Thomson v. Canada

Thomson v. Canada
Court (s) Database
Federal Court Decisions
Date
2003-01-27
Neutral citation
2003 FCT 83
File numbers
T-2648-97
Decision Content
Date: 20030127
Docket: T-2648-97
Neutral citation: 2003 FCT 83
BETWEEN:
JAMES THOMSON and ICHI CANADA LTD.
Plaintiffs
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT
LEMIEUX J.:
A. INTRODUCTION
[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 mutua