Toronto-Dominion Bank v. The Queen, 90 DTC 6639, [1990] 2 CTC 542 (FCTD)

Jerome, A.C.J.:—This matter came on for hearing on April 19, 1990, in Edmonton Alberta. The issue before me, that of the relative priority of the plaintiff's claim to funds owed by account debtors of the estate of J.K. Campbell and Associates Ltd. to the claim of the defendant to the same funds, was presented for determination pursuant to Rule 474 of the Federal Court Rules. The funds in question, some $685,575.03, which the defendant had collected from account debtors of the estate in question, were paid into Court on March 13, 1990, in compliance with my order of February 23, 1990.

An agreed statement of facts was filed by the parties on February 23, 1990. The facts, as derived from that statement, are essentially as follows. On April 26, 1983 J.K. Campbell and Associates Ltd., herein referred to as "the Company" granted to the plaintiff as security for an outstanding debt it owed the plaintiff, a general assignment of accounts and debts owing to the Company. This assignment was registered with the Central Registrar for Alberta on May 13, 1983, and subsequently renewed in 1986 and 1988.

On December 5, 1988, Coopers and Lybrand Ltd. was appointed by the plaintiff as receiver and manager of the Company. Formal notices were issued to the Company's account debtors directing that they pay their accounts to Coopers and Lybrand. One such formal notice was sent on December 5, 1988 to Suncor Inc., an account debtor of the Company, directing that Suncor pay its debt owing to the Company to Coopers and Lybrand Ltd.

During approximately the same period of time, Revenue Canada, on behalf of the defendant, served requirements to pay under subsection 224(1.2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), upon certain of the Company's account debtors, directing that they pay their debts to the defendant, in light of the Company's liability under section 227, or under similar provisions in the Canada Pension Plan, R.S.C. 1970, c. C-5 or the Unemployment Insurance Act, 1971, S.C. 1970-71-72, c. 48. Suncor was one of those served with such a notice.

Collection of the accounts owing to the Company was being adversely affected by the fact that demands for payment had been issued by both parties. Accordingly, the parties entered into an agreement providing that once Suncor paid the defendant the debt which it owed the Company on a without prejudice basis, the defendant would withdraw any outstanding requirements to pay it had issued to the Company's other account debtors. In compliance with this agreement, Suncor paid to the defendant the sum of $540,930.31 in April 1989.

The defendant also collected $144,644.72 from other account debtors of the Company, in response to requirements to pay issued to those parties. Funds collected by the defendant were applied to the Company's debt under subsection 227(10.1) of the Income Tax Act, or the provisions of other legislation referred to above.

As of January 1, 1990, the Company remained indebted to the plaintiff in the amount of $2,021,234.

The parties have agreed that the legal question as to the relative priority of the plaintiff's claims to funds owed by account debtors of the Company vis- à-vis the defendant's claim under the requirements to pay it has issued, is a question that can appropriately be decided under Rule 474, and that a determination of this issue will resolve the entire dispute existing between the parties.

The question of law which I am called upon to decide in this case has been stated, with a slight variation, by both parties, and I don't propose to make any other reference to it until the conclusion of the reasons. Essentially, it reduces itself to two questions: Does a general assignment of book debts transfer all rights and interests in such property to the assignee so that the debts can no longer be considered the property of the assignor, and secondly, what effect does section 224 of the Income Tax Act have, particularly 224(1.2)? Does it create a priority in favour of Her Majesty?

The argument advanced by the applicant with respect to the first point is essentially that it has been held by this Honourable Court as well as by a number of other common law Canadian Courts that an absolute assignment of book debts transfers all rights and interests in such property to the assignee, such that the debts can no longer be considered the property of the assignor. This is the case whether or not notice of the assignment has been issued to account debtors.

The applicant cites five cases in support of this proposition, including Royal Bank of Canada v. The Queen, [1984] C.T.C. 573; 84 D.T.C. 6439; 27 B.L.R. 276, (F.C.T.D.) decided by my colleague Mr. Justice Muldoon and affirmed by the Court of Appeal in due course ([1986] 2 C.T.C. 211; 86 D.T.C. 6390 (F.C.A.)).

In Royal Bank the question was virtually the same. Answering this question in the affirmative, Mr. Justice Muldoon commented, at page 583 (D.T.C. 6447; B.L.R. 295):

This case presents a vexed question which continues to generate litigation. Business enterprises, large and small, require credit from banks for their working capital. The future impact on the economy, and especially on employment opportunities, of requiring lenders to bear financial responsibility, in effect, for business borrowers' income tax arrears, ought to be addressed by Parliament and made plain in the legislation, if such it is to be. If that were to be the effect of the law under consideration here, it would require a different expression of parliamentary intent in that regard, and the Court should not support to supply it by usurping Parliament's role.

He concluded that the plaintiff, under its general assignment of book debts, did indeed have priority to moneys received by the Department of National Revenue under its third party demand.

A similar conclusion to that which, as I indicated, was upheld by the Court of Appeal, was reached by my colleague Mr. Justice Cullen in Ontario Development Corp. v. Canada, [1989] 1 C.T.C. 319; 89 D.T.C. 5134, again in the Federal Court-Trial Division. Same question, same argument. And in accepting the argument, he stated that he could see no purpose in repeating a review of the case law on the subject, other than to note Mr. Justice Muldoon'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." Mr. Justice Cullen concluded at page 325 (D.T.C. 5137): ”. . .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."

I also make brief reference to Evans Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 16 D.L.R. (2d) 123 (B.C.C.A.) for a similar confirmation of the same conclusions.

In light of the preceding authorities, and particularly in light of the Federal Court of Appeal's decision in Royal Bank of Canada v. The Queen, supra, which is entirely binding on this Court, I must conclude that the general assignment of book debts granted April 26, 1983 by J.K. Campbell and Associates Ltd. to the Toronto-Dominion Bank constituted an absolute transfer of all property and interest previously held by J.K. Campbell in its accounts or other book debts, present or future. Accordingly, after April 26, 1983, the Toronto- Dominion Bank had full legal and equitable title in all accounts that were owing or that would become owing by debtors of J.K. Campbell unless such right was otherwise expropriated by competent and valid legislation.

This turns then to the second issue of whether subsection 224(1.2) of the Income Tax Act gives rise to such an expropriation in favour of Revenue Canada. Subsections 224(1.2) and (1.3) of the Income Tax Act provide as follows:

(1.2) 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.

(1.3) In subsection (1.2),

"secured creditor"—"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" —"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;

“similar provision"—"similar provision” means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act.

Both parties have made detailed submissions on the issue of how subsections 224(1.2) and (1.3) ought to be interpreted, referring, in both cases to general and accepted rules of statutory interpretation. The applicant concedes that, as the defendant has argued, the modern rule of statutory interpretation expressed by E.A. Dreidger, and cited with approval by Mr. Justice Estey in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294 at 316; 84 D.T.C. 6305 at 6323 is applicable here:

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.

The applicant submits, however, that the taxing provisions which affect the relationship between a tax debtor and Revenue Canada must be considered differently than "an enactment that purportedly strips a third party of vested rights in favour of or on account of another's tax liability”. The applicant urges that where the Crown advances an interpretation of a statute which would deprive an individual or corporation of property rights by means of expropriation, "whether by prior charge, lien or the taking of property in any other way”, a presumption arises “that Parliament would not have intended such a result". According to the applicant: ” . . . a statutory power of expropriation must be expressed in terms that would leave no doubt whatsoever that such a 'brutal and piratical’ purpose was intended. Any ambiguity must be resolved in favour of protecting property interests."

The respondent submits that subsection 224(1.2) "on its plain words and read in accordance with the above quoted passage from Stubart creates a priority and a transfer of property in favour of Her Majesty in respect of funds otherwise payable to a secured creditor of a tax debtor". In particular, the respondent points out: ” . . . subsection 224(1.2) without qualification states that the Minister may require ”. . . that the particular person pay . . . the moneys otherwise payable. . .to the secured creditor . . . to the Receiver General on account of a tax debtor's liability . . .”.

The respondent has cited several cases which have dealt with the interpretation of the subsections in question, all of them very recently decided. In Lloyds Bank of Canada v. International Warranty Co., [1989] 1 C.T.C. 401; 89 D.T.C. 5279; 64 Alta L.R. (2d) 340 (Q.B.); supplementary reasons [1989] 2 C.T.C. 357, the Alberta Queen's Bench interpreted subsection 224(1.2) as follows, at page 410 (D.T.C. 5285; Alta. L.R. 352):

The answer to that argument [that if it was intended that Revenue Canada was to deprive a bank of its pre-existing property rights, the legislation must be clear and specific to that purpose] in my view, is found in a reading of the plain words of subsection 224(1.2). It empowers the Minister by letter to require a person . . . to pay "moneys otherwise payable to. . .the secured creditor . . . to the Receiver General on account of the tax debtor's liability . . .". 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 "an 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.

This view was not, however, upheld by the Alberta Court of Appeal ([1990] 2 C.T.C. 360; 60 D.L.R. (4th) 272). Mr. Justice Stratton of the Court of Appeal disagreed with the lower Court's interpretation of subsection 224(1.2), in particular disagreeing that the section has the “plain meaning that is unambiguous" attributed to it by the learned chambers judge. Mr. Justice Stratton was of the opinion that for Revenue Canada to succeed, the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor of all or part of its security without compensation, for the purpose of paying another debt entirely unrelated to the security. In his reasons, he reached the assessment that this would be "surely equivalent to the transfer of proprietary rights without compensation" (page 362 (D.L.R. 276). After a review of the relevant case law, he concluded, at pages 363-64 (D.L.R. 277):

I am of the view that the proceedings under subsection 224(1.2) are at most a form of extra-judicial attachment which could bring the funds in question into the custody of Revenue Canada. The section falls far 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.

I am in agreement with the conclusion reached by Mr. Justice Stratton for the Alberta Court of Appeal. Moreover, I am bound by the decision of the Federal Court of Appeal in The Royal Bank v. The Queen, supra. Accordingly, I conclude that subsection 224(1.2) of the Income Tax Act does not have the effect of granting a priority to Revenue Canada to the funds owed by the account debtors of J.K. Campbell and Associates Ltd.

As I concluded earlier in these reasons, subsequent to the assignment by J.K. Campbell and Associates of its book debts and accounts to the Toronto- Dominion Bank, the Toronto-Dominion Bank acquired absolute title and interest in the receivable property of J.K. Campbell, both present and future, and J.K. Campbell no longer had any interest in those accounts against which a creditor could claim a right to execute. Subsection 224(1.2) of the Income Tax Act, in order to effect what would amount to an expropriation of property from the Toronto-Dominion Bank, would have to be worded in such a way as to make this intention absolutely clear, and it is not.

When I gave these reasons orally at Edmonton, Alberta on July 13, 1990, I therefore invited counsel to draft the formal order for my signature.

Order accordingly.