Date:
20021018
Docket:
2000-3607-GST-G
BETWEEN:
ABSOLUTE
BAILIFFS INC.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Hershfield, J.T.C.C.
[1]
On March 13, 1995 Revenue Canada issued and delivered to the
Appellant a Requirement to Pay pursuant to subsection 317(3) of
the Excise Tax Act (the "Act") in the
amount of $84,177.39. That subsection permits the Minister of
National Revenue (the "Minister") to require the holder
of funds, who the Minister believes is liable to make a payment
to a tax debtor or to a secured credit of a tax debtor, to pay
the funds to the Receiver General on account of the tax
debtor's liability under the Act. The Requirement to
Pay issued under that provision named the tax debtor as Star
Furniture Ltd. ("Star").
[2]
Prior to the receipt of the Requirement to Pay, the Appellant,
retained by a landlord, MacIntosh Estates Ltd.
("MacIntosh"), had seized assets belonging to its
tenant, Star, pursuant to the terms of the Rent Distress
Act of British Columbia (the "RDA"). On
March 14, 1995 a company related to the Appellant, Absolute
Equipment and Vehicle Sales Inc. ("ASI"), disposed of
such seized assets and on the same day received the proceeds of
such sale in the amount of $43,000.00. On the same day, March 14,
1995, ASI paid $34,000.00 of such proceeds to MacIntosh. The
Respondent asserts that MacIntosh was a secured creditor of the
Appellant and that the funds on hand on March 14th were caught by
the Requirement to Pay delivered on March 13th.
[3]
Adding some complexity to the matter, Star made an assignment
into bankruptcy on the same day as the proceeds of sale of
Star's seized assets were realized, March 14, 1995, and the
Trustee in Bankruptcy (the "Trustee") subsequently
sought an order declaring the sale of the seized Star assets
invalid. Few particulars were provided as to the outcome of the
Trustee's action except that Revenue Canada notified the Trustee
of its claim but took no action to pursue it further with the
Trustee and that the Appellant made a payment to the Trustee (in
the order of $9,000.00) in settlement of the Trustee's claim to
Star's seized assets. The Appellant's principal Terry Bohn (the
president and sole shareholder of both the Appellant and ASI)
testified that it took several years to settle the
matter.
[4]
Notwithstanding the bankruptcy of the tax debtor, the Minister
issued a Notice of Assessment to the Appellant on May 17, 1995
pursuant to subsection 317(7) in the amount of $43,960.02
for its failure to comply with the Requirement to Pay. The amount
assessed includes $960.02 for interest and penalties. If the
Requirement to Pay served on the Appellant is effective,
subsection 317(7) makes the Appellant liable for moneys paid
or payable to MacIntosh. This is a penalizing provision designed
to ensure compliance with the Requirement to Pay.
[5]
In brief, the Appellant brings into question:
(A) Whether
the Minister named and served the right party in that the
Appellant was not possessed of moneys paid to MacIntosh. ASI was
possessed of the proceeds of the sale of the seized assets and
it, ASI, made the payment to MacIntosh, not the
Appellant;
(B)
Whether the Minister's failure to pursue a claim under the
bankruptcy proceedings has a bearing on this appeal. The
Appellant argues the doctrine of estoppel. This issue requires
consideration of the impact of Star's assignment into bankruptcy
on the same day as moneys were received and
distributed.
(C)
Whether in general terms subsection 317(3) which gives Revenue a
super priority on funds payable to a secured creditor of a tax
debtor was intended to apply to effect a priority over landlords
who have distressed for rent. It is argued that a distinction
must be made where moneys are paid to a person who might, for
some purposes, be a secured creditor but who is entitled to
receive funds in its own right; and
(D)
Whether the
exacting requirements of subsection 317(3) of the Act have
been met in the circumstances of this appeal. That subsection
only authorizes and invokes a requirement to pay where the person
named and served is liable to make a payment to a "tax
debtor" or to a "secured creditor" of the tax
debtor in circumstances prescribed in that subsection. The
Appellant argues that the preconditions to invoking liability
under the Requirement to Pay have not been met.
[6]
The following facts and chronology of events were either agreed
to by the parties or were put in evidence in the course of the
trial:
1.
Star is a GST registrant with GST Registration
No. 128434016.
2.
Star was assessed by the Minister on December 22, 1994 for
$54,330.96 net tax, $8,110.24 interest, and $21,918.19 penalties
with respect to the period January 1, 1991 to April 30,
1994.
3.
On March 8,
1995 the Appellant acted on behalf of the landlord, MacIntosh, to
seize assets of Star pursuant to a distress warrant issued for
rent in arrears totalling $41,160.04 plus
costs.
4.
On March 9, 1995
the Appellant notified the Revenue Canada that "we have been
involved with the following tenant under the RDA" and
named Star as the tenant. The notice requested immediate advice
if there were any funds owing. This was a voluntary act that was
the practice of the Appellant in respect of its asset seizures as
a bailiff.
5.
On March 13,
1995 the Appellant received a Requirement to Pay $84, 177.39
pursuant to subsection 317(3) of the Excise Tax
Act.
6.
Star's seized
assets were sold by ASI on March 14, 1995 for the sum of
$43,000 plus applicable taxes for a total of $46,010. ASI's
general ledger shows a deposit of this amount on the same day. On
the same day ASI paid MacIntosh $34,000 being the proceeds of
sale net of bailiff fees, sales fees and provincial
levies.
7.
On March 14, 1995,
subsequent to the sale of Star's seized assets, Star made an
assignment into bankruptcy.
8.
Mr. Bohn was
advised by the Trustee by telephone of Star's assignment into
bankruptcy after funds were transferred from ASI to MacIntosh.
Mr. Bohn advised the Trustee of the sale on being advised of
the assignment.
9.
The Trustee in Bankruptcy subsequently commenced proceedings to
declare the sale of the Tenant's assets invalid.
10.
A proof of claim was filed by
Revenue Canada with the Trustee in April 1995.
11.
Revenue Canada had notice of the proceedings and the bankruptcy
as a whole. Revenue Canada elected not to take part in the
proceedings to decide the fate of the funds raised from the
distressed sale.
12.
The active parties in the proceedings commenced by the Trustee
subsequently consented to settle the dispute. The Appellant
contributed a sum in the settlement (approximately $9,000) and
the funds at issue were directed through the Estate in
Bankruptcy. It does not appear that Revenue Canada received any
funds from the Trustee inspite of having served a proof of
claim.
13.
At all material times ASI and the Appellant conducted business
out of the same office and had the same officers and shareholder.
The Appellant and ASI routinely treated the seizure of goods and
the sale of seized goods as separate businesses (or as separate
arms of a business) conducted separately by each of them. There
were no documents supporting this practice or setting out the
terms of the arrangement.
14.
There was no documentation for the transfer of the seized Star
assets from the Appellant to ASI or for the retention of ASI to
conduct the sale.
[7]
The relevant sections of the Act, subsections 317(3), (4)
and (7) read as follows:
317. (3)
Notwithstanding any other provision of this Part, any other
enactment of Canada other than the Bankruptcy and Insolvency
Act, any enactment of a province or any law, where the
Minister has knowledge or suspects that a particular person is or
will become, within ninety days, liable to make a
payment
(a)
to a tax debtor, or
(b)
to a secured creditor who has a right to receive the payment
that, but for a security interest favour of the secured creditor,
would be payable to the tax debtor,
the
Minister may, by a letter served personally or by registered
mail, 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 this Part, and on receipt of that letter by the particular
person, the amount of those moneys that is required by that
letter to be paid to the Receiver General shall, notwithstanding
any security interest in those moneys, become the property of Her
Majesty in right of Canada to the extent of that liability as
assessed by the Minister and shall be paid to the Receiver
General in priority to any such security interest.
(4)
"secured creditor" means a particular person who has a
security interest in the property of another person or who acts
for or on behalf of the particular 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 and 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.
. .
.
(7) Every
person who fails to comply with a requirement under subsection
(1), (3) or (6) is liable to pay to Her Majesty in right of
Canada an amount equal to the amount that the person was required
under subsection (1), (3) or (6), as the case may be, to pay to
the Receiver General.
Issue A:
Whether the Requirement to Pay was served on the right
person
[8]
On the evidence before me I can only conclude that MacIntosh
dealt with no other party than the Appellant. ASI's involvement
was as a subcontractor retained by the Appellant to perform the
sales side of the package of services that a bailiff's business
might entail. There is no evidence, nor did the Appellant
suggest, that MacIntosh had a contractual arrangement with ASI.
There is no evidence, nor did the Appellant suggest, that the
contract between the Appellant and MacIntosh contemplated that
MacIntosh would have a contractual relationship with ASI such as
might have resulted had the contract expressly contemplated the
assignment of a part of it to ASI. No documentation was produced,
no one from MacIntosh was called and I am left with the fairly
clear impression that ASI contracted with the Appellant to
perform a service for the Appellant and was holding funds for the
Appellant having performed those services. On the deposit of the
sales proceeds of Star's seized assets, the funds were held for
the Appellant's account. The Appellant in furtherance of its
contract with MacIntosh caused ASI to pay the net amount payable
to MacIntosh. ASI paid MacIntosh as the Appellant's agent. ASI
had a legal interest in the funds, having same in its bank
account, but such interest, derived from possession, was subject
to the direction and control of the Appellant. The acts of ASI in
respect of the funds were the acts of the Appellant.
[9]
I also note that subsection 317(3) directs that the person who is
required to make a payment to the tax debtor (or to a secured
creditor of the tax debtor) is the person to be served with the
Requirement to Pay. On receipt of the Requirement those moneys
payable by the recipient are required to be paid to the Receiver
General. The provision does not expressly say that the recipient
of the Requirement to Pay has to be in possession of the moneys
nor do I think that such precondition is to be necessarily
implied in all circumstances. Serving the party with the
liability to pay the tax debtor is sufficient. For example, the
Minister does not have to serve that party's bank where its
moneys are kept. Serving the party liable to make the payment is
sufficient.
[10]
Accordingly, I will, with respect to the application of
subsections 317(3), (4) and (7), regard the Appellant as
having received the proceeds from the sale of the Star seized
assets and as having paid MacIntosh.
Issue B:
Estoppel and the Impact of Star's Assignment into
Bankruptcy
[11] The
Appellant asserts prejudice resulting from Revenue Canada not
pursuing a claim against the Trustee. I can only speculate as to
the outcome of such claim had it been pursued. I have no
particulars as to the Trustee's position in respect of such a
claim. Settlement was apparently reached without the
Appellant's insistence on resolving, or imposing
contingencies regarding Revenue Canada's claim.
[12] Based on my
limited understanding of these matters, it seems to me that the
Appellant acted to its own detriment. What was the basis for the
Trustee's action to set aside the sale of the seized assets
if, as admitted, moneys were paid to MacIntosh prior to notice of
Star's bankruptcy? Subsection 73(4) of the Bankruptcy
and Insolvency Act (BIA) suggests that
distressed property is required to be turned over to the Trustee
only if the Trustee produces a certified copy of the assignment.
We know the Appellant did not receive such notice. Further, if
subsection 73(4) applied to catch the seized assets, why did
the Appellant pay an amount to the Trustee equivalent to its
holdback from MacIntosh for fees? Subsection 73(4) provides that
the costs of distress are a first charge on the assets turned
over to the Trustee. Did the Trustee return funds to the
Appellant? I am somewhat confounded by these
questions.
[13] While the
settlement confounds me, the interaction between the BIA
and the Act is, in my view, clear on the facts as
admitted.
[14] Subsection
71(1) of the BIA provides that a bankruptcy is deemed to
occur at the time of filing of a petition. It is not disputed
that the bankruptcy occurred on March 14, subsequent to the
issuance of the Requirement to Pay. Further, on the facts
admitted, the bankruptcy occurred subsequent to the sale of the
seized assets and subsequent to the receipt of the proceeds of
sale so that the Requirement to Pay was in place when moneys,
which become the property of Her Majesty if
subsection 317(3) otherwise applies, were held by the
Appellant. That proprietary interest (arising if subsection
317(3) otherwise applies) keeps the moneys from the Trustee where
the requirement to pay precedes the bankruptcy.
[15]
Accordingly, for the purpose of the Act, I am satisfied
that section 317 applies notwithstanding the bankruptcy.That
being the case, the Requirement to Pay served on the Appellant is
the Crown's best protection to ensure payment of funds owed
by the tax debtor. Revenue Canada seized upon a priority given by
Parliament on the facts of this case as they perceived them. To
pursue the Trustee might have assisted the Appellant in its
defence of the action brought by the Trustee to set aside the
sale if it could be demonstrated to the Trustee's
satisfaction that the Crown had a priority in any event (if in
fact it did) but I do not think it can be said that Revenue
Canada had an obligation to try to assist the Appellant in this
manner. Perhaps the real complaint is that the Appellant having
objected to the assessment under subsection 317(7) was not
afforded the benefit of Revenue Canada's response for some
five years. This delay might suggest that Revenue Canada itself
was not certain as to its position in respect of the objection.
While this delay might have had some prejudicial affect in terms
of the Appellant's dealing with the Trustee's action, the
Appellant acknowledged that such delay could have been rectified.
The Appellant could have launched an appeal without waiting for
the Confirmation. Instead, the Appellant accepted the risk in
settling with the Trustee prior to knowing Revenue Canada's
position. Indeed that risk was accepted by the Appellant when it
paid the amounts to MacIntosh after receiving the Requirement to
Pay. Regardless, Revenue Canada is entitled to rely on section
317.
[16] Since I see
no prejudice in the non-pursuit by Revenue Canada of its claim
against the Trustee, I do not have to consider further the
application of the doctrine of estoppel.
Issue C:
Whether Subsection 317(3) was intended to effect a
priority
in favour
of the Crown over landlords who have distressed for
rent
[17] It is
helpful at this point to consider in general terms whether the
priority of the Crown is meant to apply to the subject case.
Starting the analysis from this prospective might assist in the
construction of the express language of the section in the event
if suffers from any ambiguity.
[18] The
Appellant asserts that the landlord, MacIntosh, never extended
credit to the tenant Star and that in considering the definition
of a "secured creditor" in the Act, the
application of the subject provision should be limited to true
debtor-creditor relationships. The Appellant cites the case of
Piggott Project Management Ltd. v. Land-Rock Resources, as authority
for its position. In that case Cory J. stated that
"Basically, security is something which is given to ensure
repayment of a loan". However, this quotation
must be taken in the context of that case which dealt with
security for a loan. Prefaced by the word "basically",
it was clearly not meant to provide a definition of a security
let alone an exhaustive one. Indeed, a broader definition of a
"security interest" consistent with the definition in
the Act is cited with approval in the same paragraph of
his judgment. A person having any
interest in property that secures "payment or
performance" of an "obligation" and that includes
an interest "created or arising out of a ... lien ... or
encumbrance of any kind ... however created ... or ... provided
for" is a secured creditor for the purposes of subsection
317(3). This affords the Appellant no basis for asserting that in
general terms the Act intends to limit the definition of
"secured creditors" to "secured
lenders".
[19] There is
however another aspect to the Appellant's argument that
subsection 317(3) was not intended to apply to the subject case
that is not as readily dismissed. The Appellant has referred me
to Revenue Canada's administrative practice as set out in an
internal Verification and Collection Directive dated March 3,
1988 (CA-88-13) issued following the introduction of amendments
to the corresponding garnishment provisions of the Income Tax
Act. The following is included in the Directive:
One of the
diverse interpretations that could be incorrectly
applied to the new garnishment provisions is that the Department
would now be permitted to intercept the monies payable to a
mortgagee in order to collect unpaid source deductions of an
employer assessed under subsection 227(10.1), where the monies
payable to the mortgagee were as a result of a sale of the
mortgaged property by the mortgagee in order to realize upon his
security. Such an interpretation should not be applied as it
would be contrary to the purpose of the legislation, as outlined
in the Technical Notes, which have been reproduced earlier in
this directive.
If the
proceeds realized from such a sale are in excess of the amount
required to satisfy the liability of the mortgagee, such excess
may become payable to the tax debtor and thereby subject to
garnishment.
[20] The
Directive sets out the purpose of the amendment as per the
Technical Notes as follows:
Subsection
224(1) provides for garnishment action where a person is liable
to make a payment to a tax debtor. The amendment ensures that
garnishment action can be taken where, as a result of an
assignment of property or other security interest, payments are
redirected to a secured creditor of the tax debtor.
Subsections 224(1.2) and (1.3) provide that where a payment
is redirected to a secured creditor of the tax debtor, the
Minister of National Revenue may, notwithstanding the claim or
security interest of the secured creditor, intercept the payment
and apply it to the tax debtor's liability for any source
deductions - such as tax withheld from remuneration paid to
employees and the non-resident withholding tax - he has failed to
remit as required under the Act. These subsections effectively
confer a priority on the Crown over the rights of certain secured
creditors that benefit from an assignment of the property of the
tax debtor in respect of payments to be made after notification
to the person liable to make the payments.
[21] There is no
doubt that this passage from the Technical Notes advocates a
limitation on the application of the subject provisions. It
advocates the priority of the Crown only over certain secured
creditors; namely, secured creditors "that benefit from an
assignment of the property of the tax debtor in respect of
payments to be made". The "redirection" of
"payments to be made" is the focus of the type of
security interest over which the Crown is to have a priority
under the subject provisions. This contemplates a payable to the
tax debtor by a third party prior to the assignment of it
to the person who is to hold a security interest in it. In the
context of the "but for" wording of
paragraph 317(3)(b) there must be a
"payable" to which the tax debtor has a right from a
third party and that right must be "redirected" to the
secured creditor as security for an amount payable to that
creditor. Where a person is owed money by a tax debtor (say, for
services rendered) the right to collect moneys from the tax
debtor does not arise from or by virtue of an assignment or
redirection of a right of a tax debtor.
[22] Based on
the Technical Notes I agree that there is a distinction between
redirected payments, owed to the tax debtor by a third
party garnishee, that have been pledged to a creditor to secure
an obligation of that tax debtor to that creditor versus payments
arising in the course of remedying a default of an obligation of
the tax debtor to pay moneys to a party to whom the tax
debtor is indebted such as the tax debtor's landlord. Drawing
that distinction from the plain language of the provisions is
more difficult, although, keeping in mind that the Appellant is
MacIntosh's agent in a collection exercise is helpful. I will
deal further with this point in my analysis of Issue D
below.
[23] Before
turning to the next issue which considers the express terms of
the subject provisions of the Act, I note that counsel for
the Respondent made no effort to assist me in this part of the
analysis concerning their intended scope. Indeed, she moved that
I not allow the Directive to be admitted in evidence even though
the Appellant's copy of it had been provided by her. Such
motion was denied.
Issue D:
Whether the terms of subsection 317(3) effect a priority in
favour
of
Revenue Canada and a liability on the Appellant under subsection
317(7)
[24] I now turn
the analysis to the express requirements of subsection 317(3).
What is required is consideration of two questions: firstly,
whether MacIntosh was a "secured creditor" as defined
in subsection 317(4); and secondly, whether the amount paid to
MacIntosh would have been payable to the Appellant but for
MacIntosh's right to receive it as required by paragraph
317(3)(b). The first question requires consideration of
the further question of whether MacIntosh had a "security
interest" in the property of another person which in turn
requires finding both that MacIntosh had such interest and that
it "secures" payment or performance of an
obligation.
[25] MacIntosh
will be a secured creditor for the purposes of subsection 317(3)
if pursuant to the definition of "secured creditor" in
subsection 317(4) it is "a person who has a security
interest in the property of another person" (Star).
"Security interest" is defined in subsection (4)
to mean "any interest in property that secures
payment or performance of an obligation" (emphasis added)
and includes interests created by various security instruments
such as a debenture, mortgage, hypothecation and assignment which
seem to be interests created by agreement and, as well, includes
interests that might be created at law such as liens. That the
interest that secures payment or performance of an obligation
includes an "encumbrance of any kind whatever, however ...
created ..." underlines that the securing interest, by
definition, includes contractual encumbrances, statutory
encumbrances and encumbrances created at common law. This is an
extraordinarily wide definition.
[26] The
Respondent argues that the RDA creates a lien on a
tenant's property in favour of the landlord and that such
lien gives the landlord, MacIntosh, a security interest in the
tenant's (Star) property seized by the Appellant. The
Respondent also argues that the RDA creates a statutory
lien on the proceeds of sale in favour of the landlord,
MacIntosh. As such, the Respondent argues that it follows that
MacIntosh is a secured creditor. It is noted that the RDA
does not expressly create a lien in favour of the landlord but
rather acknowledges a landlord's right to distrain personal
property of a tenant for unpaid rent. The RDA sets out a
statutory framework within which a landlord's distress right
operates. It does not seem to create the distress right
itself.
[27]
Section 7 of the RDA provides as follows:
7. (1) This
section applies if
(a) personal property has been distrained for rent due,
and
(b) the tenant or owner of the property distrained does not,
within 5 days after distress is taken and notice of it is left at
the dwelling house or other place on the premises charged with
the rent distrained for, commence an action for recovery of the
property and serve notice of the action on the person
distraining.
(2) After
distress, notice and the expiration of the 5 days, the person
distraining must have the distrained property appraised by 2
appraisers, who must be sworn before a justice or commissioner
for taking affidavits.
(3) After
appraisal the person distraining may sell the property
distrained.
(4) The
person distraining must
(a) apply the sale proceeds to satisfy the rent in arrears, the
charges of distress, appraisement and sale, and
(b) pay the surplus, if any, to the sheriff for the owner's
use.
[28] The
Respondent relies on paragraph 7(4)(b) of the RDA
to satisfy the requirement of paragraph 317(3)(b) of the
Act that the sale proceeds be payable to the tax debtor
but for MacIntosh's security interest in the seized
assets.
[29] The
Respondent also relies on the case of Active Bailiff Service
Ltd. v. Broadway Plaza Properties Ltd. (1986), 70 B.C.L.R.
117 (B.C.S.C.) as authority for the propositions that a
possessory lien is created in favour of the landlord once he
distrains the chattels of a debtor tenant and once the chattels
are sold, that a statutory lien is created in favour of the
landlord. The Respondent cites
Hinds J. at page 123 as follows:
The
landlord's right of distrain does not create a lien. But upon
a landlord distraining for rent and taking possession of a
tenant's chattels, he is entitled to retain those chattels
until the arrears of rent are paid. The landlord has a possessory
lien within the definition [of lien] above quoted. Upon a
landlord selling the tenant's chattels under s. 8(2) of
the Rent Distress Act, he has a charge upon the proceeds of the
sale for the payment of rent in arrears. The landlord has a
statutory lien upon the proceeds of sale within the first part of
the definition above quoted.
The definition
referred to is as follows:
A lien,
therefore, is 'any charge of a payment of debt or duty upon
either real or personal property', whilst a possessory lien
is 'a right in one man to retain that which is in his
possession belonging to another, till certain demands of him, the
person in possession, are satisfied.'
[30] Hinds J.
went on to consider several other cases on the question of
whether or not a lien arises in respect of a landlord's right
of distress. He considered Commercial Credit Corp. v. Harry D.
Shields Ltd. which confirmed that
while the right of distress is not a lien, a lien occurs when
there is actual or constructive taking of possession by the party
with a right of distress. That case sets out several definitions
of the term "lien" including one set out in Royal
Trust Co. v. Molsons Bank which defined
the term as "the right of a person having possession of the
property of another to retain it until some charge upon it or
some demand due him is satisfied". It is noted that the
decision in Commercial Credit Corp. was upheld on appeal.
Hinds J. notes that in giving judgment for the Court of Appeal,
Weatherston J.A. stated:
Section 3(1)(a) of the Personal Property
Security Act exempts from the application of that Act "a
lien given by statute or rule of law". A distress is the
right of a landlord to take and hold possession until rent is
paid, plus the statutory right to sell the distrained goods. We
agree with the trial Judge that a distress, when made, confers on
the landlord a lien within the meaning of s. 3(1)(a) of
the Personal Property Security Act notwithstanding that it
has other legal incidents.
[31] Hinds J.
also considered the case of Bank of Montreal v. Int.
Polyurethane Co. which held
that a landlord's distress was not an assignment by way of
security or lien. Hinds J. points out that the Court relied
in Polyurethane on Re Newmarket Lumber Co. which he found
was not appropriate in that the Newmarket case dealt with
the landlord's right to distrain as opposed to the
landlord's right to the chattels in his possession pursuant
to its right of distress. He pointed out that Commercial
Credit Corp. correctly made this distinction in determining
the application of the Newmarket case.
[32] A case not
referred to by Hinds J. (but included in the Respondent's
Book of Authorities) is Re Gingras Automobile
Ltée. That Supreme Court of
Canada decision concluded that a landlord's distress right
did not create a lien on seized chattels. Although an older case,
I note this decision of the Supreme Court of Canada is still
referred to in Houlden & C.H. Morowetz, Bankruptcy Law in
Canada as authority
for the principle that the landlord has no lien on property
seized and must surrender it to the Trustee pursuant to the
provisions of the BIA. I would note, however, that the
rationale for the Supreme Court's finding in the
Gingras case is in the context of the provisions of the
BIA that set out what the priorities of the landlord are.
Those provisions (similar to subsection 136(f) of the
current BIA) clearly set out the preferential distribution
to which a landlord is entitled. The principle of law adopted by
the Supreme Court in Gingras was that in the context of
the bankruptcy provisions, the landlord must be taken to have
given up his right of lien. The majority decision of five of the
panel of seven was given by Abbott J. who adopted the
following statement of Gordon J.A. of the Saskatchewan Court of
Appeal:
With every
deference I do not think a landlord with a claim for arrears of
rent falls within the definition of a "secured
creditor". He has no lien on the property seized but must
give it up to the trustee and file his claim in the usual way. He
has no security to value within the provisions of ss. 87-92
of The Bankruptcy Act. Further, I do not think that any such
inference should be drawn in the face of the explicit directions
contained in s. 95 of the Act. So far as I can see the Act
deprives the landlord of his right of lien and merely uses the
value of the property seized as a gauge to fix the amount for
which he is allowed a preferred claim but does not make him a
"secured creditor".
[33] While the
opening sentence in this passage favours a finding that the
Appellant in this case is not a "secured creditor", I
do not think, taken in context, that it is sufficient as a
definitive statement of law. In context, the statement suggests
that it is the BIA that deprives the landlord of the rank
of secured creditor that would otherwise attach. Further, in
Gingras it does not appear that the distress right had
been exercised prior to the bankruptcy. In Absolute Bailiffs it
is acknowledged that a lien only arises on the exercise of the
right of distress. Accordingly, I do not find the principle in
the Gingras case to be in conflict with the Absolute
Bailiff Services case. There is nothing in the Act to
deprive MacIntosh of its right of lien in respect of property
seized.
[34] I accept
that once a landlord exercises its right to distrain, the
property thereby in its possession gives rise to a lien in favour
of the landlord by operation of law. This appears to be
sufficient for the purposes of finding that MacIntosh had a
security interest in the seized property. It is, at least until
sold, an interest in the property of another person (Star).
However, I note two qualifications. Firstly, that a lien is
created is not to say that it exists to "secure"
payment of an obligation. The Appellant argues that the
RDA and the common law right of distress is not a security
regime but rather is an enforcement regime. Secondly, while there
was a lien on the seized assets, I do not agree that there was a
lien on the proceeds of sale. A statutory lien on the proceeds of
sale, as opposed to a possessory lien on the seized chattels, is
a lien on money due to the person holding it. I have reservations
as to such a notion. A landlord has a statutory right to the
proceeds subject to a statutory direction as to the application
of any excess of proceeds over rents owing. To describe this
right as a "lien" on the funds is not supported by the
authorities cited by Hinds J. My second qualification then
raises the issue as to whether it is sufficient that MacIntosh
had a lien on the seized property.
[35] As to the
first qualification it is necessary, in determining whether
MacIntosh has a security interest, to find that MacIntosh's
interest in the seized assets, its distress lien,
"secures" payment or performance of an obligation. The
word "secures" in this context invites a construction
that would place the interest ahead, in time, of the payment due
date or ahead of the date the obligation is required to be
satisfied, i.e., it secures a promise to do something at a later
time. When the Appellant as agent for MacIntosh sells the seized
assets, payment of Star's obligation to MacIntosh is
satisfied. This two-step process (seizure and sale)
effects payment of a past due amount as opposed to
securing an upcoming obligation. It is possible then to find that
the security interest that MacIntosh held in the seized assets
(the possessory lien) was not an interest that
"secures" payment in the sense required to identify
MacIntosh as a "secured creditor" for the purposes of
subsection 317(3) of the Act. Such finding would be
consistent with the administrative practice set out in the
Directive referred to above. Indeed, even further support for
that practice and for distinguishing a security interest that
"secures" an obligation and one that derives from a
collection exercise is found in the express language of paragraph
317(3)(b). That paragraph taken with its prefix requires
that the Appellant be "liable to make a payment ... to a
secured creditor ...". That this requirement is not met can
best be illustrated by ignoring the interposition of the
Appellant as MacIntosh's agent. If MacIntosh seizes the
property directly, it holds the proceeds of sale for itself. It
owes nothing to Star except excess proceeds over the amount
owing. While such excess is garnishable under paragraph
317(3)(a), there is no creditor to whom a payment is
liable to be made in respect of which paragraph 317(3)(b)
can apply. As Appellant's counsel would say, MacIntosh holds
moneys at this point in its own right. The debt owed is
satisfied. Indeed, this expression of the distinction between
realizations remedying defaults and the assignment of payables to
secure an obligation seems to parrot the administrative practice
set out in the Directive in respect of mortgages. With respect to
mortgages the Directive provides that the subject garnishment
provisions would be incorrectly applied "where the monies
payable to the mortgagee were as a result of a sale of the
mortgaged property by the mortgagee in order to realize upon his
security". That is, even where the security interest is
created to secure an obligation, the administrative practice, in
respect of mortgages at least, is that the "sale" of
the property in the course of realizing on the security interest
breaks the connection between the proceeds of sale and the
entitlement of the mortgagor. Breaking the connection between the
proceeds and sale and the entitlement of the tax debtor not only
means that the requirements of paragraph 317(1)(b) are
thereby not met but underlines that they are not a source of
funds securing payment of the obligation. They are the
payment.
[36] This
construction of the subject provisions would mean that the only
reason mortgages are expressly referred to in the definition of
"security interests" is to cover the case where the tax
debtor has assigned its interest as mortgagee of a mortgage given
by a third party mortgagor. That is the inference of the
Directive supported by the Technical Notes. Unless there is
something about the nature of mortgages that sets them apart from
other encumbrances, then liens and other encumbrances expressly
included as "security interests" would similarly cease
to fall within the scope of the subject provisions on the sale of
the property to which the encumbrance attaches. I do not believe
there is anything in the nature of mortgages that warrants
treating them differently from liens and other encumbrances
listed in the definition of "security interests" in
subsection 317(4).
[37] The
foregoing can be expressed in another way. The lien that attaches
to the seized assets is a lien on the property of the tax debtor.
The sale of that property ends the lien and effects payment. Once
the requirements of section 7 of the RDA have been
met, as to time elapsed for the Appellant to file an action for
recovery of seized property and the landlord having received
appraisals (in this case that would be at the earliest March 13),
the sale was permitted and the tenant's interest in the
seized property ceased on the sale. The sale is the point when
the interest in the property (then moneys) transfers to the
creditor in its own right. At this point the transfer is
complete. The relevance of this finding is that, as stated,
subsection 317(3) requires there be a liability "to make a
payment ... to a secured creditor". The requirement is not
that there be a secured creditor when the Requirement to Pay is
issued but that there be a liability to pay moneys to a person
that is a secured creditor at the time when the liability to make
the payment arises which is when the moneys are available for
payment. In this case when the money materializes it materializes
for the account of the creditor. The moneys are the property of
MacIntosh at the point of sale of the seized assets. There has
been a "transfer" in the course of the conversion.
Applying the reasoning in Piggott, the point in
time when the transfer to the creditor is complete, is the point
in time when subsection 317(3) ceases to apply. After that point
in time the money is property in the possession of the creditor
held for its own account.
[38] The
analysis in the preceding paragraph does not falter, in my view,
even when considering that the suffix to subsection 317(3)
invites an argument that once the Requirement to Pay is
delivered, an amount of money is then fixed and possessed of by
the Crown so that the Appellant owes such moneys on receipt of
the Requirement to Pay. Such construction of the subject
provisions would impose a liability on MacIntosh regardless that
it was not a secured creditor once the seized assets were sold.
In my view, such an argument cannot prevail. Liability to pay the
Receiver General occurs "as and when the moneys become
payable ... to the secured creditor". If no money ever
became payable to a person that was a secured creditor at the
time the liability arose, as is my finding in this case, no
liability can arise under subsection 317(7) of the
Act. If the provision suffers any ambiguity on this point,
I would resolve it in favour of a construction consistent with
administrative practices which assist taxpayers who may have
relied on them. In fact, I do not believe that there is any
ambiguity on the point, and in any event, on the facts of the
case at bar, I have found that MacIntosh was not a secured
creditor, even at the time the Requirement to Pay was issued. The
lien on the seized property was to effect collection of a debt
past due before the lien arose and cannot be said to be an
interest that secures payment of the obligation. As such
the lien that existed at the time the Requirement to Pay was
delivered was not a security interest as defined in subsection
317(4) of the Act. The property was seized for sale not
for security. The sale provides the proceeds that satisfy the
obligation to MacIntosh. It is at that point MacIntosh's
money. The Requirement to Pay affords the Minister no right to
the funds.
[39] While
these findings are sufficient to dispose of the matter I note
that an analysis of the "but for" requirement in
subsection 317(3) gives the same result. The
Respondent's position in respect of the "but for"
requirement is grounded in section 7 of the RDA. It is
argued that the Appellant, as bailiff, is accountable to the
tenant Star pursuant to paragraph 7(4)(b) of the
RDA and, as such, "but for" MacIntosh's
interest in the funds held by the Appellant, the proceeds of sale
would be payable by the Appellant to Star. I point out, however,
that section 7 of the RDA seems to address itself to the
landlord, not a bailiff who might be retained by the landlord to
carry out the seizure and sale on the landlord's behalf. The
right to distress is that of the landlord. The action for
recovery of property seized under paragraph 7(1)(b) of the
RDA is an action to be brought against the landlord and
the person distraining as referred to in subsections 7(2), (3)
and (4) is the landlord. That is, the requirement to account for
excess proceeds is a requirement imposed by the RDA on the
landlord. The Appellant in this case is the agent of the
landlord. It holds money for the landlord. The Appellant has no
liability to pay anything to the tax debtor except on the
landlord's behalf. To say that the Appellant would be
"liable" to pay the tenant anything "but for"
the interest of the landlord, even excess proceeds, would be to
attach some relationship between the Appellant and the tenant
that does not exist. The tenant has a statutory right to any
excess but that claim is against the landlord. If the Appellant
is required to pay anything (as MacIntosh's agent) it would
be limited to an "excess" amount that does not exist in
the case at bar. Even that liability, when it exists, would be to
satisfy the liability of the principal, MacIntosh. MacIntosh
would be the more appropriate garnishee in that case.
Accordingly, aside from my finding that MacIntosh was not a
secured creditor of Star, I conclude that the "but for"
requirement of paragraph 317(3)(b) has not been met in the
circumstances of this case. Once again, I note that such
conclusion is consistent with the administrative practice as set
out in the Directive discussed above.
[40] Lastly, I
note that I requested Appellant's counsel to provide me with an
analysis of a number of cases that I referred to him. On a review of those
cases I am satisfied that none are inconsistent with my findings
in the case at bar. None of those cases (or any other cases
brought to my attention) deal with security interests created in
the course of remedying a default in the performance of an
obligation or with interests that have been sold and converted to
moneys in satisfaction of an obligation. Accordingly, they make
no findings as to the application of subsection 317(3) of
the Act that bear to the facts of the case at bar. That
said, I am satisfied, for the reasons set out above, that
subsection 317(3) of the Act does not apply in cases
such as the one at bar.
[41]
Accordingly, the appeal is allowed, with costs.
Signed at
Ottawa, Canada, this 18th day of October 2002.
J.T.C.C.
COURT FILE
NO.:
2000-3607(GST)G
STYLE OF
CAUSE:
Absolute Bailiffs Inc. and
Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
April 11, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge J.E.
Hershfield
DATE OF
JUDGMENT:
October 18, 2002
APPEARANCES:
Counsel
for the Appellant: Jonathan Corbett
Counsel
for the
Respondent:
Margaret E.T. Clare
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Jonathan Corbett
Firm:
Harper Grey Easton
Vancouver, British Columbia
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3607(GST)G
BETWEEN:
ABSOLUTE
BAILIFFS INC.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on April 11, 2002 at Vancouver, British Columbia, by
the
Honourable Judge J.E. Hershfield
Appearances
Counsel
for the
Appellant:
Jonathan Corbett
Counsel
for the
Respondent:
Margaret E.T. Clare
JUDGMENT
The appeal from the assessment made under Part IX of the
Excise Tax Act, notice of which is dated May 17, 1995 and
bears number 31128, is allowed, with costs, and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment for the reasons set out in the
attached Reasons for Judgment.
The Appellant is entitled to no further relief.
Signed at
Ottawa, Canada, this 18th day of October 2002.
J.T.C.C.
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