[1] James Thomson is a businessman living in Vancouver and is President of Ichi Canada Ltd. ("Ichi"), his sole source of income during the relevant times. He owns eighty percent (80%) of its shares and his wife owns the remaining twenty percent (20%). Until 1981, Ichi's was a supplier of equipment to the pulp and paper industry. Experiencing a decline in orders in 1981, Ichi, that year, diversified into the horse racing and breeding business. 1982 and 1983 were its start up years for this new business with heavy expenditures for the purchase of horses.
[2] James Thomson and Ichi have had a long running and acrimonious battle with Revenue Canada which stems from Ichi's filing on November 1, 1983, of amended corporate income tax returns for its 1980 and 1981 taxation years seeking to carry-back farm losses from its 1983 taxation year anticipated to generate to Ichi a tax refund of $33,560.26 (the "refund"). As of February 13, 1984, Mr. Thomson owed, in personal income taxes, some $40,000 for his 1982 taxation year.
[3] At that time, he also had with his wife a tax paid shareholder loan account with Ichi, reflecting loans they made to Ichi, which equalled approximately double the amount he then owed personally to Revenue Canada.
[4] What he wanted to accomplish was not complicated. With its refund in hand, Ichi would use it to draw down Mr. Thomson's shareholder loan with the proceeds going to Revenue Canada to pay his personal tax debt for 1982. The mechanism contemplated to accomplish this purpose was an agreement between Ichi and Revenue Canada whereby Ichi's refund would be directly applied by Revenue Canada to offset Mr. Thomson's personal tax balance.
[5] His plan did not materialize. He sued Her Majesty the Queen by filing a statement of claim on December 5, 1997. His claim is in contract and damages for breach.
[6] He and Ichi allege three agreements were entered into with Revenue Canada, namely:
(1) An agreement made, in late 1983 or early 1984, with Mark Rondeau, one of the tax collectors in Revenue Canada's Vancouver office who Mr. Thomson said approved the original plan, that is, the direct application by Revenue Canada of the Ichi refund to Mr. Thomson's personal tax balance (the "Rondeau Agreement"). This agreement was implemented by a March 1, 1984 letter from Ichi to Revenue Canada authorizing Revenue Canada to offset the refund to pay Mr. Thomson's personal outstanding 1982 tax liability. On March 7, 1984, Mr. Rondeau advised Revenue Canada accounting this March 1, 1984 letter was its authorization to do the offset or setoff.
(2) An agreement made on October 6, 1987, between he and Robert Roy, then Director of Revenue Canada's Vancouver office to the effect that, if Ichi were to win its case in the Tax Court of Canada, Revenue Canada would:
i) credit Ichi's refund to Mr. Thomson's personal tax account as Mr. Rondeau had done meaning, in his mind, it would be credited as at March 1, 1984, and not when the refund was received, and from that date forward, all entries in his tax account would be recalculated to recognize that credit would have brought his tax balance to zero and along with his other payment would, in 1987, have obviated the necessity of collapsing his RRSP, his personal tax account being positive when the RRSP was seized and liquidated; and
ii) would compensate him for having collapsed his RRSP (the "Roy Agreement).
(3) An agreement made on March 13, 1989 by Don Cormack, Director of Verifications and Collections in Revenue Canada's Vancouver office with Mr. Thomson, before Ichi accepted a refund cheque of some $46,000 after its Tax Court of Canada victory and after initially refusing that cheque on March 6, 1989, to do an accounting on his personal tax file with Revenue Canada which would recognize previous Revenue Canada agreements made with him, i.e., the Rondeau Agreement and the Roy Agreement (the "Cormack Agreement").
[7] The defendant, based on Mr. Roy's testimony, now admits there was an agreement made between Mr. Roy and Mr. Thomson that, if Ichi was successful in the Tax Court of Canada, Ichi's refund and Mr. Thompson's outstanding personal tax liability would be offset. Mr. Roy, however, denied the offset was to be effected as of March 1, 1984, nor did he recall agreeing to compensate him for the collapse of his RRSP.
[8] The defendant contests the existence of the Rondeau and Cormack Agreements.
[9] Both parties agree six years is the limitation in British Columbia for the bringing of a suit in contract against Her Majesty and in the case of a contract subject to a contingency, time begins to run from the time the contingency comes to pass. Section 39 of the Federal Court Act provides that, except as expressly provided in any other Act, provincial law on limitations, where the cause of action arose, applies to Federal Court proceedings. (See also, section 32 of the Crown Liability and Proceedings Act.)
B. FACTS
[10] Mr. Thomson's claim against Revenue Canada can only be appreciated against the background of certain material facts.
(1) The Palmquist audit
[11] David Palmquist, an auditor with Revenue Canada, advised Mr. Thomson on October 27, 1983, he would be conducting an audit of Ichi for its 1979, 1980 and 1981 taxation years, its fiscal year ending April 30th.
[12] It was in 1981 that Ichi went into the business of racing, boarding and breeding race horses which led it to claim, for the first time, net farm losses from that operation and net losses for the two businesses for income tax purposes when it filed its T2 income tax return (the "T2 return") for its taxation year ended April 30, 1982, which covered both businesses: the equipment business and the horse business.
[13] When Ichi filed, on November 1, 1983, its T2 return for its taxation year ended April 30, 1983, it also claimed net losses for income tax purposes based on a large farm loss in fiscal 1983.
[14] Mr. Palmquist made, early in the audit, requests for information and Ichi, through Mr. Thomson, provided information which related to the farm losses. Mr. Thomson had advised Mr. Palmquist of proposed amendments to Ichi's 1980 and 1981 taxation year returns to carry-back its 1982 and 1983 farm losses. These exchanges led to an indication on January 16, 1984, that the farm losses might be restricted and a preliminary proposal sent by Mr. Palmquist to Ichi on February 1, 1984, to that effect thus having the potential to eliminate Ichi's anticipated refund to be generated out of its requested amendment to its 1980 and 1981 taxation years thus impacting on Ichi's authorization to use its refund to reduce its shareholder loan for the purpose of providing consideration to the offset which would pay off Mr. Thomson's outstanding personal tax debt at that time.
[15] As a result of the Palmquist audit which was completed on May 1, 1984, the Minister reassessed, on August 14, 1984, Ichi for its 1982 and 1983 taxation years. (Ichi's return for fiscal 1983 had been accepted as verified by Revenue Canada on November 28, 1983 and assessed as filed on December 28, 1983). Revenue Canada restricted the deductible farm losses to $5,000 in each year pursuant to subsection 31(1) of the Income Tax Act. The result of the reassessments had two consequences:
(1) Ichi's tax account went from nil to debit of $74,244.34 and
(2) there would be no refund to Ichi in its 1980 and 1981 taxation years to offset or setoff against Mr. Thomson's personal taxes.
[16] Ichi filed Notices of Objection and subsequently appealed the reassessments for its 1982 and 1983 taxation years to the Tax Court of Canada.
[17] Prior to and during the Palmquist audit process, Revenue Canada was taking steps to collect Mr. Thomson's outstanding personal taxes then exclusively related to his 1982 taxation year which, as previously noted, in early February 1984, stood at some $40,000. Mr. H. Doel, who was Mr. Rondeau's supervisor, wrote to Mr. Thomson on February 13, 1984, purportedly confirming an agreement Mr. Thomson would bring in a certified cheque for the balance outstanding on his 1982 taxes. Mr. Doel was not called as a witness by the defendant. I do not take Mr. Doel's letter as proof that Mr. Thomson had made an agreement to pay off his balance but as proof Revenue Canada was engaged in collection efforts for Mr. Thomson's debt. Mr. Rondeau was, at that time, the collector for Mr. Thomson's personal tax debt.
[18] It was on March 1, 1984, Ichi forwarded to Revenue Canada its authorization "to transfer the amount of $33,560.26 owed to Ichi Canada Ltd. for their 1982/83 tax return from Revenue Canada". Ichi's March 1, 1984 letter to Revenue Canada was headed "[Y]our letter of February 13, 1984, regarding James M. Thomson's outstanding 1982 tax arrears" [emphasis mine]. In Ichi's March 1, 1984 letter of authorization Mr. Thomson added "I am sending you this authorization because I do not know when your colleagues will be able to pay Ichi Canada Ltd".
[19] As noted, Mark Rondeau advised Revenue Canada accounting on March 7, 1984, the March 1, 1984 letter constituted for Revenue Canada "our authorization to have the T2 refund transferred to the Co. president's T1 account", i.e., apply Ichi's refund directly to Mr. Thomson's T1 account which meant Ichi would never see a refund cheque, (nor would Mr. Thomson receive a cheque from Ichi on account of the reduction of his shareholder loan) its authorization to be reflected in its Revenue Canada account as a debit and Mr. Thomson's account with Revenue Canada showing a credit of that amount.
(2) Revenue Canada's collection efforts and its collapse of Mr. Thomson's RRSP
[20] Notwithstanding the Notice of Objection and Tax Court appeal, Revenue Canada continued its collection efforts on two fronts: collection of Ichi's new tax arrears arising from the August 1984 reassessments and collection of Mr. Thomson's personal income tax arrears. In 1984, Mark Rondeau continued as collector of Mr. Thomson's personal debt and became responsible for the Ichi debt. In 1986, Mr. Bergen was responsible for both, with Mark Gamache taking on the collection of Mr. Thomson's tax debt in March of 1987. At the time, Mr. Phil McCutchan was Collection Group Head in Vancouver for both corporate and personal income tax collections.
[21] In late April-May 1984, Mr. Rondeau was taking steps to certify Mr. Thomson's personal tax debt in Federal Court. He obtained judgment and registered a lien against Mr. Thomson's personal property, his house, jointly held with his wife.
[22] On June 20, 1984, Mark Rondeau, referencing a June 15, 1984 conversation with him wrote a letter to Mr. Thomson under the heading "1982 Income Tax arrears $34,413.20" enclosing a draft bank letter of guarantee "which the Department will accept as security pending the outcome of your objection or appeal".
[23] On June 25, 1984, the Minister assessed Mr. Thomson for his 1983 taxation year which with arrears interest amounted to $42,573.97. Mr. Thomson did not make any payment on the filing of his 1983 return with the result, at that time, his outstanding tax balance payable to Revenue Canada amounted to close to $77,000, including the non-payment of his outstanding 1982 taxes remaining outstanding due to the non availability of the refund offset.
[24] On December 29, 1984, Mr. Thomson made a payment in the amount of $48,528.51 to reduce his tax arrears. Revenue Canada states, and Mr. Thomson in his testimony agreed, he did not direct this payment towards any particular taxation year and was simply a payment on account. Revenue Canada applied this payment to Mr. Thomson's personal tax arrears by order of its oldest debt (1982) and, through other payments in 1985 and 1986, Mr. Thomson had wiped out his personal tax liability to Revenue Canada for all taxation years up to and including the 1984 taxation year.
[25] However, for Ichi, all taxation years were in play because of the August 1984 reassessment. Also, Ichi could not benefit from the taxpayer dispute legislation which meant it had to pay or secure disputed debts which it had appealed.
[26] It is unnecessary for me to spell out in any detail Revenue Canada's increased collection efforts towards Mr. Thomson and his company during the period between the last half of 1985 through 1986 and the first half of 1987 except to note there were several meetings between Revenue Canada officials and Mr. Thomson, a continuing stream of correspondence between them, 30-day demand letters by Revenue Canada, payment schedules not honoured, partial payments on account made and legal warnings that if arrears were not cleared up collection action would follow.
[27] In March 1987, Mr. Thomson was in arrears for his 1985 taxes. Revenue Canada, on March 19, 1987, released the Federal Court certification on Mr. Thomson's home in order to facilitate placing a mortgage to pay his personal taxes (Exhibit D-41).
[28] In April 1987, both Ichi and Mr. Thomson's personal account at the Royal Bank were garnisheed. Ichi's garnishee was removed on June 6, 1987, after satisfactory arrangements had been made to pay its tax debt.
[29] However, Mr. Thomson was vulnerable for his personal tax debt from his 1985 taxation year and he had no money to pay it nor, he claims, could he borrow it because he was capped out on his credit. On June 9, and June 24, 1987, he spoke to Revenue Canada officers and asked for relief. He wrote, on June 19, 1987, to the Minister of National Revenue requesting that collection action taken against Ichi and himself be suspended until such time as Ichi's appeal to the Tax Court of Canada was heard.
[30] On June 26, 1987, Revenue Canada liquidated Mr. Thomson's RRSP, which had previously been seized in early June, in the amount of $62,991.71 and applied $44,094.20 of that amount to his outstanding tax liability, the stock brokerage firm withholding the rest. His outstanding personal tax liability at the time of the garnishee was $49,065.86.
[31] On August 31, 1987, Elmer MacKay, then Minister of National Revenue, replied to Mr. Thomson's June 19, 1987 letter. The first part of his letter deals with Ichi:
I can appreciate your request to defer payment of both tax liabilities until the appeal is heard, but the Department has a responsibility to administer the Income Tax Act as enacted by Parliament. Prior to the enactment of Bill C-72 in late 1985, subsection 158(1) of the Act required that taxes be paid within 30 days from the date the notice of assessment was issued. This was true regardless of whether or not an objection to or an appeal from an assessment or reassessment was outstanding. However, where convenient, the Department would accept security in lieu of payment, pending a decision of relevant objection or appeal, as provided by Section 220 of the Act. Because Bill C-72 was retroactive only to the first day of January 1985, the liability arising from your reassessment is payable immediately.
A review of the account of Ichi Canada Ltd. confirms that the total liability is excluded from the Amounts in Dispute legislation. A portion of the debt relates to the reassessments under appeal and, on this amount, officials had expressed a willingness to accept of Bank Letter of Guarantee in lieu of payment. The remainder relates to the initial assessment of your 1985 income tax return in August 1985 and collection action would have been deferred on this amount upon submission of a copy of the company's 1987 income tax return, a return which you indicated would show a business loss that could be used to retire the debt. Unfortunately, despite two attempts, to achieve a mutually satisfactory resolution to this matter, the required documentation was never received and legal action became regrettably unavoidable. [emphasis mine]
[32] The Minister, in his August 31, 1987 letter, then addressed Mr. Thomson's personal liability. He wrote:
As your personal tax liability is not under dispute, it too remains payable immediately. I can appreciate that a corporate tax refund was to be offset against this debt but, at this time, such a refund is not available. You were therefore asked to arrange for complete and immediate payment of the balance outstanding. According to officials of the Vancouver District Office, you indicated that personal property was being pledged to obtain the necessary funds so considerable leeway was extended to allow for voluntary payment of the debt. Again, funds were not received and legal action was taken to secure partial payment.
It is always unfortunate when legal action is necessary to secure payment of a tax liability, but your reluctance to co-operate with collection officials and the availability of assets to secure payment suggested the need to proceed with such action. It is, however, regrettable, that this action was taken before the matter could be explained to your satisfaction.
I understand that a personal tax liability of $5,000 remains and I suggest you contact ... to discuss payment of this amount. [emphasis mine]
(3) The October 6, 1987 meeting with Robert Roy
[33] On October 6, 1987, Mr. Thomson met with Robert Roy, then Director of Taxation of the Vancouver District Office. Mr. Phil McCutchan and Mr. Ken Bergen were also present.
[34] Prior to that meeting, Mr. Thomson, on July 10, 1987, had written to Mr. Gamache complaining about the collapse of his RRSP. He referred to Ichi's March 1, 1989 authorization "to collect from the balance at Revenue Canada the sum of $33,560 from that owed to Ichi Canada. This was then accounted for on the statements of Ichi Canada and reflected in the remuneration to J. Thomson".
[35] On July 13, 1987, Revenue Canada was instructed by the Minister's office to hold off its collection efforts until the Minister had an opportunity to respond to Mr. Thomson's letter of June 19, 1987. His instruction came too late. Mr. Thomson's RRSP had been liquidated by that time. However, collection efforts stopped on Ichi's account.
[36] Revenue Canada's collection efforts resumed after the Minister's August 31, 1987 letter was sent. On September 29, 1987, Ken Bergen garnisheed Ichi's Royal Bank account.
[37] As noted, the defendant now concedes Mr. Roy, at the October 6, 1987 meeting, agreed with Mr. Thomson to offset Ichi's refund with Mr. Thomson's personal taxes if Ichi won its appeal in the Tax Court of Canada.
[38] What separates Mr. Thomson and the defendant is when that offset was contemplated to be effective (March 1, 1984 or when available) and whether Mr. Roy had agreed to compensate Mr. Thomson for the loss of his RRSP.
(4) Ichi's success at the Tax Court of Canada and subsequent events
[39] On December 17, 1987, Judge Kempo of the Tax Court of Canada allowed Ichi's appeal from the Minister's reassessment of its 1982 taxation year but dismissed it in respect of its 1983 taxation year because that appeal involved a nil assessment and the Court was without jurisdiction. She ruled the restrictions placed on the farm losses by Revenue Canada were not in accordance with the Income Tax Act.
[40] On April 27, 1988, the Minister appealed to the Federal Court Trial Division Judge Kempo's decision. Tax counsel at Justice agreed with Ichi the Minister would be bound for the 1983 taxation year by the results of the appeal in the 1982 taxation year. Tax counsel suggested a number of techniques Ichi should take to avoid taxation years becoming statute barred.
[41] Mr. Thomson followed tax counsel's suggestion by requesting a loss determination for Ichi's 1983 taxation year and he also requested the application of its net loss for 1983 to be applied to 1980.
[42] After Ichi's Tax Court victory, Mr. Thomson also raised with Mr. Bergen the compensation for his RRSP. Revenue Canada began its process of reassessing Ichi for its 1982 and 1983 taxation years. Meetings took place, Mr. Thomson made information and accounting requests to Revenue Canada.
[43] On July 15, 1988, the Minister reassessed Ichi in respect of its 1982 taxation year. With respect to Ichi's 1983 taxation year, on September 28, 1988, the Minister issued a Notice of Determination of Loss which Ichi objected to on October 4, 1988.
[44] On February 7, 1989, Revenue Canada acknowledged Ichi's request for repayment pursuant to subsection 164(1.1) of the Income Tax Act.
[45] Revenue Canada calculated the refund owing to Ichi as a result of the loss carry-backs from 1982 and 1983 to 1980 and 1981 and in March 1989 issued a refund cheque payable to Ichi in the amount of $46,657.71 (the "cheque"). As at February 7, 1989, $19,486.22 of that amount was taxable interest in Ichi's hands.
[46] On March 7, 1989, Mr. Thomson met with Mr. Bergen who was to hand him the cheque. Mr. Bergen ended up keeping the cheque because Mr. Thomson did not have a cheque in the same amount to turn over to Revenue Canada to pay down Mr. Thomson's tax debt. This outstanding tax debt related to his 1986 and 1987 taxation years.
[47] Mr. Thomson testified that since Mr. Roy, on October 6, 1987, had agreed with him if Ichi was successful in the Tax Court of Canada, he would transfer Ichi's refund to Mr. Thomson's personal tax debt as Mr. Rondeau had agreed an exchange of cheques was not necessary. In other words, the Rondeau Agreement should be performed as it was originally envisaged. The mechanism proposed by Mr. Bergen, that is, an exchange of cheques, a cheque handed to Ichi and a counter cheque issued by Mr. Thomson to Revenue Canada, was not in conformity with his agreement with Mr. Roy.
(5) The March 13, 1989 meeting with Don Cormack
[48] Mr. Thomson had a meeting on March 13, 1989 with Don Cormack at the time he was Chief of Verifications and Collections reporting directly to the Director of Taxation in Vancouver. Mr. Cormack gave Mr. Thomson the cheque. Ichi deposited that cheque in its bank account that same day. Mr. Thomson gave Mr. Cormack no return cheque. Mr. Thomson testified that he asked Mr. Cormack when Mr. Cormack telephoned him to discuss the picking up of the cheque, for an accounting of his personal tax account before he would accept the cheque, meaning in his mind, the performance of the Rondeau Agreement and the entry of the offset in Revenue Canada's accounting as at March 1, 1984, with recalculations of all subsequent entries. As of this day, the cheque remains in Ichi's account and is said by Mr. Thomson to be held in trust for Revenue Canada until his claim in this Court is resolved.
[49] On March 20, 1989, Mr. Thomson wrote to Mr. Cormack acknowledging the receipt of the $46,447.30 cheque and its deposit in Ichi's bank account. He stated in the fourth paragraph of that letter:
Your acknowledgement of the $33,560.26 which was due from Revenue Canada on April 30, 1983 and was due Thomson at the same time to reduce his shareholders loan is the first in a long list to set the record correct. I thank you for this. [emphasis mine]
[50] He enclosed Ichi's journal entry from its 1983 financial statements with respect to that amount.
[51] Mr. Cormack replied on April 4, 1989. He wanted further information to "support an adjustment to your 1984 T1 return". He said he would be sending a Payroll Auditor "to trace the entries through your records in order to show that the $33,560.26 was included in your 1984 T4 supplementary and never received in cash or kind". He also reminded Mr. Thomson he had asked him to submit "the T4 RSP for 1987 that you received as a result of the collapsing of your RRSP in June of that year". He advised that "this amount must be reported as income in 1987 and a credit for tax withheld at source will also be posted". Mr. Cormack also enclosed a statement of account for personal taxes for the years 1983 to 1988.
[52] Mr. Cormack then wrote a memo to J.D.K. McGuire, Chief of Source Deductions in the Vancouver office, referring to the T4 supplementary issued by Ichi to Mr. Thomson for employment income in the amount of $45,000 and his contention (Mr. Thomson's) that, included in the $45,000, was the anticipated refund of $33,506 which never materialized. He asked that an auditor be sent to verify Ichi's books.
[53] After receiving Mr. Cormack's April 4, 1989 letter, Mr. Thomson called Mr. Cormack to advise him he misunderstood his request. The amount of $33,000 related to the shareholder loan reduction in contemplated fulfilment of the Rondeau Agreement. Mr. Cormack then sent two Revenue Canada auditors to review Ichi's books to resolve the issue.
[54] On July 5, 1989, Mr. Cormack wrote to Mr. Thomson to advise of his findings. He referred to the visit by the two auditors and their meeting with Mr. Thomson's accountant. Mr. Cormack concluded:
(1) Mr. & Mrs. Thomson's income had been overstated by $43,000 and to correct this the accountant had understated their income in 1987 in the same amount.
(2) The $33,560.26 was included in Mr. Thomson's income for 1985 but if a downward adjustment occurred that would also decrease the management fee expense claimed by Ichi. He stated both years were statute-barred and reiterated he told Mr. Thomson he would reopen his 1984 and 1985 return "if a completely one-sided error had been made and the income was being taxed unfairly without the benefit of an offsetting deduction". Since there was an offsetting reduction to Ichi he advised he did not propose to reopen the statute-barred returns and no adjustments would be made.
[55] As a result of Mr. Thomson's telephone call to him, Paul Séguin, the new Director of Taxation at the Vancouver office, on July 31, 1989, wrote to him advising that Revenue Canada would not do the retroactive offset he requested. His opening paragraph speaks of Mr. Thomson's telephone call to him on July 21, 1989, "regarding interest charged on your personal income tax liability". The second paragraph of Mr. Séguin's letter reads:
You are of the opinion that interest charged on your personal income tax liability and interest credited to your company should be adjusted to reflect an offset in the amount of a refund claimed by your company which was challenged by Revenue Canada in 1984.
[56] His letter continues:
By letter dated March 1, 1984, your company authorized transfer of an anticipated corporate refund to be offset against your personal income tax liability. However, as explained to you in a letter dated August 31, 1987 from the Minister, this refund was in dispute and not available at that time. This refund became available recently as a result of a decision in favour of your company by the Tax Court of Canada. This decision has been appealed to the Federal Court of Canada by the Minister, however the company's income tax returns have been adjusted as directed by the Court. Should the decision be reversed by the Federal Court of Canada, taxes and interest will again be re-calculated.
Taxes disputed before 1985 were required to be paid and there was no provision for making refunds. It is unfortunate that the anticipated refund was in dispute and excluded from the Amounts in Dispute legislation and therefore was not available to be offset against your personal tax liability until the decision from the Tax Court of Canada became known. Regrettably, we are not able to effect the retroactive offset you request.
Subsequent to the Court decision, I understand the refund with interest was paid out to your company at your direction. Your personal income tax liability including interest remains outstanding and payable. [emphasis mine]
[57] Mr. Cormack, on March 9, 1990, wrote to Mr. Thomson stating in part:
With regard to the $33,560.26 corporate tax refund which you requested be offset against your personal income tax liability effective March 1984, we regret we are unable to effect the retroactive offset. As explained to you in letters from our former Minister, Mr. Elmer MacKay, and our Director, Paul Séguin, the refund claimed was in dispute and not available at that time. Furthermore, when it was refundable, you took the cheque and would not agree to apply the amount to your outstanding personal taxes. [emphasis mine]
[58] On May 18, 1995, Mr. Justice Joyal of the Federal Court Trial Division dismissed the Minister's appeal from Judge Kempo's decision. The Minister did not appeal his decision to the Federal Court of Appeal.
[59] As a result, Revenue Canada reassessed Ichi for its 1980 to 1984 taxation years. Ichi was issued a refund of some $55,000.
C. THE ISSUES
[60] By order dated February 7, 2002, Prothonotary Roger R. Lafrenière made the following order concerning the issues in this case.
[61] First, he severed the issue of liability from the issue of damages. I am to decide only the question of liability.
[62] He enumerated the factual issues related to liability and they are:
(1) Was there an agreement between plaintiffs and Revenue Canada the refund could be applied to James Thomson's income tax account?
(2) If there was an agreement authorizing the setoff, was the setoff available to be applied to Mr. Thomson's personal income tax account as of March 1, 1984?
(3) If the refund was not available on March 1, 1984 to be used to offset Mr. Thomson's personal income tax liability, when was the refund available?
(4) Was there an agreement reached on October 6, 1987, between Mr. Thomson and Mr. Roy on the terms alleged?
(5) If there was an agreement with Mr. Roy, did Revenue Canada breach the agreement?
(6) Was there an agreement reached on or about March 13, 1989 with Mr. D.B. Cormack of Revenue Canada and Mr. Thomson with respect to retroactively crediting of refund against Mr. Thomson's personal income tax liability?
(7) If there was such an accounting agreement, did Revenue Canada breach the agreement?
[63] Prothonotary Lafrenière set out the following legal issues subsumed in the question of liability:
(1) Are the plaintiffs out of time for bringing this action before the Court?
(2) Could Ichi Canada Ltd. at any time assign this refund to Mr. Thomson?
(3) If Ichi Canada Ltd. could not assign its refund to Mr. Thomson, are there any enforceable rights of setoff in law or equity, between the parties?
(4) If the agreements as alleged by the plaintiffs were made, are they enforceable?
D. ANALYSIS
[64] At the heart of the litigation between Mr. Thomson and Revenue Canada is not only whether certain agreements were entered into but, if they were, what was their scope or terms.
[65] This is certainly the case for the Roy Agreement because of his admission Revenue Canada would do the offset if Ichi won its case in the Tax Court of Canada.
[66] In the case of the alleged Rondeau and Cormack Agreements, the question arises whether an agreement was reached at all and, if so, what were their terms.
[67] Professor Fridman in his book The Law of Contract, 4th edition, Carswell at pages 15 through 19, states that agreement is at the basis of any legally enforceable contract. The parties must meet on all essential points - a meeting of the minds - and such agreement must be clearly manifested, expressly or by implication.
[68] What Professor Fridman means is that there must be a communication of the parties' intentions by means of outward expression because keeping it inside - an inward intention - is not sufficient.
[69] One of the gauges of whether the requisite agreement has been established, and here the onus of establishing any one of the three agreements falls to the burden of the plaintiffs, is by the conduct of the parties subsequent to the making of the alleged contracts.
[70] As to the legal test, Professor Fridman states the following at pages 16-17:
Constantly reiterated in the judgments is the idea that the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract. The law is concerned not with the parties' intentions but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other party said or did that is the criterion of agreement; it is whether a reasonable man in the situation of that party would have believed and understood that the other party was consenting to the identical terms. The common law embraced this attitude of objectivity in the determination of contractual relations. However, equitable ideas have infiltrated the law of contract to the extent of permitting a more subjective assessment of the circumstances. In some situations, therefore, the existence of a contract and the nature and content of its terms may be determined by reference to the actual belief and understanding of an individual party rather than by reference to the belief and understanding of a reasonable man hypothetically in the position of such party.
[71] In terms of contract formation and crystallization of essential terms, the evidence from both the plaintiffs and the defendant was by way of testimony of their witnesses called at trial. We are dealing essentially here with alleged oral agreements although, in some cases, that evidence could be weighed against letters, internal memoranda and some notes (Mr. Rondeau's and Mr. Cormack's notes were not available and Mr. Roy did not keep any nor did Mr. Thomson) taken by the defendant's officers and correspondence by Mr. Thomson. The conduct of the parties, both prior or subsequent to the alleged agreements, must be assessed in the context and purpose for their formation is another element against which oral evidence must be tested and weighed in this case.
[72] The plaintiffs called but one witness - James Thomson. The defendant called ten witnesses, some of whom have previously been identified and who, at various times, were involved in the Ichi file or Mr. Thomson's personal tax file. These witnesses were: (1) Robert Roy; (2) Mark Rondeau; (3) Philip W. McCutchan; (4) David Palmquist; (5) Mark Gamache; (6) Kenneth Bergen; (7) Dennis McClure; (8) Donald Cormack; (9) Elizabeth Leong; and (10) Janice Nairn.
[73] I now analyse separately the evidence of the formation and terms of the three alleged agreements.
(1) The Rondeau Agreement
[74] In my view, the evidence is overwhelming that an agreement was reached between Mr. Rondeau and Mr. Thomson that Ichi's anticipated refund to be generated through amendments to Ichi's 1980 and 1981 taxation years would be offset against Mr. Thomson's outstanding 1982 personal tax liability.
[75] Such agreement was beneficial to both parties. Revenue Canada would collect Mr. Thomson's outstanding 1982 taxes at a time when Mr. Thomson was experiencing cash flow problems. Mr. Thomson benefited from the offset which was a means whereby he could pay his outstanding taxes in a tax efficient manner by drawing down, tax free, on the considerable amount of money he had in Ichi by way of the shareholders' loan account.
[76] Ichi made a request to offset on March 1, 1984 and Mark Rondeau accepted that request by instructing Revenue Canada accounting in Surrey, B.C., on March 7, 1992, to do the offset.
[77] The existence of an offset agreement was recognized by several of the defendant's witnesses: Robert Roy, Philip McCutchan, Ken Bergen (who thought the agreement was still in effect), Elizabeth Leong and Janice Nairn. The offset agreement was also recognized by the Minister of National Revenue at the time, Elmer MacKay, when he wrote to Mr. Thomson on August 31, 1987.
[78] However, in my view, the purpose of the Rondeau Agreement was a limited one - to collect and eliminate Mr. Thomson's outstanding 1982 personal tax debt. It was subject to a condition precedent - the existence or availability of the refund itself. If the refund was not generated and was not available, there was no purpose for the agreement because there would be nothing to setoff against.
[79] For this reason, it is not important to determine the precise moment in time when the agreement was formed. The plaintiffs suggest late December 1983 crystallizing in late January 1984 or early February 1984. What is important, is to determine whether the condition precedent to the offset agreement was ever fulfilled.
[80] I do not accept the plaintiffs' submission the refund came into existence or was available in late December 1983 or early February 1984. In my view, the evidence points to the refund never coming into existence because the source of that refund - the acceptance by Revenue Canada of amendments to Ichi's tax returns 1980 and 1981 taxation years never occurred because during that period, Ichi was being audited for those tax years and, in early December 1983, Mr. Palmquist advised his supervisor that Ichi's 1983 T2 should be sent to him "as soon as you have completed the initial assessing action as it appears we will be proposing adjustments to that year" (Exhibit D-38). The non-existence of the refund is further confirmed in the round trip memorandum by Mark Rondeau dated May 17, 1984, to Linda Higgins who replied on May 25, 1984 that the refund would not be forthcoming because of the restrictions placed on Ichi's 1983 farm losses.
[81] Counsel for the plaintiffs argued it was a term of the Rondeau Agreement or could be implied from the agreement itself, when Revenue Canada reassessed Ichi to restrict the 1983 farm losses, the performance of the Rondeau Agreement was suspended pending the final determination of the farm loss issue. Counsel for the plaintiffs submits at paragraph 52 of her written argument that the purpose of the Rondeau Agreement "was to preserve the financial integrity of Mr. Thomson, so that Revenue Canada could not pursue Mr. Thomson personally for the arrears of taxes in view of the agreement". From that point, she argues, rather than waiting for the outcome of the Tax Court of Canada decision, Revenue Canada did the very thing which the Rondeau Agreement "was meant to preserve, that is, it seriously harmed Mr. Thomson's financial integrity by seizing and collapsing the RRSP". Counsel for the plaintiffs further argues the breach of the Rondeau Agreement occurred when Mr. Thomson's RRSP was collapsed in June 1987. Upon this foundation, plaintiffs found their claim for damages for collapsing Mr. Thomson's RRSP.
[82] I do not accept that the evidence, looked at reasonably, establishes it was a term of the agreement or flowed by necessary implication from the agreement itself that the performance of the Rondeau agreement was suspended until the final resolution of the farm loss issue with the consequence Revenue Canada agreed to freeze in time its collection efforts against Mr. Thomson. I reach this conclusion for several reasons.
[83] First, such a term would be contrary to the spirit and the letter of the law since, section 158(1) of the Income Tax Act, at that time, required the taxpayer, within thirty (30) days from the day of mailing of the notice of assessment, to pay to the Receiver General for Canada any part of the assessed tax then remaining unpaid whether or not an objection to or an appeal from the assessment was outstanding. The record indicates Mr. Thomson never put in issue the assessment of his personal taxes. Minister MacKay in his August 31, 1987 letter to Mr. Thomson referred to this provision.
[84] Second, the existence of such a term is inconsistent with Mr. Rondeau's subsequent collection efforts against Mr. Thomson.
[85] Third, the existence of such a term is not consistent with Mr. Thomson's own actions when in 1985 and 1986 he made payments which resulted in his having a tax credit in his personal tax account.
[86] Fourth, such a term would destroy the mutually beneficial purpose of the Rondeau Agreement turning it into a one-sided agreement only in favour of Mr. Thomson because Ichi's tax appeal might have gone against it.
[87] Fifth, such a term would be contrary to the limited purpose of the agreement which was to collect quickly Mr. Thomson's personal tax liability for 1982.
[88] I conclude the Rondeau Agreement was subject to a condition precedent that the refund would be available within a short time in order to perform the offset. When that condition failed to materialize, the Rondeau Agreement died.
(2) The Roy Agreement
[89] The Roy Agreement is acknowledged. If Ichi won its case in the Tax Court of Canada, the offset would be performed. There remains to resolve two other questions. Did Mr. Roy agree the offset would be recorded as at March 1, 1984, giving it a retroactive application and necessitating a recalculation of Mr. Thomson's tax account at Revenue Canada from that time forward? The second question is whether Mr. Roy agreed to compensate Mr. Thomson for the collapse of his RRSP?
[90] It is important, in my view, to place Mr. Roy's agreement in context. The Roy agreement was expressed at the October 6, 1987 meeting which took place very shortly after Mr. MacKay had written to Mr. Thomson on August 31, 1987 (Exhibit D-2) and after Revenue Canada had collapsed his RRSP on June 26, 1987, a fact which Minister MacKay knew of when he responded to Mr. Thomson's complaint.
[91] The purport of Mr. MacKay's letter to Mr. Thomson is to indicate to him three things: (1) because his personal tax liability was not under dispute, that liability remained payable immediately; (2) his appreciation that, a corporate tax refund was to be offset against his personal tax liability but, "at this time, such a refund is not available"; (3) as satisfactory arrangements could not be made legal action was taken to secure partial payment because of "your reluctance to cooperate with collections officials and the availability of assets to secure payment suggested the need to proceed with such action". I take this latter statement by Minister MacKay to suggest to Mr. Thomson the collapse of his RRSP was proper in the circumstances.
[92] The thrust of Robert Roy's testimony was in relation to the October 6, 1987 meeting at which he, Mr. Thomson, Mr. McCutchan and Mr. Bergen were present. My appreciation of Mr. Roy's testimony is that he is a very credible witness. His evidence was clear and forthright and may be summarized in its main points as follows:
(1) On the issue of offsetting the Ichi refund against Mr. Thomson's personal tax liability, he agreed Revenue Canada would do so if Ichi won its case in the Tax Court. In essence, he said this offset had been agreed to by Revenue Canada officials including, by implication, Minister MacKay.
(2) He categorically denied the application of the offset was to be recorded as at March 1, 1984. He testified the offset could not have any element of reach-back and could only be effective when the refund was known, available and issued. He stated there were no means in the Income Tax Act to accomplish a reach-back and he could not recall using the word "retroactive" given his understanding of the Act.
(3) He acknowledged the issue of the collapse of Mr. Thomson's RRSP was discussed at the meeting and said he could not recall making any commitments to compensate Mr. Thomson should Ichi prevail in the Tax Court. He testified compensation would only make sense if the collapse of an RRSP had been improper and, in Mr. Thomson's case, it was not. Revenue Canada had no choice but to attach his RRSP and when payment or security was not forthcoming, to liquidate it, he testified.
(4) He acknowledged the offset agreement was conditional upon a favourable court decision because it was tied to the farm loss issue. He confirmed he had not anticipated an appeal to the Federal Court of Canada by the Minister and agreed one of the conditions to his offset agreement was the ultimate determination of the farm loss issue, whatever level of court.
(5) He confirmed that Ichi's March 1, 1984 letter was sufficient to authorize the offset.
[93] Mr. McCutchan was also present at the October 6, 1987 meeting and I consider his testimony corroborative of Mr. Roy's evidence on the RRSP issue. He testified he had a good recollection of the RRSP issue because he remembers he and Mr. Bergen had to correct their superior, Robert Roy, on a legal point of whether the Income Tax Act permitted a collapsed RRSP to be reinstated.
[94] He recalled what he termed a hypothetical discussion about the circumstances, when and what Revenue Canada might be able to do if an RRSP was wrongfully collapsed. He recalls Mr. Roy answering that an RRSP could be reinstated and Mr. Bergen advising Mr. Roy there were no provisions in the Income Tax Act authorizing the reinstatement of an RRSP. He recalls Mr. Roy asking what could the Department do and he, Mr. McCutchan, advising if an RRSP had been wrongfully collapsed, Revenue Canada would refund the RRSP monies taken with interest because interest is what the legislation provided for. Mr. Roy repeated that statement to Mr. Thomson.
[95] Mr. McCutchan was categorical in denying there was a promise by Mr. Roy to Mr. Thomson to compensate him for the collapse of his RRSP in terms of refunding the RRSP money with interest if Ichi won its case in the Tax Court of Canada.
[96] Mr. Bergen recorded the notes of the October 6, 1987 meeting. His notes all relate to matters or issues connected to Ichi. His notes do not record anything related to Mr. Thomson's personal tax situation: the offset agreement, its reach-back to 1984 and compensation in respect of the RRSP.
[97] The disagreement between Mr. Thomson, Mr. Roy and Mr. McCutchan on this point of whether Mr. Roy had committed to compensate Mr. Thomson for the collapse of his RRSP simply on Ichi's victory in the Tax Court was clearly highlighted when Mr. Thomson taped, on February 26, 2001, a conversation he had with Mr. McCutchan who was unaware the conversation was being taped.
[98] That taped telephone conversation came on the heels of a previous conversation of February 22, 2001, Mr. Thomson had with Mr. McCutchan who was then with the regional office in Calgary - a conversation which Mr. Thomson wanted Mr. McCutchan to confirm by signing a copy of a fax dated February 22, 2001 he [Mr. Thomson] sent to him containing a statement that Mr. Roy said at the October 6, 1987 meeting, he "would compensate me for it [the RRSP] provided the pending TCC decision was favourable to Ichi Canada Ltd.". Mr. McCutchan, at the time of the second conversation, had not signed the confirmatory statement Mr. Thomson wanted.
[99] During the February 26, 2001 taped conversation, Mr. McCutchan clearly denied twice what Mr. Thomson suggested to him and which he [Mr. Thomson] said was his understanding of what occurred at the October 6, 1987 meeting that Mr. Roy had promised to compensate him for the collapse of his RRSP if Ichi won its case in the Tax Court. Mr. McCutchan said Mr. Roy was trying to indicate to Mr. Thomson that compensation for an RRSP was only possible if Revenue Canada collapsed the RRSP inappropriately.
[100] During his direct examination Mr. McCutchan testified the collapse of Mr. Thomson's RRSP was correct according to law, policy and procedure.
[101] He was aware of an offset agreement with Mr. Rondeau and he stated "that was several years ago. But there was never any refund by then at all, so that was now a kind of a moot point... no longer an issue as far as I was concerned" (transcript, page 756). He did acknowledge that in a closely held corporation an individual could direct a corporate refund to apply to the discharge of a personal tax debt and he said that collection officers had the discretion to approve such an agreement. He indicated the refund had to be "pretty quick, and normally with a big refund like that we'd go to audit" (transcript, page 756).
[102] He testified he did not recall any discussion at the October 6, 1987 meeting about the offset.
[103] On the issue of an agreement made to have the offset take effect from March 1, 1984, Mr. Thomson, in his testimony:
(1) acknowledged that Mr. Roy did not use the word retroactive when discussing the offset agreement (transcript page 448);
(2) acknowledged he [Mr. Thomson] did not say to him [Mr. Roy] "if Ichi wins at the Tax Court and gets its refund, it will be applied retroactively to my 1982 tax debt" (transcript page 448);
(3) Mr. Thomson said Mr. Roy understood it would be done as Mr. Rondeau had arranged to do it (transcript page 449); and
(4) to the following question put to him on cross-examination "Okay, so is it fair to say that you assumed that because there was a reference to « [W]e would do the setoff like the collector has said, » that you assumed that it was going to be retroactive? Is that fair to say?" Mr. Thomson answered "Yes, it has to be retroactive";
(5) to the question again put in cross-examination "And do you agree with me that at the meeting of October 6, 1987, there was no discussion about how this setoff was going to take place?; there was no discussion about the mechanics of it", Mr. Thomson answered: "No, it was just a reference to the collector as the collector had arranged and they were Mr. Roy's words".
[104] My conclusion, based on all of the evidence, is that it was no part of Mr. Roy's agreement with Mr. Thomson that the offset would be recorded as at March 1, 1984.
[105] The issue of the retroactive application of the offset was never put on the table by Mr. Thomson in a sufficiently clear manner so as to communicate his intention on this point to Mr. Roy with the result that Mr. Roy's assent was not obtained. There was simply no meeting of the minds on this issue. The words "as the collector [Mark Rondeau] had agreed to do it", on its face, does not connote any element of retroactivity in the sense of backdating the credit of the refund in Mr. Thomson's tax account to a date before the offset was accomplished. Mr. Thomson admitted he did not use the words retroactive and he assumed retroactivity in the words "as the collector had agreed to do it". In my view, there was no aspect of retroactivity to the Rondeau Agreement. The offset would be recorded when performed.
[106] I accept Mr. Roy's testimony there is nothing in the Act allowing retroactivity in recording a refund or payment and no provision of that Act was drawn to my attention to that effect. I also accept his testimony that payments are recorded on the day the department receives the money (transcript of Mr. Roy's deposition, pages 553 and 554) and refunds credited the day they are issued.
[107] There is one additional reason for concluding no retroactivity in effecting the offset. The effect of such retroactivity would treat Mr. Thomson as if the refund had been available in 1984 which it was not and was the basis for not performing the offset. It is implausible officials of Revenue Canada would accept such an arrangement which would do indirectly what was unavailable to do directly, perform the offset.
[108] I have also concluded it was not a term of Mr. Roy's agreement with Mr. Thomson that he would compensate Mr. Thomson for the collapse of his RRSP simply on the basis that Ichi won its case before the Tax Court, that is, regardless of whether Revenue Canada had improperly collapsed it.
[109] In my view, such a term would be contrary to the previously expressed position Revenue Canada had taken that Mr. Thomson's RRSP was properly collapsed, a view confirmed by Minister MacKay to Mr. Thomson on August 31, 1987.
[110] I accept Mr. Roy's evidence, corroborated by that of Mr. McCutchan and indirectly corroborated by Mr. Bergen because nothing is recorded about it in his notes, that Revenue Canada would not, as a matter of policy, agree to compensate the collapse of a person's RRSP unless that collapse was improper, such as no tax debt owing. Mr. Thomson seemed to acknowledge this point being of the view there were no taxes owing by him in 1987. However, he only reaches this conclusion because of his view the refund should have been applied back in March 1984 to wipe out his 1982 outstanding tax liability. He misses the point. The refund was not available to perform the contemplated offset which Ichi had requested and Mr. Rondeau had authorized.
[111] Finally, I mention plaintiffs' exhibit P-1 (plaintiffs' book of documents, tab 89) which is an undated and unnamed Revenue Canada document entitled "History of Ichi Canada Ltd. ... James Thomson and Heidi Thomson". That document contains:
The Minister agreed to comply with the decision [the decision of the Tax Court] with respect to the 1983 taxation year of Ichi. This would allow for the refund of $33,560 to be applied to the tax debt of Mr. Thomson. This application would make the payment from the RRSP unnecessary and the RRSP was to be returned to Mr. Thomson.
[112] Assuming without deciding, this document is admissible under section 30 of the Canada Evidence Act, I give this document no weight because it assumes the retroactive application of the offset which is wrong in law and contrary to the evidence.
(3) The Cormack Agreement
[113] Mr. Thomson refused the cheque from Mr. Bergen on March 6, 1989. It is Mr. Thomson's evidence he then accepted the $46,000 refund cheque from Mr. Cormack because Mr. Cormack had promised to do an accounting of his personal file after having done the offset in accordance with the Rondeau Agreement (transcript page 162). He points to his letter of March 20, 1989 to Mr. Cormack, the penultimate paragraph reading:
Your acknowledgement of the $33,560.26 which was due from Revenue Canada on April 30, 1983 and was due Thomson at the same time to reduce the shareholders loan is the first in a long list to set the record correct. I thank you for this. [emphasis mine]
[114] Earlier on in these reasons, I referred to Mr. Cormack's letter to Mr. Thomson on April 4, 1989, addressing Mr. Thomson's March 20, 1989 letter to him, the internal memoranda and Mr. Cormack's final letter of July 5, 1989. As an aside, Mr. Thomson's information is clearly wrong. The refund was never due to Ichi and April 30, 1983 makes no sense because the amendments to generate the refund were only filed in November of 1983.
[115] Mr. Cormack testified he got involved in the file at the Director's request after the March 6, 1989 meeting when the $46,000 cheque made payable to Ichi was neither turned over to nor accepted by Mr. Thomson. The Director wanted Mr. Cormack to make sure Mr. Thomson, on behalf of Ichi, received the cheque because Revenue Canada had no basis for keeping it. That, he said, was the limited mandate he had.
[116] He had not met Mr. Thomson before the March 13, 1989 meeting and he had spoken to him only a couple of times. Prior to meeting him, he did not review either Ichi's or Mr. Thomson's tax files (transcript, page 1345).
[117] Despite not being able to refresh his memory from his notes nor having a specific recollection of what he said during that meeting with Mr. Thomson, Mr. Cormack:
(1) acknowledged that at the meeting, Mr. Thomson probably raised an issue relating to an accounting of his personal taxes and an issue related to his RRSP collapse because, in his April 4, 1989 letter to Mr. Thomson, he enclosed a statement of account and he asked Mr. Thomson to produce his 1987 RSP - T4 so he could properly be credited with the withholding tax;
(2) he denied the statement contained in Mr. Thomson's March 20, 1989 letter to him that the amount of $33,560.26 was due back in 1983. He testified this amount was the refund which was not owing in terms of any Revenue Canada obligation to pay because it was not available since no reassessment had been issued;
(3) he was certain he did not agree to credit the cheque retroactively because "that's not something we did"; (transcript, page 1373).
(4) counsel for Mr. Thomson put to him the following question: "I suggest to you you agreed to provide an accounting of Mr. Thomson's personal tax liability after crediting the refund, as or about April 30th, 1983, and it would be used to pay off Mr. Thomson's -- and he would pay his outstanding taxes after that credit was done in his personal tax account". Mr. Cormack answered: "No, I would think that probably what happened was that if -- I agreed that if, after my investigation things were as he stated and we credited the amount back to Ichi, it would be -- this was a refund on a loss carry-back. And the refund wouldn't have been credited as at April 30th, 1983. The refund would have been credited as of the date that it was deposited. However, there would be interest adjustments going back" (transcript, page 1373). At transcript page 1375, he reaffirmed his view the refund is credited the day the reassessment is issued;
(5) he denied promising to compensate Mr. Thomson for his RRSP collapse because "compensating or reinstating RRSP was not in my area of authority. It was something that probably couldn't be done, and I wouldn't have promised doing something like that" (transcript, page 1348).
[118] On cross-examination, at transcript, page 532, Mr. Thomson was asked whether he explained to Mr. Cormack by proper accounting "that you meant you wanted the refund applied, or the payment applied retroactively to March 1st, 1984?". Mr. Thomson answered "Yes, he understood the Rondeau agreement. He had seen that authorization Mr. Rondeau had made of March 7th."
[119] On further questioning, Mr. Thomson acknowledged he did not use the word "retroactive" but testified "but I inferred it was retroactive if I said « the Rondeau agreement » ." (Transcript, page 532).
[120] At transcript page 533, Mr. Thomson acknowledged he did not necessarily talk to Mr. Cormack about the $33,000 reducing his shareholder loan.
[121] After appreciating and weighing the evidence before me, I conclude there was no agreement between Mr. Cormack and Mr. Thomson that Mr. Cormack would credit the refund issued in 1989 retroactively to either April 30, 1983, or March 1, 1984, or at any time nor did he agree to compensate Mr. Thomson for his collapsed RRSP.
[122] Again, the difficulty is the thinness of substantiating corroboration to the oral testimony but, what there is favours Mr. Cormack as does the limited purpose and context of why he got involved in the file and what was sought to be achieved on March 13, 1989. For Mr. Cormack, this meeting was not a substantive meeting. It was for the purpose of handing Mr. Thomson Ichi's refund cheque.
[123] The nature of Mr. Cormack's subsequent correspondence with Mr. Thomson is evidence he did not reach any agreement on the terms put forward by Mr. Thomson. His understanding of doing an accounting on Mr. Thomson's personal tax account at Revenue Canada differed from what Mr. Thomson inferred Mr. Cormack was agreeing to. In his April 4, 1989 letter, Mr. Cormack enclosed what he considered the accounting he had agreed to. That was a statement of account. Mr. Thomson's idea of an accounting was far different and not clearly disclosed to Mr. Cormack.
[124] Similarly, Mr. Cormack's request for Mr. Thomson's RSP - T4 does not support the proposition he had agreed to compensate Mr. Thomson for the collapse of his RSP. Rather, the contrary inference is more reasonably drawn, i.e. the RSP collapse is a fact which will not be reversed but Mr. Thomson should get the benefit of any income tax withholding.
[125] Finally, the manner Mr. Cormack tackled the issue of the $33,000 refund does not fit with the notion he agreed to retroactively credit that amount to Mr. Thomson's personal tax account as at March 1, 1984. As I see it, Mr. Cormack had a totally different appreciation of the nature of the problem Mr. Thomson had raised with him and, in the end, he concluded no action was required and no adjustment would be made. Mr. Thomson did not pursue the matter.
[126] Moreover, he testified Revenue Canada did not retroactively credit payments and I accept his testimony.
(5) Remaining issues - breach and bar
[127] The result of my factual findings is that the only agreement which the plaintiffs can rely on in support of their claim is the Roy Agreement which is acknowledged by the defendant. What Mr. Roy agreed to is that if Ichi won its tax case before the Tax Court of Canada, Ichi could offset the refund to pay Mr. Thomson's then outstanding personal tax liability. The Roy Agreement contained no element of reach-back to 1984 meaning the offset would be performed when the refund became available with Mr. Thomson being credited with the refund effective the day the offset occurred. Furthermore, the Roy Agreement contained no term whereby Revenue Canada agreed to compensate Mr. Thomson for the collapse of his RSP if Ichi won its tax case.
[128] What remains to be decided are three issues: (1) when was the refund available to feed into the offset; (2) whether the manner in which the refund was handled by Revenue Canada constituted a breach of the Roy Agreement; and (3) whether the plaintiffs are barred from recovery either because the offset was not permissible under the Income Tax Act at the time or whether the statute of limitations bars their claim.
(i) When was the refund available ?
[129] The Tax Court decided in Ichi's favour on December 17, 1987. Judge Kempo ordered the Minister to reassess Ichi's 1982 tax year without the farm loss restrictions She dismissed Ichi's appeal for its 1983 taxation year because of the nil assessment. However, as noted, the Minister agreed the correctness of his reassessment of Ichi in its 1983 tax year would follow the result of the appeal he was planning to the Federal Court Trial Division in respect of Ichi's 1982 tax year.
[130] Ichi received a cheque from Revenue Canada on March 13, 1989, in the amount of $46,657.71. That cheque was the product of a request by Ichi for repayment of taxes in dispute pursuant to the provisions of section 164(1.1) of the Income Tax Act - a provision which was not law in 1984 when Ichi objected to the August 1984 reassessments on the basis of the farm loss restrictions. The amount of repayment pursuant to section 164(1.1) is calculated on the assessed amount that is in controversy.
[131] The Minister had to treat Ichi's 1982 tax reassessment differently than its 1983 year because the Tax Court had dismissed Ichi's appeal for that year. Ichi had to ask for a loss determination for its 1983 taxation year and object to it which could trigger the application of section 164(1.1).
[132] As noted, the Minister reassessed Ichi for its 1982 tax year in July 1988 and Ichi filed its Notice of Objection to the Minister's Loss Determination for 1983 on October 4, 1988.
[133] I agree with counsel for the defendant, it was only after those dates losses were available to generate loss carry-backs which is the source of the refund. After carrying out the calculations which, in my view, took too much time as Mr. Bergen admitted, the Minister issued the refund cheque on March 2, 1989, which is when it became available to make the offset possible.
(ii) Were Revenue Canada's actions consistent with the Roy Agreement ?
[134] On the second issue, I find the manner in which Revenue Canada handled the refund in March 1989, was not in accordance with the Roy Agreement which contemplated no issuance of cheques but rather, through authorization Ichi had provided, accounting entries would be made by Revenue Canada officials in Ichi's and Mr. Thomson's tax accounts at Revenue Canada, namely, a debit, the refund amount in Ichi's tax account and a credit of that same amount in Mr. Thomson's personal tax account (see, examination for discovery of Ken Bergen, January 18, 2000, questions 865 through 868).
[135] This is the way Mr. Roy envisaged it (transcript of Roy deposition, page 120) and the manner Mr. Thomson contemplated it although with an element of retroactivity to 1984 which I ruled is not the case.
[136] I acknowledge a concern Revenue Canada identified which may have motivated it to exchange cheques (see, Mr. McClure's memorandum of August 30, 1988, Exhibit D-5) Revenue Canada did not want to force an appropriation under sections 15.1 or 15.2 of the Income Tax Act.
[137] That concern, in my view, was not a sufficient justification to unilaterally force on Mr. Thomson a variation of the Roy Agreement. Mr. Thomson had told Revenue Canada Ichi had decreased, in 1985, its shareholder loan on account of the expected refund. Mr. Roy acknowledged if Mr. Thomson had a shareholders' loan payable to him and Ichi was properly recording that amount, no appropriate problem would arise (see, transcript of Roy deposition, page 124).
[138] On discovery, Mr. Bergen admitted he had only found out about Mark Rondeau's direction to Revenue Canada's Surrey Accounting Ichi's letter of March 1, 1984, was the authorization to offset and stated on cross-examination giving him the refund cheque in March 1989 was wrong and Revenue Canada should have transferred it to Mr. Thomson's personal tax debt as at March 6, 1989, as instructed by Ichi's letter (see, transcript of evidence, page 587).
[139] I conclude this point by preferring Mr. Thomson's evidence that there was no agreement by him to accept an exchange of cheques. It is true Ichi received a cheque but it was on condition that an accounting of the offset would take place. All of Mr. Thomson's conduct with Revenue Canada officials points to Mr. Thomson not accepting the cheque which sits, to this day, in Ichi's account with Mr. Thomson's shareholder loan reduced.
(iii) Roy Agreement contrary to the Income Tax Act ?
[140] The defendant raised two legal bars to the plaintiffs' claim in the event of breach: (1) the prohibitions contained in sections 67 and 68 of the Financial Administration Act against the assignment of a "Crown debt" defined in section 66 of that Act to mean "any existing or future debt due or becoming due by the Crown and any other choses in action in respect of which there is a right of recovery enforceable by action against the Crown" as these sections were interpreted by the Supreme Court of Canada in Marzetti v. Marzetti, [1994] 2 S.C.R. 765; and (2) the commencement of the plaintiffs' claim was beyond the limitation period of six years.
[141] Marzetti, supra, involved a priority contest between the Director of Maintenance Enforcement of Alberta (the "Director") who ordered, in December 1988, the payment to him of $250.00 per month to satisfy child and spousal support awards and had filed on February 15, 1990, a garnishee under the Family Orders and Agreements Enforcement Assistance Act, a federal law, instructing the Crown to pay to him all sums payable to Mr. Marzetti under any Act of Parliament and the trustee in bankruptcy appointed following Mr. Marzetti's voluntary assignment in bankruptcy.
[142] The contest was the entitlement to a post-bankruptcy tax refund under circumstances where Mr. Marzetti had on June 7, 1989, instructed the trustee to complete and file his post-bankruptcy income tax return for the year 1989 and in which he "further authorize[d] that any refund resulting from the post-bankruptcy income tax return be mailed to ... as an asset pursuant to section 47 of the Bankruptcy Act for distribution to my creditors" (page 770).
[143] Before the refund was paid, the trustee applied for a declaration the refund was properly payable to the trustee rather than the Director. The Supreme Court of Canada held the letter of authorization was "statutorily incapable of creating an effective assignment" (page 805).
[144] In my opinion, sections 67 and 68 of the Financial Administration Act as interpreted by the Supreme Court of Canada in Marzetti, supra, do not operate to bar the Roy Agreement.
[145] Justice Iacobucci, for the Court, wrote the following at pages 802 and 803 of the reported case:
[84] . . .inasmuch as the Agreement Letter is rendered ineffective by s. 67 of the Financial Administration Act. Section 67 provides, in part, that "[e]xcept as provided in this Act or any other Act of Parliament . . . a Crown debt is not assignable". The expression "Crown debt" is defined in s. 66 to include not only existing debts, but also future debts "due or becoming due". Marzetti did not obtain an accrued legal debt in respect of his post-bankruptcy income tax refund until his income tax return was filed, as I have already mentioned. But his interest in that return can legitimately be described as an interest in a future Crown debt becoming due.
[85] This Crown-debt characterization means that the Financial Administration Act operates to prohibit assignment of an income tax refund, due or becoming due from the Crown, unless assignment is permitted by that Act or another "Act of Parliament". There is no question that the Financial Administration Act fails to permit such assignment, and no express authorization appears in any other federal statute.
[146] The facts of this case are different. The nature of the Roy Agreement was not in the form of an assignment of the Crown's obligation to pay Ichi an income tax refund but rather, once that refund was issued to Ichi, to apply it to the payment of Mr. Thomson's outstanding taxes. Put simply, the offset could only operate when the refund was no longer a Crown debt but had been transformed into the property of Ichi.
[147] The nature of the Roy Agreement is illustrated by what actually occurred. Revenue Canada issued a refund cheque to Ichi on March 2, 1989 and proposed to hand it to Ichi who would cash it and in a separate transaction, Revenue Canada would receive a cheque in exchange or perhaps simply have Mr. Thomson endorse the Ichi cheque over to Revenue Canada (which he refused to do) in payment of his personal taxes. The refund having crystallized into a cheque which Ichi received discharged any debt owing by the Crown to Ichi on account of refund monies owing from the Crown to Ichi. Mr. Roy testified that in his mind, he did not see much difference between a contra-accounting (which is what he and Mr. Thomson intended) and an exchange of cheques (see, transcript of Roy deposition, page 125).
[148] The nature of the Roy Agreement is further illustrated by what Revenue Canada always told Mr. Thomson why the original offset in 1984 was never performed. It was never performed because the refund was not yet available - had not yet crystallized.
[149] Several of Revenue Canada officials testified they were familiar with the type of offset authorization envisaged by the understanding reached between Mr. Rondeau and Mr. Thomson and I infer from their answers they did not think that practice was illegal. For the reasons which I have expressed, I think that Revenue Canada officials were correct on this point.
(iv) The plaintiffs' action beyond the limitation period ?
[150] I now deal with the last issue. The defendant asserts the plaintiffs are out of time to bring this action which was commenced on December 5, 1997. The burden of establishing the plaintiffs commenced this action beyond the limitation period lies with the defendant.
[151] The issue is whether the enforcement of the performance of the Roy Agreement is barred because the action which seeks that enforcement comes too late. Time runs from the accrual of a cause of action and, in contract law, subject to the discovery principle, runs from the time of breach. (See, Mew, The Law of Limitations, Butterworths, 1991 edition, page 133).
[152] Counsel for the defendant, in her written representations at paragraphs 188 to 206, focussed her arguments on when Mr. Thomson knew Revenue Canada was not going to perform the offset retroactively. Since I ruled the Roy Agreement did not contain as a term the offset would be applied retroactively nor did it contain a term that Mr. Thomson would be compensated for the collapse of his RRSP, the limitation period, in relation to those issues, does not arise.
[153] The question remains, however, when did time begin to run on the performance of the offset agreement as originally envisaged by Mark Rondeau and reconfirmed with Mr. Thomson by Mr. Roy. What complicates the issue is that the evidence establishes, after the Tax Court decision, a refund cheque payable to Ichi was handed to Mr. Thomson by Mr. Cormack on March 13, 1989 which Ichi cashed and is said to be holding in trust but without applying it to pay Mr. Thomson's then outstanding taxes after previously, in 1985, reducing the shareholders' loan by an amount of $33,560, the expected refund.
[154] Counsel for the defendant states there is no implication it was the final determination of the Federal Court on Ichi's farm loss issue "that was the pre-condition for the compliance with the Roy Agreement - it was the outcome of the Tax Court".
[155] She points to the steps taken by Revenue Canada and Mr. Thomson to obtain the refund which led to the cheque being turned over on March 13, 1989.
[156] Counsel for the plaintiffs argues it can be implied Mr. Roy's agreement was based upon ultimately winning the farm loss issue and that did not happen until the Minister's decision not to appeal Justice Joyal's decision. However, the basis for her argument is the same as counsel for the defendant - the Roy Agreement contained, as terms, retroactive application and RRSP compensation which is not the case.
[157] Mr. Roy's evidence certainly supports the view performance of his agreement with Mr. Thomson was conditional upon a favourable court decision because the refund was tied to the farm loss issue. I agree with that view and this is why Mr. Bergen, during his examination for discovery, characterized the refund payment of March 13, 1989 as an interim payment (see, examination for discovery of Ken Bergen, January 18, 2000, questions 809 to 813) but he did not tell Mr. Thomson it was an interim refund (examination for discovery, supra, page 821). On this view, the plaintiffs' action was out of time and I so hold.
[158] I am inclined to another view which is that the Roy Agreement was in fact breached when the offset was not performed in March of 1989, as it should have been, and nobody knew about the breach perhaps until the evidence at this trial was completed.
[159] From the defendant's side, the evidence supporting this view is: (1) nobody at Revenue Canada recorded in writing the terms of the Roy Agreement and specifically in the all important collector's notes or elsewhere in the collection docket; (2) the acknowledgment of the Roy Agreement coming only during his deposition at trial; and (3) the admission by Mr. Bergen that if he had known of the Rondeau offset agreement which basically the Roy Agreement confirms, Revenue Canada would not have issued Ichi a cheque in 1989 but would have performed the offset.
[160] From the plaintiffs' side, they were also in the wilderness: (1) Revenue Canada admits it never provided Mr. Thomson with an accurate breakdown of the amount of the cheque; (2) never told Mr. Thomson it was only an interim payment; (3) Mr. Thomson had a misconception of what the Roy Agreement was all about.
[161] On this view, while the breach occurred in March 1989, the breach of the Roy Agreement was not realized by the parties until Mr. Bergen's discovery and during the trial. On this view, applying the discovery principle, the plaintiffs' action was not out of time.
[162] Ultimately, justice requires that the Roy Agreement be performed as originally envisaged, the offset effected when the refund was available, that is, as of March 6, 1989, even though it was an "interim refund".
[163] The plaintiffs are entitled to a declaration that the defendant is obligated to offset as of March 6, 1989, against the taxes owing by Mr. Thomson that day to Revenue Canada, the principal amount of the refund generated from the amendments to Ichi's 1980 and 1981 taxation year on account of the loss carry-overs from its 1982 and 1983 taxation years.
[164] I am not going to order an accounting because that issue relates to damages which I am not to deal with. I simply identify that, in the assessment of damages, the refund cheque held in Ichi's accounts since March 1989 will have to be looked at.
[165] As success is divided, each party is to bear its costs.
"François Lemieux"
J U D G E
OTTAWA, ONTARIO
January 27, 2003
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-2648-97
STYLE OF CAUSE: James Thomson and Ichi Canada Ltd.
v.
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: April 9th, 2002
REASONS FOR JUDGEMENT OF:
THE HONOURABLE MR JUSTICE LEMIEUX
DATED: January 27th, 2003
APPEARANCES:
Ms. Lana Li FOR PLAINTIFF
Linda Bell & Victoria Bryan FOR DEFENDANT
SOLICITORS OF RECORD:
Ms. Lana Li FOR PLAINTIFF
Douglas Symes & Brissenden
Vancouver, B.C.
Morris Rosenberg FOR DEFENDANT
Deputy Attorney General of Canada
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