Date: 19990106
Docket: 96-4109-GST-G
BETWEEN:
THE ROYAL BANK OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 5, 1998 in Montréal, Quebec by
the Honourable Judge Gerald J. Rip
Reasons for judgment
RIP, J.T.C.C.
[1] The issue in this appeal by the Royal Bank of Canada
("Bank") from an assessment of tax by the Minister of
Revenue of Quebec ("Minister") pursuant to subsection
317(2) of the Excise Tax Act ("Act") is
whether the Minister may legally garnish sums advanced to a tax
debtor on the basis of security given by a third party. The Bank,
after being served with a requirement to pay by the Minister of
National Revenue ("Revenue Canada") pursuant to
subsection 317(1) of the Act, loaned or advanced money or
made payment on behalf of the tax debtor, Mastercraft Leather
Goods (1986) Ltd. ("Mastercraft"), on the security of a
personal guarantee of a shareholder.
[2] The Bank argues that the service of the requirement to pay
by Revenue Canada cannot apply to it since it did not make any
payment following the receipt of the requirement to pay on the
strength of the security granted by Mastercraft. Rather, the Bank
made payments based upon the security granted by a shareholder of
Mastercraft. Subsection 317(2) of the Act applies to a
financial institution that makes a payment on behalf of a person
who owes money to the institution and who has granted security in
respect of that indebtedness.
[3] Subsection 317(2) reads as follows:
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(2) Without limiting the generality of subsection (1),
where the Minister has knowledge or suspects that within
ninety days:
(a) a bank, credit union, trust company or other similar
person (in this section referred to as the
“institution”) will loan or advance moneys to,
or make a payment on behalf of, or make a payment in
respect of a negotiable instrument issued by, a tax debtor
who is indebted to the institution and who has granted
security in respect of the indebtedness, or
(b) ...
the Minister may, by a letter served personally or by
registered or certified mail, require the institution or
person, as the case may be, to pay in whole or in part to
the Receiver General on account of the tax debtor’s
liability under this Part the moneys that would otherwise
be so loaned, advanced or paid, and any moneys so
paid
to the Receiver General shall be deemed to have been
loaned, advanced or paid, as the case may be, to the tax
debtor.
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(2) Sans restreindre la portée
générale du paragraphe (1), lorsque le
ministre sait ou soupçonne que, dans les 90 jours,
selon le cas :
(a) une banque, une caisse de crédit, une
compagnie de fiducie ou une personne semblable —
appelée “ institution ” au
présent article — prêtera ou avancera
une somme au débiteur fiscal qui a une dette envers
l'institution ou qui a donné à celle-ci
une garantie pour cette dette, ou effectuera un paiement au
nom d'un tel débiteur ou au titre d'un effet
de commerce émis par un tel débiteur;
(b) ...
il peut, par lettre recommandée ou
certifiée ou signifiée à personne,
obliger cette institution ou cette personne à verser
au receveur général au titre de
l'obligation du débiteur fiscal en vertu de la
présente partie tout ou partie de la somme qui
serait autrement ainsi prêtée, avancée
ou payée. La somme ainsi versée est
réputée avoir été
prêtée, avancée ou payée au
débiteur fiscal.[1]
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[4] The facts are not in issue. Mastercraft is a private
corporation that carried on the manufacture and sale of leather
goods. On December 13, 1990, Mastercraft established a
credit facility with the Bank by which the Bank agreed to lend to
Mastercraft the amount of $1,700,000 as an operating loan, the
amount of $602,840 as a term loan ("loans"), as well as
other amounts. The security for the loans included an assignment
of inventory under section 178 of the Bank Act
covering raw materials, work in process and finished goods,
a general assignment of book debts and a guarantee and
postponement of claim for $2,306,420 by Michael Zunenshine,
a shareholder. Mr. Zunenshine also executed a letter[2] acknowledging, among
other things, that he is a guarantor of the loans. He also
recognized that the financial situation of Mastercraft did not
warrant bank advances totalling $3,519,170 to Mastercraft and an
affiliated corporation and that "facilities are based solely
on my personal guarantees totalling $2,306,420 for
Mastercraft...[and is a] potential liability against my
personal assets...". Counsel agreed that the value of
the security granted by Mastercraft itself, that is, the
assignment of inventory and the general assignment of book debts,
aggregated $1,700,000.
[5] On March 19, 1992 Revenue Canada issued a requirement for
the Bank to pay pursuant to subsection 317(2) of the Act.
Revenue Canada was of the view that the Bank was, or was about to
become, liable to make a payment to Mastercraft in the amount of
$42,976.04. The Bank was required to pay that amount to the
Receiver General for Canada on account of Mastercraft’s
liability under the Act. It appears that by March 19,
1992 Mastercraft had utilized in full its credit facility with
the Bank. Counsel for both parties agree that all amounts paid by
the Royal Bank after the receipt of the requirement to pay were
based on the personal guarantee given to the Bank by Mr.
Zunenshine whose guarantee exceeded the security given by
Mastercraft itself.
[6] Counsel advised that the only issue before me is the
interpretation of subsection 317(2) of the Act, more
precisely, to determine if this provision applies when a
financial institution makes advances after receipt of requirement
to pay by virtue of a guarantee given by a third party and not in
virtue of security given by the debtor itself.
[7] In the appellant’s view the person "who has
granted security in respect of the indebtedness" was Mr.
Zunenshine, not Mastercraft.
[8] The debtor, Mastercraft, is not party to the contract
between the Bank and Mr. Zunenshine although the contract was
made for the benefit of Mastercraft. The contract between Mr.
Zunenshine and the Bank is a contract of suretyship or
"cautionnement", defined in article 2333 of the
Civil Code of Quebec ("Civil Code"):
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Art. 2333. Suretyship is a contract by which a
person, the surety, binds himself towards the creditor,
gratuitously or for remuneration, to perform the obligation
of the debtor if he fails to fulfil it.
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Art. 2333. Le cautionnement est le contrat par
lequel une personne, la caution, s'oblige envers le
créancier, gratuitement ou contre
rémunération, à exécuter
l'obligation du débiteur si celui-ci n'y
satisfait pas.
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[9] Mastercraft did not guarantee payment of any amount over
and above the value of the security it gave to the Bank, namely
$1,700,000, declared the appellant's counsel. Subsection
317(2), she said, seeks to ensure the assets of the debtor are
available to the creditor; the provision is not concerned with
the assets of a third party who secured the debt. Subsection
317(2) does not refer to a tax debtor "for whom
security has been provided", but to a tax debtor
"who has granted security in respect of the
indebtedness".
[10] Counsel for the respondent, on the other hand, argues
that subsection 317(2) applies to all security available to
the creditor to enforce payment of the debt, which security is an
interest in property or the personal obligation of a third party.
Counsel for the respondent distinguished between the meaning of
the words security and "garantie" in the English and
French versions of paragraph 317(2)(a) and the definitions
of security interest and "garantie" for the purpose of
subsection 317(3) in the English and French versions of
subsection 317(4). In counsel’s view, the words security
and "garantie" in paragraph 317(2)(a) do not
refer to a property interest but to any type of security whereas
the words security interest and "garantie" in
subsection 317(3) specifically refer to interest in property that
secures payment or performance of an obligation.
[11] Respondent’s counsel submitted that the words
security and "garantie" in
paragraph 317(2)(a) include a suretyship or
"cautionnement". The reason the Royal Bank loaned money
to Mastercraft, according to counsel, was because the debtor
provided the Bank with sufficient guarantees; the guarantees were
the security of its assets and Mr. Zunenshine's personal
guarantee. In other words, since Mastercraft could only give
security to the extent of $1,700,000, but required loans
aggregately in excess of that amount, at least $2,300,000, it
obtained for the Bank the personal guarantee of
Mr. Zunenshine to the extent of the $2,300,000.
ANALYSIS
[12] The words security and "garantie" in subsection
317(2) are not defined in the Act. Their meanings must be
determined according to the laws of the province in which the
security was contracted, in this case, Quebec. The Civil
Code does not define the word security. In the definition of
suretyship or "cautionnement", the Civil Code
refers to the person who provides the guarantee as the surety or
"caution". Me P.B. Mignault, as he then was,
writes that "le cautionnement ne peut avoir plus
d'étendue que la dette qu'il garantit"[3]. That is, the
surety cannot be greater than the debt it secures; a surety is a
security. Professor Deslauriers discusses the import of the word
"sûreté", a synonym of the word
"caution":
I. Définition générale des
sûretés
Les sûretés sont des garanties accordées
à un créancier, soit par la loi, soit par le
débiteur lui-même, pour lui assurer
l’exécution d’une obligation principale et le
protéger contre les risques d’insolvabilité
de son débiteur. L’obligation principale constitue
donc un engagement distinct de la sûreté qui la
garantit.
[...]
La sûreté accompagnant une créance,
sûreté personnelle ou réelle, assure au
créancier une certaine protection contre
l’insolvabilité de son débiteur. En cas de
défaut du débiteur, le créancier peut
réclamer le paiement de la caution, sûreté
personnelle.[4]
[13] In Caisse populaire d'Amos c. Denis Cimaf
Inc., [1997] A.Q. no 3951, the Court of Appeal of Quebec
considered the meaning of "garantie" (the French
version of security in subsection 317(2)) at paragraph 25:
Ensuite, la définition encore plus large de
"garantie" comprend tout droit sur un bien qui garantit
l'exécution d'une obligation. Ces termes me
semblent, là encore, suffisamment étendus pour
couvrir la cession de créance du droit civil
québécois. [Je souligne]
[14] The fact that the French version of subsection 317(2) of
the Act refers only to a "garantie" and not a
"sûreté" indicates that the legislator
intended to give the word "garantie" a wide and large
interpretation. Professor Deslauriers defined the term
"sûreté" as a "garantie". The
Le Nouveau Petit Robert dictionary defines the words
"garantie" and "sûreté" as:
Garantie: n.f. 1. Dr. Obligation
d’assurer à qqn la jouissance d’une chose,
d’un droit, ou de le protéger contre un dommage
éventuel; responsabilité résultant de cette
obligation... Contrat de garantie, dont l’objet
principal est de fournir une garantie à un
créancier...
Sûreté: n.f. Dr. Garantie
fournie à un créancier pour le recouvrement de sa
créance... Sûreté réelle,
lorsque les biens du débiteur sont apportés en
garantie de paiement. Sûreté personnelle, qui
résulte de l'engagement d'un tiers au
côté du débiteur...
[15] A "sûreté" is a form of
"garantie". The definition of
"sûreté" includes different kinds of
"sûreté", personal and real. The
Dictionnaire de droit québécois et canadien
defines the term "sûreté personnelle":
Sûreté consistant dans l’engagement
personnel d’un tiers de répondre sur son patrimoine
de l’exécution de l’obligation du
débiteur. Ex. Le cautionnement est une sûreté
personnelle.
[16] In common law, the word security has been judicially
considered by the Supreme Court of Canada in The Queen v.
Province of Alberta Treasury Branches et al.[5]. The Court examined whether
a general assignment of book debts is a form of security and
whether the Crown has priority over lending institutions. At
page 6249, Cory J. states:
Basically, security is something which is given to ensure the
repayment of a loan. ...
[17] In Singer v. Williams, [1921] 1 A.C. 41 the
House of Lords examined the meaning of the terms "foreign
securities" and "foreign possessions" in the
Income Tax Act of 1842. Viscount Cave said, at page
49:
My Lords, the normal meaning of the word
"securities" is not open to doubt. The word denotes a
debt or claim the payment of which is in some way secured. The
security would generally consist of a right to resort to some
fund or property for payment; but I am not prepared to say that
other forms of security (such as personal guarantee) are
excluded. In each case, however, where the word is used in its
normal sense, some form of secured liability is postulated.
[18] It appears that there is no significant difference in the
definition of the word "garantie" in civil law and the
word security in common law. In both legal systems a personal
guarantee is a security.
[19] Counsel for the respondent declared that Mr. Zunenshine
is a guarantor of the debt for the benefit of Mastercraft, and a
guarantee of the guarantor is security under subsection 317(2) of
the Act provided by the tax debtor. It is the latter who
has the duty to find security to satisfy the lender. I share this
view. The tax debtor has a duty to find security to secure the
loan. If the lender is satisfied with the security the tax debtor
has provided, then the lender will lend the money to the
debtor.
[20] Parliament intended to give a wide and large meaning to
the words security and "garantie" in subsection 317(2)
of the Act. In the absence of any restriction, the words
security and "garantie" have a wide import and may
include any form of security, whether personal, as in the case at
bar, or in property.[6] The fact that Parliament defined the term security
interest and "garantie" in subsection 317(4) more than
suggests that it wanted to give this term a meaning for purposes
of subsection 317(3) that the term "garantie" does not
have in subsection 317(2).
[21] When Mastercraft negotiated the loan with the Bank, the
Bank required more security than Mastercraft could provide from
its own proceeds. Mastercraft thus arranged for additional
security by way of the personal guarantee of Mr. Zunenshine.
It was Mastercraft who provided Mr. Zunenshine's personal
guarantee to the Bank. Mr. Zunenshine was the "caution"
or surety who bound himself to the Bank. And the personal
guarantee of Mr. Zunenshine is a security or a
"garantie" contemplated by subsection 317(2) of the
Act.
[22] Therefore, the appeal is dismissed with costs to the
respondent.
Signed at Ottawa, Canada, this 6th day of January 1999.
"Gerald J. Rip"
J.T.C.C.
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