Newcourt Financial Ltd. v. Canada, 2006 DTC 6627, 2004 FCA 91

Date: 20040305

Docket: A-529-02

Citation: 2004 FCA 91

CORAM:        DÉCARY J.A.

NOËL J.A.

NADON J.A.

BETWEEN:

NEWCOURT FINANCIAL LTD.

Appellant

and

HER MAJESTY THE QUEEN

IN RIGHT OF CANADA

Respondent

Hearing held at Montréal, Quebec, on February 4, 2004.

Judgment rendered at Ottawa, Ontario, on March 5, 2004.

REASONS FOR JUDGMENT:                                                                                         NOËL J.A.

CONCURRED IN BY:                                                                                                 DÉCARY J.A.

                                                                                                                                      NADON J.A.

Date: 20040305

Docket: A-529-02

Citation: 2004 FCA 91

CORAM:        DÉCARY J.A.

NOËL J.A.

NADON J.A.

BETWEEN:

NEWCOURT FINANCIAL LTD.

Appellant

and

HER MAJESTY THE QUEEN

IN RIGHT OF CANADA

Respondent

REASONS FOR JUDGMENT

NOËL J.A.

[1]        This is an appeal by Newcourt Financial Ltd. (the appellant) from a judgment by Martineau J. on September 13, 2002 (Newcourt Financial Ltd. v. The Queen, 2003 DTC 5462), dismissing with costs the appeal it had filed against the earlier decision by Prothonotary Morneau which dismissed its objection to a seizure in execution made by the Crown.

Facts

[2]        The facts underlying the case originate with the failure of Entreprises forestières P.S. Inc. (the tax debtor) to forward to the National Revenue Department the deductions made from salaries paid to its employees for the period from February 1 to October 31, 1999. The payments had to be made under the Income Tax Act (ITA) and the Employment Insurance Act (EIA).

[3]        In order to recover these amounts, as well as the related penalties and interest, the respondent registered a certificate with the Trial Division pursuant to subsection 223(3) of the ITA, setting out the amount of the respondent's tax debt. Such a certificate has the effect of a judgment.

[4]        Based on that judgment, the respondent on March 17, 2000, by a writ of seizure in execution issued 10 days earlier seized from the tax debtor a 1997 Timberjack grapple skidder (the skidder).

[5]        A few weeks later, on March 27, 2000, the appellant registered a prior notice of exercise of its hypothecary rights in the Register of Personal and Movable Real Rights (RPMRR). On April 11, 2000, the tax debtor voluntarily relinquished the property covered by this prior notice, including the skidder.

[6]        On April 13, 2000, the appellant filed in the Trial Division a notice objecting to the seizure by the respondent and claiming the property seized as owner. As the Federal Court Rules, 1998 (the Rules) do not cover the question of seizure in execution, subsections 56(3) and (4) of the Federal Court Act provide that the rules of the province in which the seized property is located, here Quebec, shall be used "as nearly as may be" (Rule 448 is to the same effect).

[7]        The general and specific rules on forced execution of movable property are contained in Chapter IV of the Code of Civil Procedure (C.C.P.) (articles 568 et seq.), and it is those rules, and in particular article 597 C.C.P., which were relied on by the appellant in support of its objection. It argued that it had become owner of the skidder as a result of its debtor's voluntary relinquishment of the property and its taking of the latter in payment.

[8]        The respondent put forward two arguments to counter this objection. First, it argued that the appellant, as the tax debtor's creditor, could not object to the seizure in accordance with article 604 C.C.P. It instead had to be collocated by rank in the distribution of the proceeds of the sale. Further, in the respondent's submission the appellant could not take the skidder in payment and become owner after it had been garnished.

[9]        The respondent also pointed out that even if the appellant had become owner of the skidder, its objection could not be sustained in view of the deemed trust which operated in its favour pursuant to subsections 227(4) and (4.1) of the ITA and subsections 86(2) and (2.1) of the EIA.

[10]      Those provisions read as follows:

Income Tax Act

Employment Insurance Act

[11]      The following provisions of the Civil Code of Quebec (C.C.Q.) and the C.C.P. are also relevant to the outcome of the case:

Civil Code of Quebec

Code of Civil Procedure

[12]      Counsel for the respondent confirmed at the hearing that the skidder had still not been sold and was still subject to the seizure in execution.

Prothonotary's decision

[13]      The prothonotary ruled that the state of the law in Quebec was too uncertain for him to conclude that the appellant was not owner of the skidder and could not as such claim the property seized.

[14]      He nevertheless dismissed the objection on the ground that the skidder was subject to the deemed trust, which in his opinion gave the Crown a better right and allowed it to maintain the seizure despite its owner's objection:

[22]    Reading s. 227(4.1) as a whole, therefore, one has to conclude that in February 1999 the judgment debtor's property, including the property at issue, was deemed to be held for Her Majesty in trust separate and apart from that of the judgment debtor. Further, Her Majesty was deemed at that time to have beneficial ownership in the property regardless of any other security, including a hypothec.

[23]    Finally, it is clear from the beginning of s. 227(4.1) that this provision in favour of Her Majesty applies regardless of any provincial legislation or rule of law. There is thus no need to examine the provisions of the Civil Code of Quebec or any other rule of provincial law which may conflict with s. 227(4.1): that subsection applies notwithstanding any provision of law to the contrary.

Judgment of Martineau J.

[15]      Martineau J. upheld the prothonotary's decision, but only in terms of the applicable civil law:

[27]    To begin with, and with all due respect to the prothonotary, although I agree with the outcome I feel he erred in summarily dismissing application of art. 604 C.C.P.

. . . . .

[29]    In my opinion, this provision limits the hypothecary creditor's rights: when a seizure is made, the latter can no longer take the seized property in payment, but must exercise his rights to the proceeds of sale of the seized property. Interpreting the provisions in any other way would amount to allowing a hypothecary creditor to get around the prohibition of any creditor objecting to seizure or sale of the seized property. Article 604 C.C.P. would thus have no particular effect. Consequently, one has to exclude the possibility of a hypothecary creditor subsequently claiming seized property under art. 597 C.C.P.

. . . . .

[37]    In view of my conclusion on the application of art. 604 C.C.P. in the case at bar, Newcourt's claim based on art. 597 C.C.P. is inadmissible. It is therefore unnecessary to deal with the other arguments made by the parties.

Arguments made against impugned decision

[16]      To begin with, the appellant maintained that it had become owner of the property in question and it was in that capacity rather than as a hypothecary creditor that it objected to the seizure by the Crown. Article 604 C.C.P. would therefore be inapplicable, and Martineau J. erred in law in arriving at the contrary conclusion.

[17]      The appellant also objected that Martineau J. had not ruled on the effect of the deemed trust. In its submission, the taking in payment of the seized property could be set up against the Crown despite the deemed trust and the prothonotary had wrongly ruled that the Crown's right had precedence over its own.

[18]      Assuming the deemed trust could be set up against it, it maintained that subsections 227(4) and (4.1) of the ITA and subsections 86(2) and (2.1) of the EIA are unconstitutional since they legislate in an exclusively provincial area of jurisdiction, namely that of property and civil rights.

Analysis and decision

[19]      For the appellant to be successful, it had to show that both the prothonotary and Martineau J. were wrong in dismissing its objection. I consider that the prothonotary could not dismiss the appellant's objection for the reason he gave. On the other hand, in my view Martineau J. properly concluded that the appellant's objection was inadmissible under the applicable civil law.

[20]      In The Attorney General of Canada v. National Bank of Canada, A-626-02, The Attorney General of Canada v. Caisse populaire d'Amos, A-627-02, The Attorney General of Canada v. Caisse populaire Desjardins de Lebel-sur-Quévillon, A-628-02, and The Attorney General of Canada v. National Bank of Canada, A-629-02, this Court was called on to consider the effect of subsections 227(4.1) of the ITA and 86(2.1) of the EIA. The reasons filed today confirm that those provisions give Her Majesty absolute priority over the proceeds from property subject to a deemed trust.

[21]      The question raised before the prothonotary was of a different order. He had to determine whether the "beneficial right" held by Her Majesty allowed her to maintain the seizure of the skidder against the appellant's objection, and effectively to force its sale by the Court against the latter's wishes. I note that on the assumption made by the prothonotary, the skidder belonged to the appellant under the applicable private law, that law consisting of the rules of the Civil Code of Quebec which must now be regarded as the "ius commune" of Quebec (see Prud'homme v. Prud'homme, [2002] 4 S.C.R. 663, paragraph 28).

[22]      Subsection 227(4.1) of the ITA does not have the effect it was given by the prothonotary. That provision gives Her Majesty absolute priority over the "proceeds thereof" (a non-limiting phrase) subject to the deemed trust and to this end provides that Her Majesty has an ongoing interest in that property so long as it is subject to the trust. Apart from the right conferred on Her Majesty to follow this property and to receive the proceeds thereof in priority, the owner continues to have control of his property.

[23]      In saying this, I do not rule out the possibility that an action could be brought by the Crown if the owner acted to adversely affect Her Majesty's right to receive the proceeds from the property in priority, as for example by destroying it or by diminishing its value. Such an action undoubtedly exists in the common law provinces, relying on the body of English law rules known as "equity", and such an action might exist in Quebec in accordance with its own ius commune. However, nothing of the kind was alleged before the prothonotary, and the Court does not have to decide whether or how such an action could be brought in Quebec.

[24]      I therefore consider that the "beneficial right" relied on by the Crown did not allow the prothonotary to dismiss the appellant's objection. On the assumption made by the prothonotary, the appellant was owner of the skidder under the ius commune of Quebec, and so entitled to claim the property seized. The prothonotary consequently should have ordered that the property seized be released. The Crown's right to obtain the proceeds from the property in priority under subsections 227(4.1) of the ITA and 86(2.1) of the EIA clearly was not thereby altered.

[25]      In view of this conclusion, some of the arguments made by the appellant in support of its constitutional challenge become redundant. Nevertheless, I feel it is worth responding to the gist of the challenge, by repeating what this Court said in St-Hilaire v. Canada (Attorney General), [2001] 4 F.C. 289 (F.C.A.), per Décary J.A. (paragraph 44):

. . . the Parliament of Canada may derogate from the civil law when it legislates on a subject that falls within its jurisdiction.

[26]      In the more special context of the ITA and recovery proceedings contemplated by that Act, this Court said in Marcoux v. Canada (Attorney General), 2001 FCA 92 (F.C.A.), at paragraph 6:

Having said that, the issue as submitted to this Court ultimately only involves a question of statutory construction. Counsel for the appellant conceded, as he did before the trial judge, that the Parliament of Canada has the legislative authority to raise money "by any Mode or System of Taxation" (s. 91(3) of the Constitution Act, 1867, U.K., 30 & 31 Vict., c. 3), that this jurisdiction includes that of recovering the taxes so raised (R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627; Transgas Ltd. v. Mid-Plains Contractors Ltd., [1994] 3 S.C.R. 753; Pembina on the Red Development Corp. v. Triman Industries Ltd., [1991] 6 W.W.R. 481), and that s. 224 is part of the legitimate exercise of that power (Sun Life Assurance Company of Canada v. Canada, [1992] 4 W.W.R. 504). Counsel for the appellant accordingly acknowledged that in exercising this power Parliament is free to disregard or to adopt the exemptions from seizure made pursuant to provincial law (Wainio v. Ontario Teachers' Pension Plan Board, [2000] O.J. No. 1175 (Q.L.), para. 6), so that the only question that arises in the case at bar is whether these exemptions were excluded in respect of seizures made pursuant to s. 224. [My emphasis.]

[27]      I would add that the encroachment of the "beneficial right" on the right of the owner under the applicable ordinary law is very limited: Her Majesty (or more specifically, the Receiver General) is given the right to follow the property, and to be paid in priority from the proceeds resulting from it. It is worth noting in this regard the comments of the Saskatchewan Court of Appeal, dismissing a similar constitutional challenge to subsection 224(1.2) of the ITA, in TransGas Ltd. v. Mid-Plains Contractors Ltd., 93 D.T.C. 5391 (aff. [1994] 3 S.C.R. 753), at 5398:

. . . having already noted that the legislation at issue has been enacted pursuant to a valid federal purpose, we conclude that intrusion by the provision upon provincial jurisdiction is justified. The provision enables the Minister to collect withheld taxes by garnisheeing funds payable to the delinquent employer funds that would not have been available to other creditors if they had been remitted as required by law. In order to ensure the collection of "withheld" tax money, the government has enacted this garnishment provision with the result that it constitutes an integral and essential part of the collection scheme as it is clearly designed to attack the problem of tax deficiencies due to conversion or other types of misappropriation at the source of the deductions.

[28]      This brings us to the judgment of Martineau J. The appellant argued that it had become owner of the skidder on April 16, 2000, that is 20 days after the prior notice was registered, with effect retroactive to March 27, 2000, the date of the registration. Accordingly, on March 17, 2000, the day of the seizure made by the respondent, the appellant was still not owner of the property, even taking into account the retroactive effect of article 2783 C.C.Q.

[29]      Based on these facts, and after referring to article 604 C.C.P., Martineau J. concluded that the appellant could not rely on article 597 C.C.P. in claiming the property. The gist of his reasoning is contained in paragraph 29 of his reasons:

In my opinion, this provision limits the hypothecary creditor's rights: when a seizure is made, the latter can no longer take the seized property in payment, but must exercise his rights to the proceeds of sale of the seized property. Interpreting the provisions in any other way would amount to allowing a hypothecary creditor to get around the prohibition of any creditor objecting to seizure or sale of the seized property. Article 604 C.C.P. would thus have no practical effect. Consequently, one has to exclude the possibility of a hypothecary creditor subsequently claiming seized property under art. 597 C.C.P.

[30]      The appellant is asking the Court to disregard the reasoning of Martineau J., but it was not able to challenge the logic. The inevitable effect of article 604 C.C.P. is to prevent any creditor, including a hypothecary creditor, from objecting to the seizure. Allowing a hypothecary creditor to take in payment property already subject to a seizure would deprive the provision of all its practical effect.

[31]      The appellant argued that the hypothecary creditor's right to take in payment the property subject to his guarantee despite the seizure of the property by a third party is well established by precedent. It cited in support National Trust v. Bureau, [1979] S.C. 241, Dorion v. Lagarde, [1987] R.D.I. 50, Construction Rivard & Lavallée Inc. v. CCEPTA,[1986] R.D.I. 92, Les Produits aluminium P.S. Inc. v. Cardinal, [1992] R.D.I. 518 and Mcguire-Morin v. 1855-5185 Québec Inc., REJB 1998-09062.

[32]      The issue in all these cases, decided before the most recent amendment to article 604 C.C.P. in 1992, was whether a hypothecary creditor could bring the giving in payment action provided for in the old Civil Code of Lower Canada (C.C.L.C.) when property was under seizure. The courts replied in the affirmative, since the consequence of the giving in payment was to confer the ownership title on the creditor retroactive to the day the debtor undertook the debt, that is, in all these cases, before the seizure in execution.

[33]      That was the effect of the giving in payment in article 1040(a) of the C.C.L.C., which was replaced in 1994 by the taking in payment procedure, which made the ownership title retroactive only to the time prior notice of exercise was registered (cf. National Trust Company Ltd. v. Gilles Bureau Ltd., (1979) S.C. 241).

[34]      The interpretation adopted by the trial judge is that discussed by Louis Payette, specialist in securities, in a publication which coincided with the reform of the Civil Code:

This rule applies even to holders of security, more particularly, in the terms of the new Code, "hypothecs" and "prior claims"; these secured creditors whose claims by virtue of article 718 C.C.P. are rendered liquid and exigible following the seizure, have the right to be paid by preference and to contest the status of collocation which would disregard their preferred rights, but they do not have the right, any more than do ordinary creditors, to prevent the seizure. The granting of a security on a particular property does not remove such property from the common pledge of the other creditors, nor does it prevent the other creditors, from seizing it. Seizure of a property by an ordinary creditor may thus have the effect of depriving a hypothecary creditor of the recourse he would have chosen. Thus, for example, a seizure by an ordinary creditor could prevent the hypothecary creditor from taking the property in payment. (Louis Payette, Reform of the Civil Code . . . Claims and Hypothecs . . ., Les Presses de l'Université Laval, 1993, vol. 3, para. 86).

[35]      The appellant argued that this academic opinion had been rejected by the Superior Court in Compagnie d'assurance Vie Manufacturers v. Goyer Inc. R.E.J.B., 1997-02927 (S.C.). In that case, Rayle J. (as she then was) had to consider the validity of the taking in payment of property seized by a third party before judgment. The taking in payment had taken place after the seizure before judgment, but before the third party obtained judgment.

[36]      The Court concluded that the taking in payment was valid since it took place before the third party obtained judgment. According to Rayle J., a seizure before judgment is a conservatory measure which differs from the seizure in execution contemplated by article 604 C.C.P. (paragraph 12). After citing the above passage from Mr. Payette, she said (paragraph 11):

[TRANSLATION]

With respect, the Court does not feel that the foregoing passage applies to solution of this problem. Manufacturers is not, in the case at bar, a hypothecary creditor which should, as Louis Payette indicates, comply with the execution proceedings already initiated by an ordinary creditor following the judgment in its favour. In such a case, the seizure in execution of the property by the ordinary creditor will have the effect of depriving the hypothecary creditor of his right to take in payment the property already seized and subject to public sale. In such a case, the hypothecary creditor will have his debt liquidated as a consequence of the judgment made in favour of the other creditor (art. 718 C.C.P.), and will have the right to be paid in priority or to challenge the statement of collocation that does not protect his debt (articles 604 and 615 C.C.P.). [Emphasis added.]

[37]      Not only does the Court not question the opinion expressed by Mr. Payette, it effectively confirms that, according to Mr. Payette's hypothesis, the hypothecary creditor will be deprived of his right to take the property in payment.

[38]      The appellant did not persuade this Court that Martineau J. was wrong in rejecting its objection to the seizure of the skidder.

[39]      Of his own motion, the trial judge put forward two additional reasons against the appellant's position, without using them as grounds for dismissal since they had not been raised before him. Inter alia, he raised Rule 447 of the Federal Court Rules, which provides:

[40]      In the case at bar, the writ of seizure in execution was necessarily given to the bailiff (or to a competent officer under Rule 2) before March 17, 2000, the date on which the seizure authorized by the writ was carried out. Martineau J. accordingly wondered whether this incumbrance created by the giving of the writ by the bailiff could be set up against the appellant. He implied that it might be (reasons, paragraph 43):

This at least is what can be concluded in light of the judgment in Attorney General of Canada v. Boucher et al. (1979), 28 N.B.R. (2d) and 63 A.P.R. 211 (N.B.Q.B.), which held that the old Rule 2106, worded in a similar form to that contained in Rule 447 of the Rules, allowed execution of a judgment to be prosecuted against the new purchaser of an immovable.

[41]      On the evidence, the incumbrance which results from Rule 447 came into existence before the time at which the appellant became owner of the property, so that under the very language of article 2783 C.C.P., a contrario, the ownership right relied on by the appellant could not be set up against Her Majesty.

[42]      The appellant sought as best it could to avoid the effect of Rule 447 on the seized property. First, it argued that the incumbrance at issue in Rule 447 does not create [TRANSLATION] "a specific incumbrance or security on the property", that is "a kind of real right" (appellant's Memorandum, paragraphs 61 and 65). It based its argument on the word "bound" in the English version, which does not suggest a right [TRANSLATION] "to the property" (appellant's Memorandum, paragraphs 61 to 64).

[43]      In my view, the wording of Rule 447 does not create the ambiguity which the appellant sought to suggest. It is "the property [which] is bound", and it cannot reasonably be suggested that such an incumbrance is not in the nature of a real right.

[44]      The appellant further argued that its right to the seized property came into being at the time of the loan deed, that is before the skidder became subject to the incumbrance created under Rule 447 (appellant's Memorandum, paragraph 66). As we have seen, the taking in payment, unlike the old giving in payment, is not retroactive to the time of the deed creating the security, but to the date of the registration of the prior notice, which in the case at bar is subsequent to the date on which the writ was issued within the meaning of Rule 447.

[45]      Lastly, the appellant sought to distinguish Boucher, referred to by Martineau J. in his reasons (appellant's Memorandum, paragraphs 68 to 71). In this regard, we need only note that although that decision dealt with an immovable seizure, there is no basis for excepting a movable seizure from the proposition for which this case stands.

[46]      Finally, the trial judge felt the need to question the appellant's good faith. At paragraphs 39 and 40 of his reasons, he said:

[39]    First, it should be borne in mind that the property claimed by Newcourt under art. 597 C.C.P. and arts. 2764 and 2783 C.C.Q. was at the time under the control of the guardian designated in the writ of seizure. In this regard, for surrender to be voluntary art. 2764 C.C.Q. requires that before the period indicated in the prior notice expires the person against whom the hypothecary right is exercised should abandon the property to the creditor in order that the creditor may take possession of it or consent in writing to turn it over to the creditor at the agreed time. Article 583 C.C.P. provides that the debtor who is constituted guardian cannot remove or damage the seized property, on pain of contempt of court and damages. Accordingly, how can a seized creditor, without the Court's leave, abandon the seized property to another creditor so that he may take possession of it? How can he in any other way consent under art. 2764 C.C.Q. to hand the seized property over at the agreed time to another creditor, as the written authorization in effect constitutes permission to remove the seized property?

[40]    Further, arts. 6, 7 and 1375 C.C.Q. enshrine the well-settled civil law rule that any person is required to exercise his rights in accordance with the requirements of good faith. In light of the fact that Newcourt was informed that Her Majesty's rights were being exercised, can we say that the Newcourt was in good faith when it requested Forestières to release the seized property? Can this act be seen as an attempt to defeat the application of Her Majesty's rights? Could Newcourt simply register its prior notice in the RPMRR, or should it also have sent a copy to the seizing creditor, namely Her Majesty? Since registration of the prior notice in the RPMRR took place on March 27, 2000, the 20-day deadline specified in art. 2758 C.C.Q. expired on April 16, 2000. In that case, how could Newcourt, in the affidavit of April 13, 2000, provided in support of its objection claim to be owner of the seized property on the latter date?

[47]      The appellant did not see fit to answer these latter questions, except by insisting that it acted [TRANSLATION] "in all good faith" (appellant's Memorandum, paragraph 55). It seems clear to the Court, first, that the appellant could not say that it was owner of the property in the affidavit of April 13, 2000, since it was not owner at the time the affidavit was signed. This representation is not made any more valid by the fact that the appellant subsequently became owner of the property seized with effect retroactive to March 27, 2000. At the time of the oath, the statement was false and that state of facts remained unchanged.

[48]      Further, it seems clear to the Court that the tax debtor, as guardian of the property seized from it by the Crown, had a duty to conserve it and so not to abandon it to the appellant as it did. Most importantly, the appellant should not have urged it to relinquish the property knowing that the debtor was its guardian. In my opinion, the trial judge rightly questioned the appellant's good faith.

[49]      I would dismiss the appeal with costs.

"I concur.

Robert Décary J.A."

"I concur

M. Nadon J.A."

Certified true translation

Suzanne M. Gauthier, C Tr, LLL

                          FEDERAL COURT OF APPEAL

                              SOLICITORS OF RECORD

DOCKET:                                                                   A-529-02

STYLE OF CAUSE:                                                   Newcourt Financial Ltd.

v.

Her Majesty the Queen in Right of Canada

PLACE OF HEARING:                                             Montréal, Quebec

DATE OF HEARING:                                               February 4, 2004

REASONS FOR JUDGMENT BY:                          Noël J.A.

CONCURRED IN BY:                                              Décary J.A.

Nadon J.A.

DATE OF REASONS:                                               March 5, 2004

APPEARANCES:

Paule Lafontaine                                                            FOR THE APPELLANT

Patrick Vézina FOR THE RESPONDENT

Louis L'Heureux

SOLICITORS OF RECORD:

EIDINGER & ASSOCIÉS                                           FOR THE APPELLANT

Montréal, Quebec

Morris Rosenberg                                                          FOR THE RESPONDENT

Deputy Attorney General of Canada

Ottawa, Ontario