed
to
both
corporations,
to
accomplish
the
sale
at
an
artificially
low
price.
These
factors
as
I
see
it
lead
inexorably
to
the
conclusion
that,
for
the
purposes
of
section
69,
the
parties
were
not
dealing
at
arm's
length.
In
these
circumstances,
Euroclean
is
deemed
to
have
received
full
fair
market
value
and
is
liable
to
tax
on
that
income
or
gain.
In
these
circumstances,
Dixon,
as
president,
and
the
guiding
mind
of
the
transaction,
with
full
knowledge
of
the
circumstances,
was
obliged
to
report
in
Euroclean's
tax
return
the
gain
it
was
deemed
to
receive.
He
did
not
do
so,
and
his
default
will
render
the
corporation
indictable.
See
R.
v.
Parker
Car
Wash
Systems
Ltd.
(1977),
31
D.T.C.
5327
and
authorities
there
cited
per
Hughes,
J.
(Ont.
H.C.).
I
have
considered
Ms.
Swystun's
submissions
in
reaching
this
conclusion;
they
are
principally
as
follows:
(a)
Under
the
Parker
Car
Wash
decision,
it
is
important
to
consider
the
authority
of
a
corporate
officer
to
do
the
act
that
subjects
the
company
to
criminal
liability;
Dixon
did
not,
on
the
evidence,
have
authority
to
sell
the
land
to
the
purchaser.
I
do
not
agree.
It
is
a
clear
inference
that
Dixon
had
de
facto
authority
and
the
necessary
influence
to
assert
it.
In
fact,
he
had
the
prior
approval
of
the
Chairman
of
the
Board
and
the
Board
formally
ratified
the
agreement
that
he
had
made.
He
had
both
de
facto
authority
and
sufficient
control
over
the
disposal
of
the
Victoria
Street
property
(which
was
ratified)
for
the
purposes
of
imposing
liability
on
the
corporation.
(b)
Second,
she
submits
that
the
evidence
does
not
support
the
conclusion
that
the
parties
were
not
dealing
at
arm's
length;
so
far
as
Euroclean
is
concerned,
it
was
dealing
in
the
normal
way
with
an
independent
purchaser
and
independently
agreed
to
the
sale
at
the
price
offered.
Again,
I
do
not
agree.
The
nexus
between
the
parties
that
removes
the
transaction
from
one
at
arm's
length
is
the
knowledge
of
Dixon
of
his
role
in
the
purchaser
company,
which
knowledge
is
imputed
to
Euroclean.
Dixon
was
in
fact
dealing
for
both
parties
and
in
that
sense
they
have
a
common
interest
in
the
undervalued
sale.
This
is
so
even
if
the
Euroclean
Board
were
in
fact
unaware
of
Dixon's
dual
role.
In
these
circumstances,
subsection
69(1)
applies.
It
is
my
understanding
that
Ms.
Swystun
agrees
that
if
the
parties
are
found
not
to
be
dealing
at
arm's
length,
this
result
occurs.
I
add
that
it
may
seem
strange
that
assuming
the
Board
to
have
been
misled
by
Dixon
as
a
result
of
which
the
company
sold
the
property
at
much
less
than
fair
market
value,
Euroclean,
as
a"victim",
should
be
held
liable.
This
result
is
of
course
artificial,
and
is
imposed
by
the
statute.
The
key
point
is
that
because
of
his
dual
role,
whether
communicated
to
the
directors
or
not,
the
two
companies
were
deemed
to
be
acting
in
concert,
for
mutual
benefit,
at
an
undervalued
price,
and
so
were
not
dealing
at
arm's
length.
The
statute
in
these
circumstances
requires
the
company
to
declare
the
benefit
and
pay
tax
on
it
as
described.
Conclusion
In
light
of
all
the
evidence
at
present
available
to
me,
viewed
on
a
ractical
and
common
sense
basis,
I
conclude
that
the
Crown
makes
out
a
sufficiently
strong
prima
facie
case,
in
fact
and
in
law,
that
Dixon
engineered
a
scheme
to
evade
tax
by
a
sale
of
property
to
the
purchaser,
in
which
he
had
an
interest,
at
less
than
fair
market
value,
and
that
Euroclean
was
or
was
deemed
to
be
a
party
to
that
scheme.
As
a
result,
such
of
the
disputed
documents
as
relate
to
that
scheme
or
were
exchanged
in
the
course
of
furthering
that
scheme
which
might
otherwise
be
privileged,
are
divested
of
solicitor-client
privilege
by
reason
of
their
relevance
to
the
alleged
fraud.
This
ruling
I
endorsed
on
the
application
record
on
June
5,
1989.
I
emphasize
that
I
am
not
trying
this
case.
The
sole
objective,
at
this
stage,
is
to
determine
if
there
is,
on
the
evidence
in
the
investigation,
a
sufficient
prima
facie
case
of
fraud
at
this
stage
to
displace
the
privilege
claimed.
In
my
opinion,
there
is.
The
next
step
is
to
consider
the
documents
to
determine
if
they
have
lost
any
privilege
by
reason
of
their
connection
or
relevance
to
the
alleged
fraud.
The
Disputed
Documents
I
proceeded
then
to
examine
the
documents
for
which
privilege
is
claimed
with
a
view
to
determining:
(a)
whether
each
document
falls
within
a
class
to
which
solicitor-client
privilege
attaches;
and
if
so,
(b)
whether
the
privilege
has
been
displaced
by
reason
of
the
document
being
created
or
exchanged
in
furtherance
of
the
fraudulent
purpose
which
I
have
found
to
exist;
(c)
whether
any
of
the
said
documents,
in
any
event,
fall
outside
the
authority
of
the
search
warrant
and
therefore
should
be
returned
to
the
solicitors
from
which
they
were
taken;
while
these
were
tentatively
identified,
my
jurisdiction
to
dispose
of
them
is
challenged
as
I
have
said
at
the
outset.
Counsel
commendably
did
a
prodigious
amount
of
work
in
organizing
and
describing
all
the
documents.
Because
this
preliminary
work
was
of
great
assistance
to
the
Court,
and
gives
a
ready
means
of
recording
the
disposition
of
each
document,
I
have
placed
the
two
lists
prepared
by
Ms.
Swystun
and
her
covering
letter
of
explanation
in
the
Appendix.
[NOTE—For
purposes
of
general
release
of
my
decision
I
have
here
replaced
the
Appendix
with
the
final
Order
to
which
is
attached
List
#1
which
we
used
as
the
working
list
and
upon
which
the
individual
dispositions
were
recorded
as
explained
hereunder.
Thus
proliferation
of
lengthy
lists
of
documents
for
reporting
purposes
is
avoided.
The
Appendix
also
includes
Ms.
Sywstun’s
covering
letter.]
I
then
examined
each
document
in
turn,
in
the
presence
of
both
counsel,
in
chambers
and
in
camera
I
permitted
Ms.
Bell
to
have
her
"client"
present
(the
investigating
officer)
to
assist
her,
and
permitted
Ms.
Swystun
to
have
her
law
clerk
to
assist
her.
I
ruled
on
each
document
as
it
was
examined
and
briefly
explained
my
decision
as
I
did
so.
It
is
self-evident
that
while
Ms.
Swystun,
who
was
familiar
with
each
document,
could
state
her
position,
Ms.
Bell
was
at
a
disadvantage,
having
no
access
to
it.
This
problem
was
overcome
in
a
practical
way
—
Ms.
Swystun
stated
the
general
nature
of
the
document
and
the
reason
for
her
claim
to
privilege,
and
the
contents
so
far
as
it
was
proper
to
disclose
them;
Ms.
Bell
then
responded
as
best
she
could,
quite
effectively
as
it
turned
out.
In
most
cases
the
decision
was
almost
self-evident,
as
could
be
seen
from
the
descriptions
in
the
List
(see
Appendix).
They
generally
fall
into
the
following
categories
when
related
to
the
definition
of
solicitor-client
privilege
set
out
in
paragraph
232(1)(e)
of
the
Income
Tax
Act,
infra:
(a)
communications
of
a
confidential
character
between
the
client
and
legal
adviser
relating
to
the
seeking,
formulating
or
giving
of
legal
advice;
(b)
correspondence
between
solicitor
and
client,
including
the
solicitor's
letters
reporting;
(c)
communications
between
the
solicitor
and
a
third
party
where
they
are
(i)
communications
relating
to
existing
or
contemplated
litigation
of
the
client,
or
(ii)
communications
where
the
third
party
is
acting
as
agent
of
the
client;
(d)
memoranda
or
opinions
prepared
by
the
solicitor
(either
as
work
product
or
for
delivery
to
the
client);
(e)
papers
and
materials
created
or
obtained
for
the
solicitor's
brief
for
litigation,
whether
existing
or
contemplated;
(f)
documents
prepared
by
the
solicitor
for
his
own
use
in
the
course
of
performing
his
professional
services
to
the
client,
including
his
notes,
summaries,
interoffice
memoranda,
memoranda
to
file
and
list
for
closing
a
sale;
(g)
billing
records
relating
to
professional
services
rendered
by
the
solicitor
in
advising
the
client
and
the
trust
account
ledger;
(h)
unexecuted
and
draft
agreements;
(i)
documents
which
are
irrelevant
or
beyond
the
authority
of
the
warrant.
A
final
important
category
consists
of
documents
otherwise
privileged
which
I
decided
had
been
divested
of
the
privilege
because
they
related
in
my
opinion
to
the
advancement
of
the
fraudulent
or
illegal
act
or
purpose.
Most
documents
that
fall
into
this
category
ante-dated
the
closing
of
the
transaction
of
purchase
and
sale
of
the
Victoria
Street
property.
I
included
however
later
documents
which
related
to
the
aftermath
of
the
transaction,
i.e.,
the
“cleanup”
phase.
I
also
included
documents
which,
in
my
opinion
related
to
any
attempt
to
“cover
up"
the
impugned
transaction.
I
did
not
however
include
documents
which
emerged
once
the
Department's
challenge
was
disclosed
and
which
could
fairly
be
said
to
be
created
or
exchanged
for
the
purpose
of
advising
the
clients
as
to
their
rights,
obligations
and
liability
and
as
to
defences
available.
Issue
re
Statement
of
Account
for
Legal
Services
An
issue
arose
as
to
documents
labelled
3.6(a)
to
3.6(d)
which
was
a
letter
from
Sutherland,
Hagarty
to
their
client
Euroclean,
dated
June
8,
1988.
It
enclosed
a
statement
of
account
for
fees
and
disbursements
relating
to
services
for
the
period
October
1986
to
June
1988,
well
after
the
closing
of
the
impugned
Victoria
Street
transaction.
The
documents
consisted
of
a
covering
letter
to
the
client,
a
standard
block
recital
in
narrative
form
of
the
services
rendered,
and
a
computer
docket
printout
itemizing
each
service
charged
for,
with
the
name
of
the
solicitor,
date,
billable
time
and
the
charge
for
that
item.
The
print-out
gives
virtually
no
information
about
the
type
of
service
rendered
on
each
occasion,
but
the
block
narrative
is
descriptive
in
general
terms
of
the
services
rendered
during
the
period.
Ms.
Swystun
claimed
privilege
for
the
documents
in
this
group
as
a
communication
by
the
solicitor
to
his
client
respecting
legal
services
and
advice
intended
to
be
confidential.
Counsel
then
argued
the
question,
first,
whether
the
privilege
attached
to
the
documents
and
second,
if
so,
whether
it
was
displaced
by
association
with
the
alleged
fraud.
Ms.
Bell
submitted
that
there
is
no
privilege
by
reason
of
the
following
definition
of
the
Income
Tax
Act
provided
in
paragraph
232(1)(e):
232.(1)
Definitions.
—
In
this
section,
(e)
"solicitor-client
privilege”.
—"solicitor-client
privilege”
means
the
right,
if
any,
that
a
person
has
in
a
superior
court
in
the
province
where
the
matter
arises
to
refuse
to
disclose
an
oral
or
documentary
communication
on
the
ground
that
the
communication
is
one
passing
between
him
and
his
lawyer
in
professional
confidence,
except
that
for
the
purposes
of
this
section
an
accounting
record
of
a
lawyer,
including
any
supporting
voucher
or
cheque,
shall
be
deemed
not
to
be
such
a
communication.
Ms.
Bell
referred
to
three
judicial
decisions
in
support
of
the
absence
of
privilege.
In
re
Romeo's
Place
Victoria
Ltd.,
supra,
Collins,
J.
in
the
Federal
Court-Trial
Division,
held
that
a
solicitor's
trust
account
record
of
a
client's
transactions
is,
in
ordinary
circumstances,
privileged,
in
the
absence
of
fraud.
However,
the
exception
in
paragraph
232(1)(e)
above
excluded
the
trust
account
records
from
the
normal
solicitor-client
privilege
because
trust
account
records
are
undoubtedly
accounting
records
of
a
lawyer.”
In
Mintz
v.
Mintz
(1983),
38
C.P.C.
125
(Ontario
H.C.)
at
the
trial
of
a
divorce
action
the
wife
was
awarded
costs
against
the
husband,
to
be
taxed
on
a
solicitor
and
client
basis
by
way
of
complete
indemnification
for
her
costs.
The
wife
submitted
a
bill
for
taxation
at
$165,000.
Prior
to
taxation,
the
husband
sought
production
of
her
solicitor’s
dockets,
correspondence
between
the
wife
and
her
solicitor’s
fees
and
disbursements,
the
bill
sent
to
her
by
the
solicitor
and
the
cheques
given
in
payment.
The
wife
claimed
privilege
for
the
documents.
The
issue
came
before
Trainor,
J.
by
way
of
stated
case.
He
ordered
the
documents
produced.
It
is
significant
that
Trainor,
J.
took
a
different
position
with
respect
to
the
pre-trial
period
and
the
taxation
of
costs
after
trial.
At
page
132,
he
states
principle
thus:
Ordinarily,
a
solicitor
cannot
be
compelled
to
disclose
communications,
whether
written
or
oral,
passing
directly
or
indirectly,
between
him
and
his
client,
or
between
him
and
a
person
who
is
communicating
with
him
professionally
with
a
view
to
becoming
his
client,
for
the
purpose
of
giving
or
receiving
legal,
professional
advice,
if
they
are
legitimate
communications
in
the
sense
they
are
not
made
in
furtherance
of
fraud
or
crime.
Halsbury's
Laws
of
England
(4th
ed.),
vol.
44,
p.
52,
para.
74
Four
preconditions
suggested
by
Wigmore
[Wigmore
on
Evidence
(McNaughton
Rev.
1961),
vol.
8,
para.
2285]
with
respect
to
privilege
generally
are:
(1)
The
communications
must
originate
in
a
confidence
that
they
will
not
be
disclosed.
(2)
The
element
of
confidentiality
must
be
essential
to
the
maintenance
of
the
relationship.
(3)
The
relationship
must
be
one
that,
in
the
opinion
of
the
community,
ought
to
be
sedulously
fostered.
(4)
The
injury
that
would
inure
to
the
relationship
by
the
disclosure
of
the
communications
must
be
greater
than
the
benefit
gained
through
the
correct
disposal
of
the
litigation.
The
solicitor-and-client
relationship
clearly
meets
these
standards
prior
to
a
trial
taking
place.
Where
the
issue
after
trial
was
the
quantum
of
the
wife's
legal
costs,
the
husband
was
entitled
to
know
the
basis
of
the
claim
in
detail.
Trainor
J.
expressed
the
view
that
at
the
trial
much
of
the
pre-existing
privilege
was
lost
or
displaced
by
disclosure;
and
also
that
the
greater
good
in
Wigmore's
fourth
precondition
should
at
that
stage
prevail.
(I
note
that
this
case
was
not
affected
by
any
statutory
exception
as
in
the
Income
Tax
Act.)
Ms.
Bell
cites,
thirdly,
Re
Cox
v.
The
Attorney-General
of
Canada,
[1988]
2
C.T.C.
365;
D.T.C.
6494
(B.C.S.C.)
per
Tyrwhitt
Drake,
J.,
which,
she
submits,
ought
not
to
be
followed.
This
was
an
income
tax
matter
to
which
paragraph
232(1)(e)
applied,
and
the
document
for
which
privilege
was
claimed
was
the
solicitors
trust
account
ledger.
The
judge
reviewed
the
authorities
and
declined
to
follow
Re
Romeo's
Place
concluding
that
the
judgment
was
delivered
per
incuriam.
Simply
put,
he
held
that
the
trust
account
records
are
much
more
than
records
of
the
lawyer;
they
are
the
records
of
the
client's
account
and
are
privileged.
The
accounting
records
of
a
lawyer
to
which
the
statutory
exception
refers
are
records
relating
to
his
own
business.
This
decision
Ms.
Bell
asks
me
not
to
follow,
as
being
bad
law.
Ms.
Bell
further
submits
that
even
apart
from
the
Income
Tax
Act
provision,
the
account
is
not
privileged;
she
however
concedes
that
the
explanation
of
the
account
may
be
privileged.
Ms.
Swystun
referred
me
to
Mutual
Life
Assurance
Company
of
Canada
v.
The
Deputy
Attorney
General
of
Canada,
[1984]
C.T.C.
155;
38
D.T.C.
6177
(Ont.
H.C.)
which
was
an
application
under
the
Income
Tax
Act
section
232
to
determine
the
question
of
solicitor-client
privilege.
One
of
the
documents
in
issue
was
the
statement
of
account
sent
by
the
solicitors
to
the
client,
Mutual
Life.
Southey,
J.
sets
out
the
contents
of
the
document,
which
appear
to
be
much
like
the
document
before
me.
He
considered
the
effect
of
paragraph
232(1)(e)
with
its
exception.
He
clearly
was
of
the
opinion
that,
absent
that
exception,
the
privilege
would
ordinarily
attach.
He
decided
that
the
exception
did
not
apply,
as
the
statement
of
account
was
not
part
of
the
accounting
records
of
the
lawyer.
See
also,
Re
Evans
(1968),
22
D.T.C.
5277.
Having
considered
the
foregoing
submissions
and
authorities,
I
have
no
hesitation
in
concluding
that
the
statement
of
account
in
documents
3.6(a)
to
3.6(d)
constitutes
a
communication
by
the
solicitor
to
the
client
that
is
ordinarily
privileged.
Paragraph
232(1)(e)
does
not
displace
the
privilege;
the
exception
simply
does
not
refer
to
this
type
of
document.
In
this
respect,
it
is
my
opinion
that
the
rationale
in
Evans,
Mutual
Life
and
Cox
is
sound,
and
ought
to
be
followed
and
applied.
I
add
that
if
one
looks
at
the
document
as
a
form
of
report
to
the
client
of
what
the
solicitor
has
done,
which
it
is,
it
becomes
self-evident
that
it
must
be
a
privileged
communication.
The
extent
of
the
detail
reported
is
immaterial—
the
more
detail
reported,
the
easier
it
is
to
perceive
the
principle,
but
it
is
only
a
matter
of
degree.
It
is
not
an
accounting
record
of
the
solicitor's
within
the
meaning
of
paragraph
232(1)(e).
The
onus
is
on
Ms.
Swystun
to
show
that
the
privilege
has
not
been
displaced
by
reason
of
the
document
being
created
or
exchanged
in
furtherance
of
the
alleged
fraud,
or
reflecting
advice
or
other
legal
services
in
furtherance
thereof.
The
onus
is
discharged;
the
account
refers
only
to
advice
and
services
that
post-dated
the
period
of
the
alleged
fraud
and
does
not
relate
to
any
subsequent
furtherance
of
the
alleged
fraud
such
as
a
"cover-up".
The
privilege
therefore
is
not
displaced.
Disposition
For
clarity
I
have
indicated
my
disposition
of
each
document
on
the
list
in
the
Appendix
as
follows,
by
the
following
symbols:
P.
means
the
document
is
privileged
and
is
to
be
returned
to
the
solicitors;
N.P.
means
not
privileged;
in
most
but
not
all
cases
the
original
privilege
has
been
displaced
by
association
with
the
alleged
fraud.
In
some
cases
it
was
waived.
These
documents
are
to
be
delivered
by
the
Sheriff
to
the
Departmental
investigator,
Mr.
Tom
Wilson,
C.M.A.,
Revenue
Canada,
Taxation,
166
Frederick
Street,
Kitchener,
Ontario
NZG
4N1;
D.
means,
are
for
further
determination
as
irrelevant,
or
beyond
the
authority
of
the
warrant;
this
is
a
holding
category
to
be
retained
by
the
court
until
a
further
motion
is
made
by
Ms.
Swystun
for
their
return;
R.
means
the
documents
are
to
be
returned
to
the
solicitors
by
agreement
between
counsel.
The
remaining
issues
were
ultimately
resolved
by
counsel.
An
order
will
therefore
issue
directing
the
Sheriff
to
deliver
the
documents
in
the
categories
P.,
N.P.
and
R.
as
indicated.
Documents
in
category
D.
will
remain
in
the
custody
of
the
court
pending
further
disposition.
The
remainder
of
the
application
is
adjourned
to
a
date
to
be
fixed;
costs
may
also
be
spoken
to
at
that
time.
NOTE
—
The
formal
order
disposing
of
the
documents,
which
includes
the
working
list
as
I
have
said
earlier,
forms
part
of
the
Appendix.)
Order
Having
reviewed
the
documents
contained
in
the
seven
files
which
were
seized
from
Sutherland,
Hagarty,
Mark
&
Somerville
and
Cowling
&
Henderson
on
November
22,
1988,
which
documents
have
been
more
particularly
identified
in
the
List
attached
hereto,
and
having
previously
made
an
order
dated
July
21,
1989,
for
the
return
or
release,
as
the
case
may
be,
of
all
of
the
documents
in
the
said
files
but
for
the
documents
which
were
itemized
in
paragraph
5
of
the
said
order,
and
having
been
advised
by
counsel
for
the
applicants
and
counsel
for
the
respondent
that
an
agreement
has
been
reached
regarding
the
release
or
return,
as
the
case
may
be,
of
the
documents
itemized
in
the
said
paragraph
5:
1.
THIS
COURT
ORDERS
THAT
the
following
documents
are
documents
in
respect
of
which
the
Applicants,
or
either
of
them,
have
waived
the
claim
of
solicitor-client
privilege
and
which
shall
be
released
to
Thomas
Wilson
C.M.A.,
of
Revenue
Canada,
Taxation,
166
Frederick
Street,
Kitchener,
Ontario
N2G
4N1
or
such
other
person
as
is
designated
by
the
Deputy
Minister
of
National
Revenue
for
Taxation:
1.2,
1.3,
1.16a,
1.16b,
1.23,
1.24,
1.25,
1.26,
1.30,1.31,
2.3,
3.35,
3.49a,
3.49b,
3.59,
4.14b,
4.40,
6.48.
2.
THIS
COURT
ORDERS
THAT
the
following
documents
shall
be
returned
to
the
Applicants’
solicitors,
which
documents
the
Respondent
has
agreed
can
be
returned
and
has
undertaken
not
to
reseize:
1.6,
2.6a,
3.36,
3.60,
4.1,
4.47,
4.52,
6.1,
6.2,
6.3,
6.4,
6.5,
6.6,
6.7,
6.12,
6.13,
6.14,
6.15,
6.16,
6,17,
6,18,
6.23,
6.26,
6.27,
6.28,
6.29,
6.30,
6.31,
6.32,
6.33,
6.34a,
6.34b,
6.35,
6.49,
6.50,
6.51,
6.54,
6.55,
7.20
last
page.
3.
THIS
COURT
ORDERS
THAT
the
Sheriff
of
the
Judicial
District
of
York
shall
deal
with
the
documents
referred
to
in
paragraphs
1
and
2
above
in
accordance
with
those
paragraphs,
in
the
presence
of
a
representative
of
each
party.
Order
accordingly.
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