Present: La Forest, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for alberta
Taxation ‑‑ Income tax ‑‑ Goods and Services Tax ‑‑ Garnishment ‑‑ Income tax and GST legislation providing for garnishment enabling Minister of National Revenue to intercept monies owed to tax debtors ‑‑ Whether provisions give Minister priority over creditors who have received general assignment of book debts from tax debtor ‑‑ Meaning of "secured creditor" ‑‑ Income Tax Act, S.C. 1970‑71‑72, c. 63, s. 224(1.2), (1.3) ‑‑ Excise Tax Act, R.S.C., 1985, c. E‑15, s. 317(3) , (4) .
Bankruptcy ‑‑ Priorities ‑‑ General assignments of book debts ‑‑ Income tax and GST legislation providing for garnishment enabling Minister of National Revenue to intercept monies owed to tax debtors ‑‑ Whether provisions give Minister priority over creditors who have received general assignment of book debts from tax debtor.
The first case involved in these appeals arose from a loan made by the respondent Alberta Treasury Branches to a hotel operator which was secured in part by a general assignment of book debts ("GABD"). The hotel operator was in arrears to the Minister of National Revenue ("MNR") for unremitted GST, plus interest and penalties. The MNR served requirements to pay under s. 317(3) of the Excise Tax Act ("ETA ") on all possible debtors of the hotel operator. That section provides for a form of garnishment which enables the MNR in certain circumstances to intercept monies owed to a tax debtor. It applies to a "secured creditor", defined as "a person who has a security interest in the property of another person". After the hotel operator made an assignment under the Bankruptcy Act, the trustee estimated the realization of the assets of the estate would leave a shortfall to Alberta Treasury Branches. The Court of Queen's Bench, in an application to determine priorities, held that the MNR had priority by virtue of the provisions of the ETA . In the second case, an excavation company borrowed money from Alberta Treasury Branches and granted it a GABD. After the company completed certain contract work, the client held holdback funds which were claimed by various creditors of the company, including the MNR, to whom the company was indebted for unremitted employee source deductions, interest and penalties. The MNR served two requirements to pay on the client, under s. 224(1.2) of the Income Tax Act ("ITA"), which provides for a garnishment remedy identical to the one provided for in the ETA . On an application to determine priority to the monies in question, the master decided that Alberta Treasury Branches had priority through its GABD. This decision was upheld on appeal. In the third case, a drilling company borrowed money from the respondent bank which was secured in part by a GABD. The company owed the MNR unremitted GST, interest and penalties. The MNR served requirements to pay under s. 317(3) ETA on the company's trade debtors. Another of its creditors successfully filed a petition under the Bankruptcy Act to have the company declared a bankrupt. In an application to determine priority, the Court of Queen's Bench held that the MNR had priority under the provisions of the ETA . In all three cases the Court of Appeal held that the lending institution had priority over the MNR.
Held (Iacobucci and Major JJ. dissenting): The appeals should be allowed.
Per La Forest, Cory and McLachlin JJ.: The definition of "security interest" is broad enough to include a GABD, and the wording of s. 224(1.2) ITA and s. 317(3) ETA is sufficiently clear and unequivocal to allow a transfer of property in the garnished funds to the MNR and to grant him a priority in circumstances where the balance of the section applies. Moreover, an assignee of a GABD is a "secured creditor" within the meaning of s. 224(1.3) ITA or s. 317(3) ETA because the assignee holds a security interest "in the property of another person". Each assignment of book debts made in these cases provides that it is to be a "continuing collateral security". Further, all the assignments limit liability to the extent of the outstanding indebtedness. Thus, if the loan secured by the GABD was repaid, the lending institution would have no further interest in the assignment. Since the assignment by its terms can be redeemed by payment of the debt, it should not be construed as an absolute assignment. Neither the lending institutions nor the debtor companies by their actions gave any indication that the institutions were the owners of the book debts. The lending institutions made no efforts whatsoever to realize upon the book debts or in any way to act as "owners" of them until the debtor companies were obviously in severe financial difficulty if not bankrupt. Both the wording of the documents and the actions of the parties indicate that they regarded the assignment to be given as collateral security for the indebtedness. So long as the possibility of redemption exists, the GABD remains as collateral security.
When there is neither any doubt as to the meaning of the legislation nor any ambiguity in its application to the facts, then the statutory provision must be applied regardless of its object or purpose. However, the very history of this case with the clear differences of opinion expressed as between the trial judges and the Court of Appeal indicates that for able and experienced legal minds, neither the meaning of the legislation nor its application to the facts is clear. Even if the ambiguity were not apparent, it is significant that in order to determine the clear and plain meaning of the statute it is always appropriate to consider the scheme of the Act, the object of the Act and the intention of Parliament. The Parliamentary intent was to confirm the overriding right of the MNR to collect by garnishment the taxes collected which ought to have been remitted by the debtor company to the MNR. These amounts so collected could be said to belong not to the collecting debtor entities but to the government. In those circumstances the priority granted to the MNR to recover such funds cannot possibly be said to be expropriation without compensation.
The same instrument cannot be both a "security interest" and an "absolute assignment". If an instrument is an absolute assignment, then since it is complete and perfect in itself, there cannot be a residual right remaining with the debtor to recover the assets. Pursuant to the instruments presented in this case the borrower retains the right to redeem the book debts once the debt is paid off. This right of redemption irrefutably demonstrates that the assignment is something less than absolute. A GABD represents a security interest with the legal title being with the lender and the equitable title remaining with the borrower. This conclusion is supported by s. 63 of the Alberta Personal Property Security Act, which stipulates the basis upon which the right of redemption in personal property, including book debts, will be terminated. To conclude that a GABD results in a change of ownership as a result of its absolute nature rather than constituting collateral security for a debt will have serious implications. It could result in a change in the ordering of priorities provided by the Bankruptcy and Insolvency Act , the Companies’ Creditors Arrangement Act and the Canada Business Corporations Act . Further, it could constitute the means by which an unscrupulous debtor company, knowingly or unknowingly abetted by a creditor company, could so order its affairs that many other bona fide creditors could be adversely affected.
Per Major J. (dissenting): A GABD falls within the definition of "security interest" in s. 224(1.3) ITA. The phrase an "assignment . . . of any kind whatever" is broad enough to encompass the absolute assignments of book debts which are at issue in these appeals. The lending institutions, however, do not fall within the definition of "secured creditor" because they do not hold a security interest "in the property of another person". An assignment passes title and therefore property in the book debts is held by the lending institution and not by the tax debtor. The assignments in each of the three cases involved here all contain language which makes it clear that they are immediate and absolute. The fact that the GABD is referred to as "continuing collateral security" in the instruments does not make the GABD anything less than absolute. While the tax debtor retains an equity of redemption upon an assignment of its book debts, here the value of the loans secured by the book debts far exceeds the value of the debts themselves and there is thus no value in the equity of redemption. Further, an absolute assignment of book debts makes those book debts the property of the assignee, and they remain the property of the assignee until the assignor actually exercises his equitable right to redeem. In determining whether the book debts, once assigned, are the "property" of the assignor or of the assignee, the court must interpret the word in its plain and ordinary sense. The plain and ordinary meaning of "property" is legal title and not a contingent future equitable right to reacquire property which one does not presently hold. In the circumstances of these appeals, a strict reading of the taxation statute is appropriate. In the absence of clear and unequivocal language, there is a presumption that proprietary rights are not to be taken away without provision being made for compensation. In the context of these appeals, the interpretation urged by the MNR would have the effect of expropriating property to which the lender is legally entitled under its security agreement with the tax debtor. The plain and ordinary meaning of the statutory words simply does not bear the strained interpretation of property that, absent the security interest, is the property of another person. In addition to offending the principle that extra words should not be read into a section unless absolutely necessary, this proposed reading attempts to read in wording which can be expressly found in another part of the same section. If there is an ambiguity in the meaning of the word "property", then the specific effect of this section warrants a strict resolution of any ambiguity in favour of the respondent lending institutions.
Per Iacobucci J. (dissenting): While the general principles of statutory interpretation outlined by Cory J. were agreed with, the general assignments of book debts in this case were tantamount to an absolute transfer of property, as found by Major J.
Cases Cited
By Cory J.
Referred to: Friesen v. Canada, [1995] 3 S.C.R. 103; Pembina on the Red Development Corp. v. Triman Industries Ltd., [1991] 6 W.W.R. 481; Thermo King Corp. v. Provincial Bank of Canada (1981), 34 O.R. (2d) 369, leave to appeal refused, [1982] 1 S.C.R. xi; Bonavista (Town) v. Atlantic Technologists Ltd. (1994), 117 Nfld. & P.E.I.R. 19; Bank of Montreal v. Baird (1979), 33 C.B.R. (N.S.) 256, leave to appeal refused, [1980] 1 S.C.R. v; R.V. Demmings & Co. v. Caldwell Construction Co. (1955), 4 D.L.R. (2d) 465; R. in Right of B.C. v. F.B.D.B. (1987), 17 B.C.L.R. (2d) 273; Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 27 W.W.R. 38; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061; Canada v. National Bank of Canada, [1993] 2 F.C. 206; TransGas Ltd. v. Mid‑Plains Contractors Ltd. (1993), 101 D.L.R. (4th) 238, aff'd [1994] 3 S.C.R. 753; Berg v. Parker Pacific Equipment Sales, [1991] 1 C.T.C. 442; Lundrigans Ltd. (Receivership) v. Bank of Montreal (1993), 110 Nfld. & P.E.I.R. 91.
By Major J. (dissenting)
Royal Bank of Canada v. R. (1984), 52 C.B.R. (N.S.) 198, aff'd (1986), 60 C.B.R. (N.S.) 125; Lloyds Bank of Canada v. International Warranty Co. (1989), 68 Alta. L.R. (2d) 356, rev'g (1989), 64 Alta. L.R. (2d) 340; Re Lamarre; University of Calgary v. Morrison, [1978] 2 W.W.R. 465; Attorney General of Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479, aff'g (1977), 25 C.B.R. (N.S.) 233; Pembina on the Red Development Corp. v. Triman Industries Ltd., [1991] 6 W.W.R. 481; Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc. (1990), 72 D.L.R. (4th) 405; Royal Bank of Canada v. Saskatchewan Power Corp., [1991] 1 W.W.R. 1, aff'g [1990] 2 W.W.R. 655; Touche Ross Ltd. v. M.N.R. (1990), 71 D.L.R. (4th) 648; Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 27 W.W.R. 38; Lettner v. Pioneer Truck Equipment Ltd. (1964), 47 W.W.R. 343; Toronto‑Dominion Bank v. Minister of National Revenue (1990), 39 F.T.R. 102; Friesen v. Canada, [1995] 3 S.C.R. 103; Johns‑Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46.
Statutes and Regulations Cited
Bankruptcy and Insolvency Act , R.S.C., 1985, c. B‑3 [am. 1992, c. 27] (formerly Bankruptcy Act).
Canada Business Corporations Act , R.S.C., 1985, c. C‑44 .
Companies' Creditors Arrangement Act , R.S.C., 1985, c. C‑36 .
Excise Tax Act , R.S.C., 1985, c. E‑15 , s. 317(3) , (4) [ad. 1990, c. 45, s. 12].
Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 153, 224(1) [rep. & sub. 1980‑81‑82‑83, c. 140, s. 121], (1.2) [ad. 1987, c. 46, s. 66; am. 1990, c. 34, s. 1], (1.3) [ad. 1987, c. 46, s. 66].
Personal Property Security Act, S.A. 1988, c. P‑4.05, ss. 62, 63.
Authors Cited
Black's Law Dictionary, 6th ed. St. Paul, Minn.: West Publishing Co., 1990.
Burgess, Robert. Corporate Finance Law, 2nd ed. London: Sweet & Maxwell, 1992.
Halsbury's Laws of England, vol. 32, 4th ed. London: Butterworths, 1980.
Pearce, Robert A. "Fixed Charges over Book Debts", [1987] J. Bus. L. 18.
APPEALS from a judgment of the Alberta Court of Appeal (1994), 16 Alta. L.R. (3d) 1, 149 A.R. 34, 63 W.A.C. 34, [1994] 4 W.W.R. 685, 24 C.B.R. (3d) 257, 94 D.T.C. 6650, [1995] 1 C.T.C. 75, reversing decisions of Forsyth J. (1992), 5 Alta. L.R. (3d) 141, 134 A.R. 124, [1993] 1 W.W.R. 639, 15 C.B.R. (3d) 143, and MacLeod J. and affirming a decision of Hunt J. (1993), 9 Alta. L.R. (3d) 349, 139 A.R. 295, [1993] 5 W.W.R. 756, [1994] 1 C.T.C. 108, 5 P.P.S.A.C. (2d) 117, concerning priorities. Appeals allowed, Iacobucci and Major JJ. dissenting.
Edward R. Sojonky, Q.C., and Michael J. Lema, for the appellant.
Written submissions only by J. Gary Greenan and Scott Watson, for the respondent Province of Alberta Treasury Branches.
Jeffery D. Vallis and C. Bryce Code, for the respondent the Toronto‑Dominion Bank.
The judgment of La Forest, Cory and McLachlin JJ. was delivered by
I. Cory J. -- At issue on these appeals is whether, on the facts of this case, lending institutions are secured creditors pursuant to the provisions of s. 224 of the Income Tax Act, S.C. 1970‑71‑72, c. 63 (ITA) and s. 317 of the Excise Tax Act , R.S.C., 1985, c. E‑15 (ETA ), which are practically identical in their provisions.
II. The facts giving rise to these appeals and the decisions of the court below have been ably set out in the reasons of Justice Major.
III. Both the ITA and the ETA provide for the collection of funds due to the federal government by way of income tax deductions from the wages of employees and for the remission of monies owing for the Goods and Services Tax (GST). The sections under review provide for the recovery of monies owing from those who are responsible for the collection and remission of income tax deductions and GST collections by way of garnishment. This system of collection and remission of income tax is exceedingly important. For example, in 1987 some 87 per cent of all personal income tax was collected through employer’s deduction and remission.
IV. In the cases under consideration, the company responsible for collection and remission of income tax and GST borrowed money from a lending institution. To secure their indebtedness the debtor companies made a general assignment of book debts (GABD) to the lending institution. If the submissions of the appellant prevail then the Government of Canada will recover the monies which ought to be paid to it by way of employees’ income tax or GST. If the respondents are correct in their position, then the lending institutions will retain the funds which have come into their possession as a result of the GABD. Thus the decision in this case will have a very real significance for both the federal government and lending institutions.
V. In essence, s. 224(1.2) provides a form of garnishment enabling the federal government to intercept monies owed to tax debtors. It is not available for the collection of income tax generally, but is limited to the recovery of funds owing by a person or company which has withheld monies from another person, usually an employee, for income tax purposes pursuant to s. 153 ITA and has failed to remit the withheld amounts to the federal government. A similar garnishment remedy is provided by s. 317(3) ETA . It is applicable in circumstances where a company or an individual has failed to remit GST which was collected as required by the provisions of the ETA .
VI. Major J. has concluded that the Alberta Court of Appeal was correct in finding that an assignee of a GABD is not a “secured creditor”within the meaning of s. 224(1.3) ITA or s. 317(3) ETA because the assignee does not hold a security interest “in the property of another person”. Rather, the assignee is the owner of those book debts. With respect I cannot agree with that conclusion. However I am in complete agreement with these conclusions:
1.The definition of “security interest” is broad enough to include a general assignment of book debts even where that assignment is absolute.
2.The wording of s. 224(1.2) ITA as amended in 1990 is sufficiently clear and non-equivocal to allow a transfer of property in the garnished funds to the Minister of National Revenue (MNR) and to grant him a priority in circumstances where the balance of the section applies.
The Provisions of the GABD Made in These Cases
VII. It would be helpful first to consider the assignment of book debts made in these cases in order to ascertain the apparent intentions of the parties. The two assignments in which the Treasury Branch was the lender provide:
THE PRESENT assignment and transfer shall be a continuing collateral security to Treasury Branches for the payment of all and every present and future indebtedness and liability of the undersigned to Treasury Branches. . . . [Emphasis added.]
To a similar effect, the Toronto Dominion assignment reads in part:
PROVIDED and it is hereby distinctly understood and agreed that these presents are and shall be a continuing collateral security to the Bank for the general balance due at any time by the Assignor to the Bank. . . .
PROVIDED ALWAYS and it is hereby distinctly agreed that these presents are and shall be continuing and collateral security to the present and any future indebtedness of the Assignor to the Bank. . . . [Emphasis added.]
VIII. Further, all the assignments limit liability to the extent of the outstanding indebtedness. Thus, if the loan secured by the GABD was repaid the Bank or Treasury Branch would have no further interest in the assignment. The documents themselves refer to the assignment as being a continuing collateral security for the payment of the indebtedness. The clear intention of the parties is that the assignment is given as security for the payment of a debt and upon payment of the debt the GABD is to be of no force or effect. That is to say the lending institution could not, after payment of the debt, make use of the GABD to realise upon any of the book debts of the assignor. In my view since the assignment by its terms can be redeemed by payment of the debt it cannot or at least should not be construed as an absolute assignment.
IX. Neither the lending institutions nor the debtor companies by their actions gave any indication that the respondents were the owners of the book debts. This is demonstrated by the fact that the lending institutions made no efforts whatsoever to realise upon the book debts or in any way to act as “owners” of them until the debtor companies were obviously in severe financial difficulty if not bankrupt. Only then did the lending institutions seek to realise upon their security. Both the wording of the documents and the actions of the parties indicate that they regarded the assignment to be given as collateral security for the indebtedness. In commercial affairs, it is well known that a GABD is indeed a means of granting collateral security for a debt. In my view, so long as the possibility of redemption exists, the GABD remains as collateral security.
X. In light of this customary commercial understanding of a GABD, it may be helpful to review the legislation to determine if, by its wording, it renders a GABD something other than collateral security for a debt and makes the assignee the owner of the book debts.
Pertinent Provisions of the ITA and the ETA and Their History
XI. As Major J. pointed out, prior to 1987 the provisions of the garnishment remedy in the ITA (s. 224(1)) were almost unanimously interpreted by the courts in such a way that a demand made under the section was ineffective to attach any of the assigned debts. The courts held that by the assignment the tax debtor had transferred all its interest in the accounts to the assignee with the result that there was nothing left for the Minister of National Revenue (MNR) to attach by garnishment.
XII. In an attempt to address these decisions, Parliament amended the ITA in 1987 by adding two new subsections. They provided that the MNR could garnish funds owed by a tax debtor to a “secured creditor” and defined the terms “secured creditor” and “security interest”. As Major J. observed, there was a divergence of opinion in the provincial courts of appeal as to whether the 1987 amendments permitted the MNR to effectively garnish funds in the hands of an assignee of a GABD.
XIII. In order to further clarify the situation and resolve the differences of opinion in the appellate courts, Parliament again amended the ITA with the apparent aim of granting priority to the MNR. It may be helpful to set out s. 224(1.2) ITA as it now appears following the 1990 amendment:
224. . . .
(1.2) Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within 90 days, liable to make a payment
(a) to another person (in this subsection referred to as the “tax debtor”) who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or
(b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor,
the Minister may, by registered letter or by a letter served personally, require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor’s liability under subsection 227(10.1) or a similar provision, and on receipt of that letter by the particular person, the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest. [Emphasis added.]
(1.3) In subsection (1.2),
“secured creditor” means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver‑manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator or any other person performing a similar function;
“security interest” means any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for;
XIV. The question then is how should these sections be interpreted. At the outset it should be remembered that Parliament was responding to the division of opinion in the appellate courts and attempting to make it clear that the MNR could undertake garnishment procedure in those situations where a GABD has been made. The appropriate principles to be considered in interpreting taxation legislation were clearly set out in Friesen v. Canada, [1995] 3 S.C.R. 103, at pp. 112‑14. There the principles were summarized in these words:
C. Principles of Interpretation
The central question on this appeal of whether the appellant is entitled to take advantage of the inventory valuation method in s. 10 of the Act involves a careful examination of the wording of the provisions of the Act and a consideration of the proper interpretation of these sections in the light of the basic structure of the Canadian taxation scheme which is established in the Income Tax Act.
In interpreting sections of the Income Tax Act, the correct approach, as set out by Estey J. in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to apply the plain meaning rule. Estey J. at p. 578 relied on the following passage from E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
The principle that the plain meaning of the relevant sections of the Income Tax Act is to prevail unless the transaction is a sham has recently been affirmed by this Court in Canada v. Antosko, [1994] 2 S.C.R. 312. Iacobucci J., writing for the Court, held at pp. 326‑27 that:
While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at p. 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.
I accept the following comments on the Antosko case in P. W. Hogg and J. E. Magee, Principles of Canadian Income Tax Law (1995), Section 22.3(c) “Strict and purposive interpretation”, at pp. 453‑54:
It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court’s view of the object and purpose of the provision. . . . (The Antosko case) is simply a recognition that “object and purpose” can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision.
XV. Thus, when there is neither any doubt as to the meaning of the legislation nor any ambiguity in its application to the facts then the statutory provision must be applied regardless of its object or purpose. I recognize that agile legal minds could probably find an ambiguity in as simple a request as “close the door please” and most certainly in even the shortest and clearest of the ten commandments. However, the very history of this case with the clear differences of opinion expressed as between the trial judges and the Court of Appeal of Alberta indicates that for able and experienced legal minds, neither the meaning of the legislation nor its application to the facts is clear. It would therefore seem to be appropriate to consider the object and purpose of the legislation. Even if the ambiguity were not apparent, it is significant that in order to determine the clear and plain meaning of the statute it is always appropriate to consider the “scheme of the Act, the object of the Act, and the intention of Parliament”. What then was Parliament’s intention in enacting the 1990 legislation?
The Purpose of the Legislation
XVI. There can be no doubt of the importance of levying taxation. The ITA entrusts to employers the duty of deducting income tax from the wages of employees and remitting it on their behalf. Similarly the ETA imposes on those who provide goods and services to others the duty to collect and remit the GST which is payable. In essence, companies collect taxes which they hold in trust for the government.
XVII. The purpose of the 1987 legislation, which I think is even more appropriately applied to the 1990 legislation, was very clearly and forcefully set forth in Pembina on the Red Development Corp. v. Triman Industries Ltd., [1991] 6 W.W.R. 481 (Man. C.A.). There, at pp. 488‑89, Scott C.J.M. observed:
To determine the dominant characteristic of the legislation, it is important to know the governmental policy behind the section. The tax debtor’s bank is in the best position to know its customer and to structure its business arrangements accordingly. Revenue Canada, on the other hand, does not have the same opportunity to become acquainted with the affairs of the tax debtor or its creditors. It must therefore rely solely on the provisions of the legislation to mandate the employer to remit the employee income tax deductions as required by the [Income Tax] Act, and to establish its collectability in the event of default.
. . .
The purpose of the Act is not only to levy tax, but to collect it. There is a strong public duty on employers to remit; indeed, this is central to the scheme of self‑assessment under the Act.
Further, Lyon J.A., dissenting in the result, stated at pp. 506‑7:
One must always remember that the withholding tax or source deduction to which s. 224 applies is at the heart of the collection procedures for personal income taxation in Canada. Indeed, if one makes a calculation from the statistics reported in “Taxation Statistics, 1987," a publication of Revenue Canada Taxation, catalogue No. RV‑1987, one finds that 87 per cent of all personal income taxes paid in Canada are collected by source deductions. It can thus be seen that Parliament in passing s. 224(1.2) made it as all-encompassing as it is in order to ensure its continued viability. No other system is so crucial to the overall collection procedure adopted by the Crown. Parliament clearly meant to protect this system. Using the employer as a tax collector requires such extra protection in cases such as the one at bar where the employer converts the withheld tax money to its own purposes. Understandably, that conversion cannot be countenanced if the integrity of that system is to be preserved. Parliament, therefore, acting within its constitutional authority, has taken this extraordinary remedy to protect a major collection source.
. . .
In my opinion it was intended by Parliament that anyone who, in the ordinary course of business, made credit arrangements with a tax debtor involving assignments of accounts receivable, did so subject to the overriding right of the Crown to satisfy the primary obligations of the tax debtor to collect and remit taxes withheld from its employees. The words of the statute can mean nothing less. The section is cast in the broadest of possible terms precisely because it was meant to interfere with and interrupt payments under such assignments and divert them to meet this statutory obligation. I do not know what other words Parliament could use to make its overriding intention and claim more clear.
XVIII. These statements can be applied even more forcefully to the 1990 amendments. The Parliamentary intent was to confirm the overriding right of the MNR to collect by garnishment the taxes collected which ought to have been remitted by the debtor company to the MNR.
What is the Nature of a General Assignment of Book Debts?
XIX. Like Major J., I am of the view that a GABD is a form of security for a loan which is always subject to the right of the debtor to redeem. It will be remembered that s. 224(1.3) defines the “security interest” in these words:
“security interest” means any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for;
This definition encompasses the general assignments of book debts which are at issue in these appeals. However, I cannot agree with Major J.’s conclusion that the creditors are not secured creditors. I find it difficult, indeed impossible, to conclude that the same document can be both a security interest and an absolute assignment. The same document cannot, simultaneously, embrace two such conflicting concepts.
XX. Basically, security is something which is given to ensure the repayment of a loan. Black’s Law Dictionary (6th ed. 1990), at p. 1357, gives a clear definition of a “security interest” in these terms:
The term “security interest” means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time, (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money’s worth.
XXI. This definition is consistent with that set out in the ITA. It is in sharp contrast to the definition of the word “absolute” set out in the same source at p. 9 in these terms:
Complete; perfect; final, without any condition or incumbrance; as an absolute bond (simplex obligatio) in distinction from a conditional bond. Unconditional; complete and perfect in itself; without relation to or dependence on other things or persons.
XXII. These definitions are, in my view, correct. If that is the case, then it can be seen that the same instrument cannot be both a “security interest” and an “absolute assignment”. If an instrument is an absolute assignment, then since it is complete and perfect in itself, there cannot be a residual right remaining with the debtor to recover the assets. By definition, a complete and perfect assignment cannot recognize the concept of an equity of redemption. An absolute assignment cannot function as a means of “securing” the payment of a debt since there would be no basis for the debtor to recover that which has been absolutely assigned. An absolute assignment is irrevocable. To say that the same instrument can operate both as an absolute assignment and as a security interest is to simultaneously put forward two incompatible positions. The two conflicting concepts cannot live together in the same document.
Cases Which Have Considered the Nature of a General Assignment of Book Debts
XXIII. Major J. expressed the opinion that it is “well‑established law” that a GABD, such as those in issue, has the effect of transferring all title and ownership in the property assigned so that they can no longer be considered to be the property of the assignor. Yet ordinarily, in the world of commerce, a GABD is considered to be a security interest. As a security interest, it simply cannot transfer all “right, title and ownership in and to the property assigned”. This conclusion has found support in other cases.
XXIV. In Thermo King Corp. v. Provincial Bank of Canada (1981), 34 O.R. (2d) 369 (C.A.), leave to appeal refused, [1982] 1 S.C.R. xi, Wilson J.A. (as she then was) held, for a unanimous court, that a GABD is a security document. In that case she was required to consider an instrument which was very similar if not identical to those presented in these appeals. At p. 381 she concluded:
While these provisions appear on their face to constitute the assignor a trustee for the bank of any payments it receives from its customers and to permit the bank to appropriate them at will, whether or not any debt is then due to the bank by the assignor, this seems to be quite incompatible with the nature of the instrument as a collateral security. [Emphasis in original.]
Similarly, in Bonavista (Town) v. Atlantic Technologists Ltd. (1994), 117 Nfld. & P.E.I.R. 19, Osborn J. considered a GABD. He wrote (at p. 24):
One may ask, if the assignment is absolute to the point of ownership, why does it specifically give to the Bank the power to collect or dispose of the debts. Are not such powers incidents of ownership? Similarly, if the assignment is absolute, what remaining rights reside in the customer that may be “extinguished” if the Bank buys the accounts at a sale?
In my view, the assignment contemplates that it will operate as a security interest. It vests in the Bank title to the debts owed to Atlantic, but such vesting is for the purpose of security; it is not to transfer ownership, as that term is commonly understood . . . . The Bank is a “secured creditor”. The nature of the interest held by the Bank, even if considered to be an absolute assignment, cannot be divorced from the circumstances in which it arose. The commercial reality is that the Bank held a security interest in the property of Atlantic. Atlantic transferred its receivable to the Bank to secure payment of money Atlantic owed to the Bank. Once Atlantic paid off the Bank, it was entitled, not to a reassignment of the debt, but, by the wording of the assignment, “to the cancellation hereof”. The Bank was a secured creditor holding a security interest. [Emphasis added.]
XXV. I agree with the reasoning expressed in these cases. As well, I would note that the Newfoundland Court of Appeal in Bank of Montreal v. Baird (1979), 33 C.B.R. (N.S.) 256, leave to appeal refused, [1980] 1 S.C.R. v, dealt with a GABD as a security interest. Further, the New Brunswick Court of Appeal in R.V. Demmings & Co. v. Caldwell Construction Co. (1955), 4 D.L.R. (2d) 465, found that a bank holding a GABD was a secured creditor, subject to an equity of redemption in the assignor company.
XXVI. I also find support for this conclusion from the reasoning in cases which considered a situation similar to that created by a GABD. These cases arise when a borrower grants to a lending institution a fixed charge or mortgage based upon the borrower’s present and future stock‑in‑trade and inventory but reserves to the borrower the right to make sales of the stock‑in‑trade and inventory in the ordinary course of business.
XXVII. In R. in Right of B.C. v. F.B.D.B. (1987), 17 B.C.L.R. (2d) 273, McLachlin J.A. (as she then was), on behalf of the majority of the Court of Appeal, considered the manner in which courts have dealt with such instruments and in so doing, reached the following conclusions at p. 303:
Generally speaking, the authorities draw a clear distinction between fixed and floating charges, recognizing nothing between and taking the view that any charge which permits dealing in the ordinary course of business must be regarded as floating. . . .
XXVIII. She then went on, at pp. 303‑4, to discuss the conceptual possibility of a fixed charge on stock‑in‑trade coupled with a licence to deal in those goods, a situation analogous to that which the lending institutions claim exists under a GABD. She noted at p. 305:
The generally accepted view . . . is that such a charge should be regarded as floating rather than fixed because it involves no final and irrevocable appropriation of property to the creditor.
She also observed that the English courts have specifically rejected the possibility of an absolute assignment being coupled with a licence to deal (at pp. 305‑6):
. . . this theory was soon rejected by the English courts, as is seen from the comments of Lord Buckley in Evans v. Rival Granite Quarries Ltd., [1910] 2 K.B. 979 at 999 (C.A.):
A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallize into a fixed security. [Emphasis added by McLachlin J.A.]
XXIX. In determining whether a particular charge over book debts is fixed or floating, McLachlin J.A. referred (at p. 307) to R. A. Pearce in “Fixed Charges over Book Debts”, [1987] J. Bus. L. 18, at p. 29:
. . . the essential characteristic for deciding whether a charge of book debts is fixed or floating is whether the book debts can be disposed of free from the charge; if they can, the charge is a floating charge, otherwise it is a fixed charge.
. . .
Modern authorities have accepted the either-or approach to fixed and floating charges upon which the courts settled in the late 19th and early 20th centuries. For example, they accept the conclusion that a fixed charge on book debts is inconsistent with the assignor having the freedom to deal with proceeds in the course of his business: see Siebe Gorman & Co. v. Barclays Bank Ltd., [1979] 2 Lloyd’s Rep. 143 (Ch. D.); Re Armagh Shoes Ltd., [1982] N.I. 59 (Ch. D.); Re Keenan Bros. Ltd. (1985), 5 I.L.R.M. 641 (S.C.). In Great Lakes Petroleum Co. v. Border Cities Oil Ltd., [1934] O.R. 244, [1934] 2 D.L.R. 743 (C.A.), an assignment of book accounts which permitted the debtor to continue to “collect, get in, and deal with said debts, accounts, claims, moneys, and choses in action in the ordinary course of the business” was held to be a floating charge. The same result obtained in R. v. Lega Fabricating Ltd. (1980), 22 B.C.L.R. 145 (S.C.).
She indicated that the sole exception to this rule appeared to be the case of Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 27 W.W.R. 38 (B.C.C.A.), cited by Major J. in his reasons. Significantly she went on to observe at p. 307:
Why did the courts reject the concept of a fixed charge with a licence to deal? In doing so, they undeniably limited the freedom of debtor and creditor to contract as they might choose in an age when freedom of contract was paramount. The answer, it may be suggested, lies in the effects which recognition of such a concept would have upon the rights of third parties and general commercial activity, as well as the perceived injustice of allowing the debtor to trade freely while remaining immune from the normal incidents of legal process. As Fletcher-Moulton L.J. put it in Evans v. Rival Granite Quarries Ltd., supra (p. 995):
The results of such a contention are astonishing; it means that by giving such a debenture a company retains the full right of trading with untied hands and at the same time obtains immunity from the operation of all processes of law. I should be slow to come to the conclusion that such an anomaly was recognized by the law. Nor do I think that it is. A consideration of the effect of floating charges and of the fact that the freedom of the company to carry on its business is not based on special words creating that freedom, but on the nature of the charge itself, leads me to the conclusion that the right of the company to carry on its business as it wills pending the enforcement of the security must mean that it may carry it on in accordance with law, including a liability to the processes of the law if it does not pay its debts.
Finally, at p. 309, McLachlin J.A. concluded:
In general, the courts have been unwilling to characterize charges which permit the debtor to deal with his property in the ordinary course of business as fixed charges with licenses to sell. Rather, the courts have characterized such charges as floating, with the result that they give the chargeholder no priority over third parties prior to crystallization. . . . In short, the answer to the question of whether the courts have recognized a fixed charge subject to a licence to sell in the ordinary course of business is no . . . .
The Significance of the Equity of Redemption
XXX. For the resolution of these appeals, it is essential that there be a clear recognition of the fundamental difference between an absolute and a conditional assignment of book debts. In an absolute assignment, all interests are transferred and no property remains in the hands of the assignor. It is, simply, a sale of the book debts of the company. This is the basis of the business of factoring. Factoring is described in R. Burgess, Corporate Finance Law (2nd ed. 1992), at p. 100, in this manner:
“Factoring is a legal relationship between a financial institution (the factor) and a business concern (the client) selling goods or providing services to trade customers (the customers) whereby the factor purchases the client’s book debts either with or without recourse to the client and administers the client’s sales ledger.”
From this definition it is apparent that factoring arrangements involve:
(1) the purchase of the client’s book debts;
(2)the taking over and administration of the client’s sales ledger and credit control functions; and
(3)the provision to the client of finance which will be a specified percentage of the nominal value of the debts.
The author goes on (at p. 101) to consider the requirements for an assignment of book debts under English law and observes that to be effective the assignment must be absolute. The text defines “absolute”, in these terms:
The ordinary legal meaning of “absolute” is unconditional, so, for an assignment to be absolute, it must not be conditional in any way; specifically, it must not purport to be by way of charge only.
XXXI. A factoring of accounts receivable is based upon an absolute assignment of them. It is in effect a sale by a company of its accounts receivable at a discounted value to the factoring company for immediate consideration. In my view, s. 224 ITA does protect those engaged in the factoring business and those lending institutions that have succeeded in perfecting their security interest prior to any intervention by the MNR. However, I cannot accept the submission that Parliament, by this section, intended to create an interest which was both conditional as a security interest and at the same time unconditional as an absolute assignment. There cannot have been an intent to combine such incompatible concepts.
XXXII. Clearly a GABD does not meet the standard required for a factoring arrangement which requires an absolute transfer of the proprietary interest of the assignor in the book debts. Pursuant to the instruments presented in this case the borrower retains the right to redeem the book debts once the debt is paid off. This right of redemption irrefutably demonstrates that the assignment is something less than absolute.
XXXIII. I agree with the MNR that what the actual equity of the borrower in the book debts may be from time to time is irrelevant for the purpose of determining the legal effect of the equity of redemption. It would be absurd if a company were to fluctuate between having title and not having title to their book debts based on their ratio of debt to assets. This is particularly true of a company engaged in a seasonal business. Yet if a GABD is treated as an absolute assignment, this can be the only result, as the bank is limited to recovering the amount of the loan. Since the bank could not recover any book debts if the company had a surplus in their account, the book debts would belong to the company. When there was a deficit, some or all of the book debts would belong to the bank. Such a fluctuating state of affairs is inconsistent with the certainty required in commercial matters. I believe that the correct view is that a GABD represents a security interest with the legal title being with the lender and the equitable title remaining with the borrower. This is supported both by the jurisprudence and by the wording of the section.
XXXIV. This Court, in Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061, interpreted “property of a bankrupt” in what is now s. 67 of the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B‑3 , as including property subject to a security interest, even when the legal title to the property is transferred to the security holder. This indicates that the concept of “property” is not so narrow as to encompass only legal title. It would be inconsistent to hold in this case that a transfer of legal title by means of a GABD is an absolute transfer when it has already been held in another that an equity of redemption is a property interest which remains with the borrower.
XXXV. The recent case of Canada v. National Bank of Canada, [1993] 2 F.C. 206, applied Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), supra, to provide an appropriate answer to the question as to whether or not a borrower under a GABD retains a property interest in the book debts. Rothstein J. held (at pp. 224‑25):
Based on the reasoning of Houlden J. in Re Broydon Printers, supra, as approved by Lamer J. in Federal Business Development Bank, supra, the right of redemption of the book debts, in my view, comes within the definition of “property” in the Bankruptcy Act. As such, the reasoning of Lamer J. in Federal Business Development Bank would apply and the book debts would constitute “property of the bankrupt” for purposes of subsection 107(1) of the Bankruptcy Act.
In summary, an assignment cannot be both absolute and yet leave an equity of redemption in the form of the right to redeem with the assignor. The retention of an equity of redemption is consistent with a security interest and not with an absolute assignment. A GABD simply cannot constitute an absolute transfer of property.
XXXVI. This conclusion is supported by s. 63 of the Alberta Personal Property Security Act, S.A. 1988, c. P‑4.05, which stipulates the basis upon which the right of redemption in personal property, including book debts, will be terminated. There must be either a disposition of the collateral by the secured party or an irrevocable election made by the secured party creditor under s. 62 of the Act to take the collateral. In the absence of these events, the debtor has certain rights under the section to redeem the collateral. The facts presented on these appeals do not disclose whether the lending institutions prior to receiving notice from the MNR, sold or transferred the book debts, or met the requisite conditions in order to be deemed irrevocably to have taken the collateral. If they did not, it would appear that the debtor companies still retained a right of redemption under the statute.
XXXVII. I would further add that to conclude that a GABD results in a change of ownership as a result of its absolute nature rather than constituting collateral security for a debt will have serious implications. It could, for example, result in a change in the ordering of priorities provided by the Bankruptcy and Insolvency Act , the Companies’ Creditors Arrangement Act , R.S.C., 1985, c. C‑36 , and the Canada Business Corporations Act , R.S.C., 1985, c. C‑44 . Further, it could constitute the means by which an unscrupulous debtor company, knowingly or unknowingly abetted by a creditor company, could so order its affairs that many other bona fide creditors could be adversely affected.
Summary
XXXVIII. In Friesen, supra, it was held that the words of the Income Tax Act should be given their plain and ordinary meaning in accordance with the structure and purpose of the Act. It is clear that in enacting the sections of the ITA and ETA under consideration Parliament was attempting to ensure the priority of the claim of the MNR over that of other creditors. The primary task of collecting and remitting taxes and contributions under both Acts rests with those who are employers and those who sell goods and services. These amounts so collected could be said to belong not to the collecting debtor entities but to the government. In a sense the funds collected but not remitted might be considered to be held in a form of trust since the entities that have collected these funds are not in any circumstances entitled to retain them. Rather, they must remit the funds. In those circumstances the priority granted to the MNR to recover such funds cannot possibly be said to be expropriation without compensation.
XXXIX. In an effort to ensure the recovery of these amounts collected for the MNR, Parliament has endeavoured to ensure the priority of the claims of the MNR to these funds over other creditors. The majority of the courts that have considered this issue since the 1990 amendment have concluded that Parliament has succeeded in achieving this aim: see: TransGas Ltd. v. Mid-Plains Contractors Ltd. (1993), 101 D.L.R. (4th) 238 (Sask. C.A.), aff’d [1994] 3 S.C.R. 753; Berg v. Parker Pacific Equipment Sales, [1991] 1 C.T.C. 442 (B.C.S.C.); Lundrigans Ltd. (Receivership) v. Bank of Montreal (1993), 110 Nfld. & P.E.I.R. 91 (Nfld. T.D.); Bonavista (Town) v. Atlantic Technologists Ltd., supra, as well as two of the trial decisions in this case on appeal.
XL. I am in agreement with Major J. that a GABD is a security interest and as well that “secured creditor” excludes those individuals who own property absolutely. However I cannot agree that a GABD constitutes an absolute assignment so that the assignee becomes the owner of the book debts. The two concepts in the same instrument are incompatible and an impossible contradiction. Quite simply, a GABD cannot be an absolute assignment since by its very nature it is a security interest.
XLI. In drafting the language of the sections it must be assumed that Parliament sought carefully to achieve its purpose, and that it did not intend to create an absurdity or a redundancy. My position can be summarized in this manner:
(i) The definitions of a “security interest” and a “secured creditor” cannot be contradictory. Parliament cannot have intended to create definitions which overlap and contradict each other with the result that the same instrument can, at the same time, be both a “security interest” and not a “security interest”. This is not to say that all assignments are “security interests”. Rather it is simply that an instrument, once having been defined as a “security interest”, cannot also be an absolute assignment. By definition, an absolute assignment cannot be a “security interest”.
(ii) GABDs are “security interests” and not absolute assignments because they:
(a) meet the definition of “security interests” as set out in s. 224(1.3) ITA;
(b) are defined as collateral security on their face;
(c) are treated as security for a loan on the part of the parties involved;
(d) have been defined by this Court as including an equity of redemption, and thus provide a property interest for the borrower. As a result they cannot be absolute;
(e) cannot be simultaneously a security interest and an absolute assignment;
(f) to recognize GABDs as absolute assignments would frustrate the purpose of several other statutes.
(iii) “secured creditor” is meant to exclude absolute owners. By definition, one cannot be a secured creditor and at the same time an owner of the security. An absolute assignee would be an owner of the book debts as is, for example, a factor. Parliament by this section has excluded those financial institutions engaged in factoring from the operation of the section, together with those financial institutions who have perfected their security interest by assuming ownership. There is no intention manifested by the 1990 amendment to accord any priority to holders of GABDs.
Disposition
XLII. I would allow the appeals, set aside the order of the Court of Appeal and confirm the priority of the MNR, and direct that the MNR recover in all three cases in the manner directed by the trial judge in The Queen v. Toronto‑Dominion Bank. The MNR should have his costs throughout.
The following are the reasons delivered by
I. Iacobucci J. (dissenting) -- While I agree with the general principles of statutory interpretation outlined by my colleague Justice Cory, I agree with Justice Major that the general assignments of book debts in this case were tantamount to an absolute transfer of property. Accordingly, I would dispose of the appeals in the manner proposed by Major J.
The following are the reasons delivered by
Major J. (dissenting) --
I. Introduction
II. These are appeals from a decision of the Court of Appeal of Alberta involving three cases. In all cases Her Majesty in Right of Canada as represented by the Minister of National Revenue (the "MNR") is a party. Alberta Treasury Branches is a party in two of the cases and the Toronto-Dominion Bank is the other party. Each appeal involves a priorities contest between the MNR's garnishee summons, and a general assignment of book debts ("GABD") to the lending institutions.
III. Section 224(1.2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended in 1990, S.C. 1990, c. 34, s. 1, provides a form of garnishment which enables the MNR in certain circumstances to intercept monies owed to tax debtors. This form of garnishment is not available for the collection of income tax debts generally. It is limited to the collection of amounts owing by a person who has withheld, or should have withheld, monies from another under s. 153 of the Income Tax Act and who has failed to remit the withheld amounts. An identical garnishment remedy, provided by the Excise Tax Act , R.S.C. 1985, c. E-15, s. 317(3) , applies where a person has failed to remit GST which was, or ought to have been, collected from other persons.
IV. The issue in these appeals is whether the sections apply to give the MNR a priority over creditors who have received an absolute assignment of book debts from the tax debtor. The resolution of the appeals turns on the definition of "secured creditor", which requires the holding of a security interest in the "property of another person".
V. In my opinion, the sections do not grant the MNR a priority over a creditor who holds an assignment of book debts. As a matter of law, such a creditor owns the book debts in question and thus cannot be said to have a security interest in the property of another person.
VI. This result is dictated by the common law as well as basic principles of the interpretation of the Income Tax Act. The wording of the sections is simply not sufficiently clear and unambiguous to authorize the expropriation, without compensation, of a proprietary interest from the innocent holder of the assignment of the book debts.
II. Facts
VII. The first case arose in 1987 from a loan made by the respondent, Alberta Treasury Branches, to Country Inns Inc., an Alberta hotel operator. The borrowed money was secured in part by a general assignment of book debts. Country Inns Inc. was in arrears to the appellant MNR for $33,312.67 in unremitted GST, plus interest and penalties. Zurich Canada owed Country Inns Inc. $15,000 while Zurich Insurance Company was alleged to owe $95,000.
VIII. In June 1992, the MNR served requirements to pay under s. 317(3) of the Excise Tax Act on Zurich Canada and Zurich Insurance Company, and all other possible debtors. After Country Inns Inc. made an assignment under the Bankruptcy Act, R.S.C., 1985, c. B-3 , the trustee estimated the realization of the assets of the estate would leave a shortfall to the respondent Alberta Treasury Branches, which was owed in excess of $6,000,000. Forsyth J. of the Court of Queen's Bench, in an application to determine priorities, held that the MNR had priority by virtue of the provisions of the Excise Tax Act : (1992), 5 Alta. L.R. (3d) 141.
IX. In the second case, Pigott Project Management Ltd. contracted with Land-Rock Resources Ltd. for excavation work on the Old Man River Dam spillway. In 1989, Land-Rock borrowed monies from the respondent Alberta Treasury Branches and granted it a general assignment of book debts. After Land-Rock completed the contract work, Pigott held $161,821.77 in contract holdback funds. These funds were claimed by various creditors of Land-Rock, including the appellant MNR, to whom Land-Rock was indebted for unremitted employee source deductions, interests and penalties.
X. In 1991, the MNR served two requirements to pay on Pigott, under s. 224(1.2) of the Income Tax Act, for almost $600,000. On an application to determine priority to the monies in question, Master Waller of the Court of Queen's Bench decided the respondent Alberta Treasury Branches had priority through its general assignment of book debts. An appeal to Hunt J. was dismissed: (1993), 9 Alta. L.R. (3d) 349.
XI. In the third case, Bodor Drilling Ltd. operated a drilling company which borrowed monies from the respondent Toronto-Dominion Bank. The borrowed money was secured in part by a general assignment of book debts. Bodor owed the appellant MNR $83,325.19, in unremitted GST, interest and penalties.
XII. In March 1992, the MNR served requirements to pay under s. 317(3) of the Excise Tax Act on the trade debtors of Bodor. Another of Bodor's creditors successfully filed a petition under the Bankruptcy Act to have Bodor declared a bankrupt. Bodor was indebted to the respondent Toronto-Dominion Bank in the amount of $266,331.12. In an application to determine priority, MacLeod J. of the Court of Queen's Bench held that the MNR had priority under the provisions of the Excise Tax Act .
XIII. All three cases were appealed to the Alberta Court of Appeal. It held that in each case the lending institution had priority over the MNR: (1994), 16 Alta. L.R. (3d) 1.
III. Analysis
XIV. Before 1987, the primary garnishment remedy in the Income Tax Act was provided by s. 224(1), which stated:
224. (1) Where the Minister has knowledge or suspects that a person is or will be, within 90 days, liable to make a payment to another person who is liable to make a payment under this Act (in this section referred to as the "tax debtor"), he may, by registered letter or by a letter served personally, require that person to pay forthwith ... the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.
XV. Where a tax debtor had assigned its debts to another party as part of a security arrangement, courts were virtually unanimous in finding that a demand under s. 224(1) was ineffective to attach any of the assigned debts. The courts held that, by the assignment, the tax debtor had transferred its interest in its accounts to the assignee, leaving nothing for the MNR's garnishment to attach. See: Royal Bank of Canada v. R. (1984), 52 C.B.R. (N.S.) 198 (F.C.T.D.), at pp. 210-13, aff'd (1986), 60 C.B.R. (N.S.) 125 (F.C.A.).
XVI. Parliament amended the Income Tax Act in 1987 (S.C. 1987, c. 46, s. 66) and added two additional subsections (ss. 224(1.2) and (1.3)). Sections 317(3) and (4) were also added to the Excise Tax Act . For the purposes of the issue raised in these appeals the wording of the sections in the Excise Tax Act is identical to that of the Income Tax Act. For the sake of convenience I will refer to the sections of the Income Tax Act.
XVII. Section 224(1.2) provided that the MNR could garnish funds owed to a tax debtor or to a "secured creditor". Section 224(1.3) provided, inter alia, definitions of "secured creditor" and a "security interest":
224. ...
(1.2) Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within 90 days, liable to make a payment
(a) to another person who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or to a legal representative of that other person (each of whom is in this subsection referred to as the "tax debtor"), or
(b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor,
the Minister may, by registered letter or by a letter served personally, require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole in or in part to the Receiver General on account of the tax debtor's liability under subsection 227(10.1) or a similar provision.
(1.3) In subsection (1.2),
"secured creditor" means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator, or any other person performing a similar function;
"security interest" means any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for;
XVIII. The operation of the 1987 version of s. 224(1.2) as against the holder of a GABD was considered by courts in Alberta, British Columbia, Saskatchewan, Manitoba and Nova Scotia.
XIX. In Alberta, in Lloyds Bank of Canada v. International Warranty Co. (1989), 64 Alta. L.R. (2d) 340 (Q.B.), rev'd (1989), 68 Alta. L.R. (2d) 356 (C.A.), McDonald J. held that the new definition of "security interest" was broad enough to include monies which were equitably assigned by a tax debtor to a bank (at pp. 352-53):
...the definition of "security interest" is so broad as to include moneys which have been equitably assigned by the tax debtor to, for example, a bank. The ownership by the bank of the funds that are the subject of the assignment constitutes an "interest in property". That interest in property is one which "secures payment" of the "obligation" of the tax debtor.... The provision of such security is the very purpose of the assignment of book debts. Moreover, the bank's interest is one "created by or arising out of [an] assignment...of any kind whatever, however or whenever arising..."
As a result, he held that the MNR obtained priority to the garnished funds over the claim of Lloyds Bank as the assignee of the book debts.
XX. The Alberta Court of Appeal reversed the trial decision in Lloyds Bank but on other grounds. Relying on its decisions in Re Lamarre; University of Calgary v. Morrison, [1978] 2 W.W.R. 465, and Attorney General of Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479, the Court of Appeal held that the provisions of s. 224(1.2) provided at most for a form of extra-judicial attachment which could bring the funds into the custody of the MNR. The court held that the section fell short of effecting a transfer of property in the funds or establishing the priority of the MNR's claim. It concluded (at p. 362) that "[s]omething further is required to accomplish either purpose".
XXI. The decision of the Alberta Court of Appeal in Lloyds Bank was followed by the Manitoba Court of Appeal in Pembina on the Red Development Corp. v. Triman Industries Ltd., [1991] 6 W.W.R. 481, and the British Columbia Court of Appeal in Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc. (1990), 72 D.L.R. (4th) 405. In the B.C. decision, Hinkson J.A. referred to the decision of the Alberta Court of Appeal in Lloyds Bank and stated at p. 409:
In my opinion, s. 224 styled as it is "Garnishment" deals in s-ss. (1) and (1.2) with the mechanics of garnishment. The Minister in serving a demand pursuant to that section must be proceeding upon the basis that he asserts a tax debtor's liability to him. That justified garnishing the funds in the hands of a creditor of the tax debtor. But, I am unable to see in that section any provision that would have the effect of transferring the property in the funds to the Minister or establishing a priority of Revenue Canada's claim. That was the point dealt with by the Alberta Court of Appeal. [Emphasis added.]
XXII. To the opposite effect are decisions by courts in Saskatchewan and Nova Scotia: Royal Bank of Canada v. Saskatchewan Power Corp., [1991] 1 W.W.R. 1 (Sask. C.A.), aff'g [1990] 2 W.W.R. 655 (Sask. Q.B.) and Touche Ross Ltd. v. M.N.R. (1990), 71 D.L.R. (4th) 648 (N.S.S.C.T.D.).
XXIII. Apparently in order to deal with the competing lines of authority as to whether s. 224(1.2) was sufficient to grant a priority to the MNR, Parliament amended the section in 1990 by adding the following to the end of the section:
...and on receipt of that letter [i.e. the garnishment summons] by the particular person, the amount of those moneys that is required by that letter, to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest.
XXIV. This 1990 amendment was made to both the Income Tax Act and the relevant provisions of the Excise Tax Act . The three trial decisions in the cases at issue in these appeals are principally concerned with the issue of whether this amendment constituted the "something further" which Lloyds Bank had held was necessary to transfer the property interest in the funds to the MNR or to grant a priority to the MNR.
XXV. Two judges of the Court of Queen's bench held that the 1990 amendments did constitute the "something further" and that as a result the MNR gained priority over the book debts to the lending institutions in question. Forsyth J. based his decision expressly on the wording of the 1990 amendment and held that it was sufficiently explicit. In addition to the 1990 amendments, MacLeod J. placed reliance on the finding of McDonald J. in Lloyds Bank that a GABD falls within the definition of a security interest in s. 224(1.3).
XXVI. In the third case, the Master in Chambers held that the 1990 amendments were still not sufficiently broadly worded to allow Revenue Canada to attach monies in which the tax debtor has no interest by virtue of an absolute assignment. Hunt J. on appeal agreed with his conclusion. She relied on a perceived ambiguity in the definition of security interest, stating at pp. 360-61:
I am of the view, moreover, that it is not clear whether the modifying provisions at the end of the definition of "security interest" (the words "of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for") are meant to apply to each of the enumerated types of interests or instruments (debenture, mortgage, assignment, etc.) or whether these words are meant only to modify the term "encumbrance". McDonald, J. [in Lloyds Bank, supra] assumed the former to be the case, but in my view the meaning is not without doubt. There is a third way of reading the modifying words at the end, namely that the words "of any kind whatever" describe "encumbrance", with the balance of the words applying to each of the listed types of interests. The words "of any kind whatever" might also be taken to apply to assignments and encumbrances. Were this provision more clear, it would be easier to conclude that Parliament meant to include all types of assignments, including unconditional assignments, in the definition. This would make it plainer that, indeed, Parliament intended Revenue Canada's claim to take priority over the property of someone other than the tax debtor, such as an assignee of the tax debtor's book debts. [Emphasis in original.]
XXVII. I agree with Forsyth J. that the 1990 amendments to the Income Tax Act and the Excise Tax Act were sufficient to provide the "something further" which the Alberta Court of Appeal thought to be necessary in Lloyds Bank. As Côté J.A. in the decision of the Court of Appeal in this case stated about the amendment to s. 224(1.2), at p. 6:
...the amendments to that subsection say that service transfers the debt to Her Majesty, and that it shall be paid to Her Majesty notwithstanding the security interest, and in priority to the security interest. Where those amendments apply, in my view they reverse our Lloyds Bank decision and give the M.N.R. priority over earlier mortgages and assignments. I cannot confine them to floating or conditional assignments and must disagree with one of the Justices appealed from.
XXVIII. I also agree with MacLeod J. that McDonald J. at trial in Lloyds Bank was correct to hold that a GABD falls within the definition of security interest in s. 224(1.3). That section defines "security interest" as including:
... any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of ... [an] assignment ... of any kind whatever, however or whenever arising ....
XXIX. With respect, I do not accept the conclusion of Hunt J. that the definition of "security interest" is ambiguous and that the phrase "of any kind whatever" should be read to modify only "encumbrance" which is the last type of security listed. When the definition is read in its plain and ordinary sense, it is clear that the broad phrase "of any kind whatever" is intended to cover all of the listed types of security including an assignment. The phrase "a[n] assignment ... of any kind whatever" is broad enough to encompass the absolute assignments of book debts which are at issue in these appeals.
XXX. The finding that a GABD is a security interest for the purposes of the Income Tax Act or the Excise Tax Act is also consistent with the manner in which the assignments are dealt with in the contracts which create the assignments. For instance, the instrument which creates the assignment of book debts from Land-Rock Resources Ltd. to Alberta Treasury Branches provides, inter alia:
THE PRESENT assignment and transfer shall be a continuing collateral security to Treasury Branches for the payment of all and every present and future indebtedness and liability of the undersigned to Treasury Branches and any ultimate unpaid balance thereof with interest. [Emphasis added.]
XXXI. My conclusions that the GABDs at issue in these appeals fall within the statutory definition of a security interest and that the 1990 amendment is effective, when it applies, to give the MNR a priority over earlier mortgages and assignments, do not, however, lead inevitably to the conclusion that the MNR has priority over the lending institutions to the debts at issue in these appeals.
XXXII. A new argument was raised before the Alberta Court of Appeal and this Court to the effect that even if an unconditional GABD is a security interest, the lending institutions do not fall within the definition of "secured creditor" in s. 224(1.3) of the Income Tax Act. Côté J.A. held at pp. 7-8:
The M.N.R. must believe or suspect that the intended recipient of the letter is liable, or will soon become liable to make a payment under para. (a) or para. (b) of the operative subs. (1.2). No one suggests that para. (a) applies here, given the general assignments of book debts and other assignments. So the effective precondition in these cases is para. (b). It says:
(b) to a secured creditor who has a right to receive the payment that, but for [a] security interest in favour of the secured creditor, would be payable to the tax debtor. (emphasis added)
Subsection (1.3) defines "security interest", and that definition appears to be satisfied in the present cases. But subs. (1.3) also defines "secured creditor".... I will restate that definition slightly using square brackets:
... a [certain] person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes... (emphasis added)
In each of these three appeals, there was a general assignment of book debts which purported immediately to transfer title to the Bank or Treasury Branch. Doubtless it was done to secure a loan, but legal title was thereafter in the transferee, the Bank or Treasury Branch. Therefore, the Bank or Treasury Branch is not a "secured creditor" under this definition, because it does not have any interest "in the property of another person". The Bank or Treasury Branch itself is the owner. The tax debtor, both sides agree, would have to be the "other person". But he has no title. So one cannot say that the book debts (receivables) assigned are "the property of" the tax debtor.
XXXIII. I agree. The wording of s. 224(1.2) clearly requires not only that there is a security interest, but also that the payment be made either to the tax debtor or to a secured creditor. Here, because of the assignments, the payments are made to the lending institutions and the question is whether these lending institutions meet the definition of "secured creditor" as defined in the statutes.
XXXIV. The definition of secured creditor is a "person who has a security interest in the property of another", that other being the tax debtor. The critical issue is whether, after an assignment, the lending institutions have a security interest in the property of the tax debtor. In my view, they do not. An assignment passes title and therefore property in the book debts is held by the lending institution and not by the tax debtor.
XXXV. It is well-established law that a GABD, such as the ones at issue in these appeals, has the effect of transferring all right, title and ownership in and to the property assigned so that it can no longer be considered the property of the assignor. See: Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 27 W.W.R. 38 (B.C.C.A.), at p. 42; Lettner v. Pioneer Truck Equipment Ltd. (1964), 47 W.W.R. 343 (Man. C.A.), at pp. 348-49; Royal Bank of Canada v. Attorney General of Canada (1977), 25 C.B.R. (N.S.) 233 (Alta. S.C.T.D.), at pp. 236 and 241, aff'd [1979] 1 W.W.R. 479; Royal Bank of Canada v. R., supra, at pp. 206 and 212; Toronto-Dominion Bank v. Minister of National Revenue (1990), 39 F.T.R. 102, at p. 105.
XXXVI. In Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd., the plaintiff attempted to garnish funds owing to the defendant which were held by a bank. A second bank held a GABD executed by the defendant. The British Columbia Court of Appeal concluded that the GABD passed property in the book debts absolutely, and that the defendant no longer had an interest that could be garnisheed.
XXXVII. In Royal Bank of Canada v. R., Muldoon J. of the Federal Court Trial Division came to a similar conclusion which was unanimously confirmed by the Federal Court of Appeal. Under the terms of the assignment, the assignor Miles contracted to act as a trustee for the funds assigned by him to the Royal Bank under a GABD. The MNR argued that an assignee can have no greater claim on the garnished money than the assignor. Muldoon J. rejected this argument and held at p. 212:
With respect, that contention misses the point. To equate the respective rights of the assignee and the assignor in and upon the book debts is to overlook the very nature and effect of the assignment, for the assignee owns the book debts and the assignor does not. To those who have not searched in the personal property security register, the assignor, of course, might still appear to be an ordinary trade creditor, but having assigned the book debts, the assignor, Miles, was in reality a trustee of them for the assignee, the plaintiff bank. Here, the Crown has received that which belonged to the bank.
XXXVIII. In Lettner v. Pioneer Truck Equipment Ltd., Guy J.A. of the Manitoba Court of Appeal commented upon the nature and effect a GABD as follows at pp. 348-49:
As between Pioneer Truck and the bank, Pioneer Truck knows that its accounts receivable or book debts belong to the bank. In equity it cannot be heard to say that it owns these book debts.
. . .
The fact that banking practice in Canada permits the extension of credit to going concerns, and permits the borrowers (by licence, as it were) to collect some accounts to pay wages and current creditors, does not destroy the absolute and specific quality of the legal assignment to the bank.
XXXIX. In Toronto-Dominion Bank v. Minister of National Revenue, Jerome A.C.J. of the Federal Court Trial Division conducted a thorough review of the authorities, including those discussed above, and concluded at p. 105:
In light of the preceding authorities, and particularly in light of the Federal Court of Appeal's decision in Royal Bank of Canada v. The Queen, which is entirely binding on this Court, I must conclude that the general assignment of book debts granted April 26, 1983, by J.K. Campbell and Associates Limited to the Toronto-Dominion Bank constituted an absolute transfer of all property and interest previously held by J.K. Campbell in its accounts or other book debts, present or future. Accordingly, after April 26, 1983, the Toronto-Dominion Bank had full legal and equitable title in all accounts that were owing or that would become owing by debtors of J.K. Campbell unless such right was otherwise expropriated by competent and valid legislation.
XL. In addition to establishing that an absolute assignment of book debts transfers property in the debts to the assignee, the cases discussed above also stand for the simple and obvious proposition that the true nature of an assignment can only be determined by examining the particular wording of the instrument which creates the assignment.
XLI. The assignments in each of the three cases which are involved in these appeals all contain language which makes it clear that they are immediate and absolute. Typical is the assignment from Land-Rock Resources to Alberta Treasury Branches, which provides:
THE UNDERSIGNED Land-Rock Resources Ltd. for valuable consideration HEREBY ASSIGNS AND TRANSFERS to Province of Alberta Treasury Branches (herein called "Treasury Branches") all debts, demands and choses in action now due or hereafter to become due, together with all judgments and securities for the said debts, demands and choses in action, and all other rights and benefits in respect thereof which now are or may hereafter become vested in the undersigned.
XLII. It was noted in Royal Bank of Canada v. R., at p. 202, that there may be a distinction between an absolute assignment and one that provides that, in the event of default and the non-remedy of the default, the bank may without further notice deal with the book debts. Such wording appears to be less than an absolute assignment and creates for the lending institution a charge on the book debts which does not crystallize into property in the debts until there has been an unremedied default.
XLIII. While it does not fall to be decided in this case, it seems likely that such an assignment does not transfer property to the lending institution and thus, at least prior to default on the part of the assignor, the lending institution would be a secured creditor under s. 224(1.3). This type of conditional wording is not present in any of the instruments at issue in these appeals, all of which are unconditional and absolute.
XLIV. Moreover, at least one of the instruments provides that the assignor is a trustee for the book debts held by the lending institution. In Royal Bank of Canada v. R., Muldoon J. held that the fact that the assignor is in the position of a trustee is a further indication that the assignment passes property to the assignee. The assignment from Bodor to the Toronto-Dominion Bank provides:
IT IS HEREBY DECLARED AND AGREED that all money received by the Assignor in payment of any debts, demands and choses in action...shall be received and held by the Assignor in trust for the Bank.
XLV. It should be noted that the fact that the GABD is referred to as "continuing collateral security" in two of the instruments does not make the GABD anything less than absolute. In both Evans Coleman and Lettner, the GABDs contained language that the general assignment of book debts would be continuing collateral security and in each case the courts held that such language did not affect the absoluteness of the assignment.
XLVI. At the Alberta Court of Appeal, the MNR took the position that even if legal title was transferred to the assignee by the GABD, the assignor tax debtor retained an equitable interest in the nature of an equity of redemption which was sufficient for the book debts to remain the "property" of the tax debtor.
XLVII. Côté J.A. responded to this argument by stating that while in theory the tax debtor held an equity of redemption, this equity could not be exercised in practice except by application to a court of equity. Such an application would only be granted by a court of equity where the value of the book debts exceeded the value of the loans which they secured. He concluded that in cases like the three on appeal, where the value of the loans exceeded the value of the book debts, there is no real equity of redemption. He also held that the only property of the tax debtor was the equity of redemption and that the MNR did not claim that interest.
XLVIII. I agree with Côté J.A. that the tax debtor retains an equity of redemption upon an assignment of its book debts. Halsbury's Laws of England (4th ed. 1980), vol. 32, at para. 401, defines a mortgage as "a disposition of property as security for a debt" which "may be effected ... by an assignment of a chose in action" such as a book debt. At para. 407 Halsbury's also states that:
Incident to every mortgage is the right of the mortgagor to redeem, a right which is called his equity of redemption.... This right arises from the transaction being considered as a mere loan of money secured by a pledge of the estate.
Thus prima facie an assignor of book debts retains an equitable right to redeem his assignment of the book debts once the debt obligation which is secured by the book debts has been completely discharged by the assignor.
XLIX. I also agree with Côté J.A. that in the context of these appeals the fact that the tax debtors in theory hold an equity of redemption in their book debts is of purely academic interest since, on the facts, the value of the loans secured by the book debts far exceeds the value of the debts themselves. Thus there is no value in the equity of redemption held by the tax debtors. While the equity of redemption theoretically exists, for practical purposes it is incapable of any realization.
L. The appellant MNR argues, however, that Côté J.A. erred by focusing his attention on whether the value of the loans exceeds the value of the book debts. The MNR points out that if the relative value of the loan and the security is the only relevant factor then a tax debtor who operates his business with the assistance of a revolving line of credit secured by an assignment of book debts (which is a common business arrangement) would fluctuate between being and not being a secured creditor on an almost daily basis depending on the relative value of the collectibles and the line of credit of the business.
LI. I share the MNR's concern that the relative value of the loan and the book debts is not the sole determining factor as to whether the assignor's equity of redemption makes the book debts his "property".
LII. As a matter of law, an absolute assignment of book debts makes those book debts the property of the assignee. Those book debts remain the property of the assignee until the assignor actually exercises his equitable right to redeem. It is a necessary precondition to the exercise of the equity of redemption that the loans secured by the assignment be paid off in full, along with any accrued interest and costs.
LIII. With respect, however, while it is a necessary precondition that the value of the security exceed the value of the loan in order to exercise the right of redemption, the fulfilment of this precondition is not sufficient to return the book debts to the property of the assignor. The assignor must also choose to exercise the right of redemption which will mean a termination of the loan arrangement with the lending institution.
LIV. At base, the equity of redemption is no more than a recognition that the assignment of debts to the creditor, while immediate and absolute, is for a limited purpose. In equity, the creditor cannot unjustly enrich itself by realizing on more security than the value of the loan which is secured. At any given time the value of the security may exceed the value of the loan, but upon termination of the lending relationship, the assignor of the security is entitled, in equity, to an accounting.
LV. In determining whether the book debts, once assigned, are the "property" of the assignor or of the assignee, the Court must choose between two competing definitions of "property". One definition is the immediate legal title to what had been assigned and the other is a potential interest enforceable only in equity to reacquire property which has been assigned to another, contingent upon successfully fulfilling the terms of the loan agreement.
LVI. In Friesen v. Canada, [1995] 3 S.C.R. 103, it was held that the words of the Income Tax Act are to be read in their plain and ordinary sense. The plain and ordinary meaning of "property" is legal title and not a contingent future equitable right to reacquire property which one does not presently hold. The very term "equity of redemption" highlights the fact that property is not presently held by the assignor, but rather there is a limited right to reacquire property at a future date.
LVII. The central thrust of the MNR's submissions in this Court is contained in para. 45 of his factum, where he states that where title to property is transferred, the phrase "property of another person" must be read to mean "property that, absent the security interest, is the property of the person giving the security".
LVIII. This proposition is contrary to the traditional Canadian jurisprudence that the words of a taxing statute are to read strictly for their plain and ordinary meaning and that only if there is a true ambiguity is the intention of Parliament to be considered.
LIX. In the circumstances of these appeals, a strict reading of the taxation statute is appropriate. As pointed out by Hunt J. at p. 361, these appeals raise not only the traditional tax interpretation principle of resolution of ambiguity in favour of the taxpayer: Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, at p. 72. They also raise the well-known principle that, in the absence of clear and unequivocal language, there is a presumption that proprietary rights are not to be taken away without provision being made for compensation.
LX. In the context of these appeals, the interpretation of s. 224 urged by the MNR would have the effect of expropriating property to which the lender is legally entitled under its security agreement with the tax debtor. The taxes which would be garnished and withheld from the lending institution are not taxes owed by the lender but rather taxes owed by its debtor.
LXI. The lending institutions are innocent third parties whose proprietary rights would be expropriated by the provisions of s. 224 and accordingly those provisions must be read strictly to determine whether the expropriatory language is clear and unequivocal.
LXII. However, it is not necessary to resort to strict interpretation to resolve these appeals. In this case the plain and ordinary meaning of the phrase "property of another person" is property now held by another person. This interpretation makes sense of the words without reading anything into the statute and respects the well-established principle of interpretation that statutes are to be read as though presently speaking.
LXIII. One of the cardinal principles of the plain and ordinary meaning approach is that nothing be read into a section unless no sense can be made of that section without the addition of the extra words. The plain and ordinary meaning of the statutory words simply does not bear the strained interpretation urged by the MNR of "property that, absent the security interest, is the property of the person giving the security".
LXIV. In addition to offending the principle that extra words should not be read into a section unless absolutely necessary, this proposed reading attempts to read in wording which can be expressly found in another part of the same section. Section 224(1.2)(b) applies to "a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor". The emphasized words in s. 224(1.2)(b) are identical in effect to the words which the MNR seeks to introduce into the definition of secured creditor.
LXV. The use of a particular phrase in other parts of the Income Tax Act militates against reading that same phrase into a section of the Act where it is not found. This is particularly so where the phrase is found in the very same section as the disputed wording, and the section in question has been the subject of amendments twice within the last decade.
LXVI. If Parliament had intended that s. 224(1.2) should cover all persons who hold a security interest, it could have defined "secured creditor" as any person who holds a security interest without the deliberately limiting words "in the property of another person". Alternatively, it could have expressly provided "property that but for a security interest in favour of the secured creditor would be the property of another person", thus echoing the phrasing found in the rest of the section.
LXVII. In spite of two recent amendments to this section, Parliament chose not to define secured creditor in the manner urged by the appellant MNR. To read into the section the words suggested by the MNR would be an unwarranted judicial usurpation of the legislative function. The only conclusion which can be drawn from the plain and ordinary meaning of the words which do appear in the Act is that Parliament did not intend to bring creditors who actually owned the title to the security interest within the purview of the section.
LXVIII. It is my conclusion that these appeals can be resolved without resort to any special principles of interpretation tailored to the expropriatory nature of this particular provision.
LXIX. If I am mistaken in this conclusion, and there is an ambiguity in the meaning of the word "property" then I would hold that the specific effect of this section warrants a strict resolution of any ambiguity in favour of the respondents. Such an interpretation requires that "property" be read to mean present legal title in preference to a future contingent equitable right to reacquire property not currently held. It also requires that words expressly found in another part of the same section not be read without cause into the definition of secured creditor.
LXX. In summary, these appeals should be resolved as follows:
1.The definition of "security interest" is broad enough to include a general assignment of book debts even where that assignment is absolute.
2.The wording of s. 224(1.2), as amended in 1990, is sufficiently clear and unequivocal to allow a transfer of property in the garnished funds to the MNR and to grant him a priority in circumstances where the rest of that section applies.
3.An assignee of an absolute assignment of book debts is not a "secured creditor" within the meaning of s. 224(1.3) because he does not hold a security interest "in the property of another person".
4.Therefore, s. 224(1.2) of the Income Tax Act and s. 317(3) of the Excise Tax Act are not effective to grant the appellant MNR an interest in or priority over debts owed to the assignee of a GABD.
IV. Disposition
LXXI. All three appeals should be dismissed with costs to the respondents.
Appeals allowed with costs, Iacobucci and Major JJ. dissenting.
Solicitor for the appellant: The Deputy Attorney General of Canada, Ottawa.
Solicitors for the respondent Province of Alberta Treasury Branches: Bruni Greenan Klym, Calgary; Parlee McLaws, Calgary.
Solicitors for the respondent the Toronto‑Dominion Bank: Howard, Mackie, Calgary.
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