Caisse populaire Desjardins de l'Est de Drummond v. Canada, 2009 DTC 5951, 2009 SCC 29, [2009] 2 SCR 94

                                                 SUPREME COURT OF CANADA

Between:

Caisse populaire Desjardins de l’Est de Drummond and

in right of the Caisse populaire du Bon Conseil

Appellant

and

Her Majesty The Queen in Right of Canada

Respondent

Official English Translation: Reasons of Deschamps J.

Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Charron and Rothstein JJ.

______________________________

Caisse populaire Desjardins de l’Est de Drummond v. Canada,  2009 SCC 29, [2009] 2 S.C.R. 94

Caisse populaire Desjardins de l’Est de Drummond,

in Right of the Caisse populaire du Bon Conseil                                                              Appellant

v.

Her Majesty The Queen in Right of Canada                                                                Respondent

Indexed as:  Caisse populaire Desjardins de l’Est de Drummond v. Canada

Neutral citation:  2009 SCC 29.

File No.:  31787.

2008:  February 29; 2009:  June 19.

Present:  McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Charron and Rothstein JJ.

on appeal from the federal court of appeal

Taxation — Income tax — Trust for moneys deducted — Employer defaulting on line of credit and financial institution exercising right of compensation on employer’s term deposit pursuant to agreement — Deemed trust in favour of Crown over property of employer that has deducted income tax and employment insurance premiums at source — Crown seeking to collect amount due by employer for unremitted source deductions from proceeds of term deposit — Whether compensation agreement between financial institution and employer created “security interest” within meaning of s. 224(1.3)  of Income Tax Act — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 224(1.3)  “security interest”, 227(4.1).

On September 18, 2000, the Caisse granted Camvrac a line of credit up to $277,000.  A week later, Camvrac deposited $200,000 with the Caisse in accordance with a “Term Savings Agreement”.  Under the agreement, the deposit was neither negotiable nor transferable.  On the same day, the Caisse and Camvrac entered into a “Security Given Through Savings” agreement in which Camvrac agreed to maintain and permit the Caisse to retain the deposit of $200,000 for the duration of its indebtedness to the Caisse.  It also agreed that, in the event it defaulted, there would be compensation between the credit agreement and the term deposit.  Camvrac defaulted on the loan on November 25, 2000, and later made an assignment in bankruptcy.  The Caisse noted on its copy of the “Term Savings Agreement”:  “To be closed on 21/2/2001 to realize on security”.  Since Camvrac had failed to remit to the Crown income tax and employment insurance premiums deducted at source, the Crown gave the Caisse notice to pay the amount owing to the Crown from the proceeds of the deposit.  Section 227(4.1)  of the Income Tax Act  (“ITA ”) and s. 86(2.1)  of the Employment Insurance Act  (“EIA ”) create a deemed trust in favour of the Crown over property of the employer that has deducted income tax and employment insurance premiums at source.  This trust applies to property of an employer and property held by any secured creditor of the employer that, but for its security interest, would be property of the employer.  The property is impressed with the deemed trust at the time the unremitted amounts were deducted at source by the employer.  The Caisse unsuccessfully challenged the recovery process.  The prothonotary, the Federal Court and the Federal Court of Appeal held that the Crown was entitled to recover the amounts due and the interest paid at the rate provided for in ss. 36(2)  and 37(2)  of the Federal Courts Act.

Held (LeBel and Deschamps JJ. dissenting):  The appeal should be dismissed.

Per McLachlin C.J. and Binnie, Fish, Charron and Rothstein JJ.:  The agreement between the Caisse and Camvrac gave rise to a “security interest” for the purposes of s. 224(1.3)  ITA . Camvrac’s property subject to the security interest is thus deemed to be held in trust for the Crown under s. 227(4.1)  ITA  and s. 86(2.1)  EIA  because Camvrac did not remit to the Crown income tax and employment insurance premiums deducted at source.  [1] [2]

The definition of “security interest” in s. 224(1.3)  does not require that the agreement between the creditor and debtor take any particular form, nor is any particular form expressly excluded.  So long as the creditor’s interest in the debtor’s property secures payment or performance of an obligation, there is a security interest within the meaning of this section.  Parliament has chosen an expansive definition of security interest in s. 224(1.3)  in order to enable maximum recovery by the Crown under its deemed trust for unremitted income tax and employment insurance premiums deducted at source by employers.  It is open to Parliament to define a term in an area of its own legislative competence in order to ensure that there is a rule of general application across all of the provinces.  [12] [14] [15]

Whether a contract providing for a right to compensation (in Quebec) or a right to set‑off (in the common law provinces) also gives rise to a security interest within the meaning of s. 224(1.3)  requires that the terms of the contract be carefully considered to determine whether the parties intended to confer on one party an interest in the property of the other party that secures payment or performance of an obligation. If the substance of the agreement demonstrates that the parties intended an interest in property to secure an indebtedness, then a security interest exists within the meaning of s. 224(1.3) .  In this case, it was the five‑year term and the maintenance and retention of the $200,000 deposit, as well as Camvrac’s agreement not to transfer or negotiate the deposit and that the deposit could only be used as security with the Caisse, that created the Caisse’s interest in Camvrac’s property for the purposes of s. 224(1.3)  ITA .  In the absence of these encumbrances on Camvrac’s deposit, Camvrac could have withdrawn the deposit at any time.  Should it have done so and still been indebted to the Caisse, the Caisse’s right to compensation would be ineffective because it would not be indebted to Camvrac at the time the Caisse had to resort to the remedy of compensation.  [23] [25] [30]

The Caisse is liable to pay to the Crown the amounts for employment insurance premiums and income tax deducted at source by Camvrac up to, and including, any deductions not remitted as of February 21, 2001 — the date on which the Caisse realized on its security.  The trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA  is deemed to be in effect at any time.  It does not matter that the term deposit became the property of Camvrac only after some of the employment insurance premiums and income tax deductions went unremitted since the deemed trust encompasses property which comes into the hands of the tax debtor after the trust arises.  The proceeds of Camvrac’s term deposit are therefore available to the Crown to discharge all of the outstanding employment insurance premiums and income tax deducted at source by Camvrac, whether the unremitted deductions occurred before or after Camvrac entered into the “Term Savings Agreement” and until February 21, 2001.  Interest is calculated in accordance with ss. 36(2)  and 37(2)  of the Federal Courts Act from February 21, 2001, when the Caisse effected compensation, to the date of payment.  [59] [61] [63]

Per LeBel and Deschamps JJ. (dissenting):  Compensation is not a “security interest” as that term is defined in s. 224(1.3)  ITA .  For the purposes of s. 224(1.3) , it is not enough that compensation offers protection similar to that of a security interest:  it must also confer a real right.  To limit the concept of security interest in s. 224(1.3)  to rights that are real in nature is consistent both with the shared meaning of the terms (“security interest” and “garantie”) used in the two versions of the provision and with Parliament’s purpose of giving the deemed trust priority over the security interests referred to in s. 224(1.3) .  This deemed trust was created to ensure that employers remit income tax deducted from their employees’ salaries to the Receiver General for Canada.  [65] [98] [101]

Although compensation can be likened to a security interest, it cannot be equated with one in the sense that the term “security interest” must be given in the context of s. 224(1.3)  ITA .  Where compensation may be effected between two debts, the effect is clearly analogous to that of a “security interest” in the broad sense of the term; nevertheless, compensation or set‑off is not regarded, in the positive law of either Quebec or the common law provinces, as having the characteristics of a real right.  The automatic extinction of mutual debts is an effect of compensation, but it does not constitute the enforcement of a real right in the property in question.  Furthermore, a conclusion that compensation is a “security interest” as that term is defined in the federal statute would conflict with the meaning given to the term in provincial personal property security statutes, which exclude set‑off.  Such an interpretation would also be inconsistent with the common law concept of “set‑off”, on which numerous business transactions are based.  Finally, whether considered in isolation or as a whole, the term for repayment of the deposit amount, the obligation to maintain, the right to withhold and the limits on the right to transfer, hypothecate or negotiate the deposit created only personal obligations.  [102] [107] [122] [132]

Insofar as the amounts had not been deducted at the time the agreement was entered into, the Caisse’s right to conventional compensation may be set up against Her Majesty because Her Majesty cannot have more rights than Camvrac itself had.  In Quebec civil law, as at common law, the rule for asserting contractual rights against third‑party assignees is based on the general principles governing obligations.  The right to conventional compensation is assessed as of the time the right is granted, not as of the time it is exercised.  The protection of third parties, codified in art. 1681 C.C.Q., applies to rights acquired before the compensation agreement was signed.  Thus, where the trust applies to a claim, it attaches to a legal relationship that corresponds to an active contractual situation, which explains why the beneficiary of the trust may assert only those rights held by the tax debtor.  When Parliament wished to give the deemed trust more teeth, it took care to give Her Majesty priority over secured creditors.  It did not alter the general rules governing the rights a debtor can assert against its original creditor.  [65] [147] [148] [150] [152]

Camvrac’s right to recover its claim was subject to the right to compensation that had been granted to the Caisse in September 2000 in the agreement to give savings as security.  In the context of that agreement, the right to compensation was a right held by the Caisse that could not be negated solely by the fact of the deemed trust becoming effective.  Her Majesty, as a third party, could not demand that the Caisse discharge its debt to Camvrac if the conditions for repayment had not been met.  The Caisse’s right had to be respected by third parties who acquired rights after the agreement was signed.  Consequently, Her Majesty must abide by the compensation agreement, given that her right is subsequent to it.  [153]

Her Majesty may, however, claim from the Caisse the amount owed by Camvrac before the compensation agreement was signed in September 2000.  The claims of the Caisse and Camvrac have distinct sources:  one is based on the variable credit contract, the other, on the term savings agreement.  The Caisse’s claim against Camvrac dates from September 18, 2000 and Camvrac’s claim, from September 25, 2000.  On the latter date, Camvrac undertook, first in the term savings agreement, “to make, on the date of acquisition, a deposit in the amount of $200,000”, and then in the agreement to give savings as security, to “maintain” a deposit in the amount of $200,000.  For Camvrac to be able to undertake in the agreement to give savings as security to “maintain” the deposited amount, its claim resulting from the term savings agreement had to take on an independent existence, if only at the time the deposit was made.  Given that the deposit was made before the right to compensation was granted, the deemed trust could have become effective in respect of Camvrac’s claim up to the total of the amounts owed to Her Majesty as of September 25, 2000.  This is not a case in which the respective debts have the same source and the claim is subject to a right to compensation.  Just as Her Majesty’s rights are subordinated to the right to compensation for deductions subsequent to the signing of the agreement, the Caisse’s right must give way to Her Majesty’s pre‑existing right.  [154] [156]

On the interest issue, there is no need to vary the decision of the Federal Court of Appeal. [157]

Cases Cited

By Rothstein J.

Referred to:  Saulnier v. Royal Bank of Canada, 2008 SCC 58, [2008] 3 S.C.R. 166; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Dagg v. Canada (Minister of Finance), [1997] 2 S.C.R. 403; Holt v. Telford, [1987] 2 S.C.R. 193; DaimlerChrysler Financial Services (debis) Canada Inc. v. Mega Pets Ltd., 2002 BCCA 242, 212 D.L.R. (4th) 41; Caisse populaire Desjardins de Val‑Brillant v. Blouin, 2003 SCC 31, [2003] 1 S.C.R. 666; First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94.

By Deschamps J. (dissenting)

Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94; Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Quebec North Shore Paper Co. v. Canadian Pacific Ltd., [1977] 2 S.C.R. 1054; McNamara Construction (Western) Ltd. v. The Queen, [1977] 2 S.C.R. 654; R. v. S.A.C., 2008 SCC 47, [2008] 2 S.C.R. 675; Reagan v. Murphy, 105 So.2d 210 (1958); Harwood Oil & Mining Co. v. Black, 124 So.2d 764 (1960); Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963; First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; Royal Bank of Canada v. First Pioneer Investments Ltd., [1984] 2 S.C.R. 125; 518718 Alberta Ltd. v. Canadian Forest Products Ltd., 1998 ABQB 619, 63 Alta. L.R. (3d) 371; Caisse populaire Desjardins de Val‑Brillant v. Blouin, 2003 SCC 31, [2003] 1 S.C.R. 666; A. L. Green Ltd. v. Michaud, [1975] C.A. 432; Banque Royale du Canada v. Béliveau, [1976] C.A. 539; Bandera Investment Co. v. Société immobilière du Québec, J.E. 98-1667, SOQUIJ AZ-98021774; Seigneur v. Immeubles Beneficial Ltée, [1994] R.J.Q. 1535; Banque Nationale du Canada v. Notre‑Dame‑du‑Lac (Ville) (1990), 31 Q.A.C. 45; Banque de Montréal v. Walsh & Brais Inc., [1990] R.L. 119; D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564; Ching v. Jeffery (1885), 12 O.A.R. 432; Canadian Admiral Corp. v. L. F. Dommerich & Co., [1964] S.C.R. 238; Toronto‑Dominion Bank v. Block Bros. Contractors Ltd. (1980), 118 D.L.R. (3d) 311; Board of Industrial Relations v. Avco Financial Services Realty Ltd., [1979] 2 S.C.R. 699; Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182; Cass. civ., 13 juillet 1942, J.C.P. 1943.II.2157, note Houin; Cass. com., 3 juin 1997, D. 1998.Jur.61, note François; Cass. com., 9 décembre 1997, Bull. civ. IV, n^o 327.

Statutes and Regulations Cited

Act respecting the special powers of legal persons, R.S.Q., c. P‑16.

Civil Code of Lower Canada.

Civil Code of Québec, S.Q. 1991, c. 64, arts. 875, 974, 1250, 1260, 1261, 1637, 1641, 1643, 1671, 1672, 1673, 1680, 1681, 2111 para. 2, 2123, 2329, 2330, 2543, 2660, 2683, 2702, 2703, 2710, 2714.7.

Code of Civil Procedure, R.S.Q., c. C‑25, art. 637.

Constitution Act, 1867, s. 91 (2A), (3) .

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 111.

Employment Insurance Act, S.C. 1996, c. 23, s. 86 .

Excise Tax Act, R.S.C. 1985, c. E‑15 .

Federal Courts Act, R.S.C. 1985, c. F‑7, ss. 36 , 37 .

Federal Law — Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4, s. 8 .

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 224(1) , (1.3)  “security interest”, 227(4) [repl. 1998, c. 19, s. 226(1)], (4.1) [ad. idem].

Interpretation Act, R.S.C. 1985, c. I‑21, ss. 8.1 , 8.2 .

Personal Property Security Act, C.C.S.M., c. P35, s. 3(1).

Personal Property Security Act, R.S.A. 2000, c. P‑7, s. 3(1).

Personal Property Security Act, R.S.B.C. 1996, c. 359, s. 2(1).

Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 1 “security interest”, “sûreté”, 2(a) “debenture”, 40.

Personal Property Security Act, R.S.P.E.I. 1988, c. P‑3.1, s. 3(1).

Personal Property Security Act, R.S.Y. 2002, c. 169, s. 2.

Personal Property Security Act, S.N.B. 1993, c. P‑7.1, ss. 1 “security interest”, 3(1), 41.

Personal Property Security Act, S.N.L. 1998, c. P‑7.1, s. 4(1).

Personal Property Security Act, S.N.S. 1995‑96, c. 13, s. 4(1).

Personal Property Security Act, S.N.W.T. 1994, c. 8, s. 2(1).

Personal Property Security Act, 1993, S.S. 1993, c. P‑6.2, s. 3(1).

Regulation to amend the Regulation respecting the register of personal and movable real rights, O.C. 30‑2009, (2009) 141 G.O. 2A, 17A.

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APPEAL from a judgment of the Federal Court of Appeal (Desjardins, Létourneau and Pelletier JJ.A.), 2006 FCA 366, 361 N.R. 77 (sub nom. Minister of National Revenue v. Caisse populaire du Bon Conseil), [2007] 3 C.T.C. 70, 2007 D.T.C. 5220, [2006] F.C.J. No. 1775 (QL), 2006 CarswellNat 5050, affirming a decision of Pinard J., 2005 FC 1563, [2007] 2 C.T.C. 44, 2007 D.T.C. 5664, [2005] F.C.J. No. 1933 (QL), affirming a decision by Mireille Tabib, Prothonotary, 2005 FC 731, 293 F.T.R. 166, 2006 D.T.C. 6385, [2005] F.C.J. No. 900 (QL).  Appeal dismissed, LeBel and Deschamps JJ. dissenting.

Reynald Auger and Jean‑Patrick Dallaire, for the appellant.

Pierre Cossette and Guy Laperrière, for the respondent.

The judgment of McLachlin C.J. and Binnie, Fish, Charron and Rothstein JJ. was delivered by

[1]     Rothstein J. — The primary issue in this appeal is whether the agreements between the Caisse populaire (“Caisse”) and its customer, Camvrac Enterprises Inc. (“Camvrac”), give rise to a “security interest” within the meaning of that term in s. 224(1.3)  of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”).  The definition of “security interest” in s. 224(1.3)  ITA  has also been incorporated by reference in s. 86(2.1)  of the Employment Insurance Act, S.C. 1996, c. 23  (“EIA ”).  If the agreements between the Caisse and Camvrac do fall within the definition of “security interest” in s. 224(1.3)  ITA , then the property of Camvrac that is subject to the security interest of the Caisse is deemed to be held in trust for the Crown under s. 227(4.1)  ITA  and s. 86(2.1)  EIA  because Camvrac did not remit to the Crown income tax and employment insurance premiums deducted at source by Camvrac.

[2]     In my view, the agreements  between the Caisse and Camvrac gave rise to a “security interest” for the purposes of s. 224(1.3)  ITA . Camvrac’s property subject to the security interest was property that was subject to the Crown’s deemed trust. I would dismiss the appeal.

I.       Facts

[3]     On September 18, 2000, the Caisse granted Camvrac a line of credit up to $277,000. On September 25, 2000, Camvrac deposited $200,000 with the Caisse in accordance with a “Term Savings Agreement” providing that the deposit would mature on October 16, 2005. The “Term Savings Agreement” sets out the terms of Camvrac’s entitlement to the deposit and the Caisse’s obligation to pay Camvrac $200,000. The relevant portions of the “Term Savings Agreement” stated:

[translation]

Date of maturity:  October 16, 2005

. . .

PROVISIONS GOVERNING THE PRINCIPAL

2.    The member [Camvrac] agrees to make, on the date of acquisition, a deposit in the amount of $200,000 (hereinafter referred to as the “initial amount of deposit”).

3.    On the date of issue associated with the applicable term (“date of issue”), the initial amount of deposit and the interest then accrued on that amount shall be reinvested in the form of a deposit maturing on the maturity date associated with the applicable term (“date of maturity”).

4.    This deposit may neither be negotiated nor transferred.  No amount in principal or interest shall be redeemable or payable before the date of maturity.

5.    This deposit may be hypothecated or given as security only in favor of the issuing Caisse.

. . .

[4]     The Caisse and Camvrac also entered into a “Security Given Through Savings” agreement.  The most relevant terms read:

[TRANSLATION]

1.    RIGHT TO WITHHOLDING AND COMPENSATION

To secure the repayment of any sum in principal, interest, costs and accessories owed or to be owed the Caisse by:

:  the Depositor [Camvrac]

. . .

under:

:    (a)  a line of credit agreement in the amount of $277,000.00 granted to him (her) on 2000‑09‑18;

                                                   . . .

:    and under any debts or obligations, present or future, direct or indirect held by:

:    the Depositor

                                                                      . . .

(hereinafter referred to as “the Credit Contract[s]”)

the Depositor undertakes to maintain and consents to the withholding by the Caisse, in the account(s) or on the certificate(s) of deposit mentioned below, of the amount of $200,000.00 distributed as follows:

Account or certificate of deposit                 Sum withheld by the Caisse

identification

(for deposit certificates, state date

issued amount and certificate number)

ALTERNATIVE TERM SAVINGS              

5 YEARS IN THE AMOUNT OF

$200,000.00                                                  $200,000.00

______________________________          $____________________

. . .

The Caisse may withhold the sums shown above, . . . as long as all the amounts due under the Credit Contract(s) have not been fully repaid and, in the case of a line of credit, as long as it has not been cancelled.  In cases of default as provided for below, there shall be compensation between the Credit Contract(s) and the certificate(s) of deposit or the amounts deposited defined above, as provided for in Section 7.

2.    SAFEKEEPING OF CERTIFICATES

For the whole term of this agreement, the above-mentioned certificate(s) of deposit shall be kept by the Caisse.

3.    HYPOTHEC

To further secure the repayment of any sum owed or to be owed under the Credit Contract(s), the Depositor hypothecates and pledges the above‑mentioned certificate(s) of deposit and sums deposited, for an amount equal to the total amount of the sums withheld.  The parties also agree that the clause shown on the certificate(s) of deposit stipulating that such certificate(s) are neither negotiable nor transferable shall be deemed cancelled, effective from the date of these presents.

                                                                      . . .

7.    DEFAULT

The Depositor shall be in default in any of the following cases:

(a)   if any of the commitments under the Credit Contract(s) or these presents is not fulfilled;

(b)   if the Depositor or the Borrower becomes insolvent or goes bankrupt, or if he(she) makes a proposal and it is rejected or annulled;

                                                                      . . .

In the event of any default:

(a)   any sums owing under the Credit Contracts shall immediately become payable;

(b)   the Caisse may use the sums deposited or the certificate(s) of deposit contemplated herein, regardless of its(their) having matured or not, to compensate its claim under the Credit Contract(s);

                                                                       . . .

The consequences of a default are for the exclusive benefit of the Caisse and the latter may waive them expressedly.  The Caisse may, among others, without any prejudice to its rights, wait for the maturity date of the certificate(s) of deposit before exercising its rights as provided for in paragraphs (b) and (c) above.

8.    RESERVE OF RECOURSES

. . . Furthermore, failure by the Caisse to avail itself of any of its rights in case of default shall not be interpreted as a waiver of such rights.

[5]     Camvrac failed to pay the interest on its line of credit on November 25, 2000 and so was technically in default on that date. However, the Caisse took no steps as a result of the default and, according to the Caisse’s account summaries, Camvrac’s line of credit continued to accrue interest until January 31, 2001.  On February 7, 2001, Camvrac made an assignment in bankruptcy.   On February 21, 2001, the Caisse made the following note on its copy of the “Term Savings Agreement” : [translation] “To be closed on 21/2/2001 to realize on security.” Finally, on June 12, 2001, the Crown gave the Caisse notice to pay the amount owing to the Crown for unremitted employment insurance premiums and income tax deducted at source by Camvrac from the proceeds of the term deposit the Crown said was subject to its deemed trust.

[6]     Prothonotary Tabib of the Federal Court, Justice Pinard of the Federal Court, and Justice Létourneau writing for the Federal Court of Appeal found in favour of the Crown: 2005 FC 731, 2006 D.T.C. 6385, aff’d 2005 FC 1563, 2007 D.T.C. 5664, aff’d 2006 FCA 366, 361 N.R. 77.  The Caisse now appeals to this Court.

II.      The Primary Issue

[7]     Under the “Security Given Through Savings” agreement, the Caisse was entitled to effect compensation to reduce or eliminate Camvrac’s indebtedness to it if Camvrac defaulted on its line of credit.  The Caisse did so. The issue is whether the Crown is the beneficial owner of Camvrac’s term deposit to the extent of the unremitted employment insurance premiums and income tax deducted by Camvrac at source as a result of the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA . 

III.      Analysis

A.       The Definition of “Security Interest” in Section 224(1.3)  of the Income Tax Act 

[8]     Parliament has defined “security interest” in s. 224(1.3)  ITA . This definition provides that:

“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;

[9]     Section 227(4.1)  ITA  and s. 86(2.1)  EIA  create a deemed trust in favour of the Crown over property of the employer that has deducted income tax and employment insurance premiums at source. The deemed trust applies to property of the employer and property held by any secured creditor of the employer that, but for its security interest, would be property of the employer. The property is impressed with the deemed trust at the time the unremitted amounts were deducted at source by the employer. Section 227(4.1)  ITA  provides:

Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

Section 86(2.1)  EIA  is to the same effect with respect to employment insurance premiums deducted by employers at source.

[10] While the definition of “security interest” is similar to legal terminology used in the personal property security and other legislation of the provinces, the definition in s. 224(1.3)  ITA  is the only relevant definition of “security interest” for the purposes of s. 227(4.1)  ITA  and s. 86(2.1)  EIA .  Both s. 227(4.1) ITA  and s. 86(2.1)  EIA , which incorporate by reference the definition of “security interest” from s. 224(1.3)  ITA , apply

[n]otwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law . . . . [s. 227(4.1)  ITA ]

[n]otwithstanding the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law . . . . [s. 86(2.1)  EIA ] 

This is a clear indication that the scope of the deemed trust created by these provisions over property of the tax debtor is to be defined in terms of the statutory definition of “security interest” provided by Parliament in s. 224(1.3)  ITA  and not as the term security interest may be used in provincial legislation.

[11] As Binnie J. recently noted in Saulnier v. Royal Bank of Canada, 2008 SCC 58, [2008] 3 S.C.R. 166, at para. 16, “[f]or particular purposes Parliament can and does create its own lexicon.”  Parliament’s authority to define terms without reference to provincial law in areas of federal legislative competency was considered with respect to bankruptcy in Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453. Gonthier J. held for the majority, at para. 32, that

the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for purposes of the Bankruptcy Act.

[12] It is therefore open to Parliament to define a term in an area of its own legislative competence (Constitution Act, 1867, s. 91 (2A) “Unemployment Insurance” and s. 91(3)  “The raising of Money by any Mode or System of Taxation”), as it has done here, in order to ensure that there is a rule of general application across all of the provinces.  Were provincial law used to define the meaning of “security interest” in s. 224(1.3)  ITA  and, in turn, the scope of the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA , uniformity could not be achieved.  Rather, what constituted a “security interest” for the purposes of s. 224(1.3)  ITA  could be different from province to province.  The Minister’s ability to recover unremitted source deductions would then vary depending on an employer’s location. 

[13] Further, if provincial law were used to define the meaning of a “security interest” under s. 224(1.3)  ITA , a change in the provincial law of property security would affect the scope of the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA  from time to time. This level of uncertainty cannot have been what Parliament intended with the words “any interest in property that secures payment or performance of an obligation” in s. 224(1.3)  ITA .  This definition is incorporated by reference in s. 227(4.1)  ITA  and s. 86(2.1)  EIA  which create the deemed trust in favour of the Crown “[n]otwithstanding  . . . any enactment of a province”.

[14] In this case, Parliament has chosen an expansive definition of “security interest” in s. 224(1.3)  ITA  in order to enable maximum recovery by the Crown under its deemed trust for unremitted income tax and employment insurance premiums deducted at source by employers. Parliament did so, in part, in response to this Court’s decision in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, which interpreted the former deemed trust provisions in the ITA  narrowly.

[15] In order to constitute a security interest for the purposes of s. 227(4.1)  ITA  and s. 86(2.1)  EIA , the creditor must hold “any interest in property that secures payment or performance of an obligation”. The definition of “security interest” in s. 224(1.3)  ITA  does not require that the agreement between the creditor and debtor take any particular form, nor is any particular form expressly excluded. So long as the creditor’s interest in the debtor’s property secures payment or performance of an obligation, there is a “security interest” within the meaning of this section. While Parliament has provided a list of “included” examples, these examples do not diminish the broad scope of the words “any interest in property”: see Dagg v. Canada (Minister of Finance), [1997] 2 S.C.R. 403, at para. 68, and R. Sullivan, Sullivan on the Construction of Statutes (5th ed. 2008), at pp. 61-68.

[16] I agree with my colleague that the common linguistic meaning of the defined term “security interest” in s. 224(1.3)  ITA  is the English term “security interest”. A “security interest” is defined as any interest in property or “droit sur un bien” (right over property) that secures the performance of an obligation.  

[17]  For the reasons that follow, I conclude that the definition of “security interest” in s. 224(1.3)  ITA  applies to the facts before this Court. 

B.     The Relationship Between Contractual Compensation or Set-Off and a Security Interest

[18] Compensation and set-off are terms of art which I do not purport to define exhaustively in these reasons.  Compensation in Quebec is similar to set-off in the common law provinces. There are a number of circumstances giving rise to compensation or set-off.  There are also different kinds of compensation and set-off. “Legal compensation” is defined in arts. 1672 ff. of the Civil Code of Québec, S.Q. 1991, c. 64 (“C.C.Q.”).  Articles 1672 and 1673 state in part that:

1672.   Where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are extinguished by compensation, up to the amount of the lesser debt.

. . .

1673.   Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the object of both of which is a sum of money or a certain quantity of fungible property identical in kind.

[19] In the common law provinces, “legal set-off” is similarly statutorily defined. In the Ontario Courts of Justice Act, R.S.O. 1990, c. C.43, for example, “legal set-off” is defined in s. 111:

111. — (1) In an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant.

(2) Mutual debts may be set off against each other even if they are of a different nature.

(3) Where, on a defence of set off, a larger sum is found to be due from the plaintiff to the defendant than is found to be due from the defendant to the plaintiff, the defendant is entitled to judgment for the balance.

[20] “Equitable set-off” was compared and contrasted with legal set-off by Wilson J. in Holt v. Telford, [1987] 2 S.C.R. 193. Wilson J. said of equitable set-off, at pp. 205-6:

The distinction between set-off at law and set-off in equity was canvassed by the British Columbia Court of Appeal in C.I.B.C. v. Tuckerr Indust. Inc., supra, at p. 605:

Such a set-off has its origin in equity and does not rest on the statute of 1728. It can apply where mutuality is lost or never existed. It can apply where the cross obligations are not debts.

Equitable set-off, like legal set-off, is also raised by way of cross-claim (see Holt, at pp. 212-13).

[21] There may be some differences between legal compensation (in Quebec) and legal and equitable set-off (in the common law provinces).  However, the differences between legal compensation and legal and equitable set-off do not arise in this case because this Court is considering a right to compensation conferred on the Caisse by a contract between the Caisse and Camvrac (i.e. the “Security Given Through Savings” agreement). The Caisse and my colleague use the term “compensation conventionnelle”. I translate “compensation conventionnelle” as “contractual compensation”. 

[22] Contractual compensation achieves a similar goal to legal compensation or legal or equitable set-off, the discharge of mutual debts. However, contractual compensation achieves this goal through mutual consent. It provides the contracting parties with a self-help remedy that avoids the technical requirements of legal compensation or legal or equitable set-off : see J.-L. Baudouin and P.-G. Jobin, Les obligations (5th ed. 1998), at para. 981, and K. R. Palmer, The Law of Set-Off in Canada (1993), at pp. 263-64.  Both a contract providing for a right of compensation in Quebec and a contract providing for a right of set-off in the common law provinces are to be interpreted by a court in a manner that gives effect to the intentions of the parties as reflected in the words of the contract.

[23] I do not think it is correct to make a blanket determination that a contractual right to compensation or a contractual right to set-off can never be associated with a “security interest” or that they are always associated with a “security interest”.  Whether a contract providing for a right to compensation or a right to set-off also gives rise to a “security interest” within the meaning of s. 224(1.3)  ITA  requires that the terms of the contract be carefully considered to determine whether the parties intended to confer on one party or the other “any interest in property [of the other party] that secures payment or performance of an obligation”.

[24] In The Law of Set-Off (3rd ed. 2003), Professor S. R. Derham argues, I think persuasively, that some contracts including a right of set-off (or, in this case, contracts including a right of compensation) should be said also to involve security. As an example of a set-off agreement that also contains a security interest, Professor Derham describes a situation very similar to the one before this Court in the following words, at para. 16.82:

. . . a bank as a condition to the grant of a facility requires that a deposit be made with it which the depositor is not permitted to access until all indebtedness under the facility has been paid, and the parties agree that the bank may appropriate the deposit in discharge of the debt in the event of default in payment.  The essence of the arrangement is that the depositor’s property, in the form of the account in credit, is to function as a security.  Indeed, in the case of a charge-back in which express words of charge are used, a contractual set-off is the very remedy that would be contemplated . . . . [Emphasis added.]

[25] The essence of contractual compensation or set-off is that the terms of the contract reflect the mutual intention of the parties: see Derham, at para. 16.86.  If their mutual intention is to create a security interest to ensure that the right of  compensation or set-off will be an effective remedy, there is no reason to think that a security interest does not exist simply because the parties have chosen one mechanism for realizing on the security, rather than another.  What must be considered is the substance of the agreement.  If the substance of the agreement demonstrates that the parties intended an interest in property to secure an indebtedness, then a security interest exists within the meaning of s. 224(1.3)  ITA .

C.     Application of the Deemed Trust Provisions

[26] In this case, the Caisse says that its contractual right to effect compensation with Camvrac is not a “security interest” within the meaning of s. 224(1.3)  ITA .  It says that this contractual right did not confer on it an interest in Camvrac’s property with the intention of securing the line of credit that it extended to Camvrac. Rather, the Caisse says that the contractual right allowed it simply to extinguish its own indebtedness to Camvrac.

[27] The Crown submits that the definition of “security interest” in s. 224(1.3)  ITA  is broad enough to include the Caisse’s contractual right to effect compensation contained in the “Security Given Through Savings” agreement between the Caisse and Camvrac.  It says that the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA  protected its interest in the proceeds of Camvrac’s term deposit because the property of Camvrac subject to the Caisse’s security interest is beneficially owned by the Crown under its deemed trust to the extent of the unremitted source deductions.

[28] The issue then is whether the Caisse and Camvrac intended the agreements, which included the Caisse’s right to effect compensation, to create a “security interest” within the meaning of s. 224(1.3)  ITA .  In my view, they did.

[29] The relevant facts are these. Camvrac made a deposit of $200,000 with the Caisse. Camvrac and the Caisse entered into a  “Term Savings Agreement” under which Camvrac and the Caisse agreed that:

(a)   Camvrac’s deposit would be for a term of five years;

(b)   Camvrac could not negotiate or transfer the deposit;

(c)   the term deposit could be hypothecated or given as security, but only in favour of the Caisse.

Camvrac and the Caisse also agreed to enter into the “Security Given Through Savings” agreement. Under this agreement, Camvrac and the Caisse agreed that:

(a)   “To secure repayment of any sum . . . owed or to be owed the Caisse” by Camvrac under its line of credit that:

(i) Camvrac would maintain a deposit of $200,000;

(ii) Camvrac consented to the Caisse withholding repayment of the sum of $200,000;

as long as the line of credit was still outstanding.

(b)   In the event of default, there would be compensation between the line of credit and the deposit of $200,000.

These agreements expressly conferred on the Caisse an interest in the property of Camvrac (i.e. Camvrac’s deposit) to secure repayment of Camvrac’s indebtedness to the Caisse.

[30] It was the five-year term and the maintenance and retention of the $200,000 deposit, as well as Camvrac’s agreement not to transfer or negotiate the deposit and that the deposit could only be used as security with the Caisse, that created the Caisse’s interest in Camvrac’s property for the purposes of s. 224(1.3)  ITA .  In the absence of these encumbrances on Camvrac’s deposit, Camvrac could have withdrawn the deposit at any time. Should it have done so and still been indebted to the Caisse, the Caisse’s right to compensation would be ineffective because it would not be indebted to Camvrac at the time the Caisse had to resort to the remedy of compensation. However, in this case the terms of the agreements provided that Camvrac agreed to the encumbrances on its deposit of $200,000 so that the Caisse would continuously be indebted to Camvrac and that on default there would be effective compensation.  It is the fact that the agreements secured the Caisse’s right to effective compensation by conferring on the Caisse an interest in Camvrac’s property that created a “security interest” for the purposes of s. 224(1.3)  ITA .

[31] I note here, from the words of the agreements, that the Caisse itself conceived of its agreements with Camvrac as creating “security” for the line of credit. The “Term Savings Agreement” provided that the term deposit “may be hypothecated or given as security only in favor of the issuing Caisse” (emphasis added). In the “Security Given Through Savings” agreement, it was Camvrac’s term deposit which was used “[t]o secure the repayment” of the line of credit (emphasis added). The hypothecation provision contained in the “Security Given Through Savings” agreement was “[t]o further secure the repayment” (emphasis added). Thus, even in the absence of hypothecation, the agreements granted the Caisse rights over Camvrac’s deposit to ensure an effective compensation remedy. The rights and obligations ensuring an effective compensation remedy were the Caisse’s primary security because the hypothecation was viewed as “further” security.

[32]  While the mechanism by which the Caisse would realize on its security was compensation, that mechanism in no way detracts from the fact that the deposit was encumbered by the conditions agreed to by Camvrac and imposed by the Caisse in order to ensure that the remedy of compensation would be effective.  Nor does the fact that the Caisse could realize on its security by means of a book entry diminish the fact that the deposit secured Camvrac’s obligation to the Caisse.  In the absence of the restrictions imposed by the Caisse, Camvrac’s right to repayment of its deposit of $200,000 could have been encumbered or transferred to a third party as security: see arts. 1637 and 2710 C.C.Q. and B. Crawford, The Law of Banking and Payment in Canada (loose-leaf), vol. 2, at § 9:30.20.  Just because a creditor holding a security interest (the Caisse) is also the debtor (the Caisse owes the $200,000 deposited by Camvrac to Camvrac) does not make it any less of a security interest for the purposes of s. 224(1.3)  ITA .

[33] The situation in this case is in contrast to one in which a bank has what may be a standard term in a deposit agreement that any credit in the customer’s account may be appropriated by the bank in discharge of the customer’s potential indebtedness to the bank. In that case, there is no obligation on the customer to maintain a specific sum or, indeed, any amount deposited in the account at all as security for a loan that may or may not exist.  There is no continuous right in the customer’s property to protect the bank against default.  The customer may withdraw any or all of the amounts in the account at any time.  No specific property secures repayment.  In these circumstances, based on this type of deposit agreement, the customer’s property — its right to claim a deposit — cannot be said to secure its indebtedness to the bank. Unlike the case before this Court, this is a simple contractual right to set-off or compensation without attendant security.

D.      Responses to Deschamps J.

[34] In my view, the difference in the results reached by Deschamps J. and myself in this case stems from the approaches we have taken. If I understand my colleague’s approach correctly, she focusses on the remedy of compensation to conclude it is not a security interest. Under my approach, it is necessary to consider all of the relevant terms of the agreements between Camvrac and the Caisse and not solely the provisions entitling the Caisse to the remedy of compensation. In my view, the issue is not whether compensation alone is viewed as a security interest. It is whether the agreements between the parties — including the Caisse’s contractual right to effect compensation — created a “security interest” to ensure that the remedy of compensation would be effective.

[35] Deschamps J. says that a creditor with a right to effect compensation or set-off attains a goal analogous to a security interest. However, in her view, creditors who exercise their right to compensation or set-off are not enforcing a security by realizing on the debtor’s property, but are instead just extinguishing mutual obligations.

[36]  I agree with her that compensation or set-off is the extinguishment of mutual obligations. However, mutual obligations must exist for compensation to be an effective remedy. If a debtor can, at its own option, eliminate the creditor’s liability to it (by withdrawing its deposit), the creditor may have a right of compensation or set-off, but it may not be effective. It is the encumbrances placed on the debtor’s claim against the creditor that ensure that the creditor will remain liable to the debtor and, in this way, ensure an effective compensation remedy.

[37] Deschamps J. also notes that compensation is not specifically enumerated in s. 224(1.3)  ITA  and that this is important for two reasons.  First, she relies on academic authorities who assert that a contractual right to set-off cannot create a security interest because the right does not confer on the creditor an interest in the debtor’s property. Second, she says that compensation would have to be specifically enumerated in s. 224(1.3)  ITA  because compensation and set-off are not included in the provincial statutes respecting personal property security. Legal compensation is not included in the division relating to hypothecs in the Civil Code of Québec.  She also says that set-off is excluded from the personal property security legislation of the common law provinces which all include definitions of security interest that are similar to that in s. 224(1.3)  ITA .  In light of the exclusion of contractual compensation and contractual set-off from provincial legislation dealing with security interests over property and the fact that contractual compensation does not confer on the creditor an interest in the debtor’s property, its absence from the list of examples of security interests provided in s. 224(1.3)  ITA  is evidence that Parliament did not intend to include contractual compensation or contractual set-off within its definition of “security interest”.

[38] With respect to my colleague’s reliance on academic authorities who say that a contractual right to set-off does not confer on a creditor an interest in property, I understand these authorities differently than my colleague.  Professor Derham explains that a contract containing a right to set-off like the one at issue in this case can also confer on a creditor an interest in a debtor’s property: see Derham, at para. 16.82.  However, the authors upon whom Deschamps J. relies do not address the precise issue before this Court.  For example, R. C. C. Cuming, C. Walsh and R. J. Wood say, in Personal Property Security Law (2005):

Set-off, whether contractual or procedural, does not involve a security interest because neither party to the set-off acquires a property interest. [p. 87]

And Professor R. M. Goode says, in Goode on Legal Problems of Credit and Security (4th ed. 2008):

The party asserting it [the right of set-off] never acquires rights in the other’s monetary claim at all; he merely asserts a countervailing claim which operates in pro tanto extinction of his monetary liability. [para. 1-19]

However, in this case, the Caisse has acquired rights in Camvrac’s property by the encumbrances placed on Camvrac’s deposit.  Those rights ensured that Camvrac’s claim against the Caisse for its deposit would continuously exist in order to ensure that the compensation remedy would be effective. The P. Wood quote relied upon by Deschamps J. states:

[With respect to set-off] . . . a depositor does not grant a property right over the depositor’s ownership of the deposit claim back to the bank to secure a loan owed by the depositor to the bank.

(Set-Off and Netting, Derivatives, Clearing Systems (2nd ed. 2007), at para. 1-008)

Yet, in this case, Camvrac did grant the Caisse a continuous interest in its deposit.

[39] It appears these authors were considering a bare right to contractual set-off such as the standard form deposit agreement I have discussed above. I believe these authors are saying that the remedy of set-off results in no property of the debtor coming in the hands of the creditor as the result of a set-off. All that occurs is the extinguishment of mutual debts. These authors are not addressing the period of time before set-off takes place where, as in this case, the creditor has taken steps to place restrictions on the debtor’s property to ensure that the creditor continuously remains liable to the debtor so that the set-off remedy will be effective. 

[40] I agree with my colleague that legal compensation does not appear grouped with hypothecs in the Civil Code of Québec.  However, the issue is not whether compensation is a security interest.  The fact that the terms “contractual compensation” or “contractual set-off” do not specifically appear as examples of the defined term “security interest” in s. 224(1.3)  ITA  does not mean that an agreement which provides for compensation, but which also conforms to the statutory definition of a “security interest” in s. 224(1.3)  ITA  is to be exempted from the purview of this definition.  The list is non‑exhaustive.  Even when the remedial mechanism is compensation, so long as an agreement confers on a creditor an interest in property that secures the payment or performance of an obligation through compensation, the agreement will constitute  a “security interest” within the meaning of s. 224(1.3)  ITA .

[41] Although it is unnecessary for me to decide this point in order to resolve the issues in this appeal, I would respectfully disagree with my colleague that any agreement that provides for contractual set-off is categorically excluded from the personal property security legislation of the common law provinces. In the common law provinces, the approach to personal property security arrangements is functional, rather than formal. For example, s. 3(1) of Alberta’s Personal Property Security Act, R.S.A. 2000, c. P-7, states that it applies to

(a)   every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and

(b)   without limiting the generality of clause (a), a chattel mortgage, conditional sale, floating charge, pledge, trust indenture, trust receipt, assignment, consignment, lease, trust and transfer of chattel paper where they secure payment or performance of an obligation.

See also the personal property security acts of the other provinces and territories:  s. 3(1) in New Brunswick (S.N.B. 1993, c. P-7.1), Prince Edward Island (R.S.P.E.I. 1988, c. P-3.1), Manitoba (C.C.S.M., c. P35) and Saskatchewan (S.S. 1993, c. P-6.2); s. 2(1) in British Columbia (R.S.B.C. 1996, c. 359), Northwest Territories and Nunavut (both S.N.W.T. 1994, c. 8); s. 4(1) in Nova Scotia (S.N.S. 1995-96, c. 13) and Newfoundland and Labrador (S.N.L. 1998, c. P-7.1); s. 2(a) in Ontario (R.S.O. 1990, c. P.10); and s. 2 in Yukon (R.S.Y. 2002, c. 169).

[42] Given the functional approach to personal property security arrangements  in these statutes, it is difficult for me to see how any transaction that confers an interest on a creditor in a debtor’s property to secure an obligation could be categorically excluded unless that type of transaction has been defined and expressly excluded by the legislation itself.  To my knowledge, an agreement that provides for security together with a right of set-off to realize on that security is not expressly excluded in any of the common law provincial personal property security statutes. What is required by the common law provincial personal property security statutes is a decision about whether a particular contract or agreement in a given case functions as a security interest.

[43] Deschamps J. says the Caisse did not rely on its hypothec. She says the mere obligation of Camvrac to maintain its deposit and the Caisse’s right to withhold repayment of the deposit do not create the real right necessary for a “security interest”. She distinguishes between “droit de rétention”, which she says only applies to corporeal property and which has some of the attributes of a real right and a “droit de retenue”, which applies to retention of amounts of money and which has no attributes of a real right and corresponds to compensation.        

[44] At both civil and common law, a claim, like a deposit, may be charged with a real right or become the subject of a creditor’s interest in property. For example, accounts receivable are often assigned to lending institutions as security for loans. Indeed, a deposit in a bank or caisse is an account receivable in favour of the customer. In the case of term deposits, in the absence of restrictions imposed by the lending institution, a term deposit may be assigned just like other receivables. An assignee has an interest in or a real right over the account receivable, that is an encumbrance on the claim of the creditor to the proceeds of the receivables whether from debtor customers or from a debtor bank or caisse.

[45] In s. 224(1.3) ITA , the word “interest” in English is rendered as “droit” or right in French. As Marc Cuerrier notes in “The Harmonization of Federal Tax Legislation” (section 2.3 ), booklet 7 published in The Harmonization of Federal Legislation with the Civil Law of the Province of Quebec and Canadian Bijuralism (2001), this terminological difference in the English and French reflects differences in the two major legal systems of Canada. While in the common law it is possible to speak independently of both rights and interests in property, only rights are recognized in the civil law. As Martin Lamoureux notes in his article “The Income Tax Act , the Excise Tax Act  and the Term Interest: An Interesting Case for Harmonization” published in The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism — Collection of Studies in Tax Law 2001 (2002), 7.1, the term “droit” in civil law corresponds most to the term “interest” in common law.

[46] In this case, the issue is not whether the Caisse’s interest in or right over Camvrac’s property is one that conforms with the property security legislation of the provinces. This is because the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA , which incorporate by reference the definition of “security interest” in s. 224(1.3)  ITA , applies “[n]otwithstanding . . . any enactment of a province” (see also DaimlerChrysler Financial Services (debis) Canada Inc. v. Mega Pets Ltd., 2002 BCCA 242, 212 D.L.R. (4th) 41, at para. 31). However, it is of note that the agreements between the Caisse and Camvrac did conform to the requirements for a movable hypothec with delivery established by this Court in Caisse populaire Desjardins de Val‑Brillant v. Blouin, 2003 SCC 31, [2003] 1 S.C.R. 666, so as to constitute a real right under the Civil Code of Québec.

[47] In the Civil Code of Québec, a hypothec is defined as a real right (art. 2660 C.C.Q.). As my colleague notes, a claim, like an account receivable, can be hypothecated with or without delivery (art. 2710 C.C.Q.).  In Val‑Brillant, Gonthier J., for the majority, considered what was necessary for a movable hypothec with delivery over a non-negotiable claim, like the one at issue in this case. He held at para. 28 that:

A movable hypothec with delivery on a non‑negotiable claim is therefore validly granted and published [per arts. 2702 and 2703 C.C.Q.] where (i) the debtor has transferred effective control of the claim to the creditor by giving the creditor the right to collect directly in the event of default, without further authorization by the debtor; (ii) where the claim is evidenced by a non‑negotiable title which it is possible to hand over, such title has been handed over to the creditor; and (iii) the necessary steps have been taken so that the hypothec may be set up against the debtor of the claim in accordance with art. 1641 C.C.Q.

[48] In this case, the agreements between the Caisse and Camvrac met these criteria. First, the Caisse had effective control over Camvrac’s claim. The five-year term and the conditions in the “Security Given Through Savings” agreement ensured that the Caisse had effective control over Camvrac’s deposit and that, in the event of default, the Caisse could effect compensation between the line of credit and Camvrac’s deposit without further authorization from Camvrac.  Second, it is not clear on the record whether a certificate of deposit was or was not issued in this case.  Both clause 2 of the “Security Given Through Savings” agreement and the fact that the Caisse noted on its copy of the “Term Savings Agreement” that it had been [translation] “To be closed on 21/2/2001 to realize on security” suggest that, if a certificate of deposit was issued, it was held by the Caisse.  However, nothing turns on whether Camvrac’s term deposit was evidenced by a certificate of deposit.  Gonthier J.’s second criteria for a movable hypothec with delivery over a non-negotiable claim only applies where a non-negotiable title exists.  Where it does not, the second criteria is not applicable.  Third, a movable hypothec with delivery is set up against the account debtor and all other claimants by taking the necessary steps under art. 1641 C.C.Q. Under art. 1641 C.C.Q., the assignment may be set up against the account debtor and other claimants as soon as the account debtor has acquiesced in it.  In this case, in respect of Camvrac’s deposit, the Caisse is the account debtor as well as the assignee. Obviously, the Caisse as account debtor acquiesced in the assignment of its debt to itself as assignee.  In my view, because the agreements between the Caisse and Camvrac met the criteria of a movable hypothec with delivery on a non-negotiable claim and because a hypothec is defined as a real right in the Civil Code of Québec, the Caisse must have held a real right over Camvrac’s property.

[49] As my colleague notes at para. 129, art. 2702 C.C.Q. has been amended and these amendments have come into force since this case was heard.  It is not necessary to embark upon an interpretation of these amendments.  However, what they point out is that, should provincial law form the basis for defining a “security interest” under s. 224(1.3)  ITA , the scope of the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA  could change from time to time with changes to provincial property security law.  In my view, this result is not contemplated by the words of ss. 224(1.3)  and 227(4.1)  ITA , and s. 86(2.1)  EIA .

[50] Deschamps J. says that Camvrac’s obligation to maintain the deposit and the Caisse’s right to withhold repayment “were of residual application” only (para. 120). During the term of the deposit, the Caisse was not required to return the deposit until the term had expired.

[51] Even if the obligation to maintain and the right to retain are residual and apply only after the five-year term of the deposit has expired, they are nonetheless encumbrances that could affect Camvrac’s use of its property. Indeed, as Deschamps J. says, they are mechanisms provided “to ensure that legal or conventional compensation could be effected” (para. 120). That is precisely the point. The agreements entered into by Camvrac and the Caisse created rights and obligations, including the Caisse’s right of retention and Camvrac’s obligation to maintain the deposit, to ensure that the Caisse would remain liable to Camvrac if the Caisse had to resort to compensation as a remedy.

[52] Finally, Deschamps J. says that the Caisse’s right of retention of Camvrac’s $200,000 deposit does not confer on the Caisse a real right to Camvrac’s term deposit. She says at para. 121:

The most important thing to bear in mind is that none of the clauses . . . created a real right or [a] security interest . . . .  A term is a deadline for repayment. The right to deduct is simply the right of a creditor not to perform an obligation to pay as long as a debt is owed to him or her. It is, in a way, an extension granted for repayment. As for the obligation to maintain, it is clearly an undertaking by one person to another to perform an obligation.  The limit on the right to transfer, hypothecate or negotiate constitutes an obligation “not to do”.

[53] She further says, at para. 124, that my approach may conflict with how negative pledges are treated under the functional approach to personal property security in the common law provinces. She quotes Professors Cuming, Walsh and Wood who say, at p. 86:

A “negative pledge” clause or negative covenant in a loan agreement under which the borrower covenants not to encumber or dispose of some or all of her personal property until the loan is repaid does not create a security interest since, standing alone, the covenant does not create an interest in the property of the borrower. A negative pledge clause in a security agreement cannot prevent the covenantor from giving another effective security interest in the collateral.  [Emphasis added.]

[54] I believe her paras. 121 and 124 highlight the difference between us. I would agree with my colleague that no security interest has been created if a contractual right to compensation only means that, should the debtor default, the creditor may retain amounts owed to the debtor, if any. I would also agree that a negative pledge “standing alone” does not “prevent the covenantor from giving another effective security interest in collateral”.

[55] However, much more was occurring here. From the outset, the Caisse required that Camvrac make a term deposit subject to encumbrances in order to ensure that the Caisse would remain liable to Camvrac, in the event that the Caisse had to resort to the remedy of compensation as a result of default. The right of retention, the obligation to maintain and Camvrac’s pledge not to hypothecate or use its term deposit as security in favour of anyone besides the Caisse were three of a series of encumbrances that created the Caisse’s interest in or right over Camvrac’s property to ensure that compensation would be an effective remedy.

E.      To Which of the Unremitted Source Deductions Did the Deemed Trust Apply?

[56] Having concluded that the agreements between the Caisse and Camvrac created a “security interest” within the meaning of s. 224(1.3)  ITA , it is now necessary to determine whether the deemed trust covered all unremitted source deductions that the Crown sought from the Caisse.

[57] On the facts of this case, some of the unremitted employment insurance premiums and income tax deducted was owed by Camvrac to the Crown before Camvrac entered into the “Term Savings Agreement” with the Caisse.  There is some question, then, in this case, whether the deemed trust provisions in s. 227(4.1)  ITA  and s. 86(2.1)  EIA  can confer beneficial ownership on the Crown over Camvrac’s after-acquired property (i.e. the term deposit).

[58] A second issue is at what point the Caisse realized on its security in the term deposit by effecting compensation. The Caisse says that the relevant date was the date of default, November 25, 2000. The Crown says that the relevant date was February 21, 2001. Under s. 227(4.1) ITA  and s. 86(2.1)  EIA , Camvrac’s property is impressed with the Crown’s deemed trust from the time income tax and employment insurance premiums were deducted at source by Camvrac.  The date at which the Caisse effected compensation is important because unremitted employment insurance premiums and income tax were deducted by Camvrac until the end of January 2001.  If the Caisse is correct, as of November 25, 2000 the Crown would have no entitlement to the proceeds of the term deposit for source deductions that were deducted after November 25, 2000 since the term deposit would no longer have been the property of Camvrac once compensation had been effected and could not be subject to the deemed trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA . If the Crown is correct, then the proceeds would be subject to the deemed trust for the full amount of the unremitted source deductions to February 21, 2001 (as the date when compensation was effected by the Caisse).

[59] With respect to whether the deemed trust provisions apply to after-acquired property, this Court interpreted s. 227(4.1)  ITA  broadly in First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, as applying to both property in the hands of the tax debtor and after-acquired property. In First Vancouver, Iacobucci J. held for the Court, at para. 38, that

based on the plain language of ss. 227(4)  and 227(4.1)  as supported by the purpose of the provisions and intentions of Parliament, the deemed trust created by these sections encompasses property which comes into the hands of the tax debtor after the trust arises.

The trust created by s. 227(4.1)  ITA  and s. 86(2.1)  EIA  is deemed to be in effect “at any time”. It does not matter that the term deposit became the property of Camvrac only after some of the employment insurance premiums and income tax deductions went unremitted since the deemed trust “encompasses property which comes into the hands of the tax debtor after the trust arises”. The proceeds of Camvrac’s term deposit are therefore available to the Crown to discharge all of the outstanding employment insurance premiums and income tax deducted at source by Camvrac, whether the unremitted deductions occurred before or after Camvrac entered into the “Term Savings Agreement” and until the date that the Caisse realized on its security.

[60] As to the date on which the Caisse exercised its right to compensation, I agree with the Crown for two reasons. First, February 21, 2001 is the date on which the Caisse itself noted on its copy of the “Term Savings Agreement”:  [translation] “To be closed on 21/2/2001 to realize on security.” This is evidence that the Caisse believed that compensation was effected on that date and not earlier. Second, the Caisse, according to its account records, continued to charge interest on the line of credit until January 31, 2001 despite the fact that Camvrac had defaulted on November 25, 2000 by failing to make its interest payment to the Caisse due on that date.  The “Security Given Through Savings” agreement stated that:

7.    DEFAULT

                                                                      . . .

The consequences of a default are for the exclusive benefit of the Caisse and the latter may waive them expressedly.  The Caisse may, among others, without any prejudice to its rights, wait for the maturity date of the certificate(s) of deposit before exercising its rights as provided for in paragraphs (b) and (c) above.

8.    RESERVE OF RECOURSES

. . . Furthermore, failure by the Caisse to avail itself of any of its rights in case of default shall not be interpreted as a waiver of such rights.

[61] These terms acknowledged that the Caisse had a discretion as to the timing of when compensation would be effected. The Caisse was entitled, as it did here, not to effect compensation immediately upon default, but instead could choose to allow the line of credit to remain open.  This is what the Caisse did.  It did not effect compensation until February 21, 2001.  The Caisse is liable to pay to the Crown the amounts for employment insurance premiums and income tax deducted at source by Camvrac up to, and including, any deductions not remitted as of February 21, 2001.

F.      Interest Calculation

[62] This issue may be disposed of quickly.  The Caisse says that if it is liable to the Crown, the law of Quebec with respect to pre-judgment interest rather than ss. 36(2)  and 37(2)  of the Federal Courts Act, R.S.C. 1985, c. F-7 , applies.  I cannot agree with the Caisse.  Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94, is dispositive of the issue.  Indebtedness under the ITA  and EIA  gives rise to a cause of action outside of a particular province and so the rules respecting pre-judgment interest in ss. 36(2)  and 37(2)  of the Federal Courts Act  apply:  see Markevich, at paras. 39-40.  The cause of action was that of the Crown against the Caisse for unremitted source deductions pursuant to its deemed trust which arose because the Caisse appropriated funds belonging to Camvrac which were impressed with the Crown’s deemed trust.

IV.   Conclusion

[63] For these reasons, I find that the terms of the “Term Savings Agreement” and the “Security Given Through Savings” agreement between the Caisse and Camvrac created a “security interest” within the meaning of s. 224(1.3)  ITA .  The Caisse was liable to the Crown for the unremitted employment insurance premiums and income tax deducted at source by Camvrac up to and including February 21, 2001.  Interest is calculated in accordance with ss. 36(2)  and 37(2)  of the Federal Courts Act  from February 21, 2001, when the Caisse effected compensation, to the date of payment.

[64] The appeal should be dismissed with costs in this Court only.

English version of the reasons of LeBel and Deschamps JJ. delivered by

[65] Deschamps J. (dissenting) — The Court is once again being asked to consider the scope of the rights resulting from the deemed trust created by Parliament to ensure that employers remit income tax and employment insurance premiums deducted from their employees’ salaries to the Receiver General for Canada.  For the reasons that follow, I find that compensation is not a “security interest” within the meaning of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”), and the Employment Insurance Act, S.C. 1996, c. 23  (“EIA ”), and that the appellant’s contractual right may be set up against the respondent because the respondent cannot have more rights than the employer itself had.  I would accordingly allow the appeal and remand the case to the trial judge to establish the amount of the deductions that had not been remitted at the time the compensation agreement was signed.

1.     Issues

[66] The main issue in this appeal concerns the effect of the deemed trust provided for in the ITA  and the EIA  on assets subject to compensation under an agreement between the Caisse populaire Desjardins de Bon Conseil, to whose rights the appellant (“Caisse”) has succeeded, and the employer, Camvrac Enterprises Inc. (“Camvrac”).  The Caisse raises an additional issue related to the calculation of interest.  It submits that as a result of ss. 36(1)  and 37(1)  of the Federal Courts Act, R.S.C. 1985, c. F‑7 , interest should have been calculated in accordance with the rule that applies in Quebec.  The respondent contends that ss. 36(2) and 37(2) of that Act apply instead, because the cause of action arose outside Quebec.  I will discuss the issue relating to the deemed trust first before turning to the interest issue.

2.     Facts

[67] Between May 2000 and January 2001, Camvrac, an employer doing business in Quebec, failed to remit $26,863.53 in income tax and employment insurance premiums deducted from its employees’ salaries to the Receiver General for Canada.  Nothing in the evidence specifies the amount owed by Camvrac as of September 25, 2000, but according to the Federal Court prothonotary who heard the matter at trial, the unremitted deductions totalled $5,558.72 in October 2000.

[68] On September 18, 2000, the Caisse and Camvrac signed a variable credit contract under which the Caisse extended $277,000 in credit to Camvrac.  A few days later, on September 25, 2000, two additional agreements were signed:  a term savings agreement under which Camvrac deposited $200,000 in the Caisse for a term expiring on October 16, 2005, and an agreement to give savings as security for the repayment of any amount owed to the Caisse, in which Camvrac granted the Caisse a “right to withholding and compensation” and a hypothec.  Only the right to compensation is in issue in this appeal: neither the hypothec nor the right to withhold was raised, enforced or exercised, or set up against the respondent.  Although excerpts from the relevant clauses are also set out in the Appendix, I will reproduce one here that I will be discussing more specifically:

[translation]

1.    RIGHT TO WITHHOLDING AND COMPENSATION

To secure the repayment of any sum in principal, interest, costs and accessories owed or to be owed the Caisse by the Depositor under a line of credit agreement in the amount of $277,000.00 granted to him (her) on 2000‑09‑18 and under any debts or obligations, present or future, direct or indirect held by the Depositor, the Depositor undertakes to maintain and consents to the withholding by the Caisse, in the account(s) . . . mentioned below, of the amount of $200,000.00 distributed as follows: . . . . Alternative term saving 5 years in the amount of $200,000.00 . . . .

The Caisse may withhold the sums shown above, along with the interest from the certificates of deposit if applicable, as long as all the amounts due under the Credit Contract(s) have not been fully repaid and, in the case of a line of credit, as long as it has not been cancelled.  In cases of default as provided for below, there shall be compensation between the Credit Contract(s) and the certificate(s) of deposit or the amounts deposited defined above, as provided for in Section 7.

[69] I note that the parties and the courts below have sometimes referred to the term deposit as a “certificate of deposit”.  In my opinion, as is indicated in the term savings agreement, it is simply a term deposit.  But what it is called is of no consequence in light of the mechanisms that are at issue in this appeal.

[70] On November 25, 2000, Camvrac defaulted on the interest on the borrowed amount.  On December 1, 2000, that interest was paid by means of a manual transfer of funds effected by the Caisse.  A statement dated December 31, 2000, shows a debt of $277,000 owed by Camvrac to the Caisse; it also indicates that monthly interest on the total amount of the loan was charged to Camvrac.  A savings and investment account statement dated January 31, 2001 shows a balance of $200,578 in respect of the deposit.  On February 5, 2001, Camvrac made an assignment in bankruptcy.  On its copy of the deposit agreement, the Caisse made the following note: [translation] “To be closed on 21/2/2001 to realize on security.”

[71] On June 12, 2001, the respondent required the Caisse to pay her $26,863.53 owed by Camvrac for payroll deductions.  She submits that this amount was protected by the deemed trust resulting from provisions of the ITA  and the EIA .  The Caisse counters that the note made on the deposit agreement on February 21, 2001 was merely administrative in nature and that its debt to Camvrac was extinguished by compensation.

3.      Judicial History

[72] Before a prothonotary of the Federal Court, the respondent argued that the deposited amount was property of Camvrac that was subject to the deemed trust, and that in enforcing its security interest on February 21, 2001, the Caisse had realized on that certificate and should have paid her the amount of the deductions Camvrac had failed to remit.  The Caisse submitted that under the agreement with Camvrac, the mutual debts — its own and that of Camvrac — became exigible when Camvrac defaulted and that those debts had been extinguished by compensation.  In the prothonotary’s opinion, there was no doubt that the deposited amount was held as security, that in “cashing it in”, the Caisse was enforcing a security interest, and that the deposited amount was subject to the deemed trust.  She therefore held that “the value of the benefit conferred on the [Caisse] through the realization on its security interest in the certificate of deposit constitutes the proceeds from the certificate of deposit, and must be paid to the Receiver General” (2005 FC 731, 2006 D.T.C. 6385, at para. 22).  According to the prothonotary, legal compensation could not be relied on, because the term of the deposit had not expired.  She added that if the Caisse wanted to avail itself of its contracts with Camvrac, it had to manifest its intention to enforce them, which it did not do until February 21, 2001, by which time the respondent’s right had priority.  The prothonotary therefore ordered the Caisse to pay the amount claimed by the respondent.  She awarded interest at the rate provided for in ss. 36(2)  and 37(2)  of the Federal Courts Act .

[73] The Federal Court upheld the prothonotary’s judgment (2005 FC 1563, 2007 D.T.C. 5664).  In response to the Caisse’s argument that the prothonotary had failed to consider the forfeiture of the term clause in the term savings agreement, the court stated that although conventional compensation could have been effected under the terms of the contract before the expiry of the term of the deposit, the Caisse had not exercised its right to do so until February 21, 2001, by which time the deposit amount was subject to the deemed trust.  The Federal Court rejected the Caisse’s argument that compensation is not a security interest, relying instead on the French version of the definition of “security interest” (garantie) in s. 224(1.3)  ITA  to conclude that even if compensation were held to constitute a payment, it would be considered a “security interest” within the meaning of the ITA .

[74] The Federal Court of Appeal also concluded that the ITA ’s definition of “security interest” is sufficiently broad to include the Caisse’s right to compensation in respect of Camvrac’s deposit, and that the provisions concerning the deemed trust authorized the respondent to recover from the Caisse the amounts owed by Camvrac (2006 FCA 366, 361 N.R. 77).  On the interest issue, the Court of Appeal relied on Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94, and Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31, and upheld the trial judgment.

4.       Parties’ Arguments Concerning the Deemed Trust

[75] The Caisse advances three arguments:  (1) the courts below erred in finding that the mechanism it relies on is a security interest within the meaning of ss. 224(1.3)  and 227(4.1) ; (2) compensation is not a mechanism for performing obligations; and (3) the time when the debt was extinguished does not depend on whether the compensation is characterized as legal or conventional, but in the alternative, if it must be characterized, it should instead be regarded as a contractual arrangement for compensation in the future.  This last argument does not appear to have been raised as forcefully in the courts below, but the facts and legal concepts relied on remain the same.

[76] The respondent contends that the deemed trust creates an absolute priority and that, regardless of whether the compensation is conventional or legal or of whether compensation constitutes a security interest, the proceeds from the “cashing in” of the term deposit must be paid to her up to the amount of the source deductions owed by the employer.

[77] Because the courts below held that compensation constitutes a “security interest” as defined in s. 224(1.3)  ITA , I will deal with this issue first.  I will then consider whether the contractual right to compensation may be set up against the respondent.

5.     “Security Interest” as Defined in Section 224(1.3)  ITA 

[78] Over ten years ago, Gonthier J. observed in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, at para. 22, that a clash between conflicting legislative objectives had given rise to a competition of priorities between deemed trusts and consensual security interests.  In 1998, Parliament enacted legislation to expand the scope of the deemed trust (S.C. 1998, c. 19, s. 226(1)) and give it priority over every “security interest” as that term is defined in s. 224(1.3) .  In this context, it is important to clearly delineate the concept of “security interest” as defined in that provision.

[79] Although the provisions in issue in this appeal — ss. 224(1.3) , 227(4)  and 227(4.1)  ITA  and the corresponding provisions of the EIA  — are reproduced in the Appendix, I will nevertheless reproduce the more relevant passages here for ease of reference.  Section 224(1.3)  ITA  defines “security interest” for the purposes of the deemed trust.  The English version of the definition reads as follows:

“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;

[80] The terminology used in the French version is different.  On the one hand, the term “security interest” is rendered as “garantie”.  On the other hand, whereas the word “interest” is used in the English expression “interest in property”, the word “droit” is used instead in the expression “droit sur un bien” in French:

« garantie » Droit sur un bien qui garantit l’exécution d’une obligation, notamment un paiement.  Sont en particulier des garanties les droits nés ou découlant de débentures, hypothèques, privilèges, nantissements, sûretés, fiducies réputées ou réelles, cessions et charges, quelle qu’en soit la nature, de quelque façon ou à quelque date qu’elles soient créées, réputées exister ou prévues par ailleurs.

[81] The concept of “garantie” can vary in scope depending on the context.  It is therefore important that the two versions be read together and that the meaning of the terms “security interest” and “garantie” be harmonized in the context of s. 224(1.3)  ITA .  It should be noted that there is no distinct federal common law: Quebec North Shore Paper Co. v. Canadian Pacific Ltd., [1977] 2 S.C.R. 1054, McNamara Construction (Western) Ltd. v. The Queen, [1977] 2 S.C.R. 654, and P. Denault, La recherche d’unité dans l’interprétation du droit privé fédéral (2008), at p. 38.  Where the suppletive law must be applied to interpret a concept incorporated into a federal rule, the law of the province is the relevant source: Federal Law—Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4, s. 8 , amending the Interpretation Act, R.S.C. 1985, c. I‑21 .  As a result, absent an express provision to the contrary, federal legislation must be interpreted in a manner consistent with the concepts and institutions of the legal system of the province in which it is to be applied: A. Morel, “La rédaction de lois bilingues harmonisées avec le droit civil”, in The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism — Collection of studies (1997), 309, at p. 313.

[82] Furthermore, not only must reference be made — when necessary to interpret federal legislation — to the law of the province in which it is to be applied, but both the English and French versions must be taken into consideration: M. Bastarache et al., The Law of Bilingual Interpretation (2008), at pp. 42 et seq.  I will begin by analysing the English and French versions to determine whether a shared meaning can be established.  In the case at bar, this analysis leads to a notion common to the civil law and the common law that makes it possible to harmonize the application of the taxing provision in the two legal systems.

[83] Given that the terms “security interest” in the English version and “garantie” in the French version may not have the same scope, it will be necessary to establish the shared meaning of the English and French versions by applying the principles of bilingual interpretation recently reiterated in R. v. S.A.C., 2008 SCC 47, [2008] 2 S.C.R. 675, at paras. 14‑16 (see also Bastarache et al. and P.‑A. Côté, The Interpretation of Legislation in Canada (3rd ed. 2000), at p. 327).

[84] There are two steps to this analysis:  identifying the shared meaning and establishing Parliament’s intent.  At the first step, there are three possibilities (S.A.C.,  at para. 15):

First, the English and French versions may be irreconcilable. . . .  Second, one version may be ambiguous while the other is plain and unequivocal.  The shared meaning will then be that of the version that is plain and unambiguous:  Daoust, at para. 28; Côté, at p. 327.  Third, one version may have a broader meaning than the other.  According to LeBel J. in Schreiber, at para. 56, “where one of the two versions is broader than the other, the common meaning would favour the more restricted or limited meaning”.

[85] The first possibility can be ruled out:  the two versions are not irreconcilable.  In English, the expression “security interest” has a well‑established meaning, whereas the French word “garantie” is more general.  While every security interest is necessarily a garantie, the opposite is not necessarily true.  For example, a personal surety provides a garantie but does not establish a security interest in his or her property.  The English term is therefore more specific than the French.  However, in light of the broad scope of the “security interest” concept, I do not consider it appropriate to say that the English version is “narrow” and the French version broad.  If a choice had to be made between the second and third categories, therefore, the question would have to be placed in the second, that of the unequivocal version/ambiguous version.  Here, this choice does not change the outcome, since in either case the shared meaning is that of the term used in the English version:  “security interest”.

[86] At the second step in the interpretation of bilingual statutes, it must be determined whether the shared meaning of the two versions is consistent with Parliament’s intent (S.A.C., at para. 16).  It is clear that the successive amendments to the ITA  and the EIA  in respect of the deemed trust were intended to give enhanced protection to the tax creditor.  Beyond this immediate objective, however, I cannot conclude that Parliament intended that the priority set for the taxing authorities should be vague.  Such an interpretation would make it impossible for a tax debtor’s creditors to determine their rights in advance.  Given that the common law and civil law concepts are compatible, Parliament can only have intended to treat all Canadian taxpayers the same way and to enable both communities to predict how the legal mechanisms they use to organize their affairs will be interpreted.  Only the shared meaning makes it possible to attain this objective.  Accordingly, I conclude that Parliament’s intent is consistent with the well‑established concept of “security interest” as opposed to the more ambiguous concept of “garantie” (see ss. 8.1  and 8.2  of the Interpretation Act , introduced by the Federal Law — Civil Law Harmonization Act, No. 1 ; Denault, at p. 117).

[87] If, in the instant case, the shared meaning corresponds to the unequivocal concept of “security interest”, it is because there is a concept common to a “security interest” in the sense of “interest in property” and a “garantie” in the sense of “droit sur un bien”.  It is this concept that must be identified.  In “The Income Tax Act , the Excise Tax Act  and the Term Interest: An Interesting Case for Harmonization”, in The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism (2002), published in the Collection of Studies in Tax Law 2001, Martin Lamoureux points out that a term like “interest” may be impossible to define without considering the context.  In his view, “depending on the context, the expression ‘interest in property’ appears to be the converse of the notion of absolute ownership” (p. 7:9).  According to this interpretation, therefore, the security interest — the right in question in s. 224(1.3)  ITA  — is distinct from a right of absolute ownership.

[88] After analysing how the “interest” concept is used in the ITA  and in the Excise Tax Act, R.S.C. 1985, c. E‑15  (“ETA ”), Lamoureux proposes the concept of “real right” as a basis for harmonizing those of “interest” and “droit”.  He explains this as follows:

As we stated in part three, we propose to harmonize the notion of “interest” (intérêt) with its Quebec equivalent which is “real right” (droit réel). This conclusion is based on a comparative analysis which shows a great similarity between the two concepts.  In fact, a comparison of the two concepts shows a similarity between several of their general attributes, for example, the right to follow, the right to assert adversus omnes, a direct right to the thing and the dismemberment of property over time. [p. 7:22]

[89] This proposal is relevant in the case of s. 224(1.3) , because the words “interest” and “droit” are used in the English and French versions of that provision.  However, Lamoureux mentions some differences between the “interest” and “real right” concepts: for instance, beneficial ownership, equity and future interest can give rise to an interest in property but do not necessarily have equivalents in civil law.  He accordingly suggests that Parliament should define “real right” in the ITA  and the ETA , and include common law concepts needed for certain specific purposes in the definition.  I agree with using the “real right” concept to harmonize the concept of “interest in property” with that of  “droit sur un bien” (right in property).  In classical civil law, a droit sur un bien is a real right, not a personal right.  The accessory real right (known in French as a “droit réel accessoire” and, often, as a “droit réel de garantie”) forms an essential component of a security:  P.‑C. Lafond, Précis de droit des biens (2nd ed. 2007), at paras. 422‑23 and 440‑47; Private Law Dictionary and Bilingual Lexicons: Obligations (2003), “accessory real right”, at pp. 4‑5; D.‑C. Lamontagne, Biens et propriété (6th ed. 2009), at paras.  103‑4.

[90] At common law, the term “real right” and its close cousins “right in rem” and “jus in re”, although less common, are nevertheless established.  Professor Royston Miles Goode writes in Goode on Legal Problems of Credit and Security (4th ed. 2008), at para. 1-17, that “a security interest is a right in rem”.  Professors Ronald C. C. Cuming, Catherine Walsh and Roderick J. Wood also refer to the concept of “real right” or “right in rem” in Personal Property Security Law (2005):

A creditor who is given a security interest in the debtor’s property obtains a proprietary right to the collateral. The defining characteristic of a proprietary right (which is also referred to as a real right or a right in rem) is that it is a right in a thing that is generally enforceable against the world. [p. 511]

See also R. A. Macdonald, “Reconceiving the Symbols of Property:  Universalities, Interests and Other Heresies” (1994), 39 McGill L.J. 761; J. Austin, Lectures on Jurisprudence, or, The Philosophy of Positive Law (5th ed. 1885), at pp. 381‑91; T. E. Holland, The Elements of Jurisprudence (12th ed. 1916), at pp. 146‑47; W. N. Hohfeld, “Fundamental Legal Conceptions as Applied in Judicial Reasoning” (1917), 26 Yale L.J. 710, at pp. 714‑15; J. W. Salmond, Jurisprudence (10th ed. 1947), at pp. 252‑56; G. W. Paton, A Text‑book of Jurisprudence (2nd ed. 1951), at pp. 232‑36; Reagan v. Murphy, 105 So.2d 210 (La. 1958); Harwood Oil & Mining Co. v. Black, 124 So.2d 764 (La. 1960).

[91] Moreover, just as an interest in property may be considered to be similar in many respects to a civil law real right, at common law, the notion of a “real right” is considered to be essential to a finding that a security interest exists in the area of personal property security.  It is now well established that a functional approach has been adopted in the common law provinces and that form is not determinative of whether a security has been created.  The fact remains, however, that the basis for a security interest continues to be a real right.  Professors Cuming, Walsh and Wood explain this clearly:

The elimination of form as a determinant of the existence of a security agreement necessitates a close look at some types of transactions that, on the surface, appear to fall outside the scope of a PPSA but that may provide for interests that fall on one side of the line or the other, depending upon the presence or absence of a feature. In each case, it is necessary to determine whether the essential characteristics of a security agreement are present.  This involves answering the question:  does the transaction involve the contractual recognition or creation of an interest in the personal property of one person that secures an obligation owing to another person?  . . . The “interest” involved must be a real right in personal property in the sense that it is exercisable against not only the obligor but also against third parties with subsequent interests in the property.  [pp. 85‑86]

Professor Goode makes a similar comment in this respect (at para. 1-17):

Even where the creditor is to be given rights in respect of an asset, it is necessary to distinguish real rights from personal rights. . . . [A] security interest is a right in rem and in principle the secured creditor is entitled to remove the asset from the general body of creditors.

[92] The common law concept of security interest therefore corresponds, in civil law terms, not to a personal right, but to a real right.  In short, although no single expression is used at common law, what can be seen is that the right holder has a right in the property itself, as opposed to a right to compel a person to perform an obligation, which is the essence of a personal right.  Thus, the “real right” concept is common to the two legal traditions.  This concept is also inherent, and literally so, in the English expression “interest in property” and the French expression “droit sur un bien” used in s. 224(1.3) .

[93] The “real right” concept is also inherent in the mechanisms listed in s. 224(1.3) .  From the perspective of the civil law, the list in that provision includes forms of security formerly provided for in the Civil Code of Lower Canada and certain special statutes, such as the Act respecting the special powers of legal persons, R.S.Q., c. P‑16, that have been consolidated in the Civil Code of Québec in the concept of the hypothec; the forms of security in question conferred real rights on creditors.  Some of the mechanisms set out in the list in s. 224(1.3)  ITA  warrant comment.

[94] For instance, the term “assignment” refers to an assignment by way of security, not an absolute assignment (Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at para. 22; First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, at para. 39).  In the Civil Code of Québec, an assignment by way of security takes the form of a movable hypothec (J.‑L. Baudouin and P.‑G. Jobin, Les obligations (6th ed. 2005), by P.‑G. Jobin with the collaboration of N. Vézina, at No. 942).

[95] As for the trust, it is true that, in civil law, property is transferred in trust  to a patrimony by appropriation (art. 1261 C.C.Q.).  However, the transferred right is in the “property” (art. 1260 C.C.Q.).  Moreover, a creditor who is a beneficiary of a security trust is not an ordinary creditor; the beneficiary’s right may be characterized as a hybrid or sui generis right and has some of the characteristics of a real right (R. A. Macdonald, “The Security Trust: Origins, Principles and Perspectives”, in Contemporary Utilisation of Non‑Corporate Vehicles of Commerce (1997), Meredith Lectures, 155, at pp. 203‑4; J. B. Claxton, Studies on the Quebec Law of Trust (2005), at pp. 553‑55; J. E. C. Brierley, “Title Six: Certain Patrimonies by Appropriation — Articles 1256‑1298”, in Reform of the Civil Code (1993), vol. 1‑B, at p. 17).  And it should be noted that a legislature may expressly include, in a technical definition of a term, mechanisms that do not fall within the usual definition of the term.

[96] The same reasoning applies to the mechanisms listed in the provision if they are viewed from a common law perspective.  Some of them (mortgage, trust, assignment) transfer legal or equitable title to the secured creditor.  Others, such as the pledge or the charge, are comparable to the civil law’s hypothec, with or without delivery.  As for the lien, it may take a number of forms: it is akin sometimes to a pledge, where it includes a right to sell the property (Goode, at para. 1-49), and sometimes to a legal mortgage, where it is non‑possessory.  Finally, “encumbrance” is a very broad term that is defined in Black’s Law Dictionary (6th ed. 1990) as “[a]ny right to, or interest in, land which may subsist in another to diminution of its value” (p. 527).  Although this term can refer to an easement, it should be noted that where its use to refer to a form of security is concerned, the examples given are usually the mortgage, the lien and the trust (D. A. Dukelow, The Dictionary of Canadian Law (3rd ed. 2004), at p. 408).  Thus, the mechanisms mentioned above give the creditor a right that can be characterized as a “real right” within the shared meaning of this expression in the two legal traditions.

[97] The debenture is the only item in the list in s. 224(1.3)  ITA  that does not create a real right.  However, it is a special case.  The debenture has historically been central to secured lending transactions (L. Payette, Les sûretés réelles dans le Code civil du Québec (2nd ed. 2001), at pp. 387‑89 and 815‑20; B. A. Garner, A Dictionary of Modern Legal Usage (2nd ed. 1995), at p. 250; The Dictionary of Canadian Law, at pp. 318‑19; H. Reid, Dictionnaire de droit québécois et canadien (3rd ed. 2004), at p. 162).  Ordinarily, a debenture is issued and secured in a single instrument.  One such instrument was considered by this Court in Royal Bank of Canada v. First Pioneer Investments Ltd., [1984] 2 S.C.R. 125.  The following comment by P. L. Davies helps clarify the scope of the mechanism to which the term “debenture” as used in s. 224(1.3)  ITA  applies:  “The expression ‘debenture’ is applied indiscriminately to the instrument creating or evidencing the indebtedness and to the debt itself and the bundle of rights vested in the holder to secure its payment” (Gower and Davies’ Principles of Modern Company Law (7th ed. 2003), at p. 809).  The debenture is also mentioned in s. 2(a) of Ontario’s Personal Property Security Act, R.S.O. 1990, c. P.10, as an example of a transaction that creates a security interest.  Cuming, Walsh and Wood explain this as follows:  “. . . it can be assumed that, in this context, the term refers to a corporate obligatio[n] secured by some form of security agreement in personal property” (p. 62, n. 21).  In short, even though a debenture can be seen, in a technical sense, as merely a debt obligation (P. Martel, Business Corporations in Canada (2005), at pp. 32‑14 and 32‑15), the term “debenture” must be interpreted in its commercial and historical context, and its inclusion in the list in s. 224(1.3)  ITA  leads to the conclusion that Parliament intended to include the types of security that are most frequently used to grant real rights in property.

[98] In my opinion, since compensation has not been included in the list, the Caisse’s right can constitute a security interest only if it entails a real right.  To limit the concept of security interest in s. 224(1.3)  ITA  to rights that are real in nature is consistent both with the shared meaning of the terms (“security interest” and “garantie”) used in the two versions of the provision and with Parliament’s purpose of giving the deemed trust priority over the security interests referred to in s. 224(1.3)  ITA :  First Vancouver Finance.

[99] It must now be determined whether compensation is a “security interest” as that term is defined in s. 224(1.3)  ITA .

6.       Right to Compensation and Security Interest

[100]      Before determining whether compensation is a “security interest” as that term is defined in s. 224(1.3)  ITA , I must mention that many Quebec commentators have characterized compensation as a form or type of “garantie”.  It is important to note their use of the French term “garantie”, which, as I mentioned above, has a less precise meaning than “security interest”.  Thus, Baudouin, Jobin and Vézina state, at No. 1035, that compensation [translation] “serves as a garantie by making it possible to avert the risks of debtor insolvency”.  In their view, compensation gives [translation] “ordinary creditors a measure of priority in not requiring them to compete with other creditors” (see also:  D. Lluelles and B. Moore, Droit des obligations (2006), at No. 2672; V. Karim, Les obligations (2nd ed. 2002), vol. 2, arts. 1497 à 1707 C.c.Q., at pp. 749‑50; J. Pineau, D. Burman and S. Gaudet, Théorie des obligations (4th ed. 2001), at p. 612).  Moreover, compensation is a mechanism for extinguishing obligations that operates differently depending on the context in which it is effected:  A. Bélanger, Essai d’une théorie juridique de la compensation en droit civil québécois (2004), at p. 299.

[101]      These observations, although relevant to a description of compensation and its effects, do not support a conclusion that compensation is a “security interest” as that term is defined in s. 224(1.3)  ITA .  Although compensation may have the same effect as a security interest, care must be taken not to refer to the flexible sense that can be derived only from the French term “garantie”.  For the purposes of s. 224(1.3)  ITA , it is not enough that compensation offers protection similar to that of a security interest:  it must also confer an “interest in property”, that is, a real right.

[102]      Although it is true that compensation can be likened to a security interest, it cannot be equated with one in the sense that the term “security interest” must be given in the context of s. 224(1.3)  ITA .  Where compensation may be effected between two debts, the effect is clearly analogous to that of a “security interest” in the broad sense of the term; nevertheless, compensation or set‑off is not regarded, in the positive law of either Quebec or the common law provinces, as having the characteristics of a real right.  The automatic extinction of mutual debts is an effect of compensation, but it does not constitute the enforcement of a real right in the property in question.  Since compensation is not specifically mentioned in the definition of “security interest” in s. 224(1.3)  ITA , I find that it is not a security interest for the purposes of that provision.

[103]      Guy Duboc, a French author, suggests in La compensation et les droits des tiers (1989), at pp. 244‑47, Nos. 360‑64, that compensation agreements should be recognized as pledge agreements that are subject to the same conditions and have the same effects as a pledge.  But he is alone in his opinion, and he himself acknowledges that his position is a bold one.  In my view, this position cannot be incorporated into Quebec law, especially in light of the consolidation of all forms of security that took place in the course of the reform of the Civil Code of Québec.  Rather, it must be concluded that the provisions on compensation, located as they are in the chapter on the extinction of obligations, do not support the argument that compensation is a pledge that would be considered a hypothec under the Civil Code of Québec.  To reach the same conclusion as Duboc would be contrary to the objective pursued by the codifiers in 1991 of consolidating the various forms of security.

[104]      There is another reason why I would place compensation, or set‑off, outside the ambit of s. 224(1.3)  ITA .  The term “security interest” used in the English version is one that is used extensively in the common law provinces in, specifically, the context of personal property security law.  For example, it is defined as follows in the English version of Ontario’s Personal Property Security Act:

“security interest” means an interest in personal property that secures payment or performance of an obligation, and includes . . . .

As can be seen, this definition is very similar to the one in the English version of s. 224(1.3)  ITA :

“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 . . . .

[105]      Furthermore, in most of the common law provinces, the French versions of this provision do not raise the same problems as the French version of the federal provision (see, for example, in addition to the Ontario statute, those of New Brunswick (Personal Property Security Act, S.N.B. 1993, c. P‑7.1) and Manitoba (Personal Property Security Act, C.C.S.M., c. P35)).  In the Ontario statute, the French version  reads as follows:

« sûreté » Intérêt sur des biens meubles qui garantit le paiement ou l’exécution d’une obligation, notamment les intérêts suivants . . . .

Thus, the term “security interest” is rendered as “sûreté” in the Ontario statute, as opposed to “garantie” — a word that requires interpretation because of its vagueness — in the federal statute.

[106]      All the personal property security statutes of the common law provinces include broad, functional definitions of “security interest” (see, for example, s. 1 (“security interest”) of Ontario’s Personal Property Security Act and s. 1 (“security interest”) of New Brunswick’s Personal Property Security Act).  Despite this liberal approach, all these statutes — except that of Ontario — give priority to contractual rights that arise before an assignment to another creditor is known.  The Ontario statute was to the same effect until 2006; since then, it has provided that the right arises as of the time the debt becomes payable.  The new Ontario provision does not appear to have been considered by the courts.  However, regardless of when such rights arise, they are always dealt with separately from security interests (e.g., Ontario’s Personal Property Security Act, s. 40; New Brunswick’s Personal Property Security Act, s. 41; all other such statutes have virtually identical provisions), which shows that the legislatures did not consider set‑off to be included in the concept of “security interest”.  In the only case in which the most common wording of the provisions creating this type of right has been interpreted, 518718 Alberta Ltd. v. Canadian Forest Products Ltd., 1998 ABQB 619, 63 Alta. L.R. (3d) 371, the Alberta Court of Queen’s Bench held that a creditor with a contractual right of set‑off has priority over an assignee provided that the creditor’s right arises before the assignment (paras. 54, 55 and 63) (in that case, the result was altered on the basis of estoppel, but estoppel is not in issue in the case at bar).

[107]      A conclusion that compensation is a “security interest” as that term is defined in the federal statute would therefore conflict with the meaning given to the term in the provincial personal property security statutes, which exclude set‑off.  Such an interpretation would also be inconsistent with the common law concept of “set‑off”, on which numerous business transactions are based.  Cuming, Walsh and Wood express the following opinion (at p. 87):

Set‑off, whether contractual or procedural, does not involve a security interest because neither party to the set‑off acquires a property interest.

Professor Goode adds the following, at para. 1-19:

A right of set‑off, even if given by contract, is a purely personal right to set one claim against another. The party asserting it never acquires rights in the other’s monetary claim at all;  he merely asserts a countervailing claim which operates in pro tanto extinction of his monetary liability. It follows that a contractual set‑off does not create a security interest.

P. Wood expresses the same opinion in Set‑Off and Netting, Derivatives, Clearing Systems (2nd ed. 2007), at para. 1-008:

Although set‑off has a similar commercial effect to a security interest, set‑off is not a security interest in that the creditor does not grant the debtor a property interest over the creditor’s property in the debt owed to the creditor to secure the cross‑claim owed by the creditor to the debtor, eg a depositor does not grant a property right over the depositor’s ownership of the deposit claim back to the bank to secure a loan owed by the depositor to the bank.  Nor is set‑off a right of retention like a lien because the bank does not retain the coins or notes of the depositor:  the property in the benefit of the deposit account is held by the depositor and the bank has no property to retain.

Hence a right of set‑off would not normally conflict with negative pledges typical of unsecured bank loan agreements whereby the borrower agrees not to create security over its assets.  Negative pledges which widen the concept to include transactions similar to security interests should also not prohibit set‑offs since a security interest and related title finance transactions (sale and leaseback, factoring, sale and repurchase) usually involve property transfers, but set‑off is not a property transfer.  A negative pledge which prohibited set‑off would effectively prevent the debtor from becoming reciprocally indebted to a counterparty — impracticable in the normal case.

Professor Grant Gilmore, one of the US architects of Article 9 of the Uniform Commercial Code, when requested to exclude set‑off from the definition of security interests, remarked, “One might as well exclude fan‑dancing”.  Nevertheless he reluctantly gave in:  Article 9 does not apply to “a right of recoupment or set‑off”:  see s. 9‑109(d)(10).  In New Zealand the equivalent Personal Property Security Act does not apply to a right of set‑off, netting or combination of accounts: see s. 23(c).

[108]      Although I will be discussing the reasons of Rothstein J. below, I wish at this point to draw attention to one aspect of his reasoning.  He relies on an excerpt from S. R. Derham’s book The Law of Set‑Off (3rd ed. 2003) to conclude that if the parties intended to create a security interest, that interest must be covered by the definition in s. 224(1.3)  ITA .  With respect, the following statement by Derham must be borne in mind: “. . . the predominant view is that a set‑off agreement is not a charge” (para. 16.80).  Thus, it must be understood that the passages cited by my colleague are part of a discussion of arguments in support of an unconventional approach.  As with my rejection of Duboc’s novel interpretation of French law, I find that it would not really be appropriate to incorporate into federal law a concept that is not recognized at common law and is totally unknown in civil law.  In my view, it is very dangerous to assert that a real right in property can result from the parties’ intention without basing that assertion on a mechanism known to the law.

[109]      This review of the academic commentaries thus leads me to conclude that, under the common law as it now stands, set‑off is excluded from the field of personal property security.  The fact that a legal mechanism enables a creditor to obtain an effect similar to that of a “security interest” in the generic sense of the term does not make that mechanism a security interest.

[110]      Despite the arguments presented in all courts, my colleague Rothstein J. considers that the question to be answered is not whether compensation is a security interest.  Rather, in his view, the issue is whether the agreement created a “security interest” as defined in s. 224(1.3)  ITA .  He concludes that such an interest did in fact result from the juxtaposition of certain rights of the Caisse and obligations of Camvrac.

[111]      As Rothstein J. sees it, compensation is merely a remedy (para. 30).  The undertakings that gave rise to an “interest in property” as defined in s. 224(1.3)  ITA  were those relating to the term for repayment of the deposit amount, the obligation to maintain the deposit, the right to withhold and the limits on transferring, negotiating and hypothecating the deposit (para. 30).  Rothstein J. does not concern himself with whether those rights, either individually or collectively, created a real right.  Yet even though he does not expressly accept that a security interest entails a real right, he considers that, in the case at bar, the Caisse held a movable hypothec with delivery in accordance with the reasoning of the majority in Caisse populaire Desjardins de Val‑Brillant v. Blouin, 2003 SCC 31, [2003] 1 S.C.R. 666.  For several reasons, I cannot accept my colleague’s interpretation of the “security interest” concept or his recourse to the hypothec to conclude that the deemed trust had priority.  I will discuss my objections under two heads.

Novel Approach to the “Security Interest” Concept

[112]      I must say that Rothstein J.’s approach to the “security interest” concept is a novel one.  He states that he agrees that the shared meaning lies in the English version, which implies that the English term corresponds to a legally recognized common concept.  As I mentioned above, there is no federal common law.  To identify the purpose Parliament was pursuing when it chose the “security interest” concept, it is necessary to refer to the common law, which is provincial law.  The analysis cannot therefore disregard provincial law.  However, the effect of my colleague’s interpretation is to expand the “security interest” concept beyond its accepted scope in Canadian commercial law.  Since his approach does not correspond at all to the shared meaning, its effect is to disregard both the principles applicable to the interpretation of bilingual legislation and those applicable to the harmonization of federal law and provincial law.

[113]      Rothstein J. concludes on the basis of inchoate accessory rights that an interest in property — or, in other words, a “security interest” as defined in s. 224(1.3)  LIR — was created (at para. 30):

It was the five‑year term and the maintenance and retention of the $200,000 deposit, as well as Camvrac’s agreement not to transfer or negotiate the deposit and that the deposit could only be used as security with the Caisse, that created the Caisse’s interest in Camvrac’s property for the purposes of s. 224(1.3)  ITA .

What my colleague overlooks in his analysis is the fact that under s. 224(1.3)  ITA , the interest in the property must make it possible to realize on the security.  To simply find that an interest in property exists without regard for the context is not sufficient.

[114]      At common law, a security interest typically entails three fundamental rights: (1) the right to realize on property given as security; (2) a right to priority with respect to the proceeds of realization; and (3) the right to follow the property in the hands of a third party to whom it has been transferred (Cuming, Walsh and Wood, at p. 1).  None of the rights mentioned by Rothstein J. enable the person concerned to appropriate the property.  Thus, neither the term for repayment, nor the obligation to maintain, nor the right to withhold, nor the limit on the right to transfer, hypothecate or negotiate would enable the Caisse to realize on the deposit or appropriate the deposit amount to ensure performance of the secured obligation.  I cannot imagine that Parliament intended the provision to apply to any mechanism other than the one known at common law that makes it possible to appropriate the property to which the security interest relates.  What must be done under s. 224(1.3)  ITA  is to identify a security interest, not a simple interest.

[115]      Although my colleague does not include compensation in the above list in support of his conclusion that an interest in property was created, he does ultimately refer to it, describing it as a remedy.  What I conclude from this is that he does not see compensation as an interest in property and that according to his interpretation only the rights he mentions create such an interest.  I believe that a few comments about each of these rights will be helpful here.

[116]      Regardless of what standpoint is taken in reviewing the Caisse’s obligation with respect to the term, the clause establishing the term cannot be viewed as stipulating anything other than a deadline for repayment of the deposit.  It is well established that in the context of a banking contract, to deposit an amount in a financial institution is to make a loan.  The financial institution becomes the owner of the loaned amount and must return it with the interest agreed on (art. 2330 C.C.Q.).  The transaction is, in a word, a simple loan (art. 2329 C.C.Q.).  The clause that establishes the term merely fixes the time when the loaned amount is to be returned.  Camvrac’s relationship with the Caisse with respect to the deposit was merely one of creditor and debtor that entailed only a right to be repaid upon expiry of the term.  The establishment of a term did not alter the nature of the legal relationship between the Caisse and Camvrac.  The right was not a real right, but a simple personal right.

[117]      The same analysis applies to the covenants to which Camvrac agreed, those relating to Camvrac’s claim against the Caisse.  The undertakings to maintain the deposit and not to transfer, negotiate or hypothecate the claim conferred on the Caisse no right in the claim Camvrac had against it.  In the event of default, these rights would be of no assistance unless they were violated, in which case they might give rise to an action for failure to perform the contract.  All these rights were personal rights, not real rights.  The right to withhold warrants more specific comment.

[118]      In considering the meaning to be given to the expressions “droit de retenue” and “droit de rétention” and the nature of the right that has been created, the context is essential.  In civil law, there is one concept known as the “droit de rétention” (under, for example, arts. 875, 974, 1250 and 2543 C.C.Q.), which is a right to retain corporeal property, and another known as the “droit de retenue”, or right to deduct (see arts. 2111, para. 2 and 2123 C.C.Q.).  The right to deduct is different from the right to retain: it applies to an amount of money, not to corporeal property.  There is therefore no right to follow.  Also, the creditor’s claim does not have priority.  The right to deduct has none of the characteristics on the basis of which a right to retain can be likened to a real right.

[119]      In the instant case, in the agreement to give savings as security, the following appears as the title of clause 1: “Droit de rétention et de compensation” (“Right to withholding and compensation” in the English version of the Caisse’s standard form contract).  Regarding obligations, the agreement provides that the depositor “consents to the withholding by the Caisse, in the account(s) . . . mentioned below, of the amount of . . .”, and that “[t]he Caisse may withhold the sums . . . in the case of a line of credit, as long as it has not been cancelled”.  Despite the use of the expression “droit de rétention” in the title of the clause, the purpose of the right is to deduct an amount of money and not to retain corporeal property, which means that it is a “droit de retenue”, not a “droit de rétention” within the meaning of the Civil Code of Québec.

[120]      This right to deduct could be of no help to the Caisse during the term of the deposit, as the Caisse was not required to return the deposited amount until the term expired, and this stipulation afforded it no additional protection.  Since clause 11 of the term savings agreement provided that the term would be renewed automatically in the absence of notice to the contrary, the Caisse would be able to exercise the right to deduct only if Camvrac gave notice that it would not be renewing the term.  Such notice could be given not later than seven days after the term expired.  If a notice of non‑renewal were received, it would then be open to the Caisse to request repayment under clause 5 of the variable credit contract.  In such circumstances, compensation could be effected by operation of law upon the expiry of the term, and the right to deduct and the obligation to maintain the deposit would be irrelevant.  If, however, the Caisse did not immediately cancel the line of credit when the term of the deposit expired owing to the non‑renewal, Camvrac would be precluded from requesting repayment because of its undertaking to maintain the amount in a deposit and the Caisse’s right to deduct the amount.  The Caisse would then retain the power to cancel the line of credit at any time, at its discretion, in order to effect legal compensation or, in the case of default, conventional compensation.  These scenarios show that the Caisse’s right to deduct and Camvrac’s obligation to maintain were mechanisms provided for in the agreement to ensure that legal or conventional compensation could be effected.  They conferred no separate right to realize on the claim and, moreover, were of residual application.

[121]      The most important thing to bear in mind is that none of the clauses on which Rothstein J. relies created a real right or an interest in property (“security interest” as defined in s. 224(1.3)  ITA ).  A term is a deadline for repayment.  The right to deduct is simply the right of a creditor not to perform an obligation to pay as long as a debt is owed to him or her.  It is, in a way, an extension granted for repayment.  As for the obligation to maintain, it is clearly an undertaking by one person to another to perform an obligation.  The limit on the right to transfer, hypothecate or negotiate constitutes an obligation “not to do”.

[122]      Thus, I cannot see how these rights, whether considered in isolation or as a whole, might constitute a “security interest” as that term is defined in s. 224(1.3)  ITA .  None of them provides a basis for using the property to ensure performance of the obligation, and none of them constitutes an interest in property that secures performance of an obligation.

[123]      As Professors Cuming, Walsh and Wood point out, the elimination of form as a determinant of the creation of a security does not mean that every contractual undertaking can be regarded as security on personal property.  The limits on which Rothstein J. relies can be compared with those applicable to flawed assets.  According to the technique of flawed assets, property such as a bank deposit is subject to limits on withdrawal until the depositor has repaid his or her debt to the bank.  It is well established that this technique does not create a security interest.  Professor Goode explains this as follows (at para. 1-21):

[The technique of flawed assets] does not of itself constitute a security, for the bank acquires no rights over the deposit, merely a right to withhold repayment.

[124]      Cuming, Walsh and Wood also cite examples of undertakings pursuant to which creditors are given interests in property that cannot be characterized as security interests.  One of them, the covenant not to dispose of or encumber property, is of interest, as it is analogous to one of the undertakings on which Rothstein J. relies:

A “negative pledge” clause or negative covenant in a loan agreement under which the borrower covenants not to encumber or dispose of some or all of her personal property until the loan is repaid does not create a security interest since, standing alone, the covenant does not create an interest in the property of the borrower. A negative pledge clause in a security agreement cannot prevent the covenantor from giving another effective security interest in the collateral. [p. 86]

Adding one or more personal rights does not result in the creation of a real right, which, as we saw above, Cuming, Walsh and Wood consider essential to the creation of a security interest.  If Rothstein J.’s conclusion that a contractual undertaking creates an interest in the property is based on the functional approach, a further issue that will arise is how the negative pledge — whether or not in combination with another personal right such as the right to compensation — is now to be characterized.

[125]      Therefore, in my view, not only is Rothstein J.’s analysis of the expression “interest in property” or “droit sur un bien” unacceptable in that it disregards the fact that the principal purpose of a security interest must be to permit the property given as security to be realized, but it cannot be reconciled with the characterization of techniques similar to those adopted in the case at bar that do not create security interests.

Granting of a Movable Hypothec on a Claim With Delivery

[126]      I also wish to comment on the argument that a hypothec was granted on the basis of the reasoning followed in Val‑Brillant.  First of all, I would point out that no evidence was adduced concerning a hypothec and that no submissions were made in this respect either before the prothonotary or in the Federal Court or the Federal Court of Appeal.  I find this argument somewhat surprising in view of the fact that the parties neither produced evidence nor made submissions with respect to it.  It will also be necessary to place Val‑Brillant in context and to comment briefly on the use of the hypothec to confirm that the Caisse’s right is subject to the deemed trust.

[127]      In Val‑Brillant, the issue was whether a non‑negotiable certificate of deposit could be the object of a pledge (art. 2702 C.C.Q.).  There were two opposing theories, of “materialization” or “dematerialization” of the pledge: Payette, at pp. 380‑91; P. Ciotola and A. Leduc, “Arrêt Val‑Brillant: évolution ou régression de l’hypothèque mobilière avec dépossession, en droit civil québécois?”, in S. Normand, ed., Mélanges offerts au professeur François Frenette: études portant sur le droit patrimonial (2006), at p. 361.  The majority accepted the theory of dematerialization and held that there could be a pledge on a non‑negotiable instrument.  Gonthier J., writing for the majority, concluded that effective control of a non‑negotiable instrument for the purposes of arts. 2702 and 2703 C.C.Q. could be gained by means of the assignment of claims mechanism referred to in art. 2710 C.C.Q.

[128]      The commentators have criticized the view that a movable hypothec with delivery can be granted in the manner described in Val‑Brillant:  Ciotola and Leduc; D. Pratte, “L’hypothèque avec dépossession de créances non représentées par un titre négociable ou le retour à une fiction accommodante”, in Mélanges offerts au professeur François Frenette: études portant sur le droit patrimonial, at p. 421.

[129]      Article 2702 C.C.Q. was amended on January 1, 2009.  The Civil Code of Québec now explicitly provides that physical delivery of the property or instrument is essential for a pledge to be granted.  This amendment to the Civil Code of Québec is a clarification made by the legislature in response to Val‑Brillant (see: Quebec, National Assembly, Journal des débats, June 11, 2008, 1st Sess., 38th Leg., vol. 40, No. 46, at p. 1, Bill 47, Securities and Other Financial Assets Transfer Act; M. Deschamps, “Le nouveau régime québécois des sûretés sur des valeurs mobilières”, lecture delivered on March 19, 2009 to the Chaire du notariat of the Université de Montréal, at p. 4, note 12 (online: //www.chairedunotariat.qc.ca/fr/conferences/mois/032009/Deschamps.pdf.).  It is now clear that the instrument that is delivered must confer effective control over the claim without recourse being had to the assignment of claim mechanism as suggested by Gonthier J.  By specifying that physical delivery is required, the legislature has indicated that the theory of materialization of the pledge has been accepted: the instrument must therefore be negotiable.  The only exception to this requirement that the instrument be negotiable relates to certain securities (art. 2714.7 C.C.Q.).  At the same time, in response to a concern expressed by the majority in Val‑Brillant, the Regulation respecting the register of personal and movable real rights was amended to enable individuals who do not operate enterprises to hypothecate incorporeal property and claims — including claims represented by non‑negotiable instruments — without delivery: O.C. 30‑2009, (2009) 141 G.O. 2A, at p. 17A; art. 2683 C.C.Q.  This amounts to a relaxation of the conditions under which an individual can grant a hypothec without delivery.  As for a deposit, such as the one in the case at bar, it cannot be the object of a pledge.

[130]      Having said this, I have difficulty understanding how the hypothec fits into the reasoning that leads Rothstein J. to conclude that the rights granted to the Caisse created a security interest.  Two interpretations are possible.  Does my colleague conclude that the respondent’s right has priority over the Caisse’s right solely because of the control exercised over the claim by means of the term, the obligation to maintain, the right to withhold and the limits on the rights to transfer, hypothecate and negotiate?  Or is his conclusion based on the idea that in addition to those rights, Camvrac had granted a right to compensation that resulted in a hypothec?  If the first interpretation is correct, the argument based on the hypothec is irrelevant.  If the second is correct, the right to compensation becomes determinative even though my colleague does not include it among the sources of an interest in property.  If Rothstein J.’s conclusion that the deemed trust has priority is based on the hypothec, his reasoning clashes with the clarification made by the Quebec legislature.

[131]      Furthermore, I cannot accept the Court’s recourse to an argument that has been raised neither by the Caisse nor by the respondent.  As I mentioned above, the agreement to give savings as security provided for the granting of a hypothec, a right to withhold and a right to compensation, but only the right to compensation was raised and argued.  The Caisse was not limited in the choice of rights it could exercise.  If, for example, in addition to the hypothec and the right to compensation, the claim had been secured by another personal right, such as by suretyship, the respondent could not have claimed from the Caisse the amount received from the surety.  It would have been clear that the Caisse was free to choose which right it would exercise.  Thus, it could have chosen to exercise its right to compensation, or it could also — independently of the hypothec also provided for in the contract — have availed itself of the suretyship if such a right were provided for in the contract.  The Civil Code of Québec provides, on the one hand, for compensation and, on the other hand, for hypothecs on claims.  These two mechanisms must not, in my opinion, be confused.  The reasons for the parties’ choice may be based in fact.  In my view, the question is not merely one of law.  In all fairness to the parties, therefore, I do not consider it appropriate at this point to intervene in the “judicial contract” to alter the bases of the appeal before the Court.

[132]      I therefore find, with respect, that as regards the term, the obligation to maintain, the right to withhold and the limits on the right to transfer, hypothecate or negotiate, all that have been created are personal obligations.  Furthermore, since the parties did not raise the hypothec in this Court, I do not think that we can base our conclusion on an argument in respect of which no evidence was adduced and that does not correspond to the law.  The appellant chose to exercise its right to compensation, and that is the right that must be considered.

[133]      As a result, I conclude that the appellant is correct in arguing that compensation is not a “security interest” as that term is defined in s. 224(1.3)  ITA .  To accept the Caisse’s first argument is not to dispose of the appeal, however.  Despite my finding that the Federal Court of Appeal erred in holding that the respondent had priority on the basis that the Caisse, in effecting compensation, had created a security interest for itself, the case is not yet closed.  It must still be determined whether the right to compensation may be set up against the respondent, who, as a result of the deemed trust, not only has a priority over secured creditors — as the term “secured creditor” is defined in s. 224(1.3)  ITA  — but also has a right in the tax debtor’s property.  To do this, it must be asked whether the respondent may exercise its right in respect of both the amounts that had not been remitted at the time the right to compensation was granted to the Caisse and those that were not remitted after that time.  As I mentioned above, by September 25, 2000, the date the compensation agreement was signed, Camvrac had already failed to remit some amounts that had been deducted from its employees’ salaries.  Those amounts totalled approximately $5,000.

7.       Possibility of Setting up the Compensation Agreement Against the Respondent

[134]      I do not think it necessary to explain at length why, prior to the expiry of the term of the deposit, the Caisse’s right was not a right to legal compensation.  The Caisse’s right cannot be dissociated from the contract in which it was granted, if only because one of the conditions for legal compensation was not met:  Camvrac’s debt was not exigible, because repayment of the deposit amount was not due until October 2005.  It will therefore be necessary to refer to the agreements between Camvrac and the Caisse.

[135]      The Civil Code of Québec does not mention conventional compensation.  However, there is nothing that prohibits it.  In fact, conventional compensation is merely the arrangement by contract of the mechanism provided for in the Code.  Furthermore, commentators have long recognized the validity of compensation agreements (see: Baudouin, Jobin and Vézina, at No. 1057; Lluelles and Moore, at No. 2701).

[136]      The issue in the case at bar is whether the Caisse may set up its compensation agreement against the respondent.  The respondent’s right is provided for in s. 227(4.1)  ITA .  If I exclude the portions relating to the priority over secured claims, which I have already discussed, the respondent’s right in Camvrac’s property is set out as follows:

227. . . .

(4)       Every person who deducts or withholds an amount under this Act is deemed . . . to hold the amount separate and apart from the property of the person . . . in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

(4.1)    . . . where at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person . . . equal in value to the amount so deemed to be held in trust is deemed

(a)       to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty . . . and

(b)       to form no part of the estate or property of the person from the time the amount was so deducted or withheld . . . .

[137]      The statutory mechanism transfers the tax debtor’s property to a trust.  In First Vancouver Finance, the Court likened this mechanism to a floating charge over all the tax debtor’s assets up to the amount due, in that the trust does not attach to any specific property and allows the tax debtor’s business to be carried on as usual.

[138]      All forms of security — including what was formerly referred to as a floating charge — are now consolidated in the Civil Code in a single mechanism, the hypothec.  The transfer of property into a trust may also be likened to garnishment, since that is the procedure provided for in s. 224(1)  ITA  to enable the respondent to appropriate amounts owed to the tax debtor that are subject to the deemed trust:  Alberta (Treasury Branches).  Whether the transfer into a trust is likened to a hypothec, to garnishment or to a simple assignment, the rules remain the same.  The Civil Code of Québec and the Code of Civil Procedure, R.S.Q., c. C‑25, provide that the rules governing the assignment of claims apply.  The relevant provisions read as follows:

Civil Code of Québec

1680.  A debtor who has acquiesced unconditionally in the assignment or hypothecating of claims by his creditor to a third person may not afterwards set up against the third person any compensation that he could have set up against the original creditor before he acquiesced.

An assignment or hypothec in which a debtor has not acquiesced, but which from a certain time may be set up against him, prevents compensation only for debts of the original creditor which come after that time.

Code of Civil Procedure

637.  If the affirmative declaration of the garnishee is not contested and does not show the existence of another seizure by garnishment in his hands, the clerk, upon an inscription by either party, orders the garnishee to pay to the seizing creditor the amounts which he owes to the judgment debtor to the extent of the amount of the judgment in capital, interest and costs.  To that extent the order of the clerk effects an assignment, in favour of the seizing creditor, of the judgment debtor’s claim, from the date of the seizure.  Such order must be served on the garnishee and becomes executory 10 days later.

[139]      The ability of the debtor of the assigned claim to set up against the assignee any recourse that the debtor may have against the assignor is based on the general rule that the assignee may not have more rights in the assigned claim than the assignor had.  This rule is set down in art. 1637 C.C.Q.:

1637.  A creditor may assign to a third person all or part of a claim or a right of action which he has against his debtor.

He may not, however, make an assignment that is injurious to the rights of the debtor or that renders his obligation more onerous.

[140]      This provision is complemented by art. 1643 C.C.Q., which provides that a debtor may rely on a cause of extinction that occurred before an assignment could be set up against him or her.  The first paragraph of that article reads as follows:

1643.  A debtor may set up against the assignee any payment made to the assignor before the assignment could be set up against him, as well as any other cause of extinction of the obligation that occurred before that time.

[141]      The commentators and the courts have accordingly recognized that any defences and any right to refuse to perform (exception for nonperformance) that arose prior to an assignment may be set up against the assignee by a debtor who has not acquiesced in the assignment.  The same is true of the extinction of obligations by compensation:  Karim, at p. 773; Baudouin, Jobin and Vézina, at No. 962; Lluelles and Moore, at No. 3176; Bélanger, at p. 189.

[142]      Furthermore, where the right to compensation arises from an agreement entered into before the assignment became enforceable against the debtor, the debtor’s rights under the agreement may be set up against the assignee:  A. L. Green Ltd. v. Michaud, [1975] C.A. 432, cited with approval in Banque Royale du Canada v.  Béliveau, [1976] C.A. 539, and Bandera Investment Co. v. Société immobilière du Québec, J.E. 98‑1667 (Sup. Ct.), SOQUIJ AZ‑98021774.  The above cases concerned claims for rent in respect of which the lessees had a right to deduct or a right to compensation.  In each case, because the contractual right to compensation predated the assignment, the exercise of the right was authorized in respect of the period after the assignment.  In these circumstances, it was held that the agreements could be set up against the third parties because they had acquired their rights after the compensation agreements were signed.  Although the judges did not say so explicitly, it seems clear that this conclusion was based on the premise that art. 1681 C.C.Q. did not apply in the circumstances because the assignees had acquired no rights as of the time the compensation agreements were signed.  Vincent Karim makes the following comment:

[translation]  However, it will be hard for the creditors of an insolvent party to challenge a compensation agreement entered into at the same time as the contract giving rise to that party’s claim, as the creditors will have difficulty proving that the agreement has caused them any prejudice. [p. 750]

[143]      The same approach has been adopted for assignments of conditional claims:  Seigneur v. Immeubles Beneficial Ltée, [1994] R.J.Q. 1535 (C.A.); Banque Nationale du Canada v. Notre‑Dame‑du‑Lac (Ville) (1990), 31 Q.A.C. 45; and Banque de Montréal v. Walsh & Brais Inc., [1990] R.L. 119 (C.A.).

[144]      Conventional compensation — or contractual set‑off — defies categorization, since it may take as many forms as the contract that provides for it will allow:  Derham, at para. 16.85.  However, there is no denying that the right to compensation has characteristics in common with such concepts as the conditional obligation, the exception for nonperformance, and even the right to deduct or the right to retain.  In D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564, at paras. 28-29, for example, the Court likened a statutory right to deduct to compensation.  Moreover, the right to deduct was one of the very first justifications given in France for holding that the debt actually owed to an assignee was the net amount:  Duboc, at p. 169, No. 239, commenting on Ch. civ., May 13, 1833, S. 1833.1.668.  While it comes as no surprise that Quebec’s rules lead to the same result as the rules of French law, it is interesting to note that common law commentators and courts also acknowledge that the right to set‑off may be asserted against third parties.

[145]      Where the French rules are concerned, however, it should be noted that allowing compensation to be effected is based on a concept that does not on its own form part of the positive law of Quebec.  In France, where there is a sufficient nexus between two debts, compensation may be effected despite the assignment of a claim or a collective recovery procedure: D. R. Martin, “Contrats et obligations”, Juris‑classeur civil, arts. 1289 to 1293, fasc. 108 to 111, No. 75.  Since a compensation agreement creates a sufficient nexus, the possibility of setting it up is not in dispute (unless the agreement was entered into during a period where solvency was in doubt):  Cass. civ., July 13, 1942, J.C.P. 1943.II.2157 (Annot. Houin); Cass. com., June 3, 1997, D. 1998.Jur.61 (Annot. François).   (See, however, Cass. com., Dec. 9, 1997, Bull. civ. IV, No. 327, and the critique of that decision by A. Honorat, “Redressement et liquidation judiciaires”, D. 1998.Somm.325.)  Some authors draw a distinction in the case of garnishment by a third party on the basis that the property would no longer be available after the seizure: Didier Martin, “Des techniques d’affectation en garantie des soldes de comptes bancaires”, D. 1987.Chron.229, and Thierry Bonneau, in Droit bancaire (7th ed. 2007), at No. 395.  Duboc disagrees, however, as do Jean‑Louis Rives‑Lange and Monique Contamine‑Raynaud (Droit bancaire (6th ed. 1995)).  According to Rives‑Lange and Contamine‑Raynaud, [translation] “[t]here is no reason to decide cases involving collective seizures differently from those involving individual seizures” (p. 183, footnote 6).  In Quebec, the French debate over the unavailability of seized property would have to be resolved in favour of the possibility of setting up a compensation agreement entered into before the seizure.  As I mentioned above, since art. 637 of the Code of Civil Procedure provides that seizure results in assignment of the claim, the principles discussed above concerning the assignment of claims apply to garnishment.

[146]        The number of cases in which common law courts have considered contractual set‑off is small, but the few reported decisions on this subject have been favourable to the right to rely on set‑off agreements.  For instance, I have already mentioned 518718 Alberta, in which the court held that a contractual right of set‑off had priority over the assignee’s rights.  Likewise, the Ontario Court of Appeal held in Ching v. Jeffery (1885), 12 O.A.R. 432, that the defences available to the debtor on an assigned promissory note, including the right to reduce his or her debt by an amount owed by the assignor, could be raised against the assignee.  In Canadian Admiral Corp. v. L. F. Dommerich & Co., [1964] S.C.R. 238, it was held that the debtor had as against the assignee under a factoring agreement the same defence it would have had as against the assignor.  Finally, in Toronto‑Dominion Bank v. Block Bros. Contractors Ltd. (1980), 118 D.L.R. (3d) 311 (Alta. Q.B.), a contractual right to set‑off (referred to by the parties as a right to “future set‑off”) was available against an assignee of security on the basis of cases in which courts had applied the general rule that an assignee cannot have any greater right than the assignor (p. 318).

[147]      In sum, at common law, as in Quebec civil law, the rule for asserting contractual rights against third‑party assignees is based on the general principles governing obligations.  It can be inferred from the decisions cited above that the right to conventional compensation is assessed as of the time the right is granted, not as of the time it is exercised.  The protection of third parties, codified in Quebec law in art. 1681 C.C.Q., applies to rights acquired before the compensation agreement was signed.  In Traité de droit civil — Les obligations: les effets du contrat (1992), No. 602, at p. 589, Professor Jacques Ghestin gives a clear explanation of the effect of the transfer of a claim.  His comment clarifies the legal justification for the possibility of setting up a contractual right to compensation against third parties:

[translation]  A claim is not only a patrimonial asset, but also a legal relationship.  When a claim is alienated, therefore, what is transferred is not just an asset, but also an active contractual situation.

The possibility of setting up a contract whose object is the transfer of a claim thus necessarily has some particularities that are accounted for in positive law on the basis that the contract produces effects in respect of certain third parties.

[148]      Thus, where the deemed trust applies to a claim, it attaches to a legal relationship that corresponds to an active contractual situation, which explains why the beneficiary of the trust may assert only those rights held by the tax debtor at the time the trust became effective.

[149]      It will also be helpful to refer back to s. 227(4.1)  ITA  and to review the cases in which the scope of the deemed trust has been considered.  Before Parliament clarified the respondent’s priority over secured creditors, the courts had held that prior rights could be disregarded only to the extent expressly provided for in the relevant provision.  For example, in Board of Industrial Relations v. Avco Financial Services Realty Ltd., [1979] 2 S.C.R. 699, Martland J. wrote:

In [s. 5A] the absence of a specific statutory provision to that effect, in my view it should not be construed in a manner which could deprive third parties of their pre‑existing property rights.  [p. 706]

(See also Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182, at p. 1199.)

[150]      This suggests that it is necessary to be cautious in assessing the scope of the deemed trust on the tax debtor’s property.  When Parliament wished to give the deemed trust more teeth, it took care to give the respondent priority over secured creditors.  It did not alter the general rules governing the rights a debtor can assert against its original creditor.  In assessing the consequences of that decision, particularly with regard to compensation, one can but find support in an interpretation based on the normally applicable legal rules.

[151]      Compensation is used in many business transactions and in the asset accounting of many businesses.  M. E. Grottenthaler and P. J. Henderson state in The Law of Financial Derivatives in Canada (loose‑leaf) that “Canada can be described as a ‘netting friendly’ jurisdiction” both in the context of insolvency and where contractual matters outside that context are concerned (p. 5‑3).  They explain that netting, which is a form of set‑off, is crucial to derivatives transactions that affect the capitalization rules applicable to banks.  They say the following about the importance of this mechanism:

It is of the utmost importance to parties that the termination and close‑out netting provisions are enforceable against the other party.  Unlike the case with many commercial transactions, parties are not willing to accept the risk that these provisions may not be fully enforceable in an insolvency situation.  There are several reasons for this.  First, many entities that participate in the derivatives market are subject to regulatory requirements that they maintain a certain asset level in relation to their liabilities (i.e. adequate capital).  For this purpose, it is desirable to account for their transactions with their various counterparties on a net basis.  The Basel Committee on Banking Supervision developed a new framework for regulatory capital and risk management (known as Basel II).  The implementing Capital Adequacy Requirements guidelines released by OSFI [the Office of the Superintendent of Financial Institutions] to apply to Canadian incorporated banks allow for the netting of contracts pursuant to contractual netting provisions if the bank can satisfy OSFI that certain conditions are met, including that the institution has a written and reasoned legal opinion that, in the event of any legal challenge, the relevant courts would find the exposure under the netting agreement to be the net amount under the laws of all relevant jurisdictions (which includes the counterparty’s home jurisdiction and the governing law of the transactions and the netting agreement).  The legal opinions must address the validity and enforceability of the netting agreements in the context of insolvency proceedings.

Secondly, because the marketplace for derivatives transactions is a highly competitive and global marketplace, entities governed by the laws of a jurisdiction that does not recognize the effectiveness of termination and close‑out netting in an insolvency situation are put at a serious competitive disadvantage. [pp. 5‑2 and 5‑3]

[152]      This is just one example of the use of compensation in a context that does not involve the “security interest” concept and of the great importance of this mechanism both in Canadian law and in international economic relations.  Parliament thus seems to have had reasons for acting as it did in modifying the deemed trust only to give the respondent priority over creditors with security interests.  I have concluded that the deemed trust does not give the respondent more rights than the tax debtor had and that, insofar as the amounts had not been deducted at the time the agreement was entered into, the Caisse’s right may be set up against the respondent.  What this finding means in practice must now be determined.

[153]      In the case at bar, Camvrac’s right to recover its claim was subject to the right to compensation that had been granted to the Caisse in the agreement to give savings as security.  In the context of that agreement, the right to compensation was a right held by the Caisse that could not be negated solely by the fact of the deemed trust becoming effective.  The respondent, as a third party, could not demand that the Caisse discharge its debt to Camvrac if the conditions for repayment had not been met.  The Caisse’s right had to be respected by third parties who acquired rights after the agreement was signed.  Consequently, the respondent must abide by the compensation agreement, given that her right is subsequent to it.

[154]      As I mentioned above, Camvrac had remitted nothing to the respondent since May 2000.  Because the compensation agreement was entered into in September 2000, a question that arises is whether the respondent may claim from the Caisse amounts owed prior to that date.  This is the issue that remains to be addressed.

[155]      In certain circumstances, the debt itself can consist only of the net balance owed by the debtor.  Thus, where, as in Bandera, the amount of an assignment of rent is established only after adjustments, the amount of the rent corresponds to the net balance payable to the landlord.  In such a situation, regardless of when the assignee’s right first arises, his or her claim cannot exceed the actual amount owed by the debtor of the assigned claim, that is, the post‑compensation amount.  In other cases, such as where the respective claims do not have the same source, the date the creditor’s right arises may be relevant.  The instant case is one such case.

[156]      The claims of the Caisse and Camvrac have distinct sources:  one is based on the variable credit contract, the other, on the term savings agreement.  The Caisse’s claim against Camvrac dates from September 18, 2000 and Camvrac’s claim, from September 25, 2000.  On the latter date, Camvrac undertook, first in the term savings agreement, [translation] “to make, on the date of acquisition, a deposit in the amount of $200,000”, and then in the agreement to give savings as security, to “maintain” a deposit in the amount of $200,000.  These undertakings show that the respective claims of the Caisse and Camvrac are distinct.  For Camvrac to be able to undertake in the agreement to give savings as security to “maintain” the deposited amount, its claim resulting from the term savings agreement had to take on an independent existence, if only at the time the deposit was made.  Given that the deposit was made before the right to compensation was granted, the deemed trust could have become effective in respect of Camvrac’s claim up to the total of the amounts owed to the respondent as of September 25, 2000.  This is not a case in which the respective debts have the same source and the claim is subject to a right to compensation.  Just as the respondent’s rights are subordinated to the right to compensation for deductions subsequent to the signing of the agreement, the Caisse’s right must give way to the respondent’s pre‑existing right.  As I stated at the beginning of these reasons, the evidence in the record is insufficient to establish the amount of the unremitted deductions with any precision; therefore, failing an agreement between the parties, the case must be remanded to the court of original jurisdiction to establish that amount.

8.      Interest Issue

[157]      Regarding interest, the Court of Appeal correctly endorsed the application of Markevich, and there is no need to intervene.

9.        Conclusion

[158]      For these reasons, I would allow the appeal, set aside the judgment of the Court of Appeal, authorize compensation for the balance of the amounts deducted as of September 25, 2000 and, failing an agreement between the parties, remand the case to the court of original jurisdiction to establish the amount to be paid by the Caisse to the respondent, with costs throughout.

                                                              APPENDIX

A.      Contractual Provisions

(a)      Variable Credit Contract

[translation]

1.    LINE OF CREDIT

The Caisse agrees to extend to the Borrower, who accepts, a line of credit in the amount of $277,000.00. . . .

. . .

At any point in time, the Caisse may notify the Borrower that no advance shall be granted to it thenceforth under this contract.

. . .

3.    INTEREST

. . .

The interest shall be paid on the twenty‑fifth day of each month.  It shall be debited automatically from the . . . account . . . .

The Borrower further undertakes to pay, on any payment due not made, additional interest . . . , any arrears of interest being then considered as principal.

. . .

5.    REQUEST FOR REPAYMENT

The Caisse reserves the right to demand at any time the immediate repayment of any balance owed in principal, interest, costs and accessories.  The  Caisse shall then be entitled to no longer carry out this agreement, subject to all its other rights and recourses.

. . .

7.    DEFAULT

If the Borrower draws a cheque that brings the line of credit balance to an amount higher than the amount authorized hereunder, if it goes bankrupt, if it transfers its property or becomes insolvent or fails to meet any of the conditions and obligations stipulated herein, any balance then owing in principal, interest, costs and accessories shall become immediately payable.

(b)    Term Savings Agreement

[translation]

Date of maturity:  October 16, 2005

. . .

PROVISIONS GOVERNING THE PRINCIPAL

2.    The member agrees to make, on the date of acquisition, a deposit in the amount of $200,000 (hereinafter referred to as the “initial amount of deposit”).

3.    On the date of issue associated with the applicable term (“date of issue”), the initial amount of deposit and the interest then accrued on that amount shall be reinvested in the form of a deposit maturing on the maturity date associated with the applicable term (“date of maturity”).

4.    This deposit may neither be negotiated nor transferred.  No amount in principal or interest shall be redeemable or payable before the date of maturity.

5.    This deposit may be hypothecated or given as security only in favor of the issuing Caisse.

. . .

PROVISIONS GOVERNING DISPOSAL AT MATURITY

11.  At maturity date, unless the Caisse is notified to the contrary not later than the seventh day following such date, the principal and interest shall be deposited (to a term savings account) for a term equal to the term of this deposit.  The interest rate shall be the rate then in force at the Caisse for such deposit, depending on the applicable term.  The interest shall be reckoned daily and capitalized annually.

. . .

THIS IS A DEPOSIT WITHIN THE MEANING OF THE DEPOSIT INSURANCE ACT.

(c)   Agreement to Give Savings as Security

[translation]

1.    RIGHT TO WITHHOLDING AND COMPENSATION

To secure the repayment of any sum in principal, interest, costs and accessories owed or to be owed the Caisse by:

:    the Depositor

9    Name of Borrower (if other than Depositor)                                 

under:

:      (a)     a line of credit agreement in the amount of $277,000.00 granted to him (her) on 2000‑09‑18;

9      (b)     a  (Loan, line of credit, etc.)                                   agreement in the amount of $             granted to him (her) on              ;

9      (c)     the following agreements:

:    and under any debts or obligations, present or future, direct or indirect held by:

:      the Depositor

9      Name of Borrower (if other than Depositor)                       towards the Caisse,

(hereinafter referred to as “the Credit Contract[s]”)

the Depositor undertakes to maintain and consents to the withholding by the Caisse, in the account(s) or on the certificate(s) of deposit mentioned below, of the amount of $200,000.00 distributed as follows:

Account or certificate of deposit            Sum withheld by the Caisse

identification

(for deposit certificates, state date

issued amount and certificate number)

ALTERNATIVE TERM SAVINGS        

5 YEARS IN THE AMOUNT OF

$200,000.00                                             $200,000.00

                                                                 $                  

The Caisse may withhold the sums shown above, 9 along with the interest from the certificates of deposit if applicable, as long as all the amounts due under the Credit Contract(s) have not been fully repaid and, in the case of a line of credit, as long as it has not been cancelled.  In cases of default as provided for below, there shall be compensation between the Credit Contract(s) and the certificate(s) of deposit or the amounts deposited defined above, as provided for in Section 7.

2.    SAFEKEEPING OF CERTIFICATES

                                                                      . . .

3.    HYPOTHEC

To further secure the repayment of any sum owed or to be owed under the Credit Contract(s), the Depositor hypothecates and pledges the above‑mentioned certificate(s) of deposit and sums deposited, for an amount equal to the total amount of the sums withheld.  The parties also agree that the clause shown on the certificate(s) of deposit stipulating that such certificate(s) are neither negotiable nor transferable shall be deemed cancelled, effective from the date of these presents.

4.    WITHDRAWALS AND CHEQUES

. . .

5.    REDEMPTION BEFORE MATURITY OF A CERTIFICATE OF DEPOSIT

. . .

6.    MATURITY AND RENEWAL OF A CERTIFICATE OF DEPOSIT

. . .

7.    DEFAULT

The Depositor shall be in default in any of the following cases:

(a)    if any of the commitments under the Credit Contract(s) or these presents is not fulfilled;

(b)    if the Depositor or the Borrower becomes insolvent or goes bankrupt, or if he (she) makes a proposal and it is rejected or annulled;

. . .

In the event of any default:

(a)    any sums owing under the Credit Contracts shall immediately become payable;

(b)    the Caisse may use the sums deposited or the certificate(s) of deposit contemplated herein, regardless of its (their) having matured or not, to compensate its claim under the Credit Contract(s);

. . .

The consequences of a default are for the exclusive benefit of the Caisse and the latter may waive them expressedly.  The Caisse may, among others, without any prejudice to its rights, wait for the maturity date of the certificate(s) of deposit before exercising its rights as provided for in paragraphs (b) and (c) above.

8.    RESERVE OF RECOURSES

. . . Furthermore, failure by the Caisse to avail itself of any of its rights in case of default shall not be interpreted as a waiver of such rights.

B.       Statutory Provisions

(a)      Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .)

224. . . .

(1.3) In subsection (1.2),

. . .

“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;

227. . . .

(4)  Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3) ) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

(4.1)  Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

(a)   to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b)   to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest . . . .

(b)     Employment Insurance Act, S.C. 1996, c. 23 

86. (1)  All premiums, interest, penalties and other amounts payable by an employer under this Act are debts due to Her Majesty and are recoverable in the Federal Court or any other court of competent jurisdiction or in any other manner provided for by this Act.

(2)    Where an employer has deducted an amount from the remuneration of an insured person as or on account of any employee’s premium required to be paid by the insured person but has not remitted the amount to the Receiver General, the employer is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)  of the Income Tax Act ) in the amount so deducted, to hold the amount separate and apart from the property of the employer and from property held by any secured creditor (as defined in subsection 224(1.3)  of the Income Tax Act ) of that employer that but for the security interest would be property of the employer, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

(2.1)  Notwithstanding the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection (2) to be held by an employer in trust for Her Majesty in the manner and at the time provided under this Act, property of the employer and property held by any secured creditor (as defined in subsection 224(1.3)  of the Income Tax Act ) of that employer that but for a security interest (as defined in subsection 224(1.3)  of the Income Tax Act ) would be property of the employer, equal in value to the amount so deemed to be held in trust is deemed

(a)    to be held, from the time the amount was deducted by the employer, separate and apart from the property of the employer, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b)    to form no part of the estate or property of the employer from the time the amount was so deducted, whether or not the property has in fact been kept separate and apart from the estate or property of the employer and whether or not the property is subject to such a security interest

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property or in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

(2.2) For the purposes of subsections (2) and (2.1), a security interest does not include a prescribed security interest.

(c)     Civil Code of Québec, S.Q. 1991, c. 64

1637.  A creditor may assign to a third person all or part of a claim or a right of action which he has against his debtor.

He may not, however, make an assignment that is injurious to the rights of the debtor or that renders his obligation more onerous.

. . .

1643.  A debtor may set up against the assignee any payment made to the assignor before the assignment could be set up against him, as well as any other cause of extinction of the obligation that occurred before that time.

. . .

1671.  Obligations are extinguished not only by the causes of extinction contemplated in other provisions of this Code, such as payment, the expiry of an extinctive term, novation or prescription, but also by compensation, confusion, release, impossibility of performance or discharge of the debtor.

1672.  Where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are extinguished by compensation, up to the amount of the lesser debt.

Compensation may not be claimed from the State, but the State may claim it.

1673.  Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the object of both of which is a sum of money or a certain quantity of fungible property identical in kind.

A person may apply for judicial liquidation of a debt in order to set it up for compensation.

. . .

1680.  A debtor who has acquiesced unconditionally in the assignment or hypothecating of claims by his creditor to a third person may not afterwards set up against the third person any compensation that he could have set up against the original creditor before he acquiesced.

An assignment or hypothec in which a debtor has not acquiesced, but which from a certain time may be set up against him, prevents compensation only for debts of the original creditor which come after that time.

1681.  Compensation may neither be effected nor be renounced to the prejudice of the acquired rights of a third person.

(d)    Code of Civil Procedure, R.S.Q., c. C‑25

637.   If the affirmative declaration of the garnishee is not contested and does not show the existence of another seizure by garnishment in his hands, the clerk, upon an inscription by either party, orders the garnishee to pay to the seizing creditor the amounts which he owes to the judgment debtor to the extent of the amount of the judgment in capital, interest and costs.  To that extent the order of the clerk effects an assignment, in favour of the seizing creditor, of the judgment debtor’s claim, from the date of the seizure.  Such order must be served on the garnishee and becomes executory 10 days later.

Appeal dismissed with costs, LeBel and Deschamps JJ. dissenting.

Solicitors for the appellant:  Langlois Kronström Desjardins, Lévis.

Solicitor for the respondent:  Canada Department of Justice, Montréal.