Citation: 2008 TCC 482
Date: 20080829
Docket: 2006-2572(IT)G
BETWEEN:
CANADA TRUSTCO MORTGAGE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1]
This is an appeal from
assessments issued by the Minister of National Revenue (the “Minister”) under
subsection 224(4) of the Income Tax Act (the “Act”) for
failure to comply with three Requirements to Pay (“Requirements”) served on the
Appellant under subsection 224(1) of the Act. The Requirements were
dated May 28, 2004, May 4, 2005 and April 24, 2006.
[2]
Two Notices of
Assessment were issued, one dated August 16, 2005 in the amount of $50,808.38
and one dated June 21, 2006 in the amount of $126,345.93.
[3]
The parties filed an
Agreed Statement of Facts. The Statement reads as follows:
1. During the period at issue, the Canada Trustco Mortgage Company
(“CT”) was a corporation doing business under the laws of Canada as a financial institution. It was
amalgamated into and continued under the name the Canada Trust Company, which
is a company incorporated and doing business under the laws of Canada.
2. The first Notice of Assessment (the “First Assessment”) under
appeal is dated August 16, 2005, bears number 37492, and is in the amount of
$50,808.30.
3. The second Notice of Assessment (the “Second Assessment”) under
appeal is dated June 21, 2006, bears number 37688, and is in the amount of
$126,345.93.
4. During the period at issue, Cameron C. McLeod (sometimes known as
Cameron Clyde McLeod) (“McLeod”) was practicing law as a member of the Law Society
of British Columbia.
5. On May 28, 2004, McLeod had a tax liability of approximately
$305,613.76 relating to his personal tax debts for the 1997 to 2002 taxation
years.
6. McLeod had signing authority in relation to a lawyer’s trust
account #6845002745 (previously #510756) (the “Trust Account”) at its King
George Highway Branch in Surrey, British Columbia (the “King George Highway Branch”).
7. The contractual terms governing the Trust
Account are set out in the Business Account Agreement.
8. McLeod and Herbert Maier held a joint account #684508594 (the
“Joint Account”) with CT at the King George Highway Branch.
9. The contractual terms governing the Joint Account are set out in
the Personal Account Agreement.
10. The Minister of National Revenue (the “Minister”) had knowledge
that cheques were being drawn on the Trust Account identifying McLeod as the
payee, which were being deposited into the Joint Account.
11. On May 28, 2004, the Minister issued a Requirement to Pay to CT
in the amount of $305,613.76 with respect to the tax liability of McLeod,
pursuant to subsection 224(1) of the Income Tax Act (the “Act”).
12. CT received the Requirement to Pay on or about May 28, 2004 at
its King George Highway Branch.
13. On or about June 4, 2004, CT responded by completing the
Requirement to Pay form.
14. The Minister issued the First Assessment, dated August 16, 2005,
in the amount of $50,808.30, with respect to the Requirement to Pay of May 28,
2004.
15. The First Assessment relates to transactions which occurred
between June 3, 2004 and October 19, 2004.
16. Specifically, between June 3, 2004 and October 19, 2004, 28
cheques totalling $50,808.38 were drawn on the Trust Account, with C.C. McLeod
identified as the payee.
17. Each cheque referred to in paragraph 16 was presented to CT for
deposit into the Joint Account.
18. In each instance, the cheque was accepted by CT for deposit to
the Joint Account. A credit was made to the Joint Account, and a debit was
made to the Trust Account.
19. After receiving the First Assessment, CT filed a Notice of
Objection dated November 15, 2005.
20. CT’s Notice of Objection was rejected by CRA by letters dated
May 30, 2006 and June 7, 2006, which attached a Notification of Confirmation
dated June 7, 2006.
21. On May 4, 2005, the Minister issued a second Requirement to Pay
to CT in the amount of $382,079.40 with respect to the tax liability of McLeod.
CT received the second Requirement at the King George Highway Branch on or
about the same day.
22. On or about May 5, 2005, CT responded to the CRA by completing
the second Requirement to Pay form.
23. On April 24, 2006, the Minister issued a third Requirement to
Pay to CT in the amount of $460,102.17 with respect to the tax liability of
McLeod. CT received the third Requirement at the King George Highway Branch on
or about the same day.
24. On or about April 25, 2006, CT responded by completing the third
Requirement to Pay form.
25. The Minister issued the Second Assessment, dated June 21, 2006,
in the amount of $126,345.93, with respect to the Requirements to Pay of May
28, 2004 and May 4, 2005.
26. The Second Assessment relates to transactions which occurred
between October 26, 2004 and August 19, 2005.
27. Specifically, between October 26, 2004 and August 19, 2005, 53
cheques totalling $126,345.93 were drawn on the Trust Account with C.C. McLeod
identified as the payee.
28. Each cheque referred to in paragraph 27 was presented to CT for
deposit into the Joint Account.
29. In each instance, the cheque was accepted by CT for deposit to
the Joint Account. A credit was made to the Joint Account, and a debit was made
to the Trust Account.
30. After receiving the Second Assessment, CT filed a Notice of
Objection dated October 4, 2006.
31. CT’s Notice of Objection was rejected by CRA by letter dated
June 7, 2007, which attached a Notification of Confirmation dated June 7, 2007.
[4]
Counsel for the
Appellant also submitted that “[t]here is no evidence in the record
identifying the identity of the person who presented the cheques to CT for
deposit”.
[5]
Counsel for the
Respondent also submitted in its Reply to the Amended Amended Notice of
Appeal that:
On or about December 14, 2004, Mr. Michael Kader, (“Kader”) legal
counsel for CT, contacted the CRA and informed the CRA that CT’s position was
that contravention of the Law Society Rules was irrelevant to the issue. Under
the Bank Act, CT has no legal obligation to police trust accounts to
ensure lawyers comply with Law Society Rules.
[6]
The nature of the
relationship between Mr. McLeod and Mr. Maier is unknown. In other words,
we do not know whether Mr. Maier was a full legal partner of the Appellant.
However, it was established that the Joint Bank Account was a bank account in
which the Appellant and Mr. Maier were joint tenants.
B. Issues
[7]
The Appellant’s Amended
Amended Notice of Appeal contained the following comments:
[8]
Was the Appellant
liable to make a payment to Cameron McLeod at any time during the period of
effectiveness of the three Requirements in question?
[9]
If the Appellant was
not liable to make a payment to Cameron McLeod during that period, can the
Appellant be said to have failed to comply with the three Requirements?
[10]
The Appellant’s Factum
contained the following comment:
The principal issue in the appeal is whether the Appellant is liable
to pay the Respondent an amount equal to the proceeds from 81 cheques drawn
from a lawyer’s trust account because the Appellant failed to pay those
proceeds to the Receiver General in accordance with two requirements issued
pursuant to subsection 224(1) of the Act.
[11]
The Respondent’s Reply
to the Amended Notice of Appeal contained the following comment:
The issue is whether the Appellant was a person liable to make a
payment to the tax debtor within the meaning of subsection 224(1) of the Act
and therefore, whether it was required to comply with the subsection 224(1)
requirement.
C. Admissions by the Respondent’s Counsel
(a)
the funds on deposit in
the Trust Account were not caught by the Requirements and, accordingly, the
Appellant had no obligation to remit funds on deposit in the Trust Account; and
(b)
the funds on deposit in
the Joint Account were not caught by the Requirements and, accordingly, the
Appellant had no obligation to remit funds on deposit in the Joint Account.
[12]
Those two admissions
are in accordance with the fact that the issue regarding the liability to pay
is not while the money is on deposit in either of these accounts, but whether
there is a liability to pay attached to the 81 cheques. Subsection
224(1) does not allow going after funds on deposit. It is the payments that are
attachable. In this situation, we are focusing on the repayment of the
funds that were on deposit in the Trust Account.
D. Legislation
[13]
The following described
legislation is relevant:
Income Tax Act: 224(1), (1.1), (4)
and (4.1);
Bills of Exchange
Act:
s. 1, 2, 22, 165 and 166;
Bank Act: s.
409 to 413, 437, 461 and 462; and
Law Society Rules of BC: 3-48,
3-51 and 3-53 to 3-57.
E. Analysis and Discussion
[14]
The Court must
determine if the Appellant is liable under subsection 224(4) of the Act
for not complying with a Requirement issued under subsection 224(1) of the
Act. The Court must verify if the Appellant was liable to make a payment
to the tax debtor, and if money was payable to him. It is a question of law
based on the facts presented by the parties.
[15]
Under subsection 224(1)
of the Act, the Minister has the discretion to issue a Requirement if
certain conditions are met. In National Trust Co. v. Canada, the Federal Court of Appeal highlighted
those conditions:
34 In subsection 224(1) Parliament has
invested the Minister with a discretion to issue a requirement in writing pursuant
to the subsection if the following conditions precedent are satisfied:
(a) the Minister has knowledge or a
suspicion,
(b) a person is or will be within 90 days
liable to make a payment to a tax debtor, and
(c) the amount must be payable immediately
or in the future.
35 If those conditions
are satisfied, the Minister may, in writing, require the person liable to make
the payment to pay to the Receiver General on account of the tax debtor's
liability under the Act, forthwith, if the moneys are payable immediately, or
in any other case, as and when the moneys otherwise become payable to the tax
debtor.
[16]
In this case, it is not
argued that the first condition to issue the Requirement was not met.
[17]
In National Trust
(supra), the Court also applied a two step analysis to verify if the
conditions of subsection 224(1) were fulfilled so as to justify an assessment
under subsection 224(4):
39 In these circumstances, is the
respondent "a person liable to make a payment" to the tax debtor
within the meaning of subsection 224(1)? Secondly, were the proceeds of the GIC
"payable" to the tax debtor either immediately or within 90 days?
[18]
We must then look first
if the Appellant was liable to make a payment to Mr. McLeod, and secondly
if money was payable to Mr. McLeod in the relevant period.
[19]
As counsel for the
Respondent has submitted, the National Trust (supra) decision indicates
that there is no magic to the words, “liable to pay”, and to the word “payable”:
46 The ordinary meaning of the word
"liable" in a legal context is to denote the fact that a person is
responsible at law. Hence, I am in respectful agreement with McLachlin J. (as
she then was) when she stated in Discovery Trust Company v. Abbott et al, a
case in which a section 224(1) requirement was served upon a trustee, that:
... the demand on third parties [a subsection 224(1) requirement]
by which the Crown's claim is made in this case is not confined to a
debtor-creditor relationship, as is a garnishee order; it is stated to extend
to any case where the trustee is "liable to make a payment to the
taxpayer."
[Emphasis added.]
47 It is my respectful view, therefore,
that the Tax Court Judge was wrong in law to limit the phrase "liable to
make a payment" only to situations where a debtor-creditor relationship
exists. In so doing, he precluded himself from asking the only relevant
question when one is confronted with construction of the subsection. It is
this: did the respondent have a responsibility at law to make a payment to the
tax debtor on 1 February 1994?
...
61 I turn now to consider the issue
whether the proceeds were "payable" within the meaning of subsection
224(1). In my view this issue is governed by DeConinck, supra, and the decision
of this Court in Canada v.
Yannelis where Stone J.A., for the Court, said at 636:
The word "payable" is not a term of art. Nor
is it defined in the regulations. I do not see that it was used in any special
sense. In my view, therefore, it should be interpreted in the light of ordinary
dictionary definitions.
62 and 638:
I have come to the conclusion that the word "payable" in
s. 58(8)(b)(i) [of the Unemployment Insurance Act] refers to the point in
time when vacation pay is due to a claimant in the sense that he is entitled by
his contract of employment or by the general law to have it paid to him and his
employer is under an obligation to pay it. In other words, it is payable when a
claimant is in a position at law to enforce payment.
[20]
I believe that even if
cheques were used in our case, it does not mean that those words should be
analysed differently in the context of the Bills of Exchange Act,
because as we will see the analysis should stop before considering that it was
cheques that were presented to the bank. The fact that the Federal Court of Appeal
in National Trust (supra) referred to a case regarding Unemployment
Insurance for the word “payable” does not change anything, as they used that
term in a general context, not in the context of Unemployment Insurance.
[21]
In analyzing the issues
before the Court, I believe that in this case the analysis should start by
looking at the second test and then consider the first test.
[22]
Regarding the payable
test, because there was money deposited in the Trust Account, the
obligation associated with a deposit makes the money payable on demand to the
tax debtor.
[23]
The principle of
debtor-creditor relationship between the bank and its customer has been
enunciated by the House of Lords in Foley v. Hill. This
relationship makes the bank responsible to repay the funds on deposit when asked
for it. This principle satisfies the common law in that regard, and therefore does
not need to have to be in the Bank Act to be applicable.
Money, when paid into a bank, ceases altogether to be the money of
the principal …; it is then the money of the banker who is bound to return an
equivalent by paying a similar sum to that deposited with him when he is asked
for it. … … he is not bound to keep it or deal with it as the property of his
principal, but he is of course answerable for the amount because he has
contracted, having received that money, to repay to the principal, when
demanded a sum equivalent to that paid into his hands.…. That being established
to be the relative situations of banker and customer, the banker is not an agent
or factor, but he is a debtor. …
[24]
Furthermore, I note
that counsel for the Appellant admits that if a person deposits money in a bank, the bank is
bound to return the equivalent if the person makes a demand for repayment. Counsel for the
Appellant nevertheless submitted that no demand for repayment was made in this
case, but that it was rather a payment of legal fees. There is nothing in the
evidence to support that argument.
[25]
In 3087-8847 Québec
Inc. v. Canada, Justice Lamarre of the Tax Court of Canada
decided that in a case of a debtor-creditor relationship there is no need to
request payment to fulfill a subsection 224(1) request:
40 … It is therefore to be inferred that
in the case of a debtor-creditor relationship, there is no need for such express
language in order for subsection 224(1) to apply. To the extent that the tax
debtor is also the creditor in respect of a demand shareholder loan, it is not
necessary that the tax debtor formally demand payment of that loan for
the debtor in respect thereof to be required to make a payment under subsection
224(1).
[26]
It therefore follows
that the liability for payment does not arise because of the Bills of Exchange
Act, but because of the debtor-creditor relationship that exists between
the bank and the account holder.
[27]
Vis-à-vis the Appellant, it is Mr. McLeod who owned
the funds in the Trust Account, regardless of the fact that he had
completed his work for his clients, as the bank is not required to monitor the
trust.
[28]
The only other requirement
that was necessary in this situation was for the bank to be liable to make a
payment to Mr. McLeod, and that happened when someone, who can be assumed to be
Mr. McLeod, presented the bank with the cheques.
[29]
Counsel for the
Respondent made the assumption that the cheques in issue were for payment of legal
fees, and nothing has been submitted by the Appellant to the opposite. There is also
no evidence showing that the money went for something other than to Mr. McLeod.
Mr. McLeod was not called by the Appellant as a witness. Nothing shows
that the money has been used for client disbursement. To the contrary, all
expenses made from the Joint Account seem more in the nature of personal
expenses. At the same time, nothing has been put in evidence to show if that
was Mr. McLeod or Mr. Maier’s expenses.
[30]
However, I have
concluded that the legal analysis does not need to go to the fact that monies
were moved from the Trust Account to the Joint Account, but should end where
there was demand for payment from the Trust Account to Mr. McLeod. The
analysis should not concern itself where the money went after that. Moreover,
the money was not supposed to go anywhere other than to the Receiver General
pursuant to the Requirements. At that moment, the bank should have followed the
Requirement.
[31]
I believe that counsel
for the Appellant is correct when he said that writing a cheque is not by
itself a withdrawal, but just the creation of an instrument. Nevertheless, a
cheque is an instrument by which a drawer directs a drawee to pay on the
instrument. As soon as the cheque is presented to the bank, it is different. We
should not only look at Mr. McLeod as the payee of the cheque, but also as the
drawer of the cheque. As the holder of the account, Mr. McLeod was in a position
to enforce the payment because of the debtor-creditor relationship that
existed; via the cheque he was demanding for the repayment of a portion of a
previous deposit. I again emphasize that there was no evidence produced that
Mr. McLeod was not the person who presented the cheques to the bank.
[32]
It was suggested by counsel
for the Appellant that there was some partnership arrangement associated with
the Trust Account. However, I agree with counsel for the Respondent that there
is not sufficient evidence in that regard.
[33]
I have also concluded
that the fact that Mr. McLeod never personally received the money is irrelevant
since we must determine if the Appellant was liable to make a payment to him. The
fact that the Appellant never remitted the money to Mr. McLeod can only be
important, if the other requirements are met, as showing that it did not comply
with its requirement under subsection 224(1). When there is a Requirement, you
are not supposed to pay, neither to the tax debtor nor to someone else, but only
to the Receiver General, as soon as there is a “liability to pay” to the tax
debtor. The fact that the money went in the Joint Account is only relevant to
sustain the liability of the Appellant under subsection 224(4) as it shows that
the Appellant did not remit the money to the Receiver General.
[34]
In Bank of Montreal v. Canada, it was not the tax debtor who presented
for payment, but his wife, whereas in this case, we have no evidence in that
regard. In the Bank of Montreal (supra) case, the cheque was apparently
endorsed by his wife who withdrew the money. In other words the money was
payable to the wife of the tax debtor.
[35]
Counsel for the
Appellant spent some time arguing that the funds in the Trust Account were
not the bank’s funds or Mr. McLeod’s funds but were Mr. McLeod’s clients’
funds.
If the funds were not considered as Mr. McLeod’s money, why would the bank have
contacted him and consulted him as to what he wanted to do with the balance of
the account when they wanted to close it?
[36]
It should also be noted
that the Requirement was served on the Appellant, not on Mr. McLeod’s clients.
[37]
The Law Society of
British Columbia has produced Law Society Rules that govern the practice
of law in British Columbia. Rule 3-56(1.3) of the Law Society
Rules provides for the withdrawal by cheque of funds from a lawyer’s trust
account. Rules 3-56(3) provide expressively that
withdrawal of trust funds for the payment of fees must be made by cheque
payable to the lawyer's general account. A lawyer who does not follow those rules is
responsible to the Law Society for his failure to follow the rules. Nevertheless,
the Appellant is not concerned by those rules. Mr. McLeod could have closed the
account and taken all the funds out or transferred them to another account and the
Appellant would have had nothing to say. Before releasing money from the
account, the Appellant did not have to call the clients to see if there was a
problem. There was no limit to the access of the account, and the Appellant was
not required to police or monitor the use of the trust account, as provided by
the Bank Act, at subsection 437(3). If Mr. McLeod went to withdraw cash
in violation of the Law Society Rules, the bank was not responsible to
account for it. That principle has been highlighted in the Bank of Montreal
(supra) case:
In my view, I am not called upon here to determine whether Mr. Henry
D. Morgan contravened the Regulations of the Law Society by endorsing in blank
the cheques drawn on his trust account and in transferring the said cheques to
Mrs. Lynn Morgan. Nor am I called upon to pass judgment on the actions of
the bank in negotiating these two cheques or on the propriety of such actions.
[38]
The fact that the bank
account was a Trust Account does not change anything with respect to the fact
that the Appellant had a contractual relationship and a debtor-creditor
relationship with Mr. McLeod. The bank still owed the money to the account
holder, Mr. McLeod.
It was still a direct relationship.
[39]
It appears to be
established law that a bank has no obligations in regard to the payee of a
cheque.
It is still a fact that a cheque is a bill drawn on a bank and payable on
demand.
The cheque is the form, i.e. the instrument used to demand the payment of the
debt. Paragraph 166(1)(a) of the Bills of Exchange Act foresees
the possibility that the drawer of a cheque has the right to have a cheque
paid.
[40]
The rights of Mr. McLeod
as drawer were defined in the Business Account Agreement. Counsel for the Respondent admits that this agreement
has modified the common-law obligation in regard to the instrument, but has not
modified the common-law obligation of the bank to repay deposits. By contract,
the parties have only varied the common law with regard to a bank’s duties to
its customers with regards to cheques drawn on account by making it
discretionary.
[41]
The Bank of Montreal (supra) case can be distinguished as in our case there is no evidence as to
who presented the cheques to the bank, and they were not in this case endorsed
by someone other than the taxpayer. As submitted by Counsel for the Respondent,
Mr. McLeod was still the bearer of the cheques.
[42]
The question of which
entity qualifies as the collecting bank should also not be a problem. If a
cheque was first credited to an account at another bank (assuming that the
cheque was not endorsed by someone other than the tax debtor), it should
further be dishonoured because the other bank (the drawee bank) will have to
refuse to remit the money because of the Requirements. The payee of the cheque
will have no recourse against that other bank when it is later going to reverse
the credit previously made. The fact that the cheque is presented to another
bank does not alter the fact that the drawer’s bank is still subject to a Requirement,
and will have to remit the money to the Receiver General.
[43]
It should be noted that
the argument made in Majoca Inc. v. R. regarding the alternative application of
subsection 224(1.1) is not available in this case, as the box in that regard
has not been “X-ed” or checked on any of the Requirement to Pay Forms.
[44]
It is also worth noting
that paragraph 437(2)(a) of the Bank Act says that a bank should
not pay the principal of a deposit if the money deposited is claimed by some
other person in a proceeding
to which the bank is a party and in respect of which another process
originating that proceeding has been made on the bank. It appears that a Requirement
is such a proceeding.
[45]
Section 461 of the Bank
Act deals with “the branch of account”. In subsection 461(2), it is expected
that “the amount of any debt
owing by a bank by reason of a deposit in a deposit account in the bank is
payable to the person entitled thereto only at the branch of account”. Such is
not foreseen for money deposited at other places. This is likely because it is
already considered payable by the common law.
[46]
I have concluded that
the appeal should be dismissed because the Appellant should have paid money to
the Receiver General pursuant to the specific wording contained in the
Requirements to Pay.
[47]
The appeal is dismissed
with costs.
Signed at Ottawa, Canada, this 29th
day of August 2008.
“L.M. Little”
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