In Re Gaston H. Poulin Contractor Ltd., 92 DTC 6338, [1992] 2 CTC 373 (Ont. Ct. J. (Commercial List))

Ground, J.:—This is an application by the Attorney General of Canada for an order declaring that the exercise of statutory collection remedies by the Minister of National Revenue (the "Minister") pursuant to certain sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") is not inconsistent with the order of Mr. Justice Montgomery dated December 18, 1991 permitting H. Poulin Contractor Limited (“Poulin”) to file a plan of compromise or arrangement pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the"C.C.A.A.") and for an order declaring that the Minister be at liberty to pursue his statutory remedies or in the alternative, for an order varying Mr. Justice Montgomery's order so as to exclude from its scope exercise of the powers available to the Minister under the Act.

Facts

On or about October 15, 1991, Revenue delivered to The Toronto-Dominion Bank branch located in Timmins, Ontario, a requirement to pay ("requirement") not more than the sum of $112,876.18 to the Receiver General on account of the source deduction liabilities of Poulin. The requirement was issued pursuant to the Income Tax Act, subsection 224(1). On or about the same date, Revenue delivered to the Ontario Ministry of Transportation and Communication ("MTC") a requirement demanding not more than $112,876.18 to the Receiver General on account of the source deduction liabilities of Poulin.

On or about November 6, 1991, Revenue delivered to the Federal Sales Tax Rebate (" FST Rebate”) section of its Customs and Excise branch (“Excise”) a notice issued pursuant to the Income Tax Act, section 224.1 requiring that the sum of $112,472.26 be retained by way of deduction or set-off from any amounts that may become payable to Poulin.

On or about November 14, 1991, Revenue delivered to the Goods and Services Tax ("GST") section of Excise a notice issued pursuant to the Income Tax Act, section 224.1 requiring that the sum of $152,296.28 be retained by way of deduction or set-off from any amounts that may become payable to Poulin.

On or about the same date, Revenue delivered to MTC an amended requirement demanding payment of not more than $152,296.28 to the Receiver General on account of the source deduction liabilities of Poulin.

On or about December 18, 1991, Poulin made a motion, without notice to Revenue, for an order permitting Poulin to file a plan of compromise or arrangement pursuant to the C.C.A.A. On or about January 9, 1992, Poulin delivered to Revenue, by facsimile transmission, a copy of the order of the Honourable Mr. Justice Montgomery made on December 18, 1991. The copy of the order was sent to Revenue without any accompanying explanation. Revenue had no prior knowledge that Poulin had commenced judicial proceedings for relief from its creditors.

On or about January 16, 1992, Revenue delivered to the branches of four banking institutions requirements issued pursuant to the Income Tax Act, subsection 224(1). Two of those institutions, namely, the branches of Bank of Nova Scotia and Canadian Imperial Bank of Commerce in Hearst, Ontario, returned the demands to Revenue and reported that they had no dealings with Poulin. The requirements served on Caisse Populaire Ste.-Anne Ltée and Caisse Populaire de Hearst Ltée remain outstanding and in force.

On or about January 17, 1992, Revenue delivered to the Corporation of the Town of Hearst ("Hearst"), to Raytheon Canada Limited ("Raytheon") and to Notre Dame Hospital ("hospital") its requirements demanding payment of not more than $161,531.54 pursuant to the Income Tax Act, subsection 224(1.2) out of money otherwise payable to Poulin. The hospital has returned the requirement and reported that it has had no dealings with Poulin. Hearst advised Revenue on February 27, 1992, that it proposes to pay into court all moneys payable to Poulin due to competing claims arising under the Construction Lien Act, 1983, S.O. 1983, c. 6. The requirement delivered to Raytheon remains outstanding and in effect.

On or about January 20, 1992, Revenue delivered to the Gas Tax Rebates section of Excise a notice pursuant to the Income Tax Act, section 224.1 requiring that the sum of $161,531.54 be retained by way of deduction or set-off from any amounts that may become payable to Poulin.

On or about February 7, 1992, Revenue delivered to MTC, to Lecours Lumber Company Limited ("Lecours") and to Hearst Forest Management Inc. ("Forest Management") its requirements demanding payment of not more than $298,439.44 from any amounts otherwise payable to Poulin. The requirements were issued pursuant to the Income Tax Act, section 224(1.2). Forest Management has returned the requirement to Revenue and reported that it had no dealings with Poulin. The requirements served on MTC and on Lecours remain outstanding and in force.

On or about February 7, 1992, Revenue delivered to the GST section and FST Rebate section of Excise notices issued pursuant to the Income Tax Act, section 224.1 requiring that the sum of $297,991.09 be retained by way of deduction or set-off from any amounts that may become payable to Poulin. These notices took into account an additional assessment raised by Revenue on January 21, 1992, and revised the statutory set-off notices delivered to the FST Rebate section on November 6, 1991, and to the GST section on November 14, 1991.

On or about March 2, 1992, Revenue delivered to the Ontario Ministry of Natural Resources a requirement demanding payment of not more than the sum of $299,967.64 from any amounts otherwise payable to Poulin. The requirement was issued pursuant to the Income Tax Act, subsection 224(1.2) and remains outstanding.

Issues

During the course of these proceedings, counsel for Poulin conceded that, with respect to the employee portion of the required remittances i.e., the amounts deducted from employees' wages, there is a statutory trust established pursuant to the Income Tax Act and accordingly, the arrangement under the C.C.A.A. could not apply to the employee portion of the remittances.

The issue then becomes whether, with respect to the portion of the remittances payable by the employer, such obligation is an obligation which may be the subject of an arrangement under the C.C.A.A. The answer to this question is dependent upon whether the C.C.A.A. is binding on the Crown.

Counsel for the Attorney General of Canada relied upon the judgment of the Supreme Court of Canada in Alberta Government Telephones Inc. v. C.R.T.C., [1989] 2 S.C.R. 225, 61 D.L.R. (4th) 193 in interpreting section 17 of the Interpretation Act, S.C. 1967-68, c. 7. Section 17 reads as follows:

No enactment is binding on Her Majesty or affects Her Majesty or Her Majesty's rights or prerogatives in any manner, except as mentioned or referred to in the enactment.

In Alberta Government Telephones, supra, Dickson, C.J. stated at page 281:

In my view, in light of PWA and Eldorado, supra, the scope of the words “mentioned or referred to” must be given an interpretation independent of the supplanted common law. However, the qualifications in Bombay, supra, are based on sound principles of interpretation which have not entirely disappeared over time. It seems to me that the words "mentioned or referred to" in section 16 [now section 17 of the Interpretation Act] are capable of encompassing: (1) expressly binding words ("Her Majesty is bound”); (2) a clear intention to bind which, in Bombay terminology, “is manifest from the very terms of the statute”, in other words, an intention revealed when provisions are read in the context of other textual provisions, as in Ouellette, supra, and, (3) an intention to bind where the purpose of the statute would be “wholly frustrated” if the government were not bound, or, in other words, if an absurdity (as opposed to simply an undesirable result) were produced. These three points should provide a guideline for when a statute has clearly conveyed an intention to bind the Crown.

Counsel for the Attorney General of Canada also relied on a recent unreported decision of the Quebec Court of Appeal in The Attorney General of Canada v. Les Entreprises Jean Mercier Ltée, released March 12, 1992. In the English translation of that decision submitted to this Court, Gendreau, J.A. states at pages 8-9 of his reasons as follows:

There now remains the substantive issue: is the Crown bound by the Companies' Creditors Arrangement Act?

But for a quite recent unreported decision of the Ontario Court (General Division) (Fine’s Flowers Limited et al. v. The Creditors of Fine's Flowers Limited, File No. 57354/91, Ottawa, January 17, 1992), the courts, including our Court, and the commentators have concluded that the Crown was not bound by the Companies' Creditors Arrangement Act, by reason of the application of the rule in the Interpretation Act that the Crown is not subject to an Act unless there is a specific provision to that effect; The Minister of National Revenue of Canada v. Cohen's Company Ltd., 17 C.B.R. 143; R. v. Kussner, 18 C.B.R. 58; In the Matter of Fairview Industries Ltd. et al., unreported, N.S.S.C. (1991), N.S.J. 453; Minister of National Revenue v. Roxy Frocks Mfg. Co. Ltd. et al., 62 B.R. 113; Deputy Minister of Revenue v. Rayfact Industries (1989), R.D.F.Q. 77; Reorganizations Under the Companies' Creditors Arrangement Act, David H. Goldman (1985), 55 C.B.R. (N.S.) 36, 40 and 41; Cours de formation professionnelle du Barreau du Quebec [Quebec Bar Admission Course] (1988-89), Droit commercial, Vol. 9, Facillite [Bankruptcy] Title XI, Albert Bohémier, pages 47, 58.

The respondent submits that the Crown should be bound pursuant to the so- called doctrine of necessary implication. If this were so, we would have to ignore the consistent and virtually unanimous case law cited above.

And at pages 12-14:

What about the Act we are concerned with? It is unchallenged that the Companies' Creditors Arrangement Act has no specific provision that would bind the Crown. Assented to on May 23, 1933 (23-24 George V, c. 36), the Act was intended to supplement the Bankruptcy Act, R.S.C. 1927, c. 11, and the Winding-up Act, R.S.C. 1927, c. 213. But while the Bankruptcy Act was binding on the Crown through the effect of section 188 (originally section 86 of 9-10 George V, c. 36), the Winding-up Act, on the contrary, contained no provision along these lines. Thus, it was held that the latter (like the Companies' Creditors Arrangement Act) did not bind the Crown (The North Pacific Lumber Co. v. The Minister of National Revenue, [1928] Ex. C.R. 68). At the same time Parliament enacted another statute in relation to insolvency: the Farmers’ Creditors Arrangement Act, 1934 (S.C. 1934, 24-25 George V, c. 53); this Act had no provision to bind the Crown but did contain a provision that it” (should) be read and construed as one with the Bankruptcy Act, but shall have full force and effect notwithstanding anything contained in the Bankruptcy Act" (s. 2(2)). I have found no decision on the scope and meaning of this provision with regard to section 188 of the Bankruptcy Act. Whatever the case, this Farmers' Creditors Arrangement Act, 1934 was repealed in 1943 (7 George VI,

c. 26) and replaced by the Farmers? Creditors Arrangement Act, 1943, in which the definition of the word "debt" includes a debt owing to the provincial or federal Crown (s. 2(f)). The Companies? Creditors Arrangement Act, which concerns us, has never been amended to apply to the Crown in any way although, at the very time when it came into force and was first used, the courts, including our own Court, held that it did not apply to the Crown (see the previously cited decisions, Roxy Frocks, Cohen's and Kussner, supra). Applying the historic test proposed by Mr. Justice La Forest in Friends of Oldman River, it seems to me that it is impossible to find, from either the circumstances of the adoption of the Act or the situation it was designed to remedy (the preservation of firms that might yet be saved notwithstanding their indebtedness as a result of the Depression), a legislative will, even an implicit one, to subject the Crown to the Act; instead, the contrary would seem to me to be implied by acts of Parliament which adopted different legislative attitudes and techniques with regard to a number of insolvency statutes.

Counsel for Poulin relied upon the decision of Chadwick, J., unreported, released January 17, 1992, in Fine's Flowers Limited and 595573 Ontario Inc. v. The Creditors of Fine's Flowers Limited and 595573 Ontario Inc. Chadwick J. was dealing with the question of whether the Crown in the Right of Ontario is bound by an order and arrangement made pursuant to the C.C.A.A. with respect to claims by the Crown for retail sales tax payable pursuant to the Retail Sales Tax Act, R.S.O. 1980, c. 454 and for capital tax payable pursuant to the Corporations Tax Act, R.S.O. 1980, c. 97. Chadwick, J. reviewed many of the same authorities reviewed by the Quebec Court of Appeal in Mercier, including the decision of Dickson, C.J. in Alberta Government Telephones regarding the interpretation of section 17 of the Interpretation Act and concluded that the C.C.A.A. applies to the Crown on the basis of the second and third tests set out by Dickson, C.J. in Alberta Government Telephones. Chadwick, J. stated as follows, at pages 14-16:

However, when one looks at the complete context of the act and the purpose of the legislation then one can identify an intention to bind the Crown.

The Act allows for the classification of creditors into various groups depending upon their security or statutory claim. The classification is broad enough that the Crown having statutory rights would be classified in their own special category as a secured creditor.

Section 6 C.C.A.A. requires that a majority in number representing three- fourths in value of the creditors in that class must agree to the compromise or arrangement.

I fail to see how the Crown is prejudiced by being included in a special class of secured creditors. The compromise or arrangement would have to acknowledge their statutory protection before any approval would be forthcoming from the Crown.

The intention to bind the Crown also manifests itself in the third test as described by Dickson, C.J. in Alberta Government Telephone v. C.R.T.C., supra.

PARLIAMENT MUST BE PRESUMED TO HAVE INTENDED THE CROWN TO BE BOUND BY THE ACT BECAUSE THE PURPOSES OF THAT ACT WOULD BE FRUSTRATED IF THE CROWN WOULD NOT BE BOUND.

In analyzing the Act it is noted that an applicant company can address their application so that it applies to all of its creditors or any number or class of creditors they wish. Sections 4, 5 and 6 of the C.C.A.A. provide the applicant company with a number of alternatives with reference to its various classification of creditors.

If the Crown is not bound by the plan or compromise scheme then does this frustrate the operation of the Act.

Section 11 deals with the stay of proceedings and reads as follows:

Notwithstanding anything in the Bankruptcy Act or the Winding-up Act, whenever an application has been made under this Act in respect of any company, the court, on the application of any person interested in the matter, may, on notice to any other person or without notice as it may see fit,

(a) make an order staying, until such time as the court may prescribe or until any further order, proceedings taken or that might be taken in respect of the company under the Bankruptcy Act and the Winding-up Act or either of them;

(b) restrain further proceedings in any action, suit or proceeding against the company on such terms as the court sees fit; and

(c) make an order that no suit, action or other proceeding shall be proceeded with or commenced against the company except with the leave of the court and subject to such terms as the court imposes.

For the Crown not to be bound by these procedural provisions would create havoc in the operation of the act.

If the Crown was not bound by section 11 C.C.A.A. they could proceed to execute and take other steps to enforce their statutory liens. This action would clearly frustrate the intention of the legislation.

The legislation was passed by Parliament to provide remedies which were absent in the other insolvency legislation such as the Bankruptcy Act or the Winding-up Act.

The power given to the courts in maintaining the status quo until the plan or scheme of compromise can be presented does not jeopardize priority or rights of the Crown. It does however prevent them from taking action to realize on property or security.

Conclusion

In conclusion it is my view that the Crown is bound by the C.C.A.A. Although there is no specific reference to the Crown there is an intention to bind the Crown revealed in the context of the Act. In addition the operation of the Act would be frustrated if the Crown was not bound.

With the greatest of respect, I cannot agree with the decision of Chadwick, J. in Fine's Flowers and would subscribe to the reasons of the Quebec Court of Appeal in Mercier, supra, and the decisions referred to therein. The fact that the C.C.A.A. allows for classifications of creditors into various groups, that the Crown might well be a special class of creditor and that the Crown would not be prejudiced by being included in an arrangement as a special class of creditor is not in my view the issue.

It is conceded that there is no specific provision in the Act binding the Crown. Looking at the C.C.A.A. as a whole, there are no provisions in the text of the C.C.A.A. which would indicate a clear intention to bind the Crown and no such provisions are cited in the decision of Chadwick, J. nor were any such provisions cited by counsel for Poulin. Accordingly, I find that the Crown is not bound by the C.C.A.A. on the basis of the second or "necessary implication” text of Dickson, C.J.

I am also not persuaded that the purpose and intention of the C.C.A.A. would be wholly frustrated if the Crown were not bound by arrangements under the C.C.A.A. The C.C.A.A. has been resorted to with varying degrees of intensity for over fifty years and numerous arrangements under the C.C.A.A. which did not bind the Crown have been proceeded with and proved effective. The fact that there may be claims by the Crown which must be dealt with outside the arrangement does not appear to have been a road block in the path of successfully negotiating and concluding arrangements under the C.C.A.A. over the years. In short it seems to me that there is no evidence that the intent and purpose of the C.C.A.A. is wholly frustrated by its nonapplication to the Crown. In this respect, I would adopt the words of Gendreau, J.A. in Mercier, supra, at page 14 of the English translation of his reasons as follows:

The respondent submits that the Act would be "wholly frustrated”, to use the words of Chief justice Dickson, if the Crown were excluded. I am fully prepared to acknowledge that because of the ever greater involvement of the State in business, whether as tax collector, lender or even partner, it might be preferable if its debts were included and dealt with in the debtor's arrangement proposal. But the test is not that of greater or more desirable benefit but is rather the complete frustration of the Act. The Act was regularly applied throughout the 1930s, and rediscovered fifty (50) years later and since then used regularly. It must be concluded from this past and present use and some quite numerous judicial debates to which its application and construction have given rise, that the Act has fulfilled and continues to fulfil its role, at least with respect to a particular group of companies.

Accordingly, an order will issue (1) granting leave for the applicant to bring the within motion, abridging the time for service of the applicant’s motion record and dispensing with service of the applicants motion record on any party other than Poulin and the Federal Business Development Bank; (2) declaring that the exercise by the Minister of National Revenue ("Minister") of statutory powers available under the Income Tax Act, R.S.C. 1952, c. 148, as amended by 1970-71-72, c. 63, for the collection of unremitted employee source deductions is not inconsistent with the order in this proceeding made pursuant to the C.C.A.A. on December 18, 1991 (the “C.C.A.A. Order"); and

(3) that notwithstanding the C.C.A.A. Order, the Minister may be at liberty to pursue any remedies or do any acts which he may lawfully pursue or do under the authority of the Income Tax Act in respect of the collection of unremitted employee source deductions.

Application allowed.