Wharton v. The Queen, 92 DTC 6582, [1993] 1 CTC 10 (FCTD)

Rouleau, J.:—The plaintiff brings this action seeking to set aside a demand by Revenue Canada that he reimburse the amount of a refund cheque issued to him by the Department in February of 1986. The instrument was forwarded to the taxpayer’s accountant who forged the plaintiff's endorsement and absconded with most of the funds.

Mr. Wharton, a television and film technician, had retained the services of one Stephen L. Foan, a chartered accountant residing in Vancouver, B.C. The latter was responsible for the preparation and filing of the taxpayer's annual T-1 individual income tax returns during the years with which we are concerned, 1981 through to 1984 inclusively. While attending at the accountant's office in March of 1985, and instructing him with respect to his 1984 tax return, Mr. Foan advised that he was aware of an income tax avoidance situation and suggested to the plaintiff that he may be interested in investing in a venture known as Sparrow Energy Corporation. By so doing he could be entitled to a substantial non-capital loss which could result in a gain to Mr. Wharton and he could expect net tax refunds in an amount between $10,000 to $12,000. Accepting his accountant's advice he agreed to invest and immediately issued a cheque, as directed, to McRae & Associates in the amount of $4,929.29 and turned it over to Mr. Foan.

The accountant completed the 1984 return claiming a non-capital loss of some $152,000. This resulted in a nil taxable income for the 1984 taxation year and entitled the plaintiff to a refund of approximately $13,000 for the 1984 taxation year. The non-capital loss was also carried back to the three previous years—1981-82-83. As a result of reassessment for the previous years, the plaintiff became entitled to a refund in excess of $37,000.

All T-1 individual income tax returns are executed by the plaintiff on the last page; appearing next to the signature is a box indicating that Stephen L. Foan, chartered accountant, of 1468 Main Street, North Vancouver, B.C., had prepared the return; on the front page or face of the form Mr. Wharton's name appears; the address is that of the accountant. Similarly, for the previous three annual returns, the address on the face of the return is C/o S.L. Foan . . . etc.

The uncontroverted evidence is that an income tax refund cheque was issued by Revenue Canada in June of 1985 for the 1984 taxation year in the amount of $13,791.45. The cheque indicated the payee as Fred Wharton c/o S.L. Foan, followed by the accountant's address. The cheque was received by Mr. Foan who then turned it over to Mr. Wharton who deposited it to his account. Upon completing this transaction Mr. Foan advised Mr. Wharton to issue a further cheque to McRae and Associates in the amount of $8,293.40 to complete his investment undertaking. This cheque is dated June 25, 1985. The total of both advances to McRae Investments were approximately equal to the refund amount received from Revenue Canada for the taxation year 1984 but this appears to be of no consequence or in issue in this proceeding.

The evidence is that Mr. Wharton was not aware of the amount of refund he could expect for the three previous taxation years over which the non-capital loss had been carried back. In February of 1986, Revenue Canada issued a refund cheque in the amount of $37,360.08 and forwarded it to Fred Wharton C/o S.L. Foan, 1468 Main Street, North Vancouver, B.C. Shortly thereafter, the taxpayer was telephoned by Mr. Foan advising that he had deposited to the credit of Mr. Wharton's account the sum of $11,448.23. Since this amount was close to the initial amount that his accountant told him he would be recovering, the plaintiff paid no further attention to the transaction. It was not until May of 1987, when Revenue Canada collectors contacted the plaintiff, did he become aware of the full amount of the second refund. After reassessment, they were seeking to recover some $55,000. His only knowledge of refunds was the $13,000 in 1985 and the $11,000 in 1986. There is undisputed evidence before the Court that Mr. Foan forged the plaintiff's signature on the cheque and deposited it to his account. The plaintiff acknowledges having received the sum of $11,448.23 from the refund cheque of $37,360.08; the issue before me is to determine who is to suffer the loss of the $25,911.85.

The plaintiff submits that the common law of Bills of Exchange still applies and the Crown cannot be saved by certain sections of the present Bills of Exchange Act. He nevertheless primarily relies on a decision of the Federal Court of Appeal in the case of Cumberland Properties Ltd. v. The Queen, [1989] 2 C.T.C. 75, 89 D.T.C. 5333. He argues that the principles relied on in that case are applicable to the present factual situation and, as a result, Revenue Canada should suffer the loss.

Briefly, Cumberland involved a refund cheque forwarded to the secretary of a company for the benefit of the corporation. The officer who received the funds converted them to his own use. The Court ruled that the Minister must bear the loss. It determined that the Crown had not satisfied the Court that it could "show a course of dealing or a'holding out’ on the part of the company from which officials at Revenue Canada could properly infer that [the secretary] was authorized to receive and negotiate the cheque" [emphasis added] at page 77 (D.T.C. 5335). It should also be noted that the Court also relied on a secondary fact to find as it did. The evidence revealed that all shares of the company had been acquired by third parties and some 2 /2 months before the issuance of the refund cheque, the new owners had advised Revenue Canada of a change in head office address. They so indicated when filing their annual return for the subsequent fiscal year.

The defendant relied on the principle that there was considerable authority extended to Mr. Foan on which it had a right to rely. Having sent the cheque according to the address indicated on the return, it should be exonerated from any further responsibility; it should not have to follow up on all cheques that it issues and forwards to taxpayers; that it should not have to assume responsibility in cases of obvious forgery. Counsel referred the Court to the decision of Delory v. Guyett (1920), 47 O.L.R. 137, 52 D.L.R. 506, and in particular at page 151 (D.L.R. 519) where the Ontario Court of Appeal wrote:

The principle seems to be that, where there is authority to receive a cheque, the receipt of the agent is the receipt of the principal, the cheque itself is payment, it is the principal's property, and the agent holds and deals with the cheque for his principal, and his principal assumes the risk of his improperly dealing with the cheque, while in the case where the agent has no authority to receive a cheque, the cheque is the property of the agent, and the person placing the cheque in the hands and power of the agent assumes the risk of his dealing with it improperly. . . .

The defendant also places some reliance on the decision of the Trial Division of this Court in Hosking Diamond Drilling Co. v. Canada, [1991] 2 C.T.C. 60, 91 D.T.C. 5307, which appears to follow the decision in Cumberland, Supra; apparently it has not been appealed.

I have reviewed the Hosking decision and more particularly the closing paragraph which states as follows at page 64 (D.T.C. 5310):

I therefore consider that a public agency which has to reimburse a sum of money to a corporation is, in the absence of instructions to the contrary, completely discharged by the sending of a negotiable instrument, valid for the full amount of the debt, to the last address indicated by that corporation as being that of its head office, when the said negotiable instrument is in fact received by someone who has power from the said corporation to receive it. That is exactly the case at bar, which is clearly different from Cumberland Properties Ltd. v. The Queen, where not only notice of a change of address was ignored by the debtor, but also the authority of the officer to receive payment for the credit was not established.

Perhaps there was sufficient evidence before the trial judge in the Hosking case to satisfy him that there was "holding out” as well as sufficient authority for the officer of the corporation not only to receive the instrument but as the trial judge put it: "paragraph 3 of the banking resolution made it clear that this particular officer by himself has power from the company to receive it in the latter's behalf".

One must determine if Revenue Canada had effectively discharged its initial obligation or debt to the taxpayer in order to recover the face amount on the instrument. In Orr v. The Union Bank of Scotland (1854), C.L.R. 1566, a decision of the House of Lords, a general principle was established with respect to the onus of proof that rests with the debtor. At page 1571, The Lord Chancellor wrote:

Payment of a forged cheque or order is not of itself any payment at all as between the party paying and the person whose name is forged.

The same principle was endorsed in Johnson v. Windle (1836), 3 Bing. (N.C.) 396. This case dealt with a promissory note delivered by a defendant to a plaintiff, payable to the latter's order. It was stolen and the plaintiff's endorsement was forged. Tindal, C.J. wrote at page 398:

It would be of most dangerous consequence if we were to give legality to a forged indorsement of a bill of exchange, and that would be the effect of a judgment in favour of these defendants.

The general rule is, that no title can be obtained through a forgery. Here the endorsement upon the bill has been forged, and the only ground which has been urged to take the case out of the general rule, is, that there has been such gross negligence in the plaintiffs as to divest them of any remedy against the defendants.

After carefully reviewing the Delory case, supra, it is easily distinguishable from the cases discussed. It is evident that authority was given by the creditor to the debtor to pay the principal's lawyer and as a result of that case the creditor assumes the risk of the improper dealings with the funds by his agent.

In Hosking, as I suggested, the Minister may have convinced the Court that there was sufficient “holding out". This case was not appealed and does not elaborate sufficiently on the Cumberland decision to satisfy me. There does not appear to have been any in depth analysis of what the Court had said in Cumberland. The fact that Revenue Canada had or had not discharged the onus of satisfying the Court that the secretary of the company was “ authorized to receive and negotiate the cheque” was not discussed.

Subsection 48(1) of the Bills of Exchange Act, R.S.C. 1985, c. B-4, reads as follows:

48(1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

A careful reading of the statute does not exonerate the Minister. He cannot seek to enforce payment of a forged instrument and it is wholly inoperative with respect to discharging the obligation that he had to the taxpayer.

Counsel for the defendant offered absolutely no evidence with respect to holding out that could infer ostensible authority having been extended by the plaintiff to Mr. Foan. They could not in any way satisfy me that one could infer that Mr. Foan “was authorized to receive and negotiate the cheque”. There is no indication whatsoever that the accountant was clothed with the authority of discharging the debt to the taxpayer. I would like to repeat what the Court of Appeal stated in Cumberland in giving some advice to Revenue Canada. They wrote at page 78 (D.T.C. 5336):

If the Government wants to require that corporate tax returns include the name of a person who can give discharge on behalf of the company, it should say so in language far clearer than that employed here.

I agree with that statement and I feel that the Minister can design forms to prevent such unfortunate events from occurring again.

It is therefore my decision that the question which is before me, namely whether the plaintiff is entitled to deduct the sum of $25,911.85 from any amount found to be due and owing to the defendant, is hereby answered in the affirmative and I so declare.

Costs to the plaintiff.

Application granted.