Citation: 2009 TCC 522
Date: 20091110
Docket:
2009-114(GST)I
BETWEEN:
TORONTO DOMINION BANK
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS
FOR JUDGMENT
Angers J.
[1]
The
appellant is appealing its assessment made on September 26, 2008, establishing
its tax liability at $2,867.97. The reassessment is based on the following
facts:
(a) Corporation 9161-3505
Québec Inc. (hereinafter 9161) with a debt of
$12,014.93 to the respondent, the Quebec Minister of Revenue (the Minister),
through one of its authorized employees, sent the appellant a Requirement to
Pay on December 11, 2007, pursuant to subsections 317(1) and (3) of the Excise
Tax Act (the Act);
(b) when the Minister sent
the Requirement to Pay to the appellant, the appellant had $8,868.19 belonging
to 9161;
(c) on December 24, 2007,
9161 filed a notice of intention to make a Proposal to its creditors under the Bankruptcy
and Insolvency Act (the BIA);
(d) on December 24, 2007,
the trustee of the 9161 proposal sent the appellant, pursuant to the BIA, a
notice to stay the Requirement to Pay;
(e) the appellant did not
comply with the Requirement to Pay from December 11, 2007, to December 24,
2007, although the bank account for 9161 had a positive balance of $8,868.19;
(f) on April 9,
2008, the Minister issued a Notice of Assessment to the appellant for
$6,000.22 pursuant to section 317 of the Act and on April 22, 2008, the
appellant filed an objection;
(g) on or around October 21,
2008, the objection officer dismissed the objection but recommended that the
amount of the assessment be reduced to $2,867.97 because the $6,000.22 required
had already been assessed pursuant to sections 15.5 and 15.6 of the Act by
Quebec’s Ministère du Revenu, as the positive balance in the bank account was
only $8,868.19, leaving only $2,867.97 in the account;
(h) a reassessment was made
on September 26, 2008, and is the subject of the current appeal.
[2]
It
must therefore be determined if the appellant, in these circumstances, must pay
the amounts in question to the respondent pursuant to subsection 317(3) of the
Act. Before answering this question, other underlying questions must be
addressed. When must the amount in question be paid? What is the effect of
9161’s proposal on the amount claimed and unpaid at the time the proposal was
made? Did the presumed trust the respondent benefited from include all the
money in 9161’s account? Was the written notice sent to the appellant
equivalent to the execution of the assumed trust and the recovery of property
held for the benefit of the respondent? Is there a transfer of the ownership of
money following the written notice and, if so, did the Notice to Stay cancel
the right of ownership?
[3]
Subsection
317(3) titled “garnishment” states the following:
Despite 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, if the Minister
has knowledge or suspects that a particular person is, or will become within
one year, liable to make a payment
(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 notice in writing, require the particular person to pay
without delay, if the moneys are payable immediately, 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
notice by the particular person, the amount of those moneys that is so required
to be paid to the Receiver General shall, despite 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.
Subsection 317(7)
provides as follows:
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.
The power to assess is
outlined in subsection 317(9), which states the following:
Assessment — The Minister may assess any
person for any amount payable under this section by the person to the Receiver
General and, where the Minister sends a notice of assessment, sections 296 to
311 apply, with such modifications as the circumstances require.
[4]
These
issues have already been addressed by this Court and the Federal Court of
Appeal, specifically in Judge Sarchuk’s decision in Wa-Bowden Real Estate
Reports Inc. v. Her Majesty, [1997] G.S.T.C. 49, confirmed by the Federal
Court of Appeal [1998] F.C.J. No. 641 and Judge Hershfield’s decision in Absolute
Bailiffs Inc. v. Canada, [2002] T.C.J. No. 549, also confirmed by the
Federal Court of Appeal, [2003] F.C.A. No. 1574.
[5]
In
Wa-Bowden, Judge Sarchuck was of the opinion that the wording of the
relevant paragraphs was not ambiguous. Here is the relevant excerpt:
The language of the relevant
subsections is clear and unambiguous. …the
provisions of subsection 317(3) stipulate that where monies are due and owing
from the party receiving the Requirement (in this case the Appellant) to the
tax debtor (Mid Canada), the property in those monies is transferred to Her
Majesty the Queen in right of Canada. Subsection 317(3) also specifies that its
application is subject to the Bankruptcy and Insolvency Act (Bankruptcy
Act). This has been interpreted in a number of instances to mean that where
monies were immediately due and owing prior to the date of bankruptcy, those
monies are subject to the application of the Act, but where service of the
Requirement occurs after the date of bankruptcy, or where the amount at issue
was not immediately due and payable prior to the date of bankruptcy, any monies
otherwise payable in the latter two instances are not available to the
Respondent.
[6]
In
Absolute Bailiffs, supra, the appeal dealt with the issue of
determining whether the Minister identified the right party in his Requirement
to Pay, pursuant to subsection 317(3) of the Act, and with the issue of
determining the effect of the BIA, specifically subsection 71(1) of the BIA,
and subsection 317(3) of the Act, when a bankruptcy occurs after a Requirement
to Pay is issued pursuant to subsection 317(3). In paragraphs 14 and 15 of his
decision, Judge Hershfield drew the following conclusion:
…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.
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,
…
[7]
The
Courts of Appeal in Ontario, British Columbia and Saskatchewan respectively
drew the same conclusions in Bank of Montreal and Attorney General of Canada,
66 O.R.(3d)161, In the matter of the bankruptcy of Canoe Cove Manufacturing
Ltd., [1994] G.S.T.C. 36 and Encor Energy Corp. v. Slaferek's Oilfield
Services (1983) Ltd., [1995] G.S.T.C. 54.
[8]
In
Bank of Montreal, supra, the Court had to determine if the
bankruptcy of a tax debtor affected the Canada Customs and Revenue Agency’s
right to receive payment, pursuant to subsection 317(3) of the Act, which was
required before the debtor’s bankruptcy to the benefit of the Bank of Montreal.
According to Justice Weiler, subsection 317(3) of the Act contains a transfer
of ownership upon receiving the notice. She wrote, in paragraph 12:
In essence s. 317(3) provides
a form of garnishment enabling the federal government to intercept monies owed
to tax debtors. Once a notice to pay is served, the funds acquired thereafter
never become the property of the tax debtor.
[9]
Justice
Weiler also referred to the argument raised by Counsel for the appellant. In
paragraph 14, she states:
The appellant submits that
under s. 70(1) of the BIA a receiving order takes precedence over a garnishment
that has not been completely executed by payment being made because s. 317(3)
of the ETA is made subject to the BIA. Otherwise, the appellant submits the
court would not be giving effect to the words, "other than the BIA". The
words "Other than the BIA" have meaning apart from the interpretation
suggested by the appellant. They mean that any GST payments that become due
after a receiving order in Bankruptcy has been made no longer can be collected
in priority to other creditors.
[10]In Canoe
Cove Manufacturing, supra, Justice Thackray said the same thing.
However, in my opinion the position of
the Attorney General is correct in that the Excise Tax Act now provides
for an explicit transfer of property from the "particular person" to
the government upon receipt of a 'demand letter'. Therefore, the monies owing
were no longer the property of the bankrupt at the time of the bankruptcy and
are not subject to the Bankruptcy and Insolvency Act's scheme of
distribution.
[11]In response
to the argument that subsection 317(3) of the Act is subject to the BIA, the
judge added the following:
The Trustee submitted that Parliament
intended, by having the exclusion to the Bankruptcy and Insolvency Act
in subsect. 317(3) of the Excise Tax Act, that the Excise Tax Act
would not interfere with the distribution scheme found in the Bankruptcy and
Insolvency Act upon the bankruptcy of a tax debtor. In my opinion subsect. 317(3)
is specifically phrased so as to overcome the rights of a secured creditor and
the distribution scheme of the Bankruptcy and Insolvency Act. The case
law showed confusion over the exact nature of the government's interest under a
317(3) claim and the government clarified this by stating it was a transfer of
property to the government upon receipt of a demand letter.
Finally, with
respect to the question regarding the fact that this provision is onerous for
the secured creditors, he added:
The Excise Tax Act legislation does seem harsh
to the extent that it allows the government to usurp a secured creditor's
security for a tax debtor's previously incurred tax liability. However, a
debtor should not be allowed to conduct business yet remain immune from the
normal incidents of the legal process, such as liability for the goods and
services tax. To the extent Revenue Canada's claim is for goods and services
tax incurred through ongoing business after the security agreement was in
place, this legislation does not seem unjust. The bank, as a secured creditor,
should not be entitled to any more than the tax debtor would have been entitled
to had it not assigned its book debts.
[12]These views
were also repeated in Encor Energy:
He was also of the view, and again we agree,
that having regard for the operation of ss. 317(3) of the Act, the contract
debt owing by Encor Energy Corporation Inc. to Slaferek's Oilfield Services
(1983) Ltd. became the property of the Minister on the deemed receipt by Encor
Energy of the Minister's letter of October 29, 1993. Having thus become the
property of the Minister on that date, the contract debt ceased to be the
property of either Slaferek's Oilfield Services or Canadian Imperial Bank of
Commerce, and in the result the matter was unaffected by the later bankruptcy
of Slaferek's.
[13]All this to
say that, notwithstanding that subsection 317(3) is subject to the BIA, if the
requirement made to the tax debtor to pay a sum of money is served before filing
a notice of intention to make a proposal to his or her creditors or before the
tax debtor declares bankruptcy, the sum in question becomes the property of Her
Majesty the Queen and is not longer part of the tax debtor’s patrimony.
[14]The argument
made by Counsel for the appellant is based on three decisions that contradict
the aforementioned decisions. According to these decisions, the amounts claimed
from a third party pursuant to subsection 317(3) of the ETA before the tax
debtor’s bankruptcy and unpaid at the time of the bankruptcy, cannot be paid in
priority to the Crown. According to these decisions, the section in question
provides that it applies despite any other statutes, except the BIA. This would
mean, according to these courts, that once bankruptcy occurs, the BIA applies,
especially to unpaid amounts that were claimed before the bankruptcy pursuant
to subsection 317(3) of the ETA. In other words, according to these decisions,
subsection 70(1) of the BIA gives priority to bankruptcy orders and assignments
over all proceedings against the property of a bankrupt that are not settled by
a payment before bankruptcy or assignment.
[15]Subsection
70(1) of the BIA states:
Every bankruptcy order and
every assignment made under this Act takes precedence over all judicial or
other attachments, garnishments, certificates having the effect of judgments,
judgments, certificates of judgment, legal hypothecs of judgment creditors,
executions or other process against the property of a bankrupt, except those
that have been completely executed by payment to the creditor or the creditor’s
representative, and except the rights of a secured creditor.
[16]The three decisions
in questions are Giguère et le Ministre du Revenu du Québec v. Lloyd
Woodfine et la Banque
Nationale du Canada, [2001] Q.C.C.A. 2584, Forget et Druker
& Associés Inc. v. Le sous-ministre du Revenu du Québec, [2003] J.Q. No.
1026 and Sous-ministre du Revenu du Québec v. De Courval, [2009] R.J.Q. 597.
[17]In Giguère,
a notice (garnishment) was sent to a bank pursuant to subsection 15.3.1 of An
Act respecting the Ministère du Revenu (AMR). Under this subsection,
which is similar to subsection 317(3) of the ETA, the amount that the bank had
to pay to its creditor became the property of the State and had to be paid in
full in priority over any other security granted in respect of this amount. Giguère made
an assignment of his property pursuant to the BIA before the bank followed-up
on the Minister’s notice. The Quebec Court of Appeal therefore had to decide if
the amount held by the bank became the property of the State upon receiving the
Notice or if it remained in the possession of the bankrupt as part, after
assignment, of the bankrupt’s property. The Court concluded that the right of
ownership granted by the Crown pursuant to subsection 15.3.1 of the AMR was a
legal fiction of limited effect. And this fiction did not invalidate subsection
70(1) of the BIA, which gives priority to bankruptcy orders and assignments over
all proceedings that are not settled by a payment prior to bankruptcy or assignment.
[18]In Forget,
the Superior Court of Quebec had to answer the same question as the one
addressed in Giguère. Here again, a notice was sent pursuant to section
15.3.1 of the AMR of Quebec, but also pursuant to subsection 317(3) of the ETA.
The Court relied on Giguère to decide whether the absence of full
payment before the bankruptcy date means that the garnishment ceases to be
enforceable and cannot be set up against the trustee. The Court confirmed that
if Parliament had decided to grant such a privilege to Revenue Canada, it would
not have written subsection 317(3) of the ETA creating an exception to the
effect that the BIA must be applied.
[19]Finally, the
Quebec Court of Appeal, in Québec (Sous-ministre du Revenu) v. De Courval,
supra, again addressed this issue. In this case, the requirement was
made pursuant to section 15.3.1. of the AMR of Quebec only, and the amount due
in the notice was not paid before the bankruptcy of the tax debtor. The Court
of Appeal decided that the notice did not transfer to the Minister ownership of
the money because only the property held in a real trust are excluded from the
patrimony of the bankrupt. The notice, according to the Court, did not change
the trust that was deemed to be created pursuant to section 20 of the AMR of
Quebec into a real trust as the amount claimed pursuant to section 15.3.1 was
mixed in with other amounts in the bankrupt’s bank account. The amount claimed
pursuant to section 15.3.1 therefore stopped being held in trust at the time of
bankruptcy given subsection 67(2) of the BIA establishes that property is not
regarded as held in trust for the purpose of the BIA unless, in the absence of
a statutory provision (such as section 20 of the AMR of Quebec), it would be so
regarded. Finally, the Court concluded that, to avoid the application of
section 70 of the BIA, the payment would have had to have been made before the
bankruptcy. The Court also said that other courts did not mention subsection
70(1) of the BIA.
[20]That being
said, it is important to note that the Supreme Court of Canada in Alberta
(Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, confirmed the decision of
the trial court, without doing an analysis, (Canada Trustco Mortgage Corp. v.
Port O'Call Hotel Inc., [1993] 1 W.W.R. 639), as it decided that the
amounts claimed in the Minister’s Notice had to be paid to the Minister first,
as per the notice. In this case, the Supreme Court had to decide if the Crown
had the right to the monies claimed from lending institutions pursuant to
section 224 of the ITA and section 317 of the ETA before the bankruptcy of tax
debtors. The establishments in question granted loans to tax debtors and held
assignments of book debts from these debtors to secure their loans. The Court
had to decide if these establishments were the secured creditors of these tax
debtors pursuant to sections 224 of the ITA and 317 of the ETA in order to
determine whether the notices issued pursuant to these sections were
enforceable.
[21]Justice Cory,
writing for the majority, decided that the institutions were secured creditors
and the amounts in question had to be paid to the Minister of Revenue as per
the notices.
[22]In De
Courval, the Court of Appeal of Quebec noted that the Supreme Court of
Canada had not discussed the transfer of ownership provided in subsections
224(1.2) of the ITA and 317(3) of the ETA or the application of subsection
70(1) of the BIA. If we look at the judge’s decision from the trial court in Canada
Trustco Mortgage Corp, supra, we conclude that the result is the
same: the notices issued pursuant to these provisions before the bankruptcy of
the tax debtors are enforceable on third parties despite the bankruptcy of
these debtors.
[23]In Canada
Trustco Mortgage Corp., supra, Justice Forsyth said that the changes
made to subsection 224(1.2) of the ITA in 1990 that we find in subsection
317(3) of the ETA corrects the situation resulting from the contradictory
caselaw as it states that the transfer of ownership takes place at the receipt
of the notice and therefore gives the Minister priority over the secured
creditors.
[24]Justice
Forsyth also discussed the application of the BIA and the exclusion of the
application of the BIA to subsection 317(3) of the ETA in his decision. He
concluded that the exclusion could not help secured creditors as the notice was
sent before the bankruptcy of the tax debtor, meaning that at the time of
bankruptcy, the rights of secured creditors to the property of the bankrupt are
lost.
[25]It is
important to remember that Parliament’s intention for enacting subsection
317(3) of the ETA, was to create a stronger garnishing right in that it gives
Revenue Canada priority to a tax debtor’s assets to the disadvantage of secured
creditors. The Courts explored the application of this paragraph in the event
where there is an assignment of book debt by a tax debtor to a financial
institution before a notice is sent to a creditor of the tax debtor and also in
cases where there was, as in this case, a bankruptcy or a proposal to creditors
under the BIA before the tax debtor’s creditor has made a payment required by
Revenue Canada.
[26]According to
the investigator’s testimony, the appellant refused to comply with the
Minister’s Notice because the Notice to Stay received from the bankruptcy
trustee and because the tax debtor had a debt to the appellant. In my opinion,
what subsection 317(3) of the ETA does is permit Revenue Canada to replace the
appellant as the primary creditor of the tax debtor, provided, of course, that
the bank held securities entitling it to this money. With respect to the
proposal to creditors, which came before the appellant’s payment to Revenue
Canada, the effect of subsection 317(3) of the ETA is clear in that not only
must the payment be made immediately, but at the receipt of the notice from the
Minister, this money becomes the property of Her Majesty the Queen and as a
result, is no longer part of the tax debtor’s patrimony.
[27]Regardless of
the fact that subsection 317(3) of the ETA excludes the application of all
federal, provincial or other enactments, with the exception of the BIA, that
could have an effect on the application of subsection 317(3), it is still clear
that its application here does not contradict the provisions of the BIA,
especially subsection 70(1) of the BIA, which only applies to a bankrupt’s
property. So the tax debtor’s property in this case became the property of Her
Majesty the Queen at the time the notice pursuant to subsection 317(3) of the
ETA was sent, which was before the bankruptcy proposal was made to the creditors.
[28]Therefore, in
this case, there was no reason for the appellant not to comply with the
provisions of subsection 317(3), especially since the bank did not have any
priority claim on the money and was not unclear about whom to give the money to
before it received the Notice of Stay from the trustee. The Minister was
therefore justified in assessing the appellant pursuant to subsection 317(9) of
the ETA. The appeal is dismissed.
Signed
at Ottawa, Canada, this 10th day of November 2009.
"François
Angers"
Translation
certified true
on
this 2nd day of February 2009.
Bella Lewkowicz, Translator
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