Deloitte, Haskins & Sells Ltd, Trustee of Pheonix v. Bank of Nova Scotia, 89 DTC 5355, [1989] 1 CTC 442 (Sask. C.A.)

Sherstobitoff, J.A.: — The issue in this appeal is whether a general assignment of book debts in favour of the respondent bank, duly registered under the Personal Property Security Act, R.S.S. 1978, c. P-6.1, attached to a Registered Retirement Savings Plan, of which the bank is the depositary, in view of the provisions of subparagraph 146(2)(c.3)(ii) of the Income Tax Act, R.S.C. 1970, c. I-5.

In 1978, Edwin Duncan Phenix deposited money into an R.R.S.P. of which the respondent bank was the depositary. He dealt with the bank's Tisdale branch throughout. He continued to make deposits from time to time until February 28, 1985.

In 1982, Phenix needed refinancing and made a proposal to a number of lending institutions including the respondent at its Tisdale branch. All of them refused to consider his R.R.S.P. as acceptable collateral on the basis that the law prohibited them from so doing and further because the effect of so doing would be to deregister the R.R.S.P., thereby significantly reducing its value.

On May 4, 1982, Phenix executed a General Assignment of Book Debts in favour of the bank. The assignment covered all debts, demands and choses in action of every conceivable kind which would accrue due to the assignor during the life of the assignment. It did not refer to his specific R.R.S.P., nor to R.R.S.P.s generally.

On March 7, 1987, Phenix made an assignment in bankruptcy. He owed the bank about $50,000. The appellant, as his trustee, collapsed the R.R.S.P. The bank paid the proceeds to him without complaint. The bank then made application under section 63 of the P.P.S.A., claiming that the assignment of book debts attached the proceeds and that it took priority over the claim of the trustee. It asked for a determination of their respective interests.

The judge, although he recited the relevant provisions of the Income Tax Act, did not consider their impact on the position of the parties. He found that the funds in question were held in a form of trust, and that the proceeds of the trust were a chose in action covered by the assignment. Accordingly, he found that the bank's claim took priority over that of the trustee.

These are the relevant provisions of the Income Tax Act:

146(2) The Minister shall not accept for registration for the purposes of this Act any retirement savings plan unless, in his opinion, it complies with the following conditions:

(c.3) The plan, where it involves a depositary, includes provisions stipulating that:

(ii) The property held under the plan cannot be pledged, assigned or in any way alienated as security for a loan or for any purpose other than that of providing for the annuitant, commencing at maturity, a retirement income;

146(12) Where, on any day after a retirement savings plan has been accepted by the Minister for registration for the purposes of this Act, the plan is revised or amended or a new plan is substituted therefore, and the plan as revised or amended or the new plan substituted therefore, as the case may be, (hereinafter in this subsection referred to as the “Amended Plan”) does not comply with the requirements of this section for its acceptance by the Minister for registration for the purposes of this act, the following Rules apply:

a. The Amended Plan shall be deemed, for the purposes of this Act, not to be registered retirement savings plan; and

b. The taxpayer who was the annuitant under the plan before it became an Amended Plan shall, in computing his income for the taxation year that includes that day, includes as income received at that time an amount equal to the fair market value of all the property of the plan immediately before that time.

146(13) For the purposes of subsection 12 an arrangement under which a right or obligation under a retirement savings plan is released or extinguished either wholly or in part and either in exchange or substitution for any right or obligation, or otherwise (other than an arrangement the sole object and legal effect of which is to revise or amend the plan) or under which payment of any amount by way of loan or otherwise is made on the security of a right under a retirement savings plan, shall be deemed to be a new plan substituted for that retirement savings plan.

The effect of these provisions is clear: the R.R.S.P. cannot be pledged as security for a loan, and if it is so pledged, the plan is deemed to be deregistered and the owner subject to payment of income tax on the proceeds thereof.

In light of the evidence that the bank refused to recognize the R.R.S.P. as suitable collateral for a loan, its communication of that information to Phenix, and its status as depositary for the plan, the parties cannot be said to have intended, when the assignment was executed, that it should cover the R.R.S.P. This conclusion is reinforced by the evidence that the bank not only did not deregister the plan after the execution of the assignment but continued to accept further deposits. Furthermore, the assignment executed was a printed form supplied by the bank. It should not be interpreted to intend an illegal result: a pledge of an R.R.S.P. as security for money owing when that is prohibited by section 146. Otherwise, the bank must be taken to claim the right to act routinely in contravention of the section.

If the parties did intend that the assignment cover the R.R.S.P., they acted in violation of section 146. To that extent, the assignment would have been illegal and therefore unenforceable.

In either case, the bank acquired no security interest in the R.R.S.P.

The Chambers judge relied to some extent on McMahon v. Canada Permanent Trust Company, [1980] 2 W.W.R. 438 (B.C.C.A.), Re Berman (1979), 31 C.B.R. (N.S.) 313 (Ont. C.A.), and Re Lifshen (1978), 25 C.B.R. (N.S.) 12. These cases are not relevant because they were all decided without reference to section 146 which was not yet in force.

The judge also relied upon in Re Gero, [1980] 1 F.C.R. 69 (F.C.T.D.), wherein Walsh, J. held that funds in an R.R.S.P. were subject to attachment by garnishee summons because nothing in section 146 specifically prohibited seizure of such funds. That does not advance the cause of the respondent here, because if it intended that the assignment cover the R.R.S.P., it participated in a transaction which was specifically prohibited by section 146.

Re Dowe; Bank of British Columbia v. Thorne Riddell Inc. (1986), 62 C.B.R. (N.S.) 289 (B.C.C.A.) deals with a similar fact situation. However, section 146 was not, apparently, drawn to the attention of the court, which found that a security interest could attach to an R.R.S.P. We agree with the annotation to the report that the case would have been otherwise decided had the section been considered by the court.

Finally, support for our conclusion may be found in Re Shibou; Guttman v. Toronto Dominion Bank (1984), 53 C.B.R. (N.S.) 120 (Man C.A.). Although he spoke in dissent, Monnin C.J.M. was the only judge to consider the assignability of an R.R.S.P. In referring to section 146, he said that an R.R.S.P. certificate cannot by law be pledged, assigned, alienated or set off (p. 126).

Accordingly, the appeal is allowed with costs under double Column V. The trustee in bankruptcy is entitled to the R.R.S.P. and the proceeds thereof after collapse of it.

Appeal allowed.