Date: 20020524
Dockets: 2001-3060-GST-I, 2001-3062-IT-I
BETWEEN:
RONALD HORACE FREMLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Dockets: 2001-3061-GST-I, 2001-3063-IT-I
BETWEEN:
JOHN CORBET FREMLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowman, A.C.J.
[1] These four appeals were heard together. The two appellants, father (Ronald Fremlin) and son (John Fremlin) were assessed under section 323 of the Excise Tax Act and section 227.1 of the Income Tax Act in respect of the unsatisfied liability of a company of which they were directors, Cariboo Chrysler Inc. ("Cariboo" or "company") for unremitted payroll deductions and GST remittances.
[2] The amount assessed under the Excise Tax Act was $51,756.69 net tax (GST less ITCs) plus interest and penalties for a total of $63,209.39 for reporting periods commencing August 1, 1998 to April 30, 1999. The amount assessed under the Income Tax Act was $6,988.32, which included unremitted deductions for federal and provincial tax, Canada pension plan, and employment insurance premiums plus interest in respect of salary and wages paid to employees of the corporation for the month of November 1998.
[3] The amounts are not disputed, nor is the liability of the company. The requisite conditions to assessing the appellants, such as the filing of a certificate in the Federal Court of Canada and the unsatisfied return of the execution have also been satisfied.
[4] The appellants' defence is that they "exercised the degree of care, diligence and skill to prevent the failure [of the corporation to make the remittances] that a reasonably prudent person would have exercised in comparable circumstances". The words appear in both subsection 323(3) of the Excise Tax Act and subsection 227.1(3) of the Income Tax Act. The test, as is obvious from reading those provisions, has a number of parts but it is generally and perhaps incompletely subsumed in the shorthand expression "due diligence". Where I use the expression "due diligence" I intend it to cover the test contained in the longer form of words.
[5] A preliminary objection was raised by the respondent to the appeal of John Fremlin from the assessment under the Income Tax Act. The objection was that no notice of objection had been filed to that assessment. On February 23, 2001 John Fremlin filed a document "Formal Notice of Objection or Appeal of Notice of Assessment".
[6] The document starts with the words "Please accept this as an appeal of the Third Party Notice of assessment enclosed". Attached was the GST assessment. The income tax assessment was not attached and nowhere in the seven pages of the objection was there any reference to the income tax assessment. I have read the objection several times in an attempt to find some basis upon which I could find that in the document the appellant indicated or even hinted that he was objecting to both assessments. Try as I might I was unable to do so. The Crown's objection is technical and one to which I am reluctant to give effect if I can avoid doing so. However I do not see how I can treat the objection to the GST assessment as an objection to the income tax assessment. It is too late to apply for an extension of time. I must with regret quash the appeal of John Fremlin from the income tax assessment.
[7] The essential facts are as follows.
[8] Both appellants are well educated. The father, Ronald Horace Fremlin ("Ronald") has degrees in Music and Psychology and has been active in different parts of the United States in court management and has been on the faculty of the University of Nevada and of the University of California at Berkley. He has published 35 books. His son John Corbet Fremlin ("John") is a member of the California Bar. He has not practised law for many years. In 1980 they moved to Canada. A family company, Seamens Capital Limited, acquired a large ranch in British Columbia, the 1849 Flying U Ranch, through a company The 1849 Flying U Ranch Ltd. ("1849"). In 1996 the appellants were asked by a local person, Brian Boucher, to assist him in obtaining a Chrysler franchise.
[9] Ronald initially rejected the idea after looking at the financial statements but under pressure of his wife reconsidered as an act of generosity to help. Cariboo was therefore incorporated in 1996 and it obtained a Chrysler franchise in 100 Mile House, a town north of Vancouver.
[10] 1849 owned 50% of the shares of the company and Boucher and his wife owned the other 50%. Boucher and his wife and John and Ronald were directors. Boucher was President and his wife was Secretary Treasurer.
[11] Between 1996 and 1998, to assist the company, 1849 subscribed for more shares with the result that it held more than 50%.
[12] In 1997, 1849 transferred its shares in the company to Seamen's Capital.
[13] In March 1998 a group of three people (Peter Strong, Randy Gott and John Fremlin) bought the control block of the company. Ronald stayed on as Chief Executive Officer and director at the request of the new owners.
[14] In April 1998 Ronald asked Boucher to leave the company because of his mismanagement. In the summer of 1998 Strong and Gott walked away from the company. They had never been directors. This left John and Ronald — and principally John — struggling to keep the company afoot and by July of 1998 some recovery was evident and a small profit was realized.
[15] To review the situation then as of July 1998, the four directors were Ronald, John, Boucher and his wife, and the owners were John, Strong and Gott, as to the majority and Boucher and his wife as to the minority.
[16] On July 16, 1998 John began discussions with Douglas Beckman, who owned a Chrysler dealership in Quesnel, British Columbia, Regency Chrysler Ltd. ("Regency"), with a view to a merger of the two dealerships. The term merger has no particular legal connotation in this context. It describes merely a form of business association which could include a formal amalgamation or a purchase of the assets or shares of Cariboo.
[17] An agreement was entered into on October 15, 1998 whereby Regency was to acquire the franchise of Cariboo and the real estate would be leased to Regency.
[18] Chrysler Credit Canada Ltd. ("Chrysler Credit"), represented by one Jim Ruff, came to the dealership and concluded that Cariboo was under capitalized.
[19] On October 23, 1998 Chrysler Credit served on Cariboo a Notice of Intention to Enforce Security under subsection 244(1) of the Bankruptcy and Insolvency Act. This effectively brought the purchase agreement to an end. It was suggested by John that Chrysler Credit and Beckman were in cahoots to force Cariboo into bankruptcy so that Regency could pick up the franchise and other assets for a song and, from Chrysler Credit's point of view, get rid of the current owners and management. It would not surprise me if this view of the behaviour of Chrysler Credit and Beckman were accurate, but I need make no finding on the point beyond observing that it is well within the realm of possibility.
[20] Chrysler Credit alleged that Cariboo owed it $1,453,418.62.
[21] By this time Ronald was in Arizona, although he kept in touch with John, in whom he had confidence.
[22] On or about October 30, 1998 Chrysler Credit appointed Deloitte & Touche Inc. as Receiver and Manager and for a few days it did so act, but John persuaded them to let him continue to operate the company, on the theory, probably correct, that under the receiver/manager the company could not survive whereas with John operating it it just might. John entered into a "Keeper agreement" under which Chrysler Credit was entitled to keep the proceeds from the sale of vehicles.
[23] Essentially Chrysler attempted to have the company's affairs sewn up as tight as a drum. Ruff was on the premises for a large part of the time.
[24] Notwithstanding this fact John was able to transfer $71,000 to the company's lawyers Taylor, Epp & Dolder between November 5, 1998 and December 29, 1998 to be held in their trust account. $44,719.31 was paid to the province of British Columbia in respect of provincial social services tax on December 7, 1998. The remaining $26,280.69 stayed in the lawyers' trust account.
[25] On January 27, 1999 the lawyers for Chrysler Credit brought an application in the Supreme Court of British Columbia for an order that:
1. all funds held in trust by the law firm Taylor, Epp & Dolder (to a maximum of $201,090.07), representing proceeds of sale of any motor vehicles by the Defendant, Cariboo Chrysler Inc., be forthwith paid to the Plaintiff or, alternatively, paid into Court to the credit of this action;
2. alternatively, an injunction restraining and enjoining Taylor, Epp & Dolder and any other person from releasing any monies in which the Plaintiff holds a security interest or any monies realized from the sale of motor vehicles by the Defendant, Cariboo Chrysler Ltd., until further order of the Court;
3. an accounting from the Defendant, Cariboo Chrysler Inc., of the proceeds of sale of all motor vehicles by the Defendant, Cariboo Chrysler Inc., and an order tracing such funds;
4. costs of this application against the firm of Taylor, Epp & Dolder, and the Defendant, Cariboo Chrysler Inc.; and
5. such further and other relief this Honourable Court may deem just.
[26] On February 2, 1999 Taylor, Epp & Dolder wrote to Gowling, Strathy & Henderson as follows:
I have now had the opportunity to discuss your recent application with my clients.
For your information the funds received by our office into our trust account are as follows:
1. November 5, 1998 $25,000.00
2. November 27, 1998 4,000.00
3. November 30, 1998 30,000.00
4. December 16, 1998 10,000.00
5. December 29, 1998 2,000.00
Total $71,000.00
The monies paid out from trust were as follows:
6. December 7, 1998 $44,719.31
Remaining in trust $26,280.69
The payment out on December 7, 1998 was to the Minister of Finance, Consumer Branch and for social services tax payment. The payment was on the instruction of our client and I attach a copy of the return, our letter and cheque as evidence of that payment.
My instructions are to further undertake to retain the remaining $26,280.69 in our trust account and not make any further payment or disposition without Court Order or agreement between your client and mine.
I would further advise that we are entitled to additional credits from Chrysler Canada which appear not to have been transferred to your client as yet by Chrysler Canada. We are continuing to attempt to deal with Chrysler Canada in that regard.
Please advise whether this satisfies your clients concerns in this regard. If it does not we will file the necessary reply to your application. Mr. John Fremlin is presently out of the country until next week so there would necessarily be a delay in that regard.
In any event we would request that you not set the matter for hearing without some reasonable notice to us.
I have also drafted our Statement of Defence and am in the process of attending to its entry. We expect to have that in your hands shortly.
[27] By this time the matter was completely out of the appellants' hands. In fact, by November 26, 1998 the matter had been settled between the company and Chrysler Credit for a total amount of $204,124.52. The schedule accompanying the letter from Chrysler Credit to Cariboo set out the breakdown of the $204,124.52 and it included the sum of $55,010.13 which is substantially the amount assessed against the appellants under section 323 of the Excise Tax Act.
[28] Ultimately Chrysler Credit was paid the amount remaining in the lawyers' trust account.
[29] I begin the analysis of the liability of the appellants under the Income Tax Act and the Excise Tax Act with a consideration of their respective positions in the company. It is not seriously disputed that Ronald was an outside director and John was an inside director as those expressions are used in Soper v. The Queen, 97 DTC 5407 (F.C.A.). Ronald did not even have signing authority and he was in Arizona for most of the relevant period. He was in no position to influence the events and in particular to ensure that the GST and payroll remittances be paid. His son John was in a different position. He was directly involved in the day-to-day operation of the dealership. He was a part owner.
[30] I turn then to a consideration of whether the appellants have exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.
[31] There have been numerous cases involving directors' liability under section 323 of the Excise Tax Act and section 227.1 of the Income Tax Act. Two recent cases in this court reviewed the decisions of the Federal Court of Appeal and noted the less stringent test enunciated in that court.
[32] In Mosier v. Canada, [2001] T.C.J. No. 692, I dealt with a director of a company whose finances were completely controlled by the bank. At paragraphs 33-35 the following appears
[33] One has to ask: what could he have done that he did not do? The answer is absolutely nothing. The case is in some ways reminiscent of Holmes v. R., [2000] 3 C.T.C. 2235, where the directors were unable to ensure that the CCRA be paid because the company's finances were completely controlled by their supplier. At pages 2241-2242 I referred to an earlier decision as follows.
I set out in Cloutier v. Minister of National Revenue (1993), 93 D.T.C. 544 (T.C.C.) at pp. 545-6, my approach in these cases.
The question therefore becomes one of fact and the court must to the extent possible attempt to determine what a reasonably prudent person ought to have done and could have done at the time in comparable circumstances. Attempts by courts to conjure up the hypothetical reasonable person have not always been an unqualified success. Tests have been developed, refined and repeated in order to give the process the appearance of rationality and objectivity but ultimately the judge deciding the matter must apply his own concepts of common sense and fairness. It is easy to be wise in retrospect and the court must endeavour to avoid asking the question "What would I have done, knowing what I know now?" It is not that sort of ex post facto judgement that is required here. Many judgement calls that turn out in retrospect to have been wrong would not have been made if the person making them had the benefit of hindsight at the time.
Section 227.1 is an example. That section imposes a standard of care on directors that requires reasonable prudence and skill in ensuring that the money raised through the SRTC program be in fact used for scientific research or else that the Part VIII tax be paid either out of the money so raised or otherwise. In determining whether that standard has been met one must ask whether, in light of the facts that existed at the time that were known or ought to have been known by the director, and in light of the alternatives that were open to that director, did he or she choose an alternative that a reasonably prudent person would, in the circumstances, have chosen and which it was reasonable to expect would have resulted in the satisfaction of the tax liability. That the alternative chosen was the wrong one is not determinative. In cases of this sort of failure to satisfy the Part VIII liability usually results either from the making of a wrong choice in good faith, or from deliberate default or wilful blindness on the part of the director.
I find as a fact that there is nothing that Mr. and Mrs. Holmes could reasonably have done to prevent the failure. They struck me as decent, honourable people who did all they could to ensure that the corporate obligations were fulfilled, but the economic circumstances rendered that impossible.
[34] This approach is one that I have followed in other cases and one that is, I believe, consistent with the series of cases in the Federal Court of Appeal which have invariably modified the more stringent standards applied in this court. The cases in the Federal Court of Appeal to which I am referring are The Queen v. Corsano et al. (supra), Worrell v. R., [2000] G.S.T.C. 91, Smith v. The Queen, 2001 DTC 5226, Cameron v. The Queen, 2001 DTC 5405, and Soper v. The Queen, 97 DTC 5407.
[35] I need not quote from them. They stand for the proposition that section 227.1 of the Income Tax Act and subsection 323(3) of the Excise Tax Act require only that directors act reasonably. They do not demand the impossible. I have no hesitation in following that approach.
[33] Here, subject to one possible exception, the same observation applies. Certainly Ronald was powerless to do anything. John did manage to have about $71,000 sent to the company's lawyers' trust account. About $44,000 was paid to the province of British Columbia. I do not regard this as unreasonable. Both the federal and the provincial government had claims and I do not think his decision to pay the province's claim as opposed to that of the federal government can be criticized.
[34] This leaves the $26,280.69.
[35] Between December 7, 1998 and January 27, 1999 this amount remained in the lawyers' trust account and could have been paid to the CCRA. After the motion by Chrysler Credit on January 27, 1999 was commenced I can understand why the lawyers were reluctant to pay anything out of the account, but before then there was nothing stopping John from instructing them to do so. I am not persuaded by John's explanation that the GST claim was not capable of quantification, or, at all events, approximation.
[36] I have concluded that John dealt with an impossible situation in the manner in which a reasonably prudent person would have done in comparable circumstances — in other words that he exercised the due diligence required by section 323 except with respect to the $26,280.69 which he could have paid to the CCRA. Counsel for the respondent criticised John for secretly transferring funds to his lawyers' trust account. He says that this was an illegal breach of his deal with Chrysler Credit. In the same breath he says that if John was able to secrete $71,000 away from under Chrysler Credit's nose why did he not spirit more away? Well, I shall not try to answer this interesting question beyond observing that the Crown cannot have it both ways. It can hardly say "You behaved illegally in putting that money in your lawyers' trust account but while you were at it why didn't you take enough to pay the GST?" This strikes me as a blurring of the line between the lofty moral high ground and the mundane task of collecting tax from wherever it can be found. In any event I am not prepared to make any finding of illegality in John's putting the money in his lawyers' trust account.
[37] I must finally deal with an argument that in paying money to Chrysler Credit in accordance with the settlement referred to in the letter of November 26, 1998 the schedule to which shows $55,010.13 for GST as forming part of the settlement amount of $204,124.52. John was reasonably justified in believing that Chrysler Credit was going to pay this amount over to the CCRA. On the schedule John circled the figure of $55,010.13 for GST and wrote "Ken [I presume this is his lawyer, Kenneth Dolder]. They are still debiting for our GST - this really is our $ and would reduce the pay-off considerably."
[38] Considering his relation with Chrysler Credit I do not think it would have been reasonable for him to think that it would pay anything to the CCRA even though I think Chrysler Credit probably had an obligation to do so.
[39] Subsections 222(1) and (3) of the Excise Tax Act read as follows.
(1) Subject to subsection (1.1), every person who collects an amount as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to hold the amount in trust for Her Majesty in right of Canada, separate and apart form the property of the person and from property held by any secured creditor of the person that, but for a security interest, would be property of the person, until the amount is remitted to the Receiver General or withdrawn under subsection (2).
(3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust, is deemed
(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and
(b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest
and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.
[40] I think that Chrysler Credit probably received the sum of $55,010.13 impressed with a trust in favour of Her Majesty and that the Government of Canada would have been able to pursue Chrysler Credit for this amount. That is not, however, a point that I have to decide and in any event it is not an answer to the question whether John exercised the due diligence required by section 323. As stated above I think the $26,280.69 should have been paid to the CCRA.
[41] My disposition of these appeals is as follows.
1. John Fremlin's appeal from income tax assessment number 14055 dated November 24, 2000 under section 227.1 of the Income Tax Act is quashed because no notice of objection was filed.
2. John Fremlin's appeal from the assessment under section 323 of the Excise Tax Act is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to reduce his liability under that section to $26,280.69.
3. Ronald Fremlin's appeals under section 323 of the Excise Tax Act and section 227.1 of the Income Tax Act are allowed and the assessments are vacated.
4. There will be no order for costs.
Signed at Ottawa, Canada, this 24th day of May 2002.
"D.G.H. Bowman"
A.C.J.
COURT FILE NOS.: 2001-3060(GST)I, 2001-3062(IT)I
2001-3061(GST)I, 2001-3063(IT)I
STYLE OF CAUSE: Between Ronald Horace Fremlin and
Her Majesty The Queen AND
Between John Corbet Fremlin and
Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATES OF HEARING: May 6 and 7, 2002
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: May 24, 2002
APPEARANCES:
For the Appellants: The Appellants themselves
Counsel for the Respondent: Michael Taylor, Esq.
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3060(GST)I, 2001-3062(IT)I
BETWEEN:
RONALD HORACE FREMLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard with the appeals of John Corbet Fremlin (2001-3061(GST)I and 2001-3063(IT)I) on May 6 and 7, 2002 at Vancouver, British Columbia, by
The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Michael Taylor, Esq.
JUDGMENT
It is ordered that the appeal from the assessment made under section 323 the Excise Tax Act, notice of which is dated November 24, 2000 and bears number 65421 be allowed and the assessment be vacated
It is further ordered that the appeal from the assessment made under section 227.1 the Income Tax Act, notice of which is dated November 24, 2000 and bears number 14052 be allowed and the assessment be vacated.
There will be no order for costs.
Signed at Ottawa, Canada, this 24th day of May 2002.
|
"D.G.H. Bowman" |
A.C.J.
2001-3061(GST)I, 2001-3063(IT)I
BETWEEN:
JOHN CORBET FREMLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard with the appeals of Ronald Horace Fremlin (2001-3060(GST)I and 2001-3062(IT)I) on May 6 and 7, 2002 at Vancouver, British Columbia, by
The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Michael Taylor, Esq.
JUDGMENT
It is ordered that the appeal from the assessment made under section 323 the Excise Tax Act, notice of which is dated November 24, 2000 and bears number 65423 be allowed and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment to reduce the appellant's liability under that section to $26,280.69
It is further ordered that the appeal from the assessment made under section 227.1 the Income Tax Act, notice of which is dated November 24, 2000 and bears number 14055 be quashed.
There will be no order for costs.
Signed at Ottawa, Canada, this 24th day of May 2002.
|
"D.G.H. Bowman" |
A.C.J.