The Royal Bank of Canada v. The Queen, 84 DTC 6439, [1984] CTC 573 (FCTD), aff'd 86 DTC 6390, [1986] 2 CTC 211 (FCA)

Muldoon, J:—The parties here have agreed to submit a special case in lieu of trial and have presented an agreed statement of facts followed by a question of law. Their agreed statement of facts runs as follows:

1. At all material times, Miles Construction Ltd was indebted to The Royal Bank of Canada, Beauséjour, Manitoba for outstanding loans in excess of $10,000.00.

2. On January 10, 1981 Miles Construction Ltd executed under seal in favour of The Royal Bank of Canada an assignment of book debts as general and continuing collateral security for the fulfilment of all obligations, present or future, direct or indirect, absolute or contingent, matured or not of Miles Construction Ltd to The Royal Bank of Canada.

3. Said Assignment of Book Debts was registered in the Personal Property Registry of Manitoba by financing statement pursuant to the provisions of The Personal Property Security Act* [1] of Manitoba on the 22nd day of January, 1981 as Registration No 810122-105649.

4, On the 30th day of January, 1981, Revenue Canadaf [2] was owed the sum of $17,486.39 by Miles Construction Ltd and issued a third party demand against Miles Construction Ltd which was forwarded to The Cadillac Fairview Corporation Ltd.

5. On March 31, 1981, an invoice was issued by Green Oak Gravel Ltd on behalf of Miles Construction Ltd to Cadillac Fairview Corporation Ltd for work done to March 31, 1981, said invoice in the sum of $9,361.00.

6. On April 24, 1981, The Cadillac Fairview Corporation Ltd issued and forwarded its cheque in the sum of $9,361.00 to The Revenue General for Canada in reply to said third party demand of Revenue Canada.

7. No notice of the assignment of book debts in favour of The Royal Bank of Canada was sent to The Cadillac Fairview Corporation Ltd prior to the issuance of the third party demand by Revenue Canada or prior to the cheque being forwarded by The Cadillac Fairview Corporation Ltd to Revenue Canada.

8. At all times prior to May 12, 1981, The Royal Bank of Canada, permitted Miles Construction Ltd to collect and deal with its book debts. Receivables collected in the course of these transactions were required to be deposited to an account with The Royal Bank of Canada.

9. On May 12, 1981, The Royal Bank of Canada demanded payment from Miles Construction Ltd of all its outstanding loans totalling $236,412.10.

10. At September 22, 1981, Miles Construction Ltd was indebted to The Royal Bank of Canada for $193,493.62 with interest accruing thereafter which debt has not been paid to date.

The question of law posed to the court is:

On the facts hereinbefore stated, does the Plaintiff, under its General Assignment of Book Debts, registered pursuant to the provisions of The Personal Property Security Act of Manitoba, have priority to monies received by Revenue Canada under its third party demand?

The nature and effect of the Minister’s third party demand, pursuant to section 224 of the Income Tax Act, have been considered and defined in numerous judicial pronouncements, to some of which reference will be made here. Suffice it to note at this stage, however, that the third party demand here is distinctively not made pursuant to the provisions of the Excise Tax Act, as occurred in the cases of Canadian Imperial Bank of Commerce v The Queen [3] * The kind of tax sought to be garnished imports a clear distinction of results. The case at bar involves income tax.

In order to respond to the question posed, it is of crucial importance to determine the nature and effect of the plaintiffs general assignment of book debts, registered pursuant to the provisions of The Personal Property Security Act of Manitoba. The defendant made no attack upon the constitutional validity of that Act. Indeed, it is clear that the statute is validly enacted pursuant to section 92, head 13 of the Constitution Act, 1867, “in relation to . . . property and civil rights in the province”. (The question of validity in relation to the language of enactment of this Manitoba statute is not in issue in the case at bar, since it is pending in the Supreme Court of Canada.) The defendant does contend that it is beyond the powers of the Manitoba Legislature to bind the Crown in Right of Canada, but that argument is based on section 16 of the Interpretation Act (RSC 1970 Chap I-23) of Canada, which will have to be considered in light of whether it be engaged here, or not.

It is worthy of note, too, that the Manitoba Legislature made some provisions regarding the Crown in the Act. Section 72 enacts that:

72 The Crown is bound by this Act.

That, no doubt is a reference to the Crown in Right of Manitoba. Subsection 3(1) has some reference to the Crown in Right of Canada, thus:

3 (1) This Act does not apply

(f) to security interests in property, assets or interests of the Crown, or of a corporation that is declared by an Act of Parliament or an Act of the Legislature to be an agent of the Crown, or of a municipality, or of a corporation created under The Health Services Act or The Public Schools Act

This last recited provision is of no relevance unless it were to be held that the federal Ministers’ statutory rights under the Income Tax Act are Crown “security interests” as defined in The Personal Property Security Act of Manitoba. Such a result would require some conjuring.

Counsel have cited a goodly number of judicial authorities, which, if painstakingly analysed here, would demand encyclopaedic dimensions for these reasons. Reference must be made to some of them and, for the benefit of those who are more particularly interested, the whole list is appended to these reasons.

What is the nature of the general assignment of book debts which the bank holds in this instance? Briefly, from the full text of the actual document of assignment, a copy of which is Exhibit “A”, Miles Construction Ltd, the taxpayercustomer, granted, assigned, transferred and made over to the plaintiff bank ‘‘all book accounts, book debts and generally all accounts, debts, . . . of every nature and kind howsoever arising or secured and now due, owing . . . or growing due, or which may hereafter become due . . . to the undersigned [Miles] .. .” Other pertinent provisions of that assignment of book assets document run as follows:

(2) The undersigned agrees that the debts shall be held by the Bank as general and continuing collateral security for the fulfilment of all obligations, present or future, direct or indirect, absolute or contingent, matured or not, of the undersigned to the Bank, . . . whether arising from agreement or dealings between the Bank and the undersigned or from any agreement or dealings with any third person by which the Bank may be or become in any manner whatsoever a creditor of the undersigned or however otherwise arising . . . .

(3) The undersigned expressly authorizes the Bank to collect, demand, sue for, enforce, recover and receive the debts and to give valid and binding receipts and discharges therefor and in respect thereof, the whole to the same extent and with the same effect as if the Bank were the absolute owner thereof and without regard to the state of accounts between the undersigned and the Bank.

(5) All moneys received by the undersigned from the collection of the debts or any of them shall be received in trust for the Bank.

(6) The Bank may sell either by public or private sale or otherwise dispose of any or all of the debts in such manner, upon such terms and conditions, for such consideration and at such time or times as the Bank may deem expedient and without notice to the undersigned and without any liability for any loss resulting therefrom.

In regard to the above-mentioned document, Exhibit “A”, counsel for the plaintiff bank took care to point out that this assignment contains no expression to the effect that in the event of default, and default not being remedied within a brief period of time, then the bank may until further notice to its customer, deal with the book debts. Counsel argues that, since there is no such conditional restraint upon the bank’s rights, this is an absolute assignment, conveying all of Miles’ right, title and interest in its book debts to the bank as security for all loan obligations. He says therefore that this assignment never has been a mere floating charge. Counsel is correct and, one might venture to conclude that such an absolute assignment might be found even if that expression were included. The absent expression to which counsel alludes may be regarded merely as a procedural mechanism for enforcement of the assignee’s rights rather than a dilution of them. However, the absence of such an expression here certainly emphasizes the absoluteness of the assignment, since the actual enforcement mechanism expressed in paragraph (3), above, of Exhibit “A” is, itself, absolute and not conditional.

In 1951, Schroeder, J in the Ontario High Court decided the case of Boothe v Simcoe, [1952] 1 DLR 341. Although the very words of the assignment in that instance do not appear in the report, a few passages from the reasons of Schroeder, J will serve to illustrate the nature and effect of the assignment of contract proceeds.

The contract between the plaintiff and the defendant was entered into on June 18, 1948, and on June 21, 1948, the plaintiff made an assignment of the contract and of all moneys due or to accrue under it to the Royal Bank of Canada. The bank, on the strength of this assignment, made advances to the construction company from time to time and at the date of the judgment to which I have alluded there was due to the bank by the plaintiff the sum of $15,479.53. (p. 342)

Notwithstanding the lateness on the part of the bank in notifying the municipality or the trustee of its assignment, these moneys are still impressed with a trust in favour of the bank arising from the terms and provisions of the assignment referred to, and these moneys, subject to the prior rights of assignees under other valid assignments, are the property of the bank. The only reason why notice must be given to the debtor [Emphasis added] of an assignment of a chose in action is to protect him [emphasis added] against further assignments or any right of set-off, and to secure him [Emphasis added] against other claims: see Sovereign Bk v Internat’I Portland Cement Co (1907), 14 OLR 511. If, of course, he has no notice of the assignment, he is fully protected if he should make payment to the assignor without such notice as is required to be given under s 53 of the Conveyancing and Law of Property Act, RSO 1950, c 68. (p 345) [Emphasis added]

In 1977, MacDonald, J of the Trial Division of the Alberta Supreme Court had to decide a case of marked similarity with the case at bar. He performed an exhaustive review of the authorities, including Dearie v Hall (1828), 3 Russ 1; 38 ER 475, which has been the subject of much commentary by learned authors and in subsequent judicial decision. The headnote in Royal Bank of Canada v Attor- ney General of Canada, [1977] 6 WWR 170; 25 CBR 233, accurately encapsulates Mr Justice H J MacDonald’s reasons and conclusions about the nature and effect of the assignment of book debts. (CBR).

The plaintiff bank held a general assignment of the book debts of a construction company. A garnishee notice pursuant to s 224 of the Income Tax Act was served upon a company owing money to the construction company for work performed. Subsequently, the bank gave notice of the assignment of book debts to the company indebted to the construction company. The bank claimed that its right to the moneys owing to the construction company was prior to that of the Attorney General of Canada.

Held, the bank as holder of the general assignment of book debts was entitled to the book debt in priority to the claim of the Crown under the notice of garnishment. On the giving of the assignment of book debts, the plaintiff bank, as assignee, became the equitable owner of the book debt and the debt ceased to be the property of the assignor. The assignor became trustee of the book debt for the plaintiff assignee. Notice to the debtor was not necessary to complete the plaintiffs interest in the book debt. Once notice of the assignment was given to the debtor, the equitable chose in action became a legal chose in action. The rights under an equitable assignment are comparable to the rights of a debenture holder under a floating charge.

The judgment of MacDonald, J was upheld unanimously by a panel of Appellate Division, for whom McGillivray, CJA concluded

. . . we are in complete agreement with the careful judgment of the learned trial judge and have nothing to add to it. The appeal is dismissed with costs.* [4]

Similar circumstances may be observed also in the report of Evans Coleman and Evans Limited v R A Nelson Construction Limited (1958), WWR 38; 16 DLR

(2d) 123, a decision of the British Columbia Court of Appeal. All three judges concurred in the result. The headnote again accurately synopsizes the reasons. It runs, in significant part, thus:

The claimant was the assignee from the defendant of a general assignment of book debts, duly filed and registered, but notice of which had not been served on any of the assignor’s debtors. The plaintiff garnisheed one such debt and, in a contest over priority, claimed that the assignment was a floating charge and that therefore the debt was properly attached.

Held, the debt was not attachable.

Per DesBrisay, CJBC, O’Halloran, JA concurring:

The assignment, purporting to pass the entire interest of the assignor in the book debts, was absolute. A provision that it should be a continuing security did not make it any less absolute.

As between the assignor and the assignee the assignment, which was an equitable assignment, was absolute and complete without notice being given to the debtors. The garnishor stood in the same position as the assignor, his right depending upon the debt belonging to the assignor when the garnishing order was issued; the assignor, having already parted with the debt by the assignment at such time, the garnishing order could not attach it.

The fact that the assignee permitted the assignor to collect the assigned debts did not alter the fact that they were the assignee’s property.

The assignment contained no provisions constituting it a floating charge. Gr Lakes Petroleum Co v Border Cities Oil Co, [1934] OR 244, 8 Can Abr 262, distinguished. (WWR)

The Manitoba Court of Appeal referred to, and followed the Evans Coleman judgment, among others in Lettner v Pioneer Truck Equipment Ltd (1964), 47 WWR 343. The court there, with all five judges concurring in the disposition of the appeal, took note of certain expressions in the assignment instrument which are the same as those of paragraph (3) of Exhibit “A” in the case at bar. Guy, J A, speaking for himself and three colleagues made these observations:

We were referred by counsel for the appellant to Re Guardian Press Ltd (1953) 31 MPR 55, 33 CBR 75 at 81 — the judgment of Dunfield, J of the Newfoundland supreme court in bankruptcy. In this particular case, the bank argued successfully that its general assignment of debts qualified as a floating charge and was registrable under sec 65 of the Newfoundland Companies Act, CS, 1916, ch 127. In that case, the Royal Bank assignment form contained a clause, reading in part:

“(3) The undersigned expressly authorizes the Bank to collect, demand, . . . the debts ... to the same extent and with the same effect as if the Bank were the absolute owner”. [The italics are mine.}

The words “as if”, of course, imply that the bank is not in fact the owner thereof.

Other cases which I have considered bear out the statement that the instrument itself alone governs the legal nature of the assignment.

In any event, two judges of the Court of Queen’s Bench of this province have held that this particular form of assignment is a specific charge and, with respect, I prefer their reasoning and conclusion to that of Dunfield, J in the Re Guardian Press Ltd case, supra.

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, (p 348)

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.

No one could have prevented the bank from giving the notice immediately after receiving the assignment, and its mere forbearance cannot change the characteristic of the security from a specific to a floating charge.

The assignment was effective as soon as it was signed and delivered to the bank. The giving of notice to any debtor of the assignor (that the assignment had been made) was not required in order to add anything to the completeness and the legality of the assignment. (p 349)

It seems clear on the strength of the foregoing authorities that in the instant case, Miles Construction conveyed all of its right title and interest in its book debts to the plaintiff bank on January 10, 1981, as shown by Exhibit “A”. Therefore, it is equally clear that, from that day, the book debts, actual or future, were never more the property of the assignor, Miles.

The parties are agreed that the assignment of its book debts by Miles to the bank was registered in the Manitoba personal property registry by a financing statement under The Personal Property Security Act on January 22, 1981. The Manitoba statute bears close similarity with the Ontario statute of the same name. Two judgments of Ontario courts which interpreted the effect of the like provisions of the Ontario statute were cited by counsel here. They are: Royal Bank of Canada v Inmont Canada Ltd (1980), 1 PPSAC 197 and Re Huxley Catering Ltd; Irving A Burton Ltd v Canadian Imperial Bank of Commerce (1982), 2 PPSAC 22.

In the first above-mentioned case, Inmont, Clements, CCJ made this analysis:

The concepts which help to determine the efficacy of a security interest are “attachment” and “perfection”.

“Attachment” is a term employed by the Act to describe those rights which, as against the debtor, a secured party acquires in collateral upon creation of a security interest. This concept is set out in s 12(1) of the Act. Section 12(1):

“12. (1) A security interest attached when,

(a) the parties intend it to attach;

(b) value is given; and

(c) the debtor has rights in the collateral.”

This right arises upon the fulfilment of these three conditions regardless of the order of their occurrence.

While “attachment” confers rights upon the secured party against the debtor, “perfection” is a term that describes the rights that a secured party has in collateral as they conflict with the rights of third persons.

As stated in the text Personal Security Law in Ontario, supra, p 5, 6:

“Since perfection confers the greatest bundle of rights with respect to personal property that it is possible for a party to obtain under the Act and represents an interest in personal property that cannot be defeated in bankruptcy proceedings or by creditors, it is important to spell out the mechanics of perfection. There are three main available methods to perfect a security interest. They are (a) by possession, (b) by registration, and (c) by temporary perfection.”

Here there is registration of the security interests of both the plaintiff and the defendant in accordance with the Act and is thus public notice of a non-possessory security interest.

The chief method of perfection is by registration and the requirements to achieve perfection by this method consist of (a) a written agreement; (b) attachment of the security interests; and (c) registration in the proper office of a financing statement.

Under the Act therefore a security interest although registered cannot be perfected unless and until it has attached. Reference must be made to s 21 and s 25 of the Act.

Section 21:

“A security interest is perfected when,

(i) it has attached; and

(b) all steps required for perfection under any provision of this Act have been completed, regardless of the order of occurrence.”

Section 25:

“(1) Subject to section 21, registration perfects a security interest in,

(c) intangibles.”

The security interest will not attach despite the fact that the debtor has rights in the collateral and the secured party has given value unless the third element necessary to effect attachment has occurred, ie the parties intend it to attach, (pages 204 & 205)

The provisions of the Manitoba statute are identical to those mentioned by Judge Clements. It is to be noted that registration constitutes public notice, not unlike registration of a certificate ot title to land in the Torrens systems.

Further in the Inmont case, Judge Clements wrote this:

As the authors state in the text Personal Property Security Law in Ontario at p 66:

“Therefore, when the parties enter into a security agreement under which the debtor grants to the secured party a security interest in the nature of a floating charge in collateral in or which subsequently comes into his possession and the secured party gives value, a security interest will attach under this Act. When the security agreement is registered, the security interest will become a perfected security interest.

The security agreement, including the floating charge created therein, will be effective according to its terms between the parties to it and against third parties. Therefore, either by express provision, or by implication arising from the designation of the security interest as a floating charge, third parties dealing with the debtor and/or the collateral will be deemed to have knowledge of the perfected security interest and the extent of the debtor’s right to deal with the collateral in the ordinary course of his business free of or subordinate to, the security interest.”

In accordance with s 9 of the Act which reads as follows:

“Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties.”

This interpretation is consistent with the Act itself and s 35(l)(a) which reads as follows:

“If no other provision of this Act is applicable, priority between security interests in the same collateral shall be determined,

(a) by the order of registration, if the security interests have been perfected by registration.”

Accordingly, when the general assignment of book debts was entered into between the plaintiff and the assignor thereunder, Leslie Christie, a security interest attached in the collateral and was perfected by registration. Priority therefore is provided for by s 35 of the Act and does not arise through crystallization through notice through the debtor. Perfection of the security interest serves as knowledge or notice to the defendant herein of the prior perfected security interest and the rights available or interest to be secured by the defendant in the subject collateral, (pages 206 & 207)

Again the cited provisions are identical with those bearing the same numeration in the Act in force in Manitoba.

The case of Re Huxley Catering Ltd, (supra), was decided by the Ontario Court of Appeal in which Weatherston, JA spoke as well for Lacourcière and Thorson, JJA. This unanimous judgment makes reference to a form of assignment which differs from the one in the case at bar. Weatherston, JA said:

The form of assignment used in the present case was considered in Great Lakes Petroleum Co v Border Cities Oil Co, [1934] OR 244, [1934] 2 DLR 743 (CA) and in CIBC v Sitarenios (1976), 14 OR (2d) 345, 23 CBR (NS) 6, 73 DLR (3d) 663 (CA) (page 24)

It expressed the sort of proviso which, as mentioned, was absent from that executed by Miles. That is, Huxley’s assignment — as distinct from that executed by Miles, provided that until default by the assignor, or until the bank notified the assignor to cease so doing, Huxley could continue to collect and deal with the debts, accounts, choses in action, in the ordinary course of business. Because of that proviso, the assignment of Huxley’s book debts was a floating charge. The judgment in the Huxley case deals at some length with the discussion of a floating charge under The Personal Property Security Act, but even so, the court’s interpretation of the effect of that Act is not less clear for all such discussion. Weatherston, JA continued:

In Great Lakes, supra, at p 247 [OR], Masten JA said that until the floating charge is converted into a specific charge, it does not attach to any specific book debt of the primary debtor. But he used the word “attach” in a sense different from its meaning in the Personal Property Security Act. The assignment of book debts, so long as it was a floating charge, did not effect an assignment of any specific book debt, but it was nevertheless an equitable charge on the book debts from time to time of Huxley Catering Limited. See Govts Stocks & Other Securities Invt Co v Manila Ry Co, [1897] AC 81 at 86 (HL) per Lord Macnaghten; Robson v Smith, [1895] 2 Ch 118 at 124; 7 Hals (4th ed), p 491, para 825. The security interest created by the assignment of book debts did “attach”, within the meaning of the Personal Property Security Act, to all debts as soon as they came into being, and that security interest was “perfected” by registration.

It seems to me to be circuitous to determine the rights of the parties under an assignment of book debts by first characterizing the assignment as a “floating charge”; then defining or describing the nature of a floating charge; and finally, applying the concept of a floating charge to a statute that contains its own terms of art. A floating charge is easy to recognize, but, although it has often been described in picturesque language, it has never been defined with any great degree of accuracy. See the remarks of Vaughan Williams LJ in Re Yorkshire Woolcombers Assn Ltd', Houldsworth v Yorkshire Woolcombers Assn Ltd, [1903] 2 Ch 284 at 291, affirmed (sub nom Illingworth v Houldsworth) [1904] AC 355 (HL).

Surely the simple answer to this problem is to say that the form of assignment of book debts, although giving to the bank an equitable interest in present debts immediately, and in future debts as soon as they came into being, left with the customer the right or privilege to continue to collect debts in the ordinary course of business. If debts were collected in the ordinary course of the customer’s business, the equitable interest of the bank was discharged; otherwise it was not.

The security interest created by the assignment of book debts “attached”, within the meaning of the Personal Property Security Act, to all debts as they arose. Even though the interest only attached to the debts in the sense intended by Masten JA when it “crystallized” into a specific charge, in this case it did so when the directors resolved to make an assignment in bankruptcy and the company thereby ceased to carry on business in the ordinary course. On either view of the case, the assignment of book debts gave to the bank priority over the trustee in bankruptcy, (pages 26 & 27)

In the matter here under consideration, the plaintiff bank’s security interest was clearly “perfected” by registration on January 22, 1981, about one week prior to the issuance of the third party demand upon The Cadillac Fairview Corporation Ltd. Among the plaintiffs “bundle of rights” stemming from the perfection of its security interest, was its security’s efficacy without the necessity of having to give notice to Miles’ debtors in order to achieve priority over subsequent claimants against Miles. Paragraph 52(l)(a) of The Personal Property Security Act of Manitoba so provides in these terms:

52. (1) Where the collateral covered by a security agreement is other than instruments, securities, letters of credit, advices of credit or negotiable documents of title, registration under this Act

(a) of a financing statement relating to the security agreement constitutes notice of the security agreement to all persons claiming any interest in the collateral and is effective during the period of three years following the registration of the financing statement;

The plaintiff owned the debt due to Miles from Cadillac and, by registration of its assignment, had perfected or secured its ownership even without Miles’ debtor having specific notice of the assignment of book debts. The bank’s right to the book debt would in no way have been diluted if Cadillac had paid Miles directly in the ordinary course of business, for Miles would have simply received payment as a trustee for the plaintiff bank.

Now, in such circumstances one must consider the nature and effect of the Crown’s claim to the $9,361 which Cadillac paid to the Receiver General of Canada. With one notable exceptin, the modern authorities make it plain that the third party notice upon which the Crown rests its claim to priority over the bank’s secured assignment is nothing more nor less than a statutory, non-judicial instrument of garnishment. So it has been held in: Logger Lumber & Building Supplies Ltd and Arpi’s Heating Ltd v Dep’t of National Revenue*, [5] Re Lamarre; University of Calgary v Morrison and Receiver General of Canada], [6] Jamison v Federal Business Development Bank], [7] Royal Bank of Canada v Attorney General of Canada, (supra), fn 7 (Alta SC), upheld on appeal (supra), fn 8 (Alta App Div’n), and in this court, Canadian Imperial Bank of Commerce v The Queen**, [8] among others.

The notable exception is, of course, the often-cited and much conside red decision of the Ontario Court of Appeal in Bank of Montreal v Union Gas Co.* [9] There the Ontario Court of Appeal held that there was an alternate ground which defeated the plaintiffs claim, namely, that the Crown’s third party demand evinced an equitable charge created by subsection 120(1) of the Income Tax Act. That subsection was later re-numbered 224(1) and for purposes of the case at bar, it remains the same.

The Alberta Appellate Division differed sharply from the above notion. It did so in Attorney General of Canada v Royal Bank of Canada, (supra), fn 8, in unanimously upholding the decision of MacDonald, J in the Trial Division. McGillivray, CJA said:

We are all of the view that the decision of this court in University of Calgary v Receiver Gen of Can [1978] 2 WWR 465, 27 CBR (NS) 41, 85 DLR (3d) 392, 8 AR 533, enunciated two propositions: firstly, a demand made under s 224 does not convey the indebtedness to the Crown, nor does it impress it with a trust; and, secondly, the minister does not, by virtue of the demand, become a holder of a security. In short, the Crown does not acquire an equitable interest in the indebtedness.

In this regard, we respectfully differ from the alternate reasons for judgment given by the Ontario Court of Appeal in Bank of Montreal v Union Gas Co [1969] 2 OR 776 at 781, [1969] CTC 686, 69 DTC 5441, 7 DLR (3d) 25. (p 229, CBR)

It now appears that the Ontario Court of Appeal, itself, has become disenchanted with those alternate reasons. In deciding In the Matter of Zurich Insurance Company and Troy Woodworking Limited, released February 21, 1984, Weatherston, JA, speaking also for Dubin and Goodman, JJA, held, concurring with the Alberta Court, that the Crown’s rights are purely statutory. He said: “Neither section creates an equitable charge. In so far as the court said otherwise in the Union Gas case, I respectfully disagree”.

In sum, then, the defendant’s third party notice, in both nature and effect, is a statutory instrument of garnishment. It is surely effective to pluck up what is owed to the taxpayer in the taxpayer’s own right, but it is ineffectual for the purpose of intercepting funds of which the taxpayer is merely the trustee for another whose taxes are not in arrears.

Crown counsel contends that the bank as assignee can have no greater claim on the money paid by Cadillac Fairview than can Miles, the assignor. Counsel argues from that position to the effect that once the Crown has given the debtor (Cadillac, here) notice, and received the money, thereby discharging the debtor’s obligation, then the Crown is entitled to retain what it has received.

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.

Can it be said, then, that the Crown in Right of Canada is somehow bound by the provisions of a provincial statute? Surely, no more here than if the secured property were, in fact, real property. Allowing that money is distinct from real property in that money is the principal medium of exchange and the very specie in which taxes are paid, still the Crown is not entitled to confiscate, for a mortgagor’s tax arrears, the property of a mortgagee only because the mortgagor once possessed clear title but has since conveyed it away or lost it. If the Crown in Right of Canada could lawfully effect such a confiscation, then no one’s property rights would be secure, whether by common law or pursuant to provincial real or personal property statutes modifying the common law. Indeed, Parliament has made a new approach to this problem about personal property securities by enacting subsections 224(1.1) and (4.1) of the Income Tax Act, but those provisions do not come into play here.

Mr Justice MacDonald made a careful examination of the authorities in his subsequently upheld judgment in Royal Bank v A G of Canada wherein he wrote:

In light of the authorities I have quoted, I have difficulty in accepting the statement in this case that a garnishing order forms an equitable charge on a debt owing by the garnishee. If the Income Tax Act intended to create such a charge it would have been very simple to say so in the legislation. My understanding is that the provision of the Income Tax Act means no more and no less than what is says. The Act does not give the receiver general power to take the property of one to pay the debt of another.* [10]

One cannot demonstrate that the federal Crown is bound by provincial law simply because that law validly permitted the taxpayer, Miles, to part at an earlier time with ownership of property which thereupon no longer belonged to that taxpayer and, therefore, was no longer exigible to attachment by the Crown. The Crown surely cannot complain that it is sought to be bound by provincial law simply because the Crown took aim in a direction where there was no target. In this instance the money was not owing to Miles — or “otherwise payable’’, except in trust for the bank. There having been nothing in Cadillac Fairview’s hands which was available for the Crown to attach, it is clear that in this instance the Crown’s reach has exceeded its grasp.

This case presents a vexed question which continues to generate litigation. Business enterprises, large and small, require credit from banks for their working capital. The future impact on the economy, and especially on employment opportunities, of requiring lenders to bear financial responsibility, in effect, for business borrowers’ income tax arrears, ought to be addressed by Parliament and made plain in the legislation, if such it is to be. If that were to be the effect of the law under consideration here, it would require a different expression of parliamentary intent in that regard, and the court should not purport to supply it by usurping Parliament’s role.

For the foregoing reasons, the question posed to the court is answered in the affirmative. The plaintiff, under its general assignment of book debts, registered pursuant to the provisions of The Personal Property Security Act of Manitoba, does indeed have priority to moneys received by the Department of National Revenue under its third party demand. The plaintiff is entitled to its costs of this action.

ANNEX

Authorities Cited by Counsel

Jamison v FBDB (1978), 28 CBR (NS) 194 (BCSC)

General Brake & Clutch Services Ltd v W A Scott (1975), 59 DLR (3d) 741 (Man CA)

A G Canada & Royal Bank (1979), 25 CBR 233 affd 29 CBR (NS) 227 (Alta CA)

Rhyno v Fireman’s Fund (1980), 34 CBR (NS) 215 (NSTD)

CIBC v Her Majesty; [1981] CTC 435; 81 DTC 5345 (FCTD)

Re Lamarre (1978), 27 CBR (NS) 41 (Alta CA)

Evans Coleman v Nelson Construction (1958), 27 WWR 38 (BCCA)

Burgaretta v Central Shipyards (1977), 26 CBR (NS) 269 (BCSC)

Lettner v Pioneer Truck (1964), 47 WWR 343 (Man CA)

Re Tri-Lateral Enterprises Ltd, infra, (1977) 74 DLR (3d) 517 (Ont SC)

Dauphin Plains v Xyloid (1980), 33 CBR (NS) 107 (SCC)

Alberta Energy Company Ltd v Project Management (1981), 36 CBR (NS) 215 (Alta QB)

The Royal Bank of Canada v Inmont Canada (1980), 1 PPSAC 197 (Ont CC)

Re Huxley; Irving A Burton v Canadian Imperial Bank of Commerce (1982), 2 PPSAC 22 (Ont CA)

Peter Hesse Enterprises v CIBC (1982), 2 PPSAC 57 (Mich CC)

A G Canada v Royal Bank, [1979] 1 WWR 479; 29 CBR (NS) 227

Royal Bank of Canada v Attorney General of Canada (1977), 95 DLR (3d) 608; [1977] 6 WWR 170

Bank of Montreal v The Queen (1980), 80 DTC 6024 (FCTD)

Bank of Montreal v A G of Canada (1970), 14 DLR (3d) 619 (BCSC)

Bank of Montreal v R J Nicol Construction (1975) Ltd (1981), 121 DLR (3d) 230 (Ont HC)

Bank of Montreal v Union Gas Co of Canada Ltd (1969), 7 DLR (3d) 25; [1969] 2 OR 776

The Queen v Breton (1967), 65 DLR (2d) 76 (SCC)

Gauthier v The King (1918), 40 DLR 353 (SCC)

Freshwater Fish Marketing Corporation v Duchominski (1982), 19 Man R (2d) 358 (Man CA)