Frankel v. The Queen, 84 DTC 6220, [1984] CTC 259 (FCTD)

Reed, J:—This is an action against Her Majesty in Right of Canada for an alleged unlawful seizure of funds from the personal bank account of the plaintiff.

On January 26, 1979 the Crown seized $7,774.80 from the personal account of the plaintiff. The Crown alleges that this seizure was to cover an amount owing by the plaintiff, since 1973, for unpaid income taxes. The plaintiff alleges that the debt had been paid and was not owing as of the date of the seizure.

The plaintiff carried on business through four corporations: Frisco Homes, Rambler Building Corporation Limited, Initial Investments Limited, Proud Homes Limited. He was the president and sole shareholder of the first three; he was general manager of the fourth, his wife being the president. By 1973 two of these companies were inactive: Initial Investments Limited and Proud Homes Limited. Their only assets were notes receivable from Rambler Building. The note held by Initial Investments was for $9,766, that held by Proud Homes was for $43,200. The other two corporations, Frisco Homes and Rambler Building were active companies with substantial assets.

As of January 1973 there were five outstanding tax accounts held by the Department of National Revenue. Mr Frankel in his personal capacity owed $46,707.31; Frisco Homes owed $18,584.65; Rambler Building owed $4,446.95; Initial Investments owed $13,741.34; Proud Homes owed $33,962.46.

Discussions were held with the taxpayer respecting payment of these outstanding accounts and in January 1973 a Mr Wall and a Mr Tutt of the Department of National Revenue attended at Mr Frankel’s office for the purpose of further discussions. Mr Frankel did not want to pay the taxes owing immediately because the assessments were at that time being appealed and he and the corporations were also under investigation for tax evasion which he insisted would prove to be ill-founded. His views in this respect were not accurate.

The evidence clearly discloses that the discussions at the January 1973 meeting between Mr Frankel, Mr Tutt and Mr Wall were with regard to the outstanding tax liability of all five accounts. Mr Tutt gave evidence that the discussion was with respect to the global amount owing, approximately $122,000. It is clear there was no discussion at that meeting of the accounts on an individual basis.

The outcome of the meeting was that Mr Frankel agreed to secure the taxes owing by a mortgage on some real property he held and to pay $1,000 per month towards the retirement of the debt. In exchange, of course, the Department of National Revenue agreed not to seize assets sufficient to satisfy the outstanding tax liability, to the extent that such assets were available. This agreement was tentative in the sense that Mr Wall and Mr Tutt had to obtain the approval of their superiors in the Department and of the Department’s legal advisors respecting the mortgage. Mr Frankel gave evidence that he also qualified his agreement as being subject to his lawyer’s approval of the mortgage.

Mr Frankel then sent to the Department over the course of the following months, six $1,000 cheques. These were dated February 6, March 1, April 1, May 1, June 7, July 1. The first four were made out by a Mrs Pugliese, Mr Frankel’s “girl Friday’’. The last two were made out by Mr Frankel’s daughter. All were signed, of course, by Mr Frankel, and all were drawn on the account of Rambler Building Corporation. Rambler Building Corporation was the operating company through which the other corporations acted. The cheques carried the following notations on the lower left hand corner:

At the same time discussions with respect to the preparation of the mortgage to be executed by Mr Frankel were in progress and eventually Mr Frankel’s lawyer, a Mr Foreman forwarded to the Department under cover of a letter dated July 5, 1973 a draft mortgage which would have secured the debts of the four corporate accounts and Mr Frankel’s personal account. The draft also included provision for the continued payment of the $1,000 per month until the total debt was repaid. Evidence was given that Mr Foreman received instructions from the Department of National Revenue as to what they required to be in the mortgage. Mr Frankel took the position that he did not see the draft before it was sent to the Department by Mr Foreman and that when he eventually received it he immediately reacted by denying liability for the debts of two of the corporations: Initial Investments and Proud Homes — the two inactive companies. I find this a bit incredulous. One is entitled to assume that Mr Foreman would not have sent on behalf of his client a draft of a mortgage to the Department of National Revenue, for its approval, without first obtaining the approval of his client, at least, to its general terms.

Mr Frankel had engaged as counsel for the purposes of defending the tax evasion charges Mr Arthur Scace. On July 10, 1973 the Department received from Mr Frankel a letter as follows:

I have had a discussion with my solicitor, Mr Arthur Scace of the firm of McCarthy & McCarthy in Toronto and he has asked that I send to him the mortgage that I have instructed Mr Al Foreman of Hamilton to prepare as collateral security for the reassessments by your Department of my personal tax return as well as various companies. Mr Scace will be dealing with this matter as he is with all other matters pertaining to tax problems and I would appreciate your dealing with the completion of the necessary security with him.

On July 30, 1973 Mr Frankel wrote the following letter to the Department of National Revenue:

I have been mailing to you as agreed payments of $1,000.00 on the first of each month to be applied to the credit of any tax liability for myself.

To date, including the attached cheque, this amount will be $7,000.00.

I would appreciate your verifying that the payments made have been credited to Sol D Frankel account and not to any of the companies.

On August 23, 1973 Mr Frankel wrote to the Department of National Revenue as follows:

I am today in receipt of a receipt dated August 17-73 for payment of $1,000.00 and showing a balance owing in the amount of $46,925.56. This amount owing is as a result of an assessment which is under appeal.

I have been making payments in the amount of $1,000.00 each month commencing with Feb 6-73 for a total sum of $7,000.00 to and including the payment credited. All these payments should be credited to any personal indebtedness that I may have leaving a balance substantially less than shown in your records. Please forward a corrected receipt.

No corrected receipt was ever sent since the Department took the position that the $6,000 had been properly credited to the corporate account of Initial Investments.

Mr Frankel takes the position that the notations on the cheques were an instruction to the Department that the funds being paid were meant to go towards retiring his personal liability and not that of any of the corporations. Given all the circumstances of the case I do not think this is so. The conversations prior to July 30, 1973 between Mr Frankel and the Department had been based on an acceptance of responsibility for the debts globally of all four corporate accounts as well as his personal account. Anyone who wished to designate the sums being forwarded specifically for a particular account would have been more specific; they would, for instance, have included in the notation on the cheque the specific acount number to which the funds were to be applied, or at least, designated payment to be to a “personal account”. This was not done. In addition Mr Frankel surely would have paid more attention to the notations on the June and July cheques had he really intended that they be credited to his personal tax liabilities.

Mr Frankel gave evidence that at the time of the signing of the cheques

I wanted it paid to my personal account . . .

This is simply not credible evidence in all the circumstances of this case. Mr Frankel purports to remember very clearly his intention at that time when all the evidence points to exactly the opposite conclusion and when he is unable to recall facts such as the month or year of his conviction for tax evasion, whether he continued to pay $1,000 per month after August 1973 and whether the draft mortgage of July 5, 1973 was ever forwarded to Mr Scace.

In addition Mr Frankel’s own accounting records belie his contention that the six cheques were intended to be applied to his personal tax liabilities. The moneys paid out were accounted for in the books of Rambler under “general” rather than as part of Mr Frankel’s personal drawing account. A so-called general summary ledger sheet of Mr Frankel’s tax liability payments was entered in evidence to justify the allegation that the six $1,000 cheques were paid on account of Mr Frankel personally. This ledger sheet is practically useless for the purpose for which it was introduced. It was put forward in isolation, out of the context of the rest of the accounts to which it relates; and, even on its own it deals with items other than Mr Frankel’s tax liability.

With respect to the significance of the notations, Mr Tutt’s opinion was sought both on the stand and in the course of the examination for discovery. On the stand he gave evidence that he would have interpreted them as indicating that the Department could apply the cheques as it saw fit to reduce the overall debt in some way but that his reply on the examination for discovery would have to stand. On the examination for discovery he said. that he would have interpreted the notation as indicating that Rambler Building Corporation was attempting to pay the individual tax of S Frankel.

Objection was made to the evidence of Mr Tutt on this point on the ground that he was not a qualified expert. I held that he could express his personal opinion on the basis of his experience of 6 or 7 years as a unit head in the collections branch of the Department of National Revenue.

Even if his evidence was admissible at the trial it was argued that his answers on the examination for discovery were not admissible because they related to a collateral issue. I find no merit in this objection.

While I think Mr Tutt’s evidence is admissible its weight is limited since the sufficiency of the notations as a specific direction to the department is a question for this Court on which I have already expressed my conclusion. I think his inconsistent answers do no more than demonstrate that if one were interpreting the notations on the cheques without knowledge of the surrounding circumstances, one might very well conclude that a corporation was undertaking to pay an individual account. The notations would certainly raise in the mind of a stranger to the transaction the need to enquire further as to where the monies should be credited. However, anyone reading the notations with knowledge of the surrounding discussions and circumstances could legitimately conclude that Mr Frankel was forwarding the monies to be credited in some way or other, without specification, to the total tax liability owed on the five accounts.

There is in addition one further evidentiary fact which should be noted. Evidence was given of the internal procedure by which the Department dealt with payments forwarded to it. At the same time that the taxpayer’s account was credited with the amounts paid, postings were made on receipts, vouchers and ledger cards; the receipts were then mailed out to the taxpayer. Thus in the normal course of events Mr Frankel should have received six receipts, one each month from February to July, for the cheques credited to Initial Investments. The address of all four corporations and Mr Frankel’s personal business address were all the same. Mr Frankel contends that no receipts were received during that time to alert him to the fact that the cheques were being credited to Initial Investments. While one can accept that one receipt, or perhaps two, could go astray in the mails or be lost due to human error, that this would happen on six consecutive occasions is almost impossible to believe.

Having found that there was no specific instruction to the Department respecting the allocation of the cheques prior to the August 23 letter, this leaves the question of whether the Department acted improperly in applying them to the credit of Initial Investments rather than to that of any of the other four outstanding accounts. Evidence was given by Mr Tutt that the Department’s practice when an individual secured multiple accounts without specific designation was to apply payments to the smallest outstanding debt first, leaving the largest to be retired last. He also gave evidence, however, that this practice would be departed from depending upon the circumstance. It seems clear, although there is no direct evidence on the point, that the reason payments were credited first in this case to Initial Investments, rather than to the smallest outstanding debt, which would have been Rambler Building, was the lack of sufficient assets held by Initial at the time to cover its outstanding tax liability.

It was alleged by the Crown that there was a specific agreement by Mr Frankel that the payments be credited first to Initial Investments but the evidence of such agreement, ten years after the fact, is scant and I cannot conclude that this was unequivocally the case.

However, even if there was no specific agreement between the Department and Mr Frankel that the payments forwarded be credited to the account of Initial Investments I could not find in the circumstances of this case that the Department acted improperly in crediting the funds to Initial Investments as opposed to any of the other four accounts.

It is clear that the discussions prior to July 30, 1973 proceeded on the basis that Mr Frankel was accepting responsibility for the taxes outstanding on all five accounts. It is clear that he made no specific designation as to the account to which the $1,000 cheques were to be credited.

In these circumstances I think it was quite appropriate for the Department to use its discretion in choosing to which account the payment would be applied. Its practice of usually crediting the smallest account is not legally binding on it in any way; nor does it make a deviation from that practice illegal.

My attention was directed to the Tax Court decision in Andrew Paving et al v MNR, [1984] CTC 2164; 84 DTC 1157 and the authorities to which it refers: The Agricultural Insurance Company v Sargeant (1896), 26 SCR 29 at 36, and Seymour v Pickett, [1905] 1 KB 715. These cases illustrate the proposition that when a debtor makes a payment he may allocate it to any debt he pleases and the creditor must apply it accordingly but if the debtor does not so allocate then the creditor has the right to allocate the payment as he pleases. While it is true that the cases cited deal with one debtor and in the instant case we are dealing with a situation where an individual was acting both on his own personal account and through four corporations, I think the rules established in those cases add at least some weight to the conclusion that the Department did not act improperly in acting as it did.

I would conclude by making a brief reference to the events which occurred after August 1973. Mr Frankel refused to secure by mortgage the tax liabilities of the two inactive companies Initial Investments and Proud Homes. The Department of National Revenue took assignment of notes, as noted above, which are due April 1, 1988 for the debt owed by these two corporations.

The mortgage which was finally registered in December 1973 secured the liabilities of Rambler Building, Frisco Homes and Mr Frankel’s personal account. The amount of Mr Frankel’s personal account expressed to be secured thereby was around $46,000. It did not reflect any credit of the $6,000 and Mr Frankel expressly approved this amount as being secured by the mortgage. No legal action was taken by Mr Frankel to contest the Department’s allocation of the $6,000 until 1979 and the seizure of funds from the plaintiffs bank account.

The events subsequent to August 1973 are by and large irrelevant to the issue but I have set them out above to complete the narrative. On the basis of the reasons given I dismiss the plaintiffs claim.