Pembina on the Red Development Corp. Ltd. v. Triman Industries Ltd., 92 DTC 6174, [1992] 1 CTC 133 (Man. C.A.)

Scott, C.J.M.:- C.J.M.:—

/. Introduction

Subsection 224(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") provides a mechanism for Revenue Canada to collect income tax from debtors of the taxpayer. In response to a number of appellate decisions holding that this section was ineffective to convey an indebtedness or security interest therein to Revenue Canada, Parliament enacted 224(1.2) (the subsection)—described by counsel as an "enhanced" version of subsection 224(1)—which provides as follows:

Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within 90 days, liable to make a payment

(a) to another person who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or to a legal representative of that other person (each of whom is in this subsection referred to as the "tax debtor”), or

(b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor,

the Minister may, by registered letter or by a letter served personally, require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor's liability under subsection 227(10.1) or a similar provision.

The question on this appeal is whether the section has achieved its stated purpose and enables Revenue Canada to deprive a secured creditor of the benefit of its security.

The facts are agreed upon. At all material times Triman Industries Limited (Triman) was a customer of and substantially indebted to The Royal Bank of Canada (the bank). In July 1987 Triman gave the bank an accounts receivable security agreement which was registered under the Personal Property Security Act (the PPSA). As such, the bank continues to hold a perfected first specific charge against the receivables and the proceeds therefrom. Triman defaulted and in November 1989 the bank appointed the respondent Coopers & Lybrand Limited as receiver and manager. A receiving order in bankruptcy was subsequently issued in December 1989. Triman's receivables secured in favour of the bank by the assignment totalled in excess of $246,000 as of March 1990. On November 14, 1989, pursuant to the section, Revenue Canada sent requirements to pay to various debtors of Triman. The total of this and a subsequent demand amounted to almost $100,000. Shortly before Revenue Canada's requirement to pay was served on Triman's debtors, the receiver, on behalf of the bank, demanded the receivables from the same debtors of Triman's pursuant to the bank’s duly registered assignment of accounts receivable.

Before dealing with the question of whether the section has achieved its stated purpose however, its constitutionality must be addressed.

//. The Constitutional Issue

Section 91 of the Constitution Act, 1867, in describing the powers of the Government of Canada, provides in subsection (3) thereof for the raising of money by any mode or system of taxation.” Section 92 enumerates the powers of the legislatures of the provinces which, by virtue of subsection (13) thereof, are given exclusive jurisdiction over property and civil rights.

It is submitted by the respondent that the section falls outside the jurisdiction of the Parliament of Canada because it deals in substance and fact with property and civil rights.

In order to assess the constitutional validity of the section, it is first necessary to determine the pith and substance of the federal legislation. If it is concluded that the section is in relation to matters within the federal government's exclusive jurisdiction, then that is the end of the matter. If, however, it cannot be concluded that the dominant or most important characteristic of the section is in relation to taxation, the legislation may still be valid as being necessarily incidental or ancillary to the effective operation of valid federal legislation, i.e., the Income Tax Act. This latter principle is often referred to as the "ancillary doctrine.”

In the recent Supreme Court case of Whitbread v. Walley, [1990] 3 S.C.R. 1273 (at pages 1286-87), considerable guidance is given as to the meaning of the pith and substance test (which means, according to Professor Peter Hogg,"the dominant or most important characteristic of the impugned law”), and the process to be followed to determine it.

It is the submission of the federal government that the section, in pith and substance, is within Parliaments general power under subsection 91(3) because collection is an integral part of the raising of revenue. As stated by La Forest, J. in his text The Allocation of Taxing Power under the Canadian Constitution (2nd ed., 1981), in Chapter 2 (at page 39), under the heading The Federal Power of Taxation, the taxation powers of the federal government are apparently limitless even if they are retroactive or appear to be unjust. In so doing he was doubtless relying upon the words of Laskin, C.J.C. in Re: AntiInflation Act, [1976] 2 S.C.R. 373, who also described the power given to the Parliament of Canada to raise money as being "apparently limitless” (at page 390).

What Parliament has done, Revenue Canada argues, is to simply provide for the clearance of a tax liability prior to the satisfaction of private law debts of the taxpayer.

To determine the dominant characteristic of the legislation, it is important to know the governmental policy behind the section. The tax debtor's bank is in the best position to know its customer and to structure its business arrangements accordingly. Revenue Canada, on the other hand, does not have the same opportunity to become acquainted with the affairs of the tax debtor or its creditors. It must therefore rely solely on the provisions of the legislation to mandate the employer to remit the employee income tax deductions as required by the Act, and to establish its collectability in the event of default.

This understanding of the background of the legislation is vital to its constitutional analysis. For example, in Bank of Montreal v. Hall, [1990] 1 S.C.R. 121, the Supreme Court was required to determine the priorities between the security provisions under sections 178 and 179 of the Bank Act, R.S.C. 1985 c. B-1, and the Limitations of Civil Rights Act of the Province of Saskatchewan, R.S.S. 1978 c. L-16. In concluding that the security interest created by the Bank Act, while at variance with provincial law, was intra vires Parliament, the Supreme Court relied heavily on the policy reasons behind the creation of the security interest. After concluding that the security interest under the Bank Act met the pressing need to provide for a uniform security mechanism on a nation-wide basis, La Forest, J., writing for the Court, stated (at page 154):

I can only conclude that it was Parliament's manifest legislative purpose that the sole realization scheme applicable to the section 178 security interest be that contained in the Bank Act itself. Again, as I pointed out earlier, I am firmly of the view that the security interest and realization procedure must, in essence, be viewed as a single whole in that both components of the legislation are fully integral to Parliament's legislative purpose in creating this form of financing. In other words, a s. 178 security interest would no longer be cognizable as such the moment provincial legislation might operate to superadd conditions governing realization over and above those found within the confines of the Bank Act. To allow this would be to set at naught the very purpose behind the creation of the s. 178 security interest.

The purpose of the Act is not only to levy tax, but to collect it. There is a strong public duty on employers to remit; indeed, this is central to the scheme of self-assessment under the Act. The machinery for collection and enforcement under the Act is part of the very subject matter of subsection 91(3) of the Constitution Act and not merely incidental to the raising of revenue: see McKinlay Transport Ltd. v. R., [1990] 1 S.C.R. 627, and The Canadian Indemnity Company v. Attorney-General British Columbia, [1977] 2 S.C.R. 504 which is another case where the aim or purpose of the legislation was first looked at in its historical context to determine its constitutional validity.

The position of the respondent is that prima facie the effect of the section is to interfere with private contractual rights, indeed, to extinguish these rights, and hence it encroaches directly upon subsection 92(13) of the Constitution Act. In contrast to Bank of Montreal, supra, where there was a contest between two patently contradictory provisions, one provincial and one federal, here the section purports to extinguish third-party rights. It is submitted that it is not part of the pith and substance of the raising of revenue by taxation to interfere with the contractual rights of innocent third parties. Revenue Canada can control and collect, but not confiscate without compensation moneys properly belonging to an innocent third-party creditor. Accordingly, the respondent submits that a complete extinguishment of property rights should only take place with the most stringent and specific language.

It seems to me that the respondent's argument is more relevant to the issue of the adequacy of the language used in subsection 224(1.2) to accomplish the stated purpose of the legislation than it is to the constitutional validity of the section.

In my opinion, the dominant or most important characteristic of the legislation in general falls squarely within the ambit of the raising of revenue for the purposes of taxation under subsection 91(3) of the Constitution Act. It is clearly necessarily incidental to the effective workings of the Act. In General Motors of Canada Ltd. v. City National Leasing , [1989] 1 S.C.R. 641, the Supreme Court of Canada outlined the appropriate approach to ancillary jurisdiction. At pages 670-71, Dickson, C.J.C., writing for the Court, stated:

In the present appeal, the appellant focuses its attack on a particular section of the Act. The issue is not whether the Act as a whole is rendered ultra vires because it reaches too far, but whether a particular provision is sufficiently integrated into the Act to sustain its constitutionality. In numerous cases courts have considered the nature of the relationship which is required, between a provision which encroaches on provincial jurisdiction and a valid statute, for the provision to be upheld. In different contexts courts have set down slightly different requirements, viz.: “ rational and functional connection” in Papp v. Papp, [1970] 1 O.R. 331; R. v. Zelensky, [1978] 2 S.C.R. 940, and Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161; “ancillary”, “ necessarily incidental" and "truly necessary" in Regional Municipality of Peel v. MacKenzie, [1982] 2 S.C.R. 9; “intimate connection”, "an integral part" and "necessarily incidental” in Northern Telecom Ltd. v. Communications Workers of Canada, [1980] 1 S.C.R. 115; “integral part" in Clark v. Canadian National Railway Co., [1988] 2 S.C.R. 680; "a valid constitutional cast by the context and association in which it is fixed as a complementary provision” in MacDonald v. Vapor Canada Ltd., [1977] 2 S.C.R. 134; and "truly necessary” in R. v. Thomas Fuller Construction Co. (1958) Ltd., [1980] 1 S.C.R. 695. I believe the approach I have outlined is consistent with the results of this jurisprudence. These cases are best understood as setting out the proper test for the particular context in issue, rather than attempting to articulate a test of general application with reference to all contexts. Thus the tests they set out are not identical. As the seriousness of the encroachment on provincial powers varies, so does the test required to ensure that an appropriate constitutional balance is maintained. In surveying past jurisprudence it is to be expected that some example of patterns between the appropriate test of fit, and the head of power under which the federal legislation is valid, will be found. Such patterns exist not only because of a possible degree of similarity between the federal legislation which falls under any one head of power, but also for the reason that certain federal heads of power, for example, subsection 92(10), are narrow and distinct powers which relate to particular works and undertakings and are thus quite susceptible to having provisions “tacked-on” to legislation which is validated under them, while other federal heads of power, for example, trade and commerce, are broad and therefore less likely to give rise to highly intrusive provisions.

Although it is not necessary to deal with it here, I see no reason why the procedure proposed by the Supreme Court in General Motors, supra, should not be followed when first considering the pith and substance of the same legislation.

The respondent argues that there must be a rational connection between the constitutional power and the purpose and effect of the legislation: see Re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R. 297. In the context of. this case, it means that there must be a reasonable nexus between the collection of taxes and the techniques authorized by the section to accomplish this purpose. The respondent says the collection from third parties is not rationally connected to the constitutional power. In contrast to Bank of Montreal, supra, where section 178 of the Bank Act was clearly within the direct power of Parliament and there was no expropriation of third-party rights, reference is made to Regional Municipality of Peel v. MacKenzie, [1982] 2 S.C.R. 9 where it was held that section 20 of the Juvenile Delinquents Act was not properly ancillary to the federal government's authority when it authorized the imposition by court order of a financial burden on municipalities. By way of contrast, in General Motors, supra, the infringement was carefully limited in its scope and directly related to the statutory object.

Again I disagree. In my opinion, collection is an integral part of Parliament's taxation scheme and clearly authorized by subsection 91(3) of the Constitution Act. That is the pith and substance of the section. Necessity or the wisdom of the technique is not the issue; rather the question is whether the collection provisions fit within the scope of the federal legislation. This should be answered in the affirmative.

In the second part of these reasons I conclude that subsection 224(1.2) of the Act does not accomplish its stated purpose of effecting the transfer of property in the funds in favour of Revenue Canada due to a defect in language. This being so, it is not strictly necessary to decide whether the section, notwithstanding its strong constitutional footing, nonetheless offends subsection 92(13) of the Constitution Act, 1867 by virtue of the fact that the creditor, from whom the moneys are purportedly attached, already had an absolute interest in the accounts receivable at the time of service of notice upon it. Having now had the opportunity of reading the judgment of my colleague Twaddle, J.A., I concur with his view that the answer to this specific question is best left for another day.

III. Interpretation of subsection 224(1.2)

It is Revenue Canada's position that the section is simply a refinement of subsection 224(1). As noted in the Introduction, a number of appellate decisions upheld the priority of a secured creditor under this section. These cases include Attorney-General Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479 (Alta. C.A.); Royal Bank of Canada v. R. (1984), 52 C.B.R. (N.S.) 198 (F.C.T.D.), aff'd (1986), 60 C.B.R. (N.S.) 125 (F.C.A.) and Re Lemarre; University of Calgary v. Morrison, [1978] 2 W.W.R. 465 (Alta. C.A.).

The section applies only to the collection of certain types of taxes, that is, unremitted source deductions pursuant to the Act and other statutes. It is conceded that the section has the effect of depriving—and indeed was intended to deprive—secured creditors of their pre-existing security interest in the property of the tax debtor. This follows, so it is argued, by its plain wording or, at least, by necessary implication.

The case then turns on the adequacy of the wording of the section. Revenue Canada says the section is clear and unambiguous and should be interpreted in light of the scope and purpose of the Act. See, for example, Driedger on Statutory Interpretation (2nd ed., 1983) at page 105, and the comments of Lamer, C.J.C. in R. v. Multiform Manufacturing Co., [1990] 2 S.C.R. 624 at 630: “When the words used in a statute are clear and unambiguous, no further step is needed to identify the intention of Parliament.”

The traditional view that fiscal statutes were to be strictly interpreted in favour of the taxpayer was dispelled by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. In that case Estey, J. indicated that the words of a statute". . . are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.” A similar sentiment was echoed in Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79, 85 D.T.C. 5310 (F.C.A.), wherein MacGuigan, J.A. observed at page 83 (D.T.C. 5313):

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words- in-total-context approach with a view to determining the object and spirit of the taxing legislation.

The “older authorities" relied upon by MacGuigan, J.A. applied the so- called literal or strict" approach, particularly in relation to matters of taxation. By that standard the written expression could prevail over the legislation's context and over its objects: see, for example, the words of Duff, C.J. in Shaw v. M.N.R., [1939] S.C.R. 338, 39 Tax A.B.C. 326 at page 342 (Tax A.B.C. 330).

Counsel for the respondent does not ask this Court to return to the principle of the literal interpretation of the statute. Instead he relied on the well-known principle that, in the absence of clear and unequivocal terms, there is a presumption that proprietary rights are not to be taken away without provision being made for compensation, nor in the absence of clear and unequivocal language. In Cross, Statutory Interpretation (London: Butterworth's, 1987), the author writes at page 180:

There is a general presumption that Parliament does not intend to take away private property rights unless the contrary is clearly indicated. Lord Atkinson stated that there is a canon of interpretation "that an intention to take away the property of a subject without giving to him a legal right to compensation for the loss Of it is not to be imputed to the legislature unless that intention is expressed in unequivocal terms." After all, the protection of property is generally regarded as one of the fundamental values of a liberal society.

See also Manitoba Government Employees’ Association v. Government of Manitoba, [1977] 6 W.W.R. 247 (S.C.C.)

Although apparently at odds with each other, there is in my opinion no conflict between the principles relied upon by the appellant and the respondent, at least in the context of this case. While statutory “ambiguity” is now resolved by looking to the purpose and rationale of the particular provision, the purpose rule has not displaced the plain meaning rule in tax law. Put another way, the purpose rule is only used where the statutory language of the provision under scrutiny is obscure or ambiguous. This, indeed, is consistent with the recent decision in Multiform, supra.

As Estey, J. observed in Johns-Manville Inc. v. The Queen, [1985] 2 S.C.R. 46, when all is said and done,". . . where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer" (at page 72).

Is the section clear or is it ambiguous? The leading case squarely against Revenue Canada is Lloyd's Bank Canada v. International Warranty Co., [1990] 2 C.T.C. 360, 60 D.L.R. (4th) 272 (Alta. C.A.). The gist of this case can be found at 275-76 where it was concluded that the section did not have a“ "plain meaning that was unambiguous", and that it was, in reality, equivalent to" the transfer of proprietary rights without compensation"—nor was the Court prepared to imply that Revenue Canada's requirement to pay resulted in the property becoming that of the Crown.

This can be contrasted with the decision of the Saskatchewan Court of Appeal in Royal Bank of Canada v. Saskatchewan Power Corp. (1990), 86 Sask. R. 259 where the Court concluded that the section was simply a form of garnishment and that its wording was adequate to create a priority in favour of Revenue Canada over the position of a secured creditor.

At page 268 of the decision, Vancise, J.A., writing for the Court, stated that "A transfer of property in the funds [in favour of Revenue Canada] is the logical implication", because to do otherwise denied the Minister the right to the use thereof. He further held (also at page 268):

. . However, subsection (1.2) makes it clear that when the stated procedure is complied with, Revenue Canada is to receive the funds in preference to a secured creditor, notwithstanding other enactments. Priority and a corresponding charge upon property are thus clearly intended if not specifically stated.

and concluded (at page 269):

Thus the money is, not in express terms but by implication, declared to be held in trust to apply on account of the tax debtor's liability. [Sub]section 224(1.2) does not transfer the property and the debt to the Minister or to the Receiver General. It is impressed with a trust which requires that the money be held by the Receiver General for the specific purpose of applying it on account of the tax debtor's liability under the Act.

In my opinion this confusion on the part of the Court as to the process by which the moneys in question become the property of Revenue Canada points to the fact that the section is indeed ambiguous. It is not possible for the Minister of National Revenue to be a trustee for himself. Therefore, the trust as found by Vancise, J.A. must be in favour of the tax debtor. This does not appear to coincide with reality.

Revenue Canada's answer is that it was not necessary for Vancise, J.A. to find a charge on property or a priority because the plain wording of the section was sufficient. This flies in the face of the conclusion of the Alberta Court of Appeal in Lloyd's Bank, supra, that the wording is neither plain, nor adequate.

The respondent concedes that Parliament has the statutory authority— leaving aside the constitutional argument—to legislate a preference for income tax collection purposes in favour of Revenue Canada even over the position of a secured creditor if the tax debtor has any remaining proprietary interest in the funds. In Royal Bank v. R., supra, Muldoon, J. dealt with priorities between a duly registered assignment of book debts under the PPSA and a third-party demand pursuant to subsection 224(1) of the Income Tax Act. Muldoon, J. ruled in favour of the bank. He concluded (at page 206) that, from the date of the signing of the security agreement and registration thereof pursuant to the PPSA, "the book debts, actual or future, were never more the property of the assignor". In effect, upon registration of a security agreement with respect to accounts receivable, and pursuant to the PPSA, the agreement creates a fixed rather than a floating charge. This means that the old familiar contest to see who first gives notice to creditors is no longer pertinent. It also means that the language of the statute must be particularly specific given that, for all other purposes, the tax debtor's trade accounts are "already" the Royal Bank's property: see Federal Business Development Bank v. Perron, [1980] 4 W.W.R. 607 (Man. C.A.), and the impact such a statutory provision may well have on the

financing of legitimate business activity: see the comments of Wetmore, J. in Canadian Imperial Bank of Commerce v. Florsheim Inc. (British Columbia Supreme Court, unreported decision released on October 15, 1990).

The appellant submitted that if the section is so limited in its scope, as argued by the respondent, then it is next to meaningless because Revenue Canada could never have priority over a perfected and duly registered security agreement. The appellant points to subsections 224(4) and (5) which refer to the moneys that should be remitted by the employer as being trust moneys, and subsection 227(5) which says this is so even in a bankruptcy. [Subsection 227(5) was amended in 1988, but the amendment is not relevant for our purposes.] In response, the respondent points out that there is an advantage to Revenue Canada, by the amendment, to enable it to collect and control the moneys and to retain the funds against all but properly secured creditors. It simply asserts that the wording of the section is not adequate and the statutory interpretation accepted by the Alberta Court of Appeal in Lloyd's Bank, supra, and followed by the British Columbia Court of Appeal in Concorde International Travel Inc. v. T.I. Travel Service (1990), 72 D.L.R. (4th) 405 should be followed.

The language of the section is clearly not adequate to specifically provide a form of lien, encumbrance, charge or other proprietary interest in the receivables in favour of Revenue Canada. Earlier cases described subsection 224(1) as a"statutory form of garnishment": see, for example, Re Lemarre v. Morrison, supra. The section as amended is still entitled "Garnishment". The "enhanced version” of subsection 224(1) does not grant a charge to Revenue Canada, but merely enhances its ability to issue a third-party demand even when the receivable is apparently payable to the tax debtor's secured creditor. Whether or not the Act purports to create a trust over the moneys in question, it cannot perfect the inadequacy in language of the section which addresses neither the specific nature of the interest in the pre-existing secured interest, nor, even more significantly, the issue of priority over the prior fixed and specific charge.

It is not permissible to imply such a charge and priority as was done in Saskatchewan Power, supra, even on the grounds of necessity.

I can do no better than to quote the words of Stratton, J.A. in Lloyd's Bank, supra, who, in rejecting the trial judge’s conclusion that the section clearly provided by implication that the moneys paid became the property of the Crown, said (at pages 363-64 (D.L.R. 277)):

Following the decisions in Lemarre and the Royal Bank, I am of the view that the proceedings under s. 224(1.2) are at the most a form of extra-judicial attachment which could bring the funds in question into the custody of Revenue Canada. The section falls short of effecting the transfer of property in the funds or establishing priority of Revenue Canada's claim. Something further is required to accomplish either purpose.

IV. Conclusion

To summarize, it is my conclusion that the legislation fails by virtue of a defect in language to accomplish its apparent purpose, namely, to effectively attach moneys that are already at the time of the issuance of the third-party notice the property of a secured creditor.

The appeal is therefore dismissed with costs.

Twaddle, J.A.:—The issue in this appeal is between The Royal Bank of Canada and, in right of Canada, Her Majesty the Queen. It involves the priority between them of their respective interests in the accounts receivable of a bank customer which is also a tax debtor. The Royal Bank contends that, as the holder of a perfected security interest, it has priority whilst Her Majesty asserts an allegedly superior right given to Her by statute. The issue has been litigated previously in other courts, but decided inconsistently. In the result, it is an issue which must be examined anew and on which this Court must make its own decision.

The debtor is Triman Industries Limited, a company now in bankruptcy. It was at all material times a manufacturer, borrowing money from the Royal Bank to finance its business. On July 9, 1987, Triman signed and delivered to the Bank, as security for its borrowings, an accounts receivable security agreement. In due course, this agreement was properly registered under the Personal Property Security Act.

Subsequent to the registration of the security agreement, Triman failed from time to time to remit to Revenue Canada moneys which it had deducted from its employees' wages on account of income tax. Over the period involved, the total of these deductions was $58,767.15.

In November 1989, both the Bank and Revenue Canada were pressing for payment of the moneys owing to them. On November 13, 1989, the Bank appointed Coopers & Lybrand Limited as its receiver to collect Triman's accounts receivable. It is not disputed that notice of the receiver's appointment was given to Triman's business debtors before a requirement to pay was served upon any of them by Revenue Canada.

Revenue Canada served a requirement to pay on four of Triman's business debtors before they had remitted to the receiver any of the money which was owed to Triman. The requirements to pay were issued pursuant to subsections 224(1.2) and (1.3) of the Income Tax Act. These subsections provide:

224

Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within 90 days, liable to make a payment

(a) to another person who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or to a legal representative of that other person (each of whom is in this subsection referred to as the "tax debtor"), or

(b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor,

the Minister may, by registered letter or by a letter served personally, require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor's liability under subsection 227(10.1) or a similar provision.

(1.3) In subsection (1.2),

"secured creditor" means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator, or any other person performing a similar function.

“security interest” 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;

Triman's business debtors paid the money into Court. These proceedings are to determine whether the receiver, on the Bank's behalf, or Her Majesty has the prior right to payment of that money.

Before turning to the issue as it arises under the amended legislation, it is helpful to consider those cases in which a similar issue was decided under the legislation as it was prior to 1987. The relevant subsection then was subsection 224(1) which, in the form enacted by S.C. 1980-81-82-83, c. 140, s. 121, provides:

224.(1) 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 ax 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.

In Attorney-General Canada v. Royal Bank of Canada, [1979] 1 W.W.R. 479, the Appellate Division of the Alberta Supreme Court held that Her Majesty did not acquire an equitable interest in the money owed by a third party on whom a requirement to pay had been served. A person who held a registered assignment of that money was therefore entitled to payment of it in priority to Her Majesty.

To the like effect is the decision of the Federal Court of Canada in Royal Bank of Canada v. R. (1984), 52 C.B.R. (N.S.) 198, aff’d (1986), 60 C.B.R. (N.S.) 125. The plaintiff bank held an assignment of accounts receivable, which assignment had been duly registered in accordance with the Personal Property Security Act of this province. The Minister of National Revenue served a requirement to pay, issued pursuant to subsection 224(1) of the Income Tax Act, on a third party. Muldoon, J. held that, as the assignment conveyed all of the tax debtor's interest in the funds to the bank, the money was no longer the property of the debtor. Consequently, the Minister's demand was ineffectual.

In holding for the secured party, Muldoon, J. indicated that, as of the day the assignment was perfected, “the book debts, actual or future, were never more the property of the assignor." He also said (at page 210):

The plaintiff owned the debt due to Miles [the tax debtor] from Cadillac [the third party] and, by registration of its assignment, had perfected or secured its ownership even without Miles's debtor having specific notice of the assignment of book debts. The bank’s right to the book debt would in no way have been diluted if Cadillac had paid Miles directly in the ordinary course of business, for Miles would have simply received payment as a trustee for the plaintiff bank.

And later (at page 2H):

In sum, then, the defendant's third party notice, in both nature and effect, is a statutory instrument of garnishment. It is surely effective to pluck up what is owed to the taxpayer in the taxpayer's own right, but it is ineffectual for the purpose of intercepting funds of which the taxpayer is merely the trustee for another whose taxes are not in arrears.

Crown counsel contends that the bank as assignee can have no greater claim on the money paid by Cadillac Fairview than can Miles, the assignor. Counsel argues that the position to the effect that once the Crown has given the debtor (Cadillac, here) notice, and received the money, thereby discharging the debtor's obligation, then the Crown is entitled to retain what it has received.

With respect, that contention misses the point. To equate the respective rights of the assignee and the assignor in and upon the book debts is to overlook the very nature and effect of the assignment, for the assignee owns the book debts and the assignor does not. To those who have not searched in the personal property security register, the assignor, of course, might still appear to be an ordinary trade creditor, but having assigned the book debts,the assignor, Miles was in reality a trustee of them for the assignee, the plaintiff bank. Here, the Crown has received that which belonged to the bank.

[Emphasis added.]

Finally, Muldoon, J. observed (at page 212):

One cannot demonstrate that the Federal Crown is bound by provincial law simply because that law validly permitted the taxpayer, Miles, to part at an earlier time with the ownership of property which thereupon no longer belonged to the taxpayer and, therefore, was no longer exigible to attachment by the Crown. The Crown surely cannot complain that it is sought to be bound by provincial law simply because the Crown took aim in a direction where there was no target. In this instance the money was not owing to Miles, or “otherwise payable”, except in trust for the bank. There having been nothing in Cadillac Fairview's hands, which was available for the Crown to attach, it is clear that in this instance the Crown's reach has exceeded its grasp.

The reasoning of Muldoon, J. was adopted by Cullen, J., also of the Federal Court-Trial Division, in Ontario Development Corp v. R. (1989), 9 P.P.S.A.C. 122. Although that case was decided after subsections 224(1.2) and (1.3) were added to the section, the events which gave rise to the issue had occurred beforehand. The case is not therefore decisive of the issue as to the effect of the additional subsections.

That issue was addressed, however, in Toronto-Dominion Bank v. Canada (unreported decision of the Federal Court-Trial Division, judgment released October 17, 1990). Following the decision in Royal Bank of Canada v. R., supra, Jerome, A.C.J. held that the general assignment of book debts to the Toronto- Dominion Bank was an absolute transfer of all property in them. He said: "Accordingly . . . the Toronto-Dominion Bank had full legal and equitable title in all accounts . . . unless such right was otherwise expropriated by competent and valid legislation.” The next question was whether subsections 224(1.2) and

(1.3) in combination effected such an expropriation.

In dealing with that question, Jerome, A.C.J. adopted the reasoning of the Alberta Court of Appeal in Lloyd's Bank Canada v. International Warranty Co., [1990] 2 C.T.C. 360, 60 D.L.R. (4th) 272. Both reasoned that the legislation did not go as far, in its plain and unambiguous meaning, as to expropriate the property of a former creditor who had acquired an absolute interest in the tax debtor's accounts receivable.

The decision of the Alberta Court of Appeal in Lloyd's Bank Canada v. International Warranty Co., supra, was the subject of an unsucessful application for leave to appeal to the Supreme Court of Canada: see 70 Alta. L.R. (2d) liii. Not only was it followed by Jerome, A.C.]., but it was also followed by the British Columbia Court of Appeal in Concorde Travel v. T.I. Travel (1990), 72 D.L.R. (4th) 405 and by the Superior Court of Quebec in La Compagnie de Cautionnement Alta. v. Ville de La Prairie (unreported decision dated March 9, 1990).

To the opposite effect are decisions of the Supreme Court of Nova Scotia in Touche Ross Ltd. v. M.N.R. (unreported decision dated May 11, 1990) and of the Saskatchewan Court of Appeal in Royal Bank v. Saskatchewan Power Corp. (1990), 86 Sask. R. 259. The Saskatchewan Court of Appeal was of the view, contrary to that taken by the Alberta Court of Appeal and Jerome, A.C.J., that the meaning of subsections 224(1.2) and (1.3) was clear and unambiguous: it was to confer on the Crown an entitlement to receive payment of the tax debtor's accounts receivable ahead of a secured creditor who had an assignment of them.

To an extent, I agree with the Saskatchewan Court of Appeal. The legislation is clear and unambiguous in its meaning as far as it confers a priority of interest on the Crown over a person who remains a creditor. Where I part company with that Court is the point at which a creditor acquires an absolute interest in the accounts receivable. The Personal Property Security Act has introduced a new concept into our law. Under that legislation, a creditor with a perfected security interest is not really a creditor at all. The perfection of his security interest converts his interest to ownership. From that moment on, the former creditor becomes the proprietor of the accounts receivable.

It is a long-established principle of law that, in the absence of clear language to the contrary, a tax on one person cannot be collected out of property belonging to another: see Earl of Shaftesbury v. Russell (1823), 1 B.& C. 666, 107 E.R. 244. Whilst it may be clear from the language of subsections 224(1.2) and

(1.3) that Parliament intended to place Her Majesty in a preferred position to that of a secured creditor, it is not clear enough, in my opinion, that Parliament intended to permit Her Majesty to collect tax out of property which has previously been assigned, absolutely, to another.

Whilst it may be that a taxing statute can be construed as overriding the law of property in a unitary state, it is more difficult for such a statute to be so construed in a state where legislative jurisdiction is divided. It must surely be assumed that the taxing jurisdiction did not intend to alter property rights, ordinarily beyond its powers, unless it clearly says so.

In Canada, the exclusive legislative jurisdiction in relation to property is vested in the provinces. Although Parliament may be able to provide for the collection of tax owed by one person out of that person's property in priority to the claims of others who do not own it, Parliament may not be able to go as far as providing for the collection of a tax owed by one person out of property which belongs to another. That is a nice point, but one which I do not think needs to be answered here.

If Parliament wants to go as far as providing for the collection of a tax which one person should have remitted to Her Majesty out of property which belongs to another, it must at least make its intention clear. The present law provides only for a priority between rival creditors. Parliament has not made it clear that Her Majesty should be entitled to collect what were the tax debtor's accounts receivable in priority to the person who acquired ownership of them before the tax debt arose.

In those circumstances, I am of the view that the learned motions judge was correct when he ruled in favour of the Royal Bank and the receiver. I would dismiss the appeal of the Attorney-General with costs.

Lyon, I.A.: I am indebted to my colleagues, the Chief Justice of Manitoba and Twaddle, J.A., for their thoughtful reviews of the facts, arguments and authorities in this appeal as well as to counsel for the appellant and respondent for their able presentations. I concur with and adopt the reasons given by the Chief Justice in his review of the constitutionality of subsections 224(1) and (1.2) of the Income Tax Act. I, however, believe it to be advisable to answer the constitutional question in the affirmative. I am satisfied that the sections in question were enacted within the constitutional authority of Parliament pursuant to the Constitution Act.

As to whether the section”. . .has achieved its stated purpose and enables Revenue Canada to deprive a secured creditor of the benefit of its security,” the Chief Justice concludes". . . that it fails by virtue of a defect in language to accomplish its apparent purpose, namely, to effectively attach moneys that are already at the time of the issuance of the third-party notice the property of a secured creditor."

With the greatest of respect, I have found it impossible to adopt that conclusion. The respondent” tax debtor" employer deducted income tax from its employees' pay cheques and then failed to remit the amounts deducted to Revenue Canada. Regrettably neither counsel was able to advise the Court as to the time period during which the employer made the appropriate income tax deductions and then failed to remit them to Revenue Canada. We must therefore assume that the taxation amounts deducted from the employees' pay cheques occurred subsequent in time to the assignment of book debts executed by the tax debtor in favour of the Royal Bank of Canada.

The sections of the Act which bear upon this appeal are attached to these reasons as Schedule "A" [not reproduced].

After reviewing the arguments and authorities cited by counsel, I have come to the view that the cases decided on subsection 224(1) prior to the enactment of subsection 224(1.2) are of limited value in interpreting the latter section. Considering the various sections of the Act in Schedule “A”, I do not find any ambiguity in subsection 224(1.2). Read in its totality, the Act clearly intends that the employer shall deduct or withhold the taxation from the employee's cheque and ''shall. . .remit that amount to the Receiver General on account of the payee's tax for the year. . . . ." Subsection 153(3) mandates that the amount deducted or held under section 157 is deemed to be received by the employee and is the property of the employee.

I find persuasive the argument by the appellant that the tax debtor, in the circumstances of this case, has unlawfully misappropriated the tax deductions of its employees by failing to remit them to the Receiver General as required by the Act. That being the case, either the tax debtor used the misappropriated deductions for its own purposes or the pool of moneys available for distribution to the tax debtor's creditors, including the Royal Bank, has been increased by the amount which the tax debtor failed to remit to the Receiver General.

Simply put, if the argument of the respondent is to prevail, namely, that the tax debtor has assigned all of its title and interest in accounts receivable to the Royal Bank, the result would be that the Royal Bank will benefit, at the expense of the Crown, either from the assignment of accounts receivable or from sharing the enhanced pool of money or other assets left by the now bankrupt tax debtor. The tax debtor and its creditors would thereby derive a benefit from the illegal misappropriation, and the victims of the misappropriation, the employees and the Crown, would rank only as unsecured creditors in a lengthening queue.

Such an outcome, with respect, flies in the face of common sense, is patently contrary to the public interest and is perverse. It could well encourage the repetition of this kind of "scam" by other tax debtors across the country who might coldly calculate to benefit from their own unlawful withholding of employees' tax moneys.

I am satisfied that the scheme and purpose of the Act require employers to deduct income tax from employees' pay cheques and to remit those deductions to the Crown. When an employer fails to do this in contravention of the Act and misappropriates such deductions to his own use and benefit, the courts cannot be seen to validate or even by implication to condone such an illegality merely on the basis of a perceived ambiguity in subsection 224(1.2) arrived at by a granular weighing of its text.

The core provision of subsection 224(1.2) is the collection of taxes by way of intercepting payments which are to be made directly by a third party to a person (tax debtor) who is obligated to remit moneys which he has withheld at source but failed to remit.

The second provision of subsection 224(1.2) states that Revenue Canada may likewise intercept payments made by a third party to a secured creditor when that secured creditor has stepped into the shoes of the taxpayer. Such interception is only possible when a tax debtor would have been entitled to receive payment directly from the third party “but for a security interest in favour of the secured creditor."

What Parliament has done in substance is to provide for the clearance of a tax liability prior to the satisfaction of private law debts of the taxpayer. Significantly, the respondent receiver concedes that the collection of taxes as between the Crown and its tax debtors by way of interception falls within the constitutional authority of Parliament.

In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Estey, J. at page 578 (C.T.C. 316, D.T.C. 6323) cited with approval from Construction of Statutes (2nd ed., 1983) at 87, E.A. Driedger, who put the modern rule of statutory interpretation as follows:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

This is the principle that was applied by the Saskatchewan Court of Appeal in Royal Bank of Canada v. Saskatchewan Power Corp. (1990), 86 Sask. R. 259.

The appellant submits that previous decisions such as Re Lemarre; University of Calgary v. Morrison, [1978] 2 W.W.R. 465 (Alta. C.A.) which dealt with subsection 224(1) and were rendered before the coming into force of subsections 224(1.2) and 224(1.3), are of little value in deciding the case at bar. With this submission, I agree.

The argument advanced in Lloyd's Bank Canada v. International Warranty Co., supra, was that subsection 224(1.2) falls short of effecting the transfer of property in the funds or establishing the priority of Revenue Canada's claim. Something further is required to accomplish either purpose.

However, the Saskatchewan Court of Appeal stated in the Saskatchewan Power case, supra, (at 270): "An examination of the sections clearly supports the position that there is no ambiguity." The Court cites with approval (at 271) the description of the operation of subsection 224(1.2) as described by the chambers judge in Lloyds Bank Can. v. International Warranty Co., [1989] 3 W.W.R. 152, [1989] 1 C.T.C. 401, 89 D.T.C. 5279, (Alta. Q.B.) at page 164 (C.T.C. 410, D.T.C. 5285):

If there are moneys that are otherwise payable to a secured creditor, it is clear that those moneys must be paid not to the secured creditor but to the Receiver General, and that the moneys are not to be held for some such purpose as safekeeping while entitlement is decided, but “on account of the tax debtor's liability”. In other words, the section clearly provides by implication that the moneys so paid become the property of the Crown; there is no other way that the tax debtor's liability could be satisfied.

The interpretation placed on the section by the Alberta Court of Appeal in the Lloyd's Bank case would put the Minister of National Revenue in a custodial position with respect to the funds in question. This is hardly a reasonable construction when the provision is read in its proper context. The garnishment provisions of the Act are designed to maximize fiscal recovery by redirecting payments in certain circumstances to the Crown. Parliament could not have intended the Crown to act as a collection agency for secured creditors. Such an interpretation is not reasonable in the context of the Act and more importantly by the plain meaning of the words used in the subsection. This interpretation, putting the Minister in a custodial position, would also create an anomalous result in that such a mere right of custody could create a windfall to the tax debtor and a prejudice to the Minister in that receipt by the Minister for moneys paid as required operates to satisfy the tax debtor's liability to the extent of such payment. This would be the case even if the Minister was later found not to be entitled to the funds in his possession.

With the greatest of respect to my colleagues, I find the words of the section clear and unambiguous. The intent of Parliament clearly was to make all assignments of book debts subject to the proviso that the assignor had fulfilled its obligations under that section of the Income Tax Act.

That the pith and substance of section 224 is the effective collection of moneys arising from source deductions, was made clear by the Supreme Court in its comments on the deduction process in Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182 at 1191:

It is important to consider the nature of the deduction for income tax. It is not a deduction for the benefit of the employer, it is withholding for the benefit of the employee because it is to be remitted to the Receiver General of Canada on account of the employee's tax indebtedness. By virtue of other provisions of the Income Tax Act if, as happens in a large number of cases, the withholdings exceed the employee's tax liabilities, a refund will be made to the employee by the Department of National Revenue. Therefore, the amount withheld remains a part of the wages, and subs. 153(3) provides that it is "deemed to have been received" by him at the time the payment was made less the deduction.

One must always remember that the withholding tax or source deduction to which section 224 applies is at the heart of the collection procedures for personal income taxation in Canada. Indeed, if one makes a calculation from the statistics reported in "Taxation Statistics, 1987”, a publication of Revenue Canada, Taxation, Catalogue No. RV-1987, one finds that 87 per cent of all personal income taxes paid in Canada are collected by source deductions. It can thus be seen that Parliament in passing subsection 224(1.2) made it as all- encompassing as it is in order to ensure its continued viability. No other system is so crucial to the overall collection procedure adopted by the Crown. Parliament clearly meant to protect this system. Using the employer as a tax collector requires such extra protection in cases such as the one at bar where the employer converts the withheld tax money to its own purposes. Understandably, that conversion cannot be countenanced if the integrity of that system is to be preserved. Parliament, therefore, acting within its constitutional authority, has taken this extraordinary remedy to protect a major collection source.

I am satisfied, therefore, that Parliament intended this section to be a special and extraordinary overriding power by which it could ensure that taxes withheld by an employer on behalf of an employee would remain impressed with that obligation, regardless of what credit or other arrangements the tax debtor might contract with respect to its own assets. The withheld taxes never formed a part of the tax debtor's estate. Therefore, if they were unpaid or unlawfully withheld, Parliament intended that the Crown could claim them from other assets of the tax debtor or its assignees, notwithstanding the existence of otherwise valid assignments made by the tax debtor under provincial or federal statutes, or the detriment which this extraordinary collection procedure might visit upon the tax debtor's lawful creditors.

In my opinion it was intended by Parliament that anyone who, in the ordinary course of business, made credit arrangements with a tax debtor involving assignments of accounts receivable, did so subject to the overriding right of the Crown to satisfy the primary obligations of the tax debtor to collect and remit taxes withheld from its employees. The words of the statute can mean nothing less. The section is cast in the broadest of possible terms precisely because it was meant to interfere with and interrupt payments under such assignments and divert them to meet this statutory obligation. I do not know what other words Parliament could use to make its overriding intention and claim more clear.

The effect of the section, therefore, is that normal credit obligations contracted between a tax debtor and a third party are subject to the tax debtor having first fulfilled its statutory requirement to remit source deductions. If it has not done so, subsection 224(1.2) ensures that that statutory obligation takes primacy over all other debts and obligations of the tax debtor, notwithstanding that they may arise under provincial, federal or“ any other law.” Credit grantors must understand that their contracts are subject to this overriding obligation. Until the Crown's claim has been satisfied, their assigned claim to the former assets of the tax debtor cannot arise.

I am convinced that the operation of subsection 224(1.2), on its plain words, creates a priority and a transfer of property in favour of the Minister in respect of funds otherwise payable to a secured creditor of a tax debtor. Considering statutory interpretation, as stated by the Court in Attorney-General v. Exeter Corporation, [19T1] 1 K.B. 1092 at page 1101:

If the words of the Act are clear it is not the function of the Court to struggle to find some other way of construing them. The words of the Legislature are the text of the law and must be obeyed.

The same principle was enunciated by La Forest, J.A. (as he then was) in The Queen in Right of New Brunswick v. Estabrooks Pontiac Buick Ltd. (1982), 144 D.L.R. (3d) 21 (N.B.C.A.) at page 28:

There is no doubt that the duty of the courts is to give effect to the intention of the Legislature as expressed in the words of the statute. And however reprehensible the result may appear, it is our duty if the words are clear to give them effect. This follows from the constitutional doctrine of the supremacy of the Legislature when acting within its legislative powers.

And at page 31:

The courts should not, for example, place themselves in the position of frustrating regulatory schemes or measures obviously intended to reallocate rights and resources simply because they affect vested rights. For legislation almost inevitably affects vested rights. They must similarly have great deference for legislative schemes establishing priorities among creditors and encumbrancers and, in particular, those that favour the Crown over other creditors; indeed the common law itself has always recognized certain Crown priorities flowing from the prerogative: see The Queen v. Bank of Nova Scotia et al. (1885), 11 S.C.R. 1.

Subsection 224(1.2) applies only to the collection of certain types of taxes, that is, unremitted source deductions pursuant to the Act and amounts owing by employers pursuant to the Canada Pension Plan Act and the Unemployment Insurance Act. As stated in the Saskatchewan Power case, supra, at 270, the section "makes it clear that when the stated procedure is complied with, Revenue Canada is to receive the funds in preference to a secured creditor, notwithstanding other enactments." The appellant concedes and admits that the section has the effect of depriving secured creditors of their pre-existing security interest in the property of the tax debtor. A demand pursuant to subsection 224(1.2) specifically gives Revenue Canada priority over secured creditors. It is a specific statutory provision, as the appellant has argued, the intended effect of which is to place secured creditors' interests in a subordinate position to that of the Minister with respect to the collection of unremitted source deductions.

Parliament, when introducing subsections 224(1.2) and (1.3), clearly intended these provisions to mean something more than subsection 224(1). These provisions, it should be noted, were enacted in addition to subsection 224(1) and not in substitution therefor.

I reiterate my opinion that it is contrary to public policy for a court to make a pronouncement which could well be perceived as a condonation of the conversion committed by the tax debtor. Such a result should not be permitted or sanctioned by the courts. In another context, that of interpretation of alleged undue influence by the beneficiary of a testator's will, Wilson, J. said in an unreported decision of the Supreme Court of Canada at 22 of Fffen v. Goodman Estate (judgment dated June 27,1991)): ‘’. . . there is something so completely repugnant about the judicial enforcement of coerced or fraudulently induced generosity. . .”.

In the context of the case at bar, I find there would be something completely repugnant about judicial enforcement of a misappropriation or conversion of moneys lawfully owed to the Crown.

Accordingly, I would allow the appeal and order the receiver, Coopers & Lybrand, to pay over to Revenue Canada the amounts claimed by it. The appellant is entitled to its costs in this appeal.

Appeal dismissed.