Canada (Attorney General) v. Caisse populaire de la Vallée de l'Or, 2005 FC 948

                                                                                                                                   Date: 20050708

                                                                                                                                  Docket: T-68-02

                                                                                                                          Citation: 2005 FC 948

BETWEEN:

                                         THE ATTORNEY GENERAL OF CANADA

                                                                                                                                            Applicant

                                                                         - and -

                                 LA CAISSE POPULAIRE DE LA VALLÉE DE L'OR

                                                                                                                                        Respondent

                                                        REASONS FOR ORDER

PINARD J.

Introduction

[1]         By its motion the respondent is appealing the judgment by Prothonotary Morneau dated January 25, 2005, ordering it, on the basis of subsections 227(4.1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended (the ITA), and 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, as amended (the EIA), to pay the applicant the sum of $5,849.67 with interest pursuant to subsections 36(2) and 37(2) of the Federal Courts Act, R.S.C. 1985, c. F-7, as amended (the FCA), at the rate specified in the ITA, and capitalized daily as of December 22, 1999, until paid in full, with costs.

Facts

[2]         The parties agreed on the following relevant facts:

1.         In February 1999, 2430-1277 Québec Inc. (the debtor) converted to a loan secured by a movable hypothec of a credit line which had previously been extended to it by the respondent.

2.         The debtor's property covered by the respondent's security was a "1989 Témisco RBLG" trailer (the trailer), which had already been held by the respondent since 1985 as security for another loan to the debtor.

3.         In December 1999, the debtor sold the trailer to 9028-9901 Québec Inc. (the purchaser) for $10,000, which was paid by cheque made to the order of the debtor on December 22, 1999.

4.         On December 22, 1999, the proceeds of the cashed cheque, namely $10,000, was paid in its entirety to the respondent, who proceeded to strike off the hypothec of movable hypotec that it held on the trailer.

5.         At that time the debtor was in default, and is still in default, on the payment to Her Majesty of the sum of $5,849.67, for amounts deducted from the salaries paid to its employees from February 1998 to November 1999, for taxes payable by those employees under the ITA, and for employee contributions due from those employees under the EIA.

6.          The debtor ceased operations in November 1999.

7.         On February 2, 2001, the Canada Customs and Revenue Agency (the Agency) sent the respondent a demand telling it that the debtor was liable to the applicant for source deductions and that its assets were subject to the application of subsection 227(4.1) of the ITA and subsection 86(2.1) of the EIA.

8.         The respondent refused to pay the applicant the said amount.

Analysis

[3]         As the relevant provisions contained in subsections 86(2) and (2.1) of the EIA are similar to those contained in subsections 227(4) and (4.1) of the ITA, we need only reproduce here the ITA sections:

[4]         The following provisions of the FCA are also relevant:

[5]         Essentially, the respondent submitted that the prothonotary erred in law in finding that the proceeds of the sale of the trailer were in his hands "proceeds" within the meaning of subsection 227(4.1) of the ITA. The respondent argued that consequently the prothonotary was wrong to require it to pay this amount of money to the applicant.

[6]         In particular, the respondent submitted that as a secured creditor of the tax debtor, it never formally realized its security. It said that it simply received from the debtor an amount corresponding to the proceeds of sale of the trailer and deposited it into the debtor's account, where it was confused with the other monies therein. The respondent asked the Court to regard it as a bona fide third party, relying also on legal certainty and certainty in commercial transactions.

[7]         In my view, the respondent's arguments cannot be accepted in light of the amended wording of subsection 227(4.1) of the ITA, and the application thereof by the Supreme Court of Canada in First Vancouver Finance v. M.N.R., [2002] 2 S.C.R. 720 (First Vancouver) and the Federal Court of Appeal in Canada (M.N.R.) v. National Bank et al., 2004 FCA 92, [2004] F.C.J. No. 372 (QL) (National Bank) (leave to appeal to the Supreme Court of Canada denied on October 14, 2004, SCC 30311).

[8]         First, in First Vancouver the Supreme Court, at 729 to 733, tied the procedure of the deemed trust given to the Minister by the ITA to the importance of collecting source deductions; at the same time the Supreme Court, explaining the absolute priority of this deemed trust, noted the opportunity that financial institutions have to become familiar with the affairs and financial situations of tax debtors, and further considered the significant amendments now reflected in subsection 227(4.1) of the Act, following Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R. 411:

The collection of source deductions has been recognized as "at the heart" of income tax collection in Canada: see Pembina on the Red Development Corp. v. Triman Industries Ltd. (1991), 85 D.L.R. (4th) 29 (Man. C.A.), at p. 51, per Lyon J.A. (dissenting), quoted with approval by Gonthier J. (dissenting on another issue) in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, at para. 36. Because of the importance of collecting source deductions, the legislation in question gives the Minister the vehicle of the deemed trust to recover employee tax deductions which employers failed to remit to the Minister.

It has also been noted that, in contrast to a tax debtor's bank which is familiar with the tax debtor's business finances, the Minister does not have the same level of knowledge of the tax debtor or its creditors, and cannot structure its affairs with the tax debtor accordingly. Thus, as an "involuntary creditor", the Minister must rely on its ability to collect source deduction under the ITA: Pembina on the Red Development, supra, at pp. 33-34, per Scott C.J.M., approved by Cory J. in Alberta (Treasury Branches), supra, at paras. 16-18. For the above reasons, under the terms of the ITA, the Minister has been given special priority over other creditors to collect unremitted taxes.

. . . . .

In response to Sparrow Electric, the deemed trust provisions were amended in 1998 (retroactively to 1994) to their current form. Most notably, the words "not withstanding any security interest . . . in the amount so deducted or withheld" were added to s. 227(4). As well, s. 227(4.1) (formerly s. 227(5)) expanded the scope of the deemed trust to include "property held by any secured creditor . . . that but for a security interest . . . would be property of the person". Section 227(4.1) was also amended to remove reference to the triggering events of liquidation, bankruptcy, etc., instead deeming property of the tax debtor and of secured creditors to be held in trust "at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act". Finally, s. 227(4.1) now explicitly deems the trust to operate "from the time the amount was deducted or withheld".

It is apparent from these changes that the intent of Parliament when drafting ss. 227(4) and 227(4.1) was to grant priority to the deemed trust in respect of property that is also subject to a security interest regardless of when the security interest arose in relation to the time the source deductions were made or when the deemed trust takes effect. This is clear from the use of the words "notwithstanding any security interest" in both ss. 227(4) and 227(4.1). In other words, Parliament has reacted to the interpretation of the deemed trust provisions in Sparrow Electric, and has amended the provisions to grant priority to the deemed trust in situations where the Minister and secured creditors of a tax debtor both claim an interest in the tax debtor's property.

[Emphasis added.]

[9]         In the case at bar it is true that the respondent did not formally realize on its security against the debtor. However, nothing in the wording of subsection 227(4.1) of the ITA makes the beneficial right conferred on Her Majesty dependant on such a formal execution of a security against a tax debtor. The effect of the sale by a tax debtor of property to which the deemed trust applies is clearly explained by the Supreme Court in First Vancouver, at 723 and 738:

Section 153(1) of the ITA requires employers to deduct and withhold amounts from their employees' wages ("source deductions") and remit these amounts to the Receiver General by a specified due date. By virtue of s. 227(4), when source deductions are made, they are deemed to be held separate and apart from the property of the employer in trust for Her Majesty. If the source deductions are not remitted to the Receiver General by the due date, the deemed trust in s. 227(4.1) of the ITA becomes operative and attaches to property of the employer to the extent of the amount of the unremitted source deductions. As well, the trust is deemed to have existed from the moment the source deductions were made.

. . . . .

In this way, when an asset is sold by the tax debtor, the deemed trust ceases to operate over that asset; however, the property received by the tax debtor in exchange becomes subject to the deemed trust. As such, the trust is neither depleted nor enhanced; it simply floats over the property belonging to the tax debtor at any given time, for as long as the default in remittances continues.

[Emphasis added.]

[10]       In view of this interpretation, it is clear in this case that the sum of money realized from the sale of the trailer by the tax debtor constituted "proceeds" of property subject to the deemed trust, and consequently that as the trust had ceased to apply to the trailer the monetary consideration received by the tax debtor at once itself became held in trust.

[11]       It is these very "proceeds", in which the applicant had a beneficial interest, which the same day were remitted in their entirety by the tax debtor to the respondent by a deposit in its bank account, so as to reduce its debt to the latter, thereby diminishing the deemed trust by a corresponding amount. In the circumstances, as the respondent has received the monetary proceeds of sale of the trailer, a property of the deemed trust, it cannot prevent the applicant from exercising its beneficial interest against it pursuant to subsection 227(4.1) of the ITA. This personal liability to the respondent seems to the Court to be confirmed by the following passage from National Bank, at paragraph 40:

It seems obvious to me that a secured creditor who does not comply with his statutory obligation to "pay" the Receiver General the proceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable for the unpaid amount. The amount is "payable" out of the proceeds flowing from the property and, as we have seen, section 222 of the ITA provides that "All . . . amounts payable under this Act are debts due to Her Majesty and recoverable as such . . ." . . .

[12]       In National Bank, the Federal Court of Appeal also exceptionally recognized, with respect to property forming part of the deemed trust, that its sale to a third party by the tax debtor in the normal course of business had the effect of removing it from the trust. In this case, we are clearly not dealing with a sale by the tax debtor in the normal course of business.

[13]       Finally, as to the date for computing the interest before judgment, the fact that the capital sum awarded to the applicant is an amount payable under the ITA must be taken into account, as it is thus a debt to Her Majesty recoverable as such within the meaning of section 22 of the ITA. Accordingly, I am satisfied, like the Prothonotary, based on Markevich v. Canada, [2003] 1 S.C.R. 94, National Bank and paragraph 36(2)(a) of the FCA, that in this case interest will be payable beginning on December 22, 1999.

[14]       For these reasons, the respondent's motion is dismissed with costs.

OTTAWA, ONTARIO

July 8, 2005

Certified true translation

K. Harvey

                                                             FEDERAL COURT

                                                      SOLICITORS OF RECORD

DOCKET:                                                       T-68-02

STYLE OF CAUSE:                                      THE ATTORNEY GENERAL OF CANADA v. LA CAISSE POPULAIRE DE LA VALLÉE DE L'OR

PLACE OF HEARING:                                  Montréal, Quebec

DATE OF HEARING:                                    June 6, 2005

REASONS FOR ORDER BY:                      Pinard J.

DATED:                                                          July 8, 2005   

APPEARANCES:

Patrick Vézina                                                FOR THE APPLICANT

Nadine Dupuis

Jocelyn Geoffroy                                            FOR THE RESPONDENT

SOLICITORS OF RECORD:

John H. Sims, Q.C.                                        FOR THE APPLICANT

Deputy Attorney General of Canada

Geoffroy, Matte, Kélada & Associés            FOR THE RESPONDENT

Amos, Quebec

                                                                                                                                Date: 20050708

                                                                                                                                Docket: T-68-02

Ottawa, Ontario, this 8th day of July 2005

PRESENT: THE HONOURABLE MR. JUSTICE PINARD

BETWEEN:

                                        THE ATTORNEY GENERAL OF CANADA

                                                                                                                                          Applicant

                                                                        - and -

                                LA CAISSE POPULAIRE DE LA VALLÉE DE L'OR

                                                                                                                                     Respondent

Motion by the respondent to appeal from an order by Richard Morneau, Prothonotary, dated January 25, 2005.

                                                                       ORDER

The motion is dismissed with costs.

Certified true translation

K. Harvey