DeConinck v. Royal Trust Corp. of Canada, [1989] 1 CTC 179 (N.B.C.A.)

Stratton, C.J.N.B.:— The issue in this appeal is whether the appellant's Registered Retirement Savings Plan of which the respondent is trustee could be collapsed by the trustee and the proceeds paid over to Revenue Canada pursuant to a demand made under the provisions of subsection 224(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended.

In August 1981, the appellant Serge DeConinck opened a Self-Directed Retirement Savings Plan with the respondent Royal Trust Corporation of Canada and contributed cash and securities to it. On January 29, 1982 and again on April 8, 1982 Revenue Canada issued to Royal Trust a Demand on Third Parties in respect of Mr. DeConinck pursuant to the provisions of subsection 224(1) of the Income Tax Act as it then read. At the time these demands were issued subsection 224(1) of the Income Tax Act provided as follows:

224(1) Garnishment. Where the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any payment to another person who is liable to make a payment under this Act (in this section referred to as the "tax debtor"), he may, by registered letter or by a letter served personally, require that person to pay the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.

Subsequent to receiving the Demand on Third Parties dated January 29, 1982, Royal Trust advised Mr. DeConinck by registered mail that it had received the Demand. Shortly thereafter, in late February 1982, Mr. DeConinck instructed his broker to sell all securities then held in his R.R.S.P. account. There is no evidence that Mr. DeConinck objected to the Demand on Third Parties or that he took any action as a consequence of Royal Trust's letter to him of February 3, 1982 except to sell the securities as indicated. With the permission of Revenue Canada, Royal Trust treated Mr. DeCo- ninck's R.R.S.P. funds as frozen. They were kept on deposit in a guaranteed investment account.

On October 14, 1982 Mr. DeConinck signed a Notice of Direct Transfer of Funds from Royal Trust to Midland Doherty Limited. On November 12, 1982 Mr. DeConinck also wrote Royal Trust directing it to transfer his R.R.S.P. account to Midland Doherty Limited together with the Revenue Canada Third Party Demand. The letter stated:

My purpose in transferring the account is not directed in any way toward the Third Party Demand, but is only a convenience to myself in that I will be dealing with a local agent which will make it much easier for me to make decisions from time to time.

Royal Trust did not transfer Mr. DeConinck's R.R.S.P. to Midland Doherty Limited as Mr. DeConinck had instructed.

Effective March 30, 1983 subsection 224(1) of the Income Tax Act was amended to read as follows:

224(1) Garnishment. Where the Minister has knowledge or suspects that a person is or will be, within 90 days, liable to make a payment to another person who is liable to make a payment under this Act (in this section referred to as the "tax debtor"), he may, by registered letter or by a letter served personally, require that person to pay forthwith, where the moneys are immediately payable, and, in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.

On May 27, 1983 Revenue Canada issued to Royal Trust a Requirement to Pay in respect of Mr. DeConinck pursuant to the provisions of the recently amended subsection 224(1) of the Income Tax Act. At the end of July 1983 Royal Trust terminated Mr. DeConinck's R.R.S.P. by charging fees and deducting withholding tax, the latter of which it forwarded to Revenue Canada together with the balance of the funds in the R.R.S.P. At the same time Royal Trust advised Mr. DeConinck of the action it had taken.

Mr. DeConinck sued Royal Trust for breach of trust claiming a declaration that Royal Trust lacked authority to pay the funds in his R.R.S.P. account to Revenue Canada. He also claimed damages based on a comparison with the performance of a similar R.R.S.P. in his former wife's name which he managed for her. It was the position of Royal Trust that it was entitled to terminate Mr. DeConinck's R.R.S.P. and having done so was discharged of liability pursuant to subsection 224(2) of the Income Tax Act.

The learned trial judge concluded that Mr. DeConinck's claim failed. He held that there had been no breach of trust by Royal Trust and that Royal Trust was entitled to collapse Mr. DeConinck's R.R.S.P. and to pay the funds to Revenue Canada. He made these findings after deciding that the word “liable”, in the phrase “liable to make a payment" contained in subsection 224(1) of the Income Tax Act, should receive its ordinary interpretation as defined in the Shorter Oxford Dictionary. He then said this: (p. 34)

Prior to any request to terminate by the cestui que trust, a trustee of an R.R.S.P. is indeed bound by law and equity and is legally subject to pay the vested funds to the cestui que trust. In my opinion, any trustee who holds funds that are fully vested in the cestui que trust would fall within the definition of a person “liable to make a payment” and I do not believe it is necessary for a debtor-creditor situation to be established before one is liable. It follows that in my opinion, the defendant was entitled to make the payment it did to the Minister of National Revenue. For this reason the plaintiff's claim fails.

As pointed out previously, the R.R.S.P. at issue in this case is a Self- Directed Plan under which the Royal Trust, the trustee, undertakes to hold, invest and reinvest the contributions of Mr. DeConinck to the Plan in a trust fund established in his name. The designated beneficiary under the Plan is Mr. DeConinck or, in the event of his death, his estate. The Declaration of Trust Agreement entered into between the parties provides that the trust fund shall be established and maintained by the trustee for the sole purpose of investment and reinvestment of moneys contributed by Mr. DeConinck to provide a retirement income at the maturity of the Plan. The Declaration of Trust contemplates the termination of the Plan by the purchase of an annuity for Mr. DeConinck, or his death prior to such purchase. Although not so expressly provided in the Declaration of Trust, the parties do not dispute the fact that Mr. DeConinck may collapse the Plan at any time before retirement but not, perhaps, without income tax consequences for him.

Mr. DeConinck contends that the relationship existing between him and the Royal Trust in respect of his R.R.S.P. was that of a trustee-cestu/ que trust and not a debtor-creditor relationship. He further submits that the creation of a debtor-creditor relationship is a condition precedent to the procedure adopted by Revenue Canada to attach the corpus of the Plan. To put it another way, Mr. DeConinck's position is that the existence of his trust relationship with Royal Trust precluded them, in the absence of his request or consent, from collapsing his R.R.S.P. and remitting the proceeds to Revenue Canada.

The question as to the true relationship existing between a depositor and a trust company administering a registered retirement savings plan pursuant to the terms of a trust agreement has been considered in a number of recent decisions. The weight of authority, with which I agree, is that the relationship is one of cestui que trust and trustee and not debtor and creditor: see Vancouver A & W Drive-Ins Ltd. v. United Food Services Ltd. and Komarnisky (1981), 38 B.C.L.R. 30 (B.C.S.C.); Re McMahon v. Canada Permanent Trust Co. (1979), 108 D.L.R. (3d) 71 (B.C.C.A.), and Re Bliss, Kirsh and Doyle et al. (1983), 44 O.R. (2d) 129 (Ont. H.C.). As was said by Bull, J.A. in the McMahon case at pages 73-4:

I cannot agree that the trust agreement, actually so called, executed by the bankrupt with the respondent and covering in minute detail the payments he was to make under the agreement, the uses to which those funds were to be put, and a myriad of detailed terms and conditions of the plan and trust created, could be anything but a trust in the general legal sense. The respondent was plainly a trustee under the plan, appointed as such and with clear trust duties and obligations. In my view, to refer to, or interpret, that agreement as one creating a simple relationship only of creditor and debtor is quite unreal. Credits and debits may, and often do, arise in the execution of trusts between trustees, settlors and cestui que trust, but that does not in itself change a trust to something other than a trust. Accordingly, as the plan and agreement in the R.R.S.P. here was conceived as a trust, was called a trust, was operated and carried out as a trust, required a separate special account and trust fund to be maintained and with its funds irrevocably vested in the respondent as a trustee, a trust between the bankrupt and the respondent was, in my opinion, constituted. I find no element of substance that could give weight to a conclusion that the agreement made was really or essentially merely a debtor-creditor one.

Notwithstanding that the funds held by Royal Trust for Mr. DeConinck under his Registered Retirement Savings Plan constitute a trust fund, can Revenue Canada, without Mr. DeConinck's direction or consent, attack those funds pursuant to subsection 241(1) of the Income Tax Act? A similar question had to be answered by Gratton, D.C.J. in Re Morgan Trust Company and Dellelce et al., [1985] 2 C.T.C. 370; 85 D.T.C. 5492. In that case, Revenue Canada had delivered a Demand on Third Parties to the Morgan Trust Company in respect of Dellelce's R.R.S.P. The demand was identical in form and content to that delivered to Royal Trust in the present case. Revenue Canada also delivered a Requirement to Pay to Morgan Trust Company which too was identical in form and content to that delivered to Royal Trust in the present case. Rather than collapsing the R.R.S.P. arbitrarily, Morgan Trust Company sought the direction of the Court as to whether the R.R.S.P. ought to be collapsed under the authority of subsection 224(1) of the Income Tax Act.

After reviewing the law the learned judge concluded:

In my view since the trustee has no moneys which are immediately payable to the tax debtor nor any moneys which the trustee would be within 90 days liable to pay to the debtor, then there is no obligation to pay any moneys nor to sell any of the assets which the trustee holds on behalf of Dellelce pursuant to the declaration of trust. Consequently, the only obligation in this case is to reply to the Taxation Office in order to avoid liability under subsection 224(4) of the Act.

In my opinion, it is difficult to distinguish the Morgan Trust Company case from the present one. Moreover, with respect, I am unable to agree with the conclusion of the judge of first instance in the present case that a trustee who holds funds that are fully vested in a cestui que trust would fall within the definition of a person “liable to make a payment" pursuant to subsection 224(1) of the Income Tax Act. Rather it is my opinion that until a cestui que trust requests payment of the proceeds of an R.R.S.P. from his trustee, which he is able but not bound to do under the rule in Saunders v. Vautier (1841), 41 E.R. 482, no moneys are payable to him nor is his trustee liable to make a payment to him within the meaning of subsection 224(1) of the Act. Thus, in my view, the Request to Pay pursuant to subsection 224(1) of the Income Tax Act was not sufficient authority for Royal Trust to collapse Mr. DeConinck's R.R.S.P. and pay the net proceeds to Revenue Canada.

It follows that in paying the proceeds of Mr. DeConinck's R.R.S.P. to Revenue Canada as it did, Royal Trust was in breach of its trust agreement with him. Having breached the trust Royal Trust is liable to compensate Mr. DeConinck for the loss which the breach has caused because a beneficiary of a trust is entitled to be put in the position he would have occupied if no breach of trust had been committed. But, as was pointed out by Mr. DeConinck himself, it is impossible to determine exactly what loss he has suffered as a result of the breach of trust. Because $36,134.74 was in the trust at the time it was collapsed, Mr. DeConinck's taxable income for the year in which the collapse occurred was increased by that amount. Moreover, since Mr. DeConinck's R.R.S.P. was self-directed, it is not possible to determine with any degree of certainty the extent to which the trust fund might have increased in the years since the collapse. Although there was evidence that Mr. DeConinck also directed R.R.S.P’s on behalf of his former wife and his children with successful results since the collapse of his own Plan, this would not, in my opinion, be a satisfactory measure of his lost opportunity to shelter from tax the collapsed value of his R.R.S.P.

In assessing Mr. DeConinck's loss it is to be observed that Royal Trust paid a debt claimed to be due by Mr. DeConinck for income tax. I understand that this tax debt is under appeal. If Mr. DeConinck is successful in his appeal, the moneys which were paid will be refunded, with interest. If his appeal is unsuccessful, the moneys paid will be credited to his tax debt. On this analysis, what Mr. DeConinck has lost is the interest and capital gains he might have earned if the funds had remained in the Plan until maturity, regard being had to his taxable income after maturity of the Plan and tax rates which may be in effect at that time. No actuarial evidence was tendered to substantiate Mr. DeConinck's loss nor was any dispositive evidence given to assist in making an accurate assessment. I am satisfied, however, that Mr. DeConinck has suffered a loss as the result of the breach of trust by Royal Trust. In all of the circumstances, I must attempt arbitrarily to assess that loss and, with some trepidation, I fix it at $15,000.

In the result, for the reasons given, I would allow the appeal, set aside the judgment at trial and award Mr. DeConinck the sum of $15,000 together with costs of trial and appeal which I would fix at $3,250.

Appeal allowed.