La Ronge Lumber & Electric LTD v. Minister of National Revenue, [1985] 2 CTC 2271, 85 DTC 573

Sarchuk, TCJ:—The appeal of La Ronge Lumber & Electric Ltd (La Ronge) relates to an assessment by the Minister of National Revenue of penalty and interest on the appellant’s income tax liability for its 1981 taxation year. It is common ground that the T2 return of the appellant, which was required to be filed with the respondent by October 31, 1981 was not received until June 3, 1983 and that as a result thereof the penalty was levied.

The appellant states that it estimated its tax for year ending April 30, 1981, to be $5,000. On October 3, 1981 it remitted payment to the Minister of National Revenue in the amount of $15,000. At that time La Ronge had outstanding tax arrears relating to previous years and measures were being taken with respect to that indebtedness by Revenue Canada collections officers including a request for some form of security or a bank guarantee.

It is the appellant’s position that at the time the $15,000 payment was made the appellant’s accountant, Mr Garrison, instructed an officer of Revenue Canada to allocate the payment as follows: $10,000 on account of the arrears of tax and $5,000 as an instalment payment with respect to the estimated 1981 taxes. This instruction was alleged to have been given to one of the respondent's officials by way of a telephone call.

The respondent does not dispute that a payment of $15,000 was made on October 3, 1981, but denies that such payment was accompanied by any direction as to appropriation from the appellant (which mailed the cheque) or from its accountant. It is conceded by the respondent that if the appropriation had been made as alleged by the appellant no penalty would have been exigible.

Mr Garrison testified that he had made such a call more or less at the time the cheque was being mailed. He was not certain which official of Revenue Canada he spoke to. His files and working papers did not provide him with any assistance as to the date of this call nor as to the name of the person to whom the alleged instructions were given.

A series of letters were introduced in evidence by the appellant. The first was a letter dated November 4, 1981 from Mr Percy Palmer a Revenue Canada official, to Mr Garrison enclosing a pro forma bank guarantee. This letter makes no mention of the alleged appropriation. On November 16, La Ronge received a demand letter with respect to tax arrears still due and owing. Mr Garrison responded by letter dated November 18, 1981 in the following words:

We have completed the necessary arrangement with the Bank of Montreal, La Ronge, for Guarantees as follows:

Edwin Elton Tubman	— $21,874.22
La Ronge Lumber & Electric Ltd.	— 16,466.76

The latter amount is $7,000.00 more than required. The $15,000.00 payment forwarded in October, 1981 is to be applied as follows: $8,000.00 on Company tax arrears and $7,000.00 to be a deposit on the pending audited return for 1980. [Emphasis added.]

The Court notes that the direction was given in the present tense.

It is not possible to determine whether Mr Garrison’s letter was a response to the November 4 or the November 16 letter or to both. His evidence was that he was annoyed that his oral instructions had not been followed and he stated that his letter was specifically sent to correct this oversight. The letter does not however reflect either this intention (or his annoyance) nor is there any reference therein to the directions alleged to have been given on or about October 3, 1981.

The respondent's position is that there had not been any request or direction by La Ronge prior to Mr Garrison's letter of November 18 and by that time the respondent had exercised its discretion to appropriate the funds to the existing arrears of taxes.

Testimony was adduced from Mr Palmer who at the relevant time was the unit head in the Saskatoon collections office. Precise records are kept by all collectors detailing each and every contact with a taxpayer. The records relating to the appellant’s account (some of which had been made by Palmer himself) were reviewed. They disclosed no communication from Mr Garrison with respect to any appropriation of the $15,000 payment prior to the November 18, 1981 letter. The file did note a subsequent telephone call from Mr Garrison which was received on November 23, 1981.

It is well settled law that “. . . When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment, the right of application [sic] devolves on the creditor. . . .”, Lord Macnaghten in The Mecca, (1897) A.C. 286, 293.

In Andrew Paving & Engineering Ltd v MNR, [1984] CTC 2164 at 2167; 84 DTC 1157 at 1159, the Court stated:

The law of appropriation of payments by a debtor is stated in volume 9 of Halsbury's Laws of England 4th (1974) Ed at 349-50 in these terms:

Where several distinct debts are owing by a debtor to his creditor, the debtor has the right when he makes a payment to appropriate the money to any of the debts that he pleases, and the creditor is bound, if he takes the money, to apply it in the manner directed by the debtor. If the debtor does not make any appropriation at the time when he makes the payment, the right of appropriation devolves on the creditor.

An appropriation by the debtor need not be made in express terms, but must be communicated to the creditor or be capable of being inferred; it may be inferred where the nature of the transaction or the circumstances of the case are such as to show that there was an intention to appropriate.

These comments were cited with approval by the Federal Court in Sol David Frankel v The Queen, [1984] CTC 259; 84 DTC 6220.

The onus is on the appellant to satisfy the Court that there was an appropriation and that such an appropriation was made on or before October 3, 1981, the date of payment. That onus has not been met. Without intending to cast any aspersions on Mr Garrison’s integrity the court finds his evidence to be somewhat imprecise on the key issue. It is not possible for the Court to determine when and to whom the alleged directions were given. Nor is it possible to say, with the degree of certainty necessary, that Mr Garrison made a telephone call relative to the appropriation of the payment prior to November 23, 1981.

On balance the evidence adduced by the appellant falls short of satisfying the onus and accordingly the appeal is dismissed.

Appeal dismissed.