Royal Bank of Canada v. Saskatchewan Power Corp., 90 DTC 6330, [1990] 2 CTC 285 (Sask QB)

Wright, J.: —

The Issue:

Does the Royal Bank of Canada ("Bank") have a prior right to moneys held by Saskatchewan Power Corporation which are also claimed by Revenue Canada, Taxation?

The Facts

Linnvale Steel Ltd., a manufacturer, was substantially indebted to the Bank and gave security for its indebtedness by debenture. The original debenture dated January 4, 1985 affected all present and after acquired property of Linnvale. A supplemental debenture was given May 30, 1988. Linnvale gave the Bank security on the same assets under The Personal Property Security Act, S.S. c. P-6.1, which is registered November 14, 1984. The Bank also had an assignment of Linnvale's book debts.

When Linnvale defaulted under its loan arrangements the Royal Bank appointed Clarkson Gordon Inc. receiver and manager of Linnvale. Subsequently, the Bank petitioned Linnvale into bankruptcy.

Linnvale had earlier contracted to provide steel poles and towers to the utility corporation for two transmission lines. The manufacturer was indebted to a number of other firms for material and services they provided in the preparation and transportation of the poles to the transmission sites.

Linnvale also owed Revenue Canada, Taxation substantial moneys in connection with sums that should have been remitted by Linnvale to the Crown on account of Canada Pension and other contributions. Revenue Canada served a demand on Saskatchewan Power Corporation and the latter paid the Receiver- General $69,459 and $6,349.17. These were moneys owed to Linnvale. Revenue Canada served a further claim for a portion of the $217,119.07 still held by Saskatchewan Power Corporation.

The Bank claimed for the return of the funds already paid to Revenue Canada and priority as to the moneys Saskatchewan Power Corporation now holds. Other creditors of Linnvale claimed portions of the $217,119.07 under the Builders’ Lien Act, S.S., c. B-7.1.

The applicant brought a motion for the following relief:

(a) a declaration that the provisions of the Builders' Lien Act have no application and do not attach to any of the moneys held by Saskatchewan Power Corporation arising as a result of two contracts entered into between Saskatchewan Power Corporation and Linnvale Steel Ltd.;

(b) a declaration that The Royal Bank of Canada as a prior secured creditor has priority to the moneys held by Saskatchewan Power Corporation over any of the respondents claiming priority to the moneys as lien claimants;

(c) a declaration that The Royal Bank of Canada, as a prior secured creditor has priority over any claims made by Her Majesty the Queen as represented by the Minister of Revenue Canada, Taxation arising as a result of Revenue Canada's Requirements to Pay served upon Saskatchewan Power Corporation;

(d) an Order that the Respondent Saskatchewan Power Corporation immediately pay to The Royal Bank of Canada the sum of $217,119.07, pursuant to the two contracts entered into between Saskatchewan Power and Linnvale Steel Ltd.;

(e) an Order that Her Majesty the Queen as represented by the Minister of Revenue Canada, Taxation immediately pay to The Royal Bank of Canada the sum of $75,808.17, which sum was paid by Saskatchewan Power Corporation to Her Majesty the Queen as represented by the Minister of Revenue Canada, Taxation pursuant to a Requirement to Pay;

(f) the costs of this application on a solicitor/client basis;

(g) such further relief as this Honourable Court may deem just and meet.

By agreement of the parties the issue under (a) was heard separately by MacLean, J. on December 6, 1989. He has since ruled that the Builders' Lien Act applies. I am asked to decide who has a prior claim to the moneys held by Saskatchewan Power Corporation as between the Bank and Revenue Canada. I expressed my concern about such piecemeal procedures to Mr. Matkowski but he urged me to decide this further question so the parties can proceed in a parallel action brought by Mr. Hudec's clients under the Builders' Lien Act. In expressing that concern I add the further observation that if appeals now ensue from this motion they will presumably have to be brought separately. It is not a practice to be encouraged.

The applicant concedes I have no authority to order the return of the moneys already paid by Saskatchewan Power Corporation to Revenue Canada. He invited me to make a declaration saying that the Bank was entitled to these funds as well as the $217,119.07 held by Saskatchewan Power Corporation.

The Law

(i) Jurisdiction of the Queen's Bench to make a declaration as to the funds paid to Revenue Canada, Taxation.

There are instances where a provincial superior court may make a declaration with respect to federal legislation. This Court might pass on the validity of a federal statute, for example.

Here the issue is quite different. I am asked to make a determination as to who has the right to the funds already paid to Revenue Canada. Section 17 of the Federal Court Act contains these provisions:

17. (1) The Trial Division has original jurisdiction in all cases where relief is claimed against the Crown and, except where otherwise provided, the Trial Division has exclusive original jurisdiction in all of those cases.

(2) Without restricting the generality of subsection (1), the Trial Division has exclusive original jurisdiction, except where otherwise provided, in all cases in which

(a) the land, goods or money of any person is in the possession of the Crown;

(b) the claim arises out of a contract entered into by or on behalf of the Crown; or

(c) there is a claim against the Crown for injurious affection.

The Bank's argument fails because of both subsections (1) and (2). It claims relief against the Crown and in particular money of a person in the possession of the Crown. The Supreme Court of Canada considered the question in The Queen v. The J.B. & Sons Co., [1969] C.T.C. 655; 69 D.T.C. 5406; 9 D.L.R. (3d) 345. It held that a prior declaration by a provincial superior court which purported to settle certain rights between the Crown and a taxpayer was invalid. Only the Exchequer Court could settle that question. That is the situation here. I have no jurisdiction to make that declaration. It could not affect what the Federal Court might do hereafter with respect to those funds. I decline to make any declaration as to the same.

(ii) The claim for priority with respect to the funds held by Saskatchewan Power Corporation.

It is conceded for the purposes of this application that the Bank's security was properly executed and registered and that it applies to the moneys in question. At issue is the effect of section 224 of the Income Tax Act. That section was considered in three decisions of the Alberta Court of Appeal:

— Morrison, Trustee of Estate of Lamarre v. The University of Calgary and Receiver General of Canada, 78 D.T.C. 6155; [1978] 2 W.W.R. 465;

— A.-G. Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479; 13 A.R. 318;

— Lloyds Bank v. International Warranty Company Ltd.; and A.-G. Canada v. International Warranty Company Ltd., (1989), 60 D.L.R. (4th) 272; 68 Alta. L.R. (2d) 356; revg (1989), 64 Alta. L.R. (2d) 340; [1989] 1 C.T.C. 401; 89 D.T.C. 5279;. Leave to appeal to the Supreme Court of Canada refused.

In each case the Court held a secured creditor had priority with respect to similar funds which were also claimed by Revenue Canada, Taxation. The applicant contends the circumstances here are identical to those in Lloyds Bank and that I am bound by that decision.

Before proceeding with a review of these decisions I will refer to the provisions of the Income Tax Act, 1970-71-72 (Can.), c. 63, central to those cases and this case.

224. (1) Garnishment. 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, 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 in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.

The above subsection came into effect March 30, 1983. Section 224(1) formerly read as follows:

224. (1) Where the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any 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 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.

Prior to March 30, 1983 the subsection read as follows:

(1) When the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any payment to a person liable to make a payment under this Act, he may, by registered letter or by a letter served personally, require him to pay the moneys otherwise payable to that person in whole or in part to the Receiver General of Canada on account of the liability under this Act.

Subsection 224(1.1). Subsection (1.1) was added to the Act February 26, 1981. It reads:

(1.1) Without limiting the generality of subsection (1), where the Minister has knowledge or suspects that within 90 days

(a) a bank, credit union, trust company or other similar person (in this section referred to as the "institution") will loan or advance moneys to, or make a payment on behalf of, or make a payment in respect of a negotiable instrument issued by, a tax debtor who is indebted to the institution and who has granted security in respect of the indebtedness, or

(b) a person, other than an institution, will loan or advance moneys to, or make a payment on behalf of, a tax debtor who the Minister knows or suspects

(i) is employed by, or is engaged in providing services or property to, that

person or was or will be, within 90 days, so employed or engaged, or

(ii) where that person is a corporation, is not dealing at arm's length with that person,

he may, by registered letter or by a letter served personally, require the institution or person, as the case may be, to pay in whole or in part to the Receiver General on account of the tax debtor's liability under this Act the moneys that would otherwise be so loaned, advanced or paid and any moneys so paid to the Receiver General shall be deemed to have been loaned, advanced or paid, as the case may be, to the tax debtor.

Subsection 224(1.2). Subsection (1.2) was added to the Act in 1987 and applied to assessments after December 17, 1987. It reads:

(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 or in part to the Receiver General on account of the tax debtor's liability under subsection 227(10.1) or a similar provision.

Subsection 224(1.3). Subsection (1.3) was added to the Act in 1987 and applied to assessments after December 17, 1987. It reads:

(1.3) In subsection (1.2),

"secured creditor"—"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"—"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;

“similar provision"—"similar provision” means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act.

Revenue Canada concedes I have jurisdiction to deal with the claim for priority as to the funds still in the hands of Saskatchewan Power Corporation. It is important to note that subsections (1.1), (1.2) and (1.3) were all introduced after the decisions in Morrison and Royal Bank. As noted above, 224(1) was also amended but the changes are not important to this application.

The Minister argued, firstly, that the decision in Lloyds Bank is not binding on me, notwithstanding the refusal of the Supreme Court of Canada to give leave to appeal; and secondly, that the case is not rightly decided, considering the law as it stood in January 1988, the relevant time for the purposes of the Lloyds Bank decision.

I can deal with the first question quickly. I quote from the decision of Taschereau, J. in Paul v. The Queen, [1960] S.C.R. 452; 127 C.C.C. 129 at 457:

It is furthermore my strong view, that a refusal by a Court of Appeal to grant leave to appeal is not tantamount to a dismissal of the appeal. It simply means that the right of appeal which does not exist as of right, but only by leave, never came into being. A judgment on an application for leave to appeal is one judgment, and the disposal of the case on its merits when leave has been granted is another judgment. The refusal by the Court of Appeal to grant leave is not a disposal of the case on its merits.

I am satisfied I am not bound to follow the Alberta decision.

The next question: Should I follow Lloyds Bank in this application? In considering that question I reviewed the decision of McDonald, D.C.J. who first heard the matter. In my view he reached the correct conclusion as to the application of section 224 as it stood when the Lloyds Bank case arose. As McDonald noted at page 410 (D.T.C. 5285):

The answer . . . is found in a reading of the plain words of subsection 224(1.2). It empowers the Minister by letter to require a person (here, the Toronto- Dominion Bank) to pay "moneys otherwise payable to . . . the secured creditor . . . to the Receiver General on account of the tax debtor's liability . . .". If there are moneys that are otherwise payable to a secured creditor, it is clear that those moneys must be paid not to the secured creditor but to the Receiver General, and that the moneys are not to be held for some such purpose as safekeeping while entitlement is decided, but "on account of the tax debtor's liability”. In other words, the section clearly provides by implication that the moneys so paid become the property of the Crown; there is no other way that the tax debtor's liability could be satisfied.

The Court of Appeal stressed the unfairness of the legislation which abrogated rights of a creditor without compensation. It referred to Craies on Statute Law, 6th edition (1963) at page 118 which states:

As Brett, M.R. said in Att. Gen. v. Horner (1884), 14 Q.B.D. 245, 257: “It is a proper rule of construction not to construe an Act of Parliament as interfering with or injuring persons' rights without compensation unless one is obliged to so construe it." Therefore rights, whether public or private, are not to be taken away, or even hampered, by mere implication from the language used in a statute, unless as Fry, J. said in Mayor, etc. of Yarmouth v. Simmons (1879) 10 Ch. D. 518 at 527, “the legislature clearly and distinctly authorises the doing of something which is physically inconsistent with the continuance of an existing right."

[Emphasis added.]

A similar quotation follows from Maxwell, Interpretation of Statutes, Tith edition (1962) at page 276:

Proprietary rights should not be held to be taken away by Parliament without provision for compensation unless the legislature has so provided in clear terms. It is presumed, where the objects of the Act do not obviously imply such an intention, that the legislature does not desire to confiscate the property or to encroach upon the right of persons, and it is therefore expected that, if such be its intention, it will manifest it plainly if not in express words at least by clear implication and beyond reasonable doubt.

The conclusions reached by the Court in Morrison and Royal Bank can be justified applying those principles when one looks at the provisions of the Income Tax Act as it stood in 1976 and 1973, respectively. The significant legislative changes that followed altered the rights of secured creditors drastically. One may disapprove of such Draconian provisions but be bound to uphold them where long-established rules of construction command. In my respectful view, the Court of Appeal erred in its interpretation of the amended legislation. Nothing could be clearer than the meaning of subsections (1.1),

(1.2) and (1.3). That Court also referred to certain other amendments to section 224 which were never proclaimed, and suggested that the lack of proclamation supported its construction of those portions enacted. I respectfully disagree. There may be many reasons why Parliament chooses not to proceed with a legislative change. It is not a proper matter for comment. I am not prepared to follow the Lloyds Bank decision.

The Minister of National Revenue is entitled to the funds in the hands of the Saskatchewan Power Corporation in preference to the Royal Bank. The parties are now free to proceed under the Builders’ Lien Act subject, of course, to any right of appeal which they might have. In view of the state of the law in this case, I award no costs.

Appeal dismissed.