Ontario Development Corp. v. The Queen, 89 DTC 5134, [1989] 1 CTC 319 (FCTD)

Cullen, J.:—The question to be determined is who, as between the plaintiff and the defendant Crown, has priority to the $19,116.61 paid by Bell Northern Research (BNR) to the Department of National Revenue pursuant to the "Requirement to Pay” issued under section 224 of the Income Tax Act.

The parties agreed to the facts, as set out in the “Agreement as to Facts" filed and which reads as follows:

The parties hereto, by their respective solicitors, for the purposes of this action only, agree to the following facts:

1. The Plaintiff is a Crown corporation created by the Government of Ontario for the purpose of promoting commercial development through the provision of financial and technical assistance.

2. The Defendant, Her Majesty the Queen in right of Canada, is represented herein by the Minister of National Revenue.

3. Bell Northern Research is a company incorporated under the laws of Canada.

4. Prior to 1979, the Plaintiff made two loans to Canadian Kitkraft Enterprises Limited: one for $77,000 and the other for $75,000. These loans were secured by Debentures, dated November 13, 1979.

5. The said Debentures charged certain real property of Canadian Kitkraft Enterprises Limited, situated in the Township of Gloucester, in the Regional Municipality of Ottawa-Carleton, by way of mortgage, subject to a prior mortgage thereon held by the Bank of Nova Scotia, and certain personal property, including the book debts, of that company.

6. In 1981 the Plaintiff also guaranteed a loan of $100,000 plus interest, which the Bank of Nova Scotia had made to Canadian Kitkraft Enterprises Limited.

7. The Bank of Nova Scotia held two securities for the said $100,000 loan: a general Assignment of Book Debts, Etc." and a "Security Agreement", dated June 1, 1977, and June 10, 1977, respectively, copies of which securities [were annexed to the Agreement as to Facts] and marked as Exhibits 1 and 2 respectively.

8. The Bank of Nova Scotia registered “Financing Statements" and "Financing Change Statements" in respect of the said "Assignment of Book Debts, Etc.” and “Security Agreement" (Exhibits 1 and 2) pursuant to sections 47 and 52, respectively, of the Personal Property Security Act, S.O. 1973, c. 102, s. 9 (R.S.O. 1980, c. 375, ss. 47, 52).

9. On April 25, 1983, Bell Northern Research, received from the Department of National Revenue, Taxation, a "Requirement to Pay” to the Receiver General for Canada all monies which the said defendant was liable to pay to Canadian Kitkraft Enterprises Limited up to a total of $50,899.97. A copy of the said "Requirement to Pay” [was] annexed [to the Agreement as to Facts] and marked as Exhibit 3.

10. The said "Requirement to Pay” was issued pursuant to subsection 24(2) of the Canada Pension Plan, R.S.C.-1970, c. C-5, as amended, subsection 80(1) of the Unemployment Insurance Act, 1971, S.C. 1970-71-72, c. 48, as amended, and subsection 224(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, and included a demand for $44,920.82 on account of amounts deducted or withheld by that company from its employees' wages on account of their income taxes payable by them under the Income Tax Act. A Certificate for that amount was registered in the Federal Court of Canada on May 6, 1983, pursuant to section 223 of the Income Tax Act, section 24 of the Canada Pension Plan and section 79 of the Unemployment Insurance Act, 1971, a copy of which Certificate [was] annexed [to the "Agreement of Facts"] and marked as Exhibit 4.

11. Pursuant to the said "Requirement to Pay”, Bell Northern Research, on May 3, 1983, paid to the Defendant the amount of $19,116.61 being all the monies then due and owing by Bell Northern Research to Canadian Kitkraft Enterprises Limited.

12. On May 11, 1983, Bell Northern Research, received notice from the Bank of Nova Scotia that it held a general assignment of book debts of Canadian Kitkraft Enterprises Limited and demanded payment of all amounts owing by Bell Northern Research to Canadian Kitkraft Enterprises Limited. At this time Bell Northern Research owed a further $7,535.18 to Canadian Kitkraft Enterprises Limited.

13. Being met with competing claims to the said $7,535.18, Bell Northern Research refused to pay it to either the Defendant, Her Majesty the Queen, or to the Plaintiff until it was directed to which of the parties to pay it. Bell Northern Research was impleaded by the Plaintiff in this action as a codefendant.

14. By consent of all parties the Federal Court of Canada, Trial Division, has issued Judgment, directing Bell Northern Research to pay the said $7,535.18 to The Clarkson Company Limited, Trustees in Bankruptcy of Canadian Kitkraft Enterprises Limited, and otherwise dismissing the action against Bell Northern Research.

Plaintiff's Position

It is the plaintiff's position that as to priority for the $19,116.61 paid over to the department of National Revenue, the plaintiff should have priority with respect to the general assignment of book debts. This position is supported by the following argument: when Canadian Kitkraft Enterprises Limited (Kitkraft) gave the assignment of book debts to the Bank of Nova Scotia (the Bank), the Bank became the owner of the book debts and Kitkraft merely became the trustee of these book debts. As such, any funds relating to the book debts belonged to the assignee Bank, not Kitkraft. The general assignment of book debts was registered under the Personal Property Security Act of Ontario on June 7, 1977, well before the “Requirement to Pay” was received by Bell Northern Research (BNR) from the Minister of National Revenue. However, BNR did not receive notice of the general assignment of book debts until after it had received, and made payment pursuant to, the “Requirement to Pay”. According to the plaintiff, this notice does not alter the fact that when the Minister of National Revenue sent the "Requirement to Pay” (under section 224 of the Income Tax Act) to BNR requesting that the funds relating to the book debts be paid to Her Majesty, these funds no longer belonged to Kitkraft, as Kitkraft was only the trustee, and therefore the Minister of National Revenue could not use the Bank’s money to satisfy the debt owed to the M.N.R. by Kitkraft. Further, when notice was received by BNR the Bank (and the plaintiff by subrogation) was entitled to the funds that had not beenpaid out as well as to the funds that had been paid out, namely the $19,116.61 at issue.

Defendant's Position

It is the defendant's position that this is not a case dealing with priorities, but one dealing with the question of whether or not the Crown obtained good title on May 3, 1983 to the funds in question. According to the defendant, the Crown on behalf of Kitkraft was able to give a complete discharge of the debt to BNR with the result that on May 11, 1983, the date BNR was served with the notice of the general assignment of book debts by the Bank, the debt no longer existed. Therefore, there is nothing to pay to the plaintiff.

In his submissions, counsel for the defendant did not dispute that the service on BNR of the "Requirement to Pay” did not create an equitable charge, that the Crown did not obtain an assignment of the debt owed from BNR to Kitkraft and that the Crown merely acquired the rights of a garnisher. However, this is not the end of the matter, as it is the defendant's contention that until the notice of Kitkraft's assignment of general book debts was served on BNR (which occurred on May 11, 1983), the interest that the Bank had in Kitkraft’s book debts was only an equitable interest in the nature of a floating charge. In order to become the owner in possession and claim the book debts as a legal owner, the Bank had to give notice of the assignment to BNR. Therefore, until such notice was given, the Crown could give a valid discharge for the funds related to the book debts. In this case payment to Revenue Canada was made prior to the notice of general assignment being received by BNR thereby extinguishing BNR's debt to Kitkraft. As a result, Kitkraft's debt to the Bank, and later by subrogation to the plaintiff, also became pro tanto extinguished. Therefore, the Crown is entitled to retain the $19,116.61 as it obtained these funds legally.

Discussion

The relevant portions of the assignment of book debts between the Bank of Nova Scotia and Kitkraft are set out below:

1. THE UNDERSIGNED (herein called "the Customer") for valuable consideration hereby assigns and transfers to The Bank of Nova Scotia (herein called "the Bank”) all debts, demands and choses in action which are now due, owing or accruing due or which may hereafter become due, owing or accruing due to the Customer and all claims of whatsoever nature or kind which the Customer now has or may hereafter have, including claims against the Crown and claims under insurance policies; ALSO all contracts, securities, bills, notes, lien notes, judgments, chattel mortgages, mortgages, and all other rights and benefits which now are or may hereafter be vested in the customer in respect of or as security for any of the said debts, demands, choses in action and claims; AND ALSO all books, accounts, invoices, letters, papers and documents in any way evidencing or relating to any of the said debts, demands, choses in action and claims; (all of the foregoing being hereinafter referred to as "the premises hereby assigned”).

2. This assignment and transfer shall be a continuing collateral security to the Bank without impairment or novation of any other existing or future security and shall operate as a general security for all present and future indebtedness and other liability of the Customer to the Bank so long as the Customer shall remain indebted or otherwise liable to the Bank or shall continue to be receiving advances from the Bank; but the Customer shall be entitled at any time, upon the discharge of all indebtedness and other liability of the Customer to the Bank, to the cancellation hereto.

3. The Bank shall have power at the cost of the Customer to collect, dispose of, realize or enforce any of the premises hereby assigned at such time and in such manner as the Bank may deem advisable, either in its own name or in the name of the Customer, without notice to the Customer and without prejudice to any rights the Bank may have against other parties or to the right the Bank may have against the Customer for any deficiency; and upon a sale the Bank shall have the right to buy in the whole or any portion of the premises hereby assigned offered for sale and the rights of the Customer therein shall thereupon be extinguished.

8. IT IS HEREBY AGREED that all money received by the customer in payment of any debts, demands and choses in action which are now due, owing or accruing due, or which may hereafter become due, owing or accruing due to the Customer, or in payment of any claims of whatsoever nature or kind which the Customer now has or may hereafter have, including claims against the Crown and claims under insurance policies, shall be received and held by the Customer in trust for the Bank.

After reviewing the terms of this assignment, it is clear that the assignment to the Bank was absolute and therefore Kitkraft conveyed all of its rights and interest to the book debts on June 1, 1977, the date of the assignment, to the Bank of Nova Scotia. The case of Royal Bank of Canada v. The Queen, [1984] C.T.C. 573; 84 D.T.C. 6439 (F.C.T.D.); affirmed by the Federal Court of Appeal, [1986] 2 C.T.C. 211; 86 D.T.C. 6390, is remarkably similar to the case at hand and lends much support to the plaintiffs position that when the assignor of the book debt parted with the debt by the assignment, the book debts were no longer the assignor's property and the garnishing order could not attach to it. In the Royal Bank case the plaintiff (Royal Bank of Canada) took an assignment of book debts from Miles Construction Ltd. as security for a number of outstanding loans. The plaintiff registered the assignment of book debts under the Personal Property Security Act of Manitoba. Subsequently, Revenue Canada sent a third party demand, pursuant to section 224 of the Income Tax Act, to Cadillac Fairview, a debtor of Miles Construction, in respect of outstanding income tax owed by Miles Construction. The debtor, Cadillac Fairview, had no notice of the plaintiff's assignment prior to the issuance of the third party demand by Revenue Canada or prior to the money being forwarded by Cadillac Fairview to Revenue Canada. In this regard, BNR is in the same position as Cadillac Fairview. The plaintiff demanded payment of all outstanding loans from Miles Construction and commenced an action for the recovery of the amount paid pursuant to the third party demand. The parties applied to the Court for a determination of priorities and Muldoon, J. found that on the facts, the plaintiff had priority.

Counsel for the defendant has attempted to distinguish the Royal Bank case from the case at hand on the basis that the Royal Bank case involved a security registered and perfected under the Personal Property Security Act of Manitoba, which Act endowed the holder of the security registered under it with specific rights vis-a-vis competing creditors and other claimants, including garnishers. Further, the Manitoba Personal Property Security Act expressly binds the Crown while the Ontario Personal Property Security Act does not expressly provide that the Crown is bound by the Act and therefore in the case at hand the Crown is not bound by the Act and in fact, the Personal Property Security Act should not be applied.

With respect to the first part of the defendant's submission, the relevant provisions dealing with registration, attachment and perfection of a security interest in the Manitoba Personal Property Security Act are almost identical to the provisions of the Ontario Personal Property Security Act and therefore I see no reasons why Muldoon, J’s comments in the Royal Bank case respecting these provisions could not be considered or applied to the case at hand. In fact, Muldoon, J. reviewed cases dealing with the provisions of the Ontario Personal Property Security Act in his analysis of the effect on the registration under the Manitoba Personal Property Security Act, In support of the defendant's submission regarding the Crown and the Ontario Personal Property Security Act, the case of Re: Doxtator (1984), 44 O.R. 581 (Ont. S.C.) was put forth. The Doxtator case stands for the proposition that the Crown is not bound by the Ontario Personal Property Security Act. The headnote of this case reads as follows:

The Personal Property Security Act, R.S.O. 1980, c. 375, not containing an express provision that the Crown is bound, does not bind the Crown. Consequently, a chattel mortgage and an assignment of book debts held by the Crown have priority over a trustee in bankruptcy, even though the financing statements are not registered within the time prescribed by the Act.

I have no dispute with the decision in Re: Doxtator. However, I do not think it has any application to the case before me, as I am dealing with an assignment filed and registered by the Bank of Nova Scotia, not by the Crown, as was the situation in Re: Doxtator. It was the Bank that had been given the general assignment of book debts, registered the assignment and therefore was entitled to benefit from the registration. Moreover, the Bank, not being the Crown, is bound by the Personal Property Security Act of Ontario.

Muldoon, J., in the Royal Bank case also commented on the subject of the Crown and provincial legislation at pages 582-3 (D.T.C. 6446):

Can it be said, then, that the Crown in Right of Canada is somehow bound by the provisions of a provincial statute? Surely, no more here than if the secured property were, in fact, real property. Allowing that money is distinct from real property in that money is the principal medium of exchange and the very specie in which taxes are paid, still the Crown is not entitled to confiscate, for a mortgagor's tax arrears, the property of a mortgagee only because the mortgagor once possessed clear title but has since conveyed it away or lost it. If the Crown in Right of Canada would lawfully effect such a confiscation, then no one's property rights would be secure, whether by common law or pursuant to provincial real or personal prop erty statutes modifying the common law. Indeed, Parliament has made a new approach to this problem about personal property securities by enacting subsections 224(1.1) and (4.1) of the Income Tax Act, but those provisions do not come into play here.

With respect to the plaintiff's general assignment of book debts, the Royal Bank case contains an excellent review of the relevant case law on this point and I see no purpose in repeating this review other than to note Muldoon, J.'s conclusion that from the day of the absolute assignment of book debts, "the book debts, actual or future, were never more the property of the assignor, Miles’ page 578 (D.T.C. 6443) and to include the headnote from Evans Coleman and Evans Limited v. R.A. Nelson Construction Ltd. (1958), 16 D.L.R. (2d) 123 (B.C.C.A.) as quoted in Royal Bank at page 577 (D.T.C. 6442):

The claimant was the assignee from the defendant of a general assignment of book debts, duly filed and registered, but notice of which had not been served on any of the assignor's debtors. The plaintiff garnisheed one such debt and, in a contest over priority, claimed that the assignment was a floating charge and that therefore the debt was properly attached.

Held, the debt was not attached.

Per DesBrisay, CJBC O'Halloran, JA concurring:

The assignment, purporting to pass the entire interest of the assignor in the book debts, was absolute. A provision that it should be a continuing security did not make it any less absolute.

As between the assignor and the assignee the assignment, which was an equitable assignment, was absolute and complete without notice being given to the debtors. The garnisher stood in the same position as the assignor, his right depending upon the debt belonging to the assignor when the garnishing order was issued; the assignor, having already parted with the debt by the assignment at such time, the garnishing order could not attach it.

The fact that the assignee permitted the assignor to collect the assigned debts did not alter the fact that they were the assignee’s property.

The assignment contained no provisions constituting it a floating charge. Gr Lakes Petroleum Co v. Border Cities Oil Co, [1934] OR 244, 8 Can Abr 262, distinguished (WWR)

Therefore, it seems clear that once there has been a general assignment of book debts, the amounts relating to the book debts no longer belong to the assignor. Here, on assignment of the book debts, the book debts became the property of the Bank of Nova Scotia, and later, by subrogation, the property of the plaintiff. The assignor, Kitkraft, was only the trustee for the assignee, the Bank of Nova Scotia and then the plaintiff.

The parties have indicated in the agreement as to facts that the Bank of Nova Scotia registered the assignment of book debts under the appropriate provisions of the Ontario Personal Property Security Act on June 7, 1977. Clements, C.C.J.'s analysis of the concepts of attachment and perfection in Royal Bank of Canada v. Inmont Canada Ltd. (1980), 1 P.P.S.A.C. 197, as quoted in the Royal Bank case at pages 578-80 (D.T.C. 6443 and 6444), is instructive:

The concepts which help to determine the efficacy of a security interest are "attachment" and "perfection".

"Attachment" is a term employed by the Act to describe those rights which, as against the debtor, a secured party acquired in collateral upon creation of a security interest. This concept is set out in s. 12(1) of the Act. Section 12(1):

"12.(1) A security interest attached when,

(a) the parties intend it to attach;

(b) value is given; and

(c) the debtor has rights in the collateral.”

This right arises upon the fulfilment of these three conditions regardless of the order of their occurrence.

While "attachment" confers rights upon the secured party against the debtor, "perfection" is a term that describes the rights that a secured party has in collateral as they conflict with the rights of third persons.

As stated in the text Personal Security Laws in Ontario, supra, p. 5, 6:

“Since perfection confers the greatest bundle of rights with respect to personal property that it is possible for a party to obtain under the Act and represents an interest in personal property that cannot be defeated in bankruptcy proceedings or by creditors, it is important to spell out the mechanics of perfection. There are three main available methods to perfect a security interest. They are

(a) by possession, (b) by registration, and (c) by temporary perfection.”

Here there is registration of the security interests of both the plaintiff and the defendant in accordance with the Act and is thus public notice of a nonpossessory security interest.

The chief method of perfection is by registration and the requirements to achieve perfection by this method consist of (a) a written agreement; (b) attachment of the security interests; and (c) registration in the proper office of a financing statement.

Under the Act therefore a security interest although registered cannot be perfected unless and until it has attached. Reference must be made to s. 21 and s. 25 of the Act.

Section 21:

"A security interest is perfected when,

(a) it has attached; and

(b) all steps required for perfection under any provision of this Act have been completed, regardless of the order of occurrence.”

Section 25:

“(1) Subject to section 21, registration perfects a security interest in,

(c) intangibles.”

The security interest will not attach despite the fact that the debtor has rights in the collateral and the secured party has given value unless the third element necessary to effect attachment has occurred, i.e. the parties intend to attach (pages 204 and 205).

As the authors state in the text Personal Property Security Law in Ontario at p. 66:

"Therefore, when the parties enter into a security agreement under which the debtor grants to the secured party a security interest in the nature of a floating charge in collateral in or which subsequently comes into his possession and the secured party gives value, a security interest will attach under this Act. When the security agreement is registered, the security interest will become a perfected security interest.

The security agreement, including the floating charge created therein, will be effective according to its terms between the parties to it and against third parties. Therefore, either by express provision, or by implication arising from the designation of the security interest as a floating charge, third parties dealing with the debtor and/or the collateral will be deemed to have knowledge of the perfected security interest and the extent of the debtor's right to deal with the collateral in the ordinary course of his business free of or subordinate to, the security interest.”

In accordance with s. 9 of the Act which reads as follows:

"Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties.”

This interpretation is consistent with the Act itself and s. 35(1)(a) which reads as follows:

“If no other provision of this Act is applicable priority between security interests in the same collateral shall be determined,

(a) by the order of registration, if the security interests have been perfected by registration.”

Accordingly, when the general assignment of book debts was entered into between the plaintiff and the assignor thereunder, Leslie Christie, a security interest attached in the collateral and was perfected by registration. Priority therefore is provided for by s. 35 of the Act and does not arise through crystallization through notice through the debtor. Perfection of the security interest serves as knowledge or notice to the defendant herein of the prior perfected security interest and the rights available or interest to be secured by the defendant in the subject collateral. (pages 206 & 207)

Subparagraph 53(1)(a)(i) of the Personal Property Security Act of Ontario provides that registration of the financing statement under the Act constitutes notice to all persons claiming any interest in the collateral and is set out below:

53.—(1) Where the collateral is other than instruments, securities, letters of credit, advices of credit or negotiable documents of title, registration under this Act,

(a) a financing statement constitutes,

(i) notice of the security interest to which it relates to all persons claiming any interest in such collateral, and

(ii) subject to section 21, perfection of the security interest, during the period of three years following such registration.

From the above it is clear that the Bank of Nova Scotia perfected its security interest by registration on June 7, 1977. With this "perfection" came certain rights, such as not having to specifically give notice to Kitkraft’s debtors (BNR) and to achieve priority over subsequent claims. Also, subsection 23(2) of the Personal Property Security Act states that "An assignee of a security interest succeeds insofar as its perfection is concerned to the position of the assignor at the time of the assignment".

Therefore, as the Bank's perfected interest has been maintained, the plaintiff's interest by assignment is, by virtue of subsection 23(2) considered perfected as of June 7, 1977.

Section 224 of the Income Tax Act allows the M.N.R. to require persons making payments to a defaulting taxpayer to make the payment directly to the M.N.R. on account of unpaid taxes. This process is known as garnishment or a demand on third parties and basically substitutes the M.N.R. as the person legally entitled to demand the payment and to give a receipt for such payment. At the time in question section 224 read as follows:

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 “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.

The authorities clearly indicate and counsel for the defendant has agreed, that the defendant's third party notice is merely a statutory instrument of garnishment. The notice does not create an equitable charge and service of the notice does not have the effect of transferring the property. As Muldoon, J. noted at page 582 (D.T.C. 6446) of the Royal Bank case:

It [the third party notice] 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.

Continuing, in the Royal Bank case, the Crown raised an argument very similar to the one raised by the Crown in the case at hand. Muldoon, J.'s response at page 582 (D.T.C. 6446) is set out below:

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 from that 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.

I agree with Muldoon, J.'s reasoning and feel it is applicable to the case before me. Accordingly, the assignor Kitkraft was the trustee of the book debts for the assignee Bank and later by subrogation for the plaintiff, and the defendant received money that belonged to the Bank and by subsequent assignment, belonged to the plaintiff.

Before concluding, I would note Muldoon, J.'s comments at page 583 (D.T.C. 6446 and 6447) of the Royal Bank case:

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 ownership of property which thereupon no longer belonged to that taxpayer and, therefore, was no longer exigible to attachment by the Crown. The Crown surely cannot complain that it is sought to be found 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.

Similarly, in this case, the money was not owing to Kitkraft, except in trust for the Bank of Nova Scotia. There was nothing in BNR's hands which was available for the Crown to attach and once again, "the Crown exceeded its grasp".

For the reasons indicated above, the plaintiff, as assignee of the Bank’s assignment of book debts from Kitkraft, is entitled to the $19,116.61. Interest

The plaintiff claims interest pursuant to section 36 (formerly section 35) of the Federal Court Act. The statutory authority under which the plaintiff claims this interest is contained in paragraph 164(3)(e) of the Income Tax Act. According to the plaintiff's counsel, the sum of $19,116.61 is an amount in controversy under paragraph 164(3)(e) and therefore the plaintiff is entitled to the interest.

The defendant submits that the $19,116.61 is not an amount in controversy contemplated by paragraph 164(3)(e) of the Act. It is the defendant's position that when paragraph 164(3)(e) is read in terms of the entire context of subsection 164(3), it becomes clear that the subsection deals only with income tax assessed, paid and then refunded or repaid and not with money received from a third party pursuant to a notice under section 224 of the Income Tax Act. Therefore, there is no statutory authority to award interest.

Section 36 of the Federal Court Act clearly provides that no interest is payable by the Crown unless a contract or statute so provides. The statute in question in this case, is paragraph 164(3)(e); the entire section reads as follows:

(3) Interest on refunds and repayments. Where under this section an amount in respect of a taxation year is refunded or repaid to a taxpayer or applied to another liability, the Minister shall pay or apply interest thereon at the prescribed rate for the period beginning on the day that is the latest of the following days:

(a) where the taxpayer is an individual, the day on or before which the taxpayer's return of income under this Part for the year was required to be filed under section 150 or would have been required to be so filed if tax under this Part were payable to him for the year,

(b) where the taxpayer is a corporation, the day that is 120 days after the end of the year,

(c) the day on which the taxpayer's return of income under this Part for the year was filed under section 150, unless the return was filed on or before the day on or before which it was required to be filed, or would have been required to be filed if tax under this Part were payable by him for the year,

(d) in the case of a refund of an overpayment, the day the overpayment arose,

and

(e) in the case of a repayment of an amount in controversy, the day an overpayment equal to the amount of the repayment would have arisen if the aggregate of all amounts payable on account of the taxpayer's liability under this part for the year were the amount by which

(i) the lesser of the aggregate of all amounts paid on account of his liability under this Part for the year and the aggregate of all amounts assessed by the Minister as payable under this Part by the taxpayer for the year

exceeds

(ii) the amount repaid,

and ending on the day the amount is refunded, repaid or applied, unless the amount of the interest so calculated is less than $1, in which event no interest shall be paid or applied under this subsection.

After examining the paragraph in its context, I accept the Crown's position that there is no statutory authority upon which to grant the interest.

Costs

The plaintiff also claims solicitor-client costs based on the defendant's unnecessary requests for discovery which unduly delayed the trial of this action. The defendant maintains there was no delay caused to the fair trial of the action attributable to any unreasonable demands for a discovery on the part of the Crown and therefore there is no basis upon which to award costs on a solicitor-client basis.

It is difficult to find a basis on which to grant costs on a solicitor-client basis (from a practice standpoint) other than under Federal Court Rule 344(1) which provides that the awarding of costs are at the complete discretion of the Court and Rule 344(3)(k) which allows the Court to consider "the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding”. Of some interest is Schering Canada Inc. v. Pentagone Laboratories Ltd. (1985), 6 C.P.R. (3d) 22 and 489 (F.C.T.D.) which held that the court may exercise its discretion as to costs as an inducement for the proper performance by a party of its obligations as to discovery. In the circumstances here, I cannot find the conduct of the defendant was such as to warrant this punitive measure. The plaintiff is entitled to costs, forthwith after taxation thereof.

Judgment for the plaintiff.