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.
A.C.J.
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