Canada (Attorney General) v. Caisse populaire Desjardins de Lyster, 2005 FC 949

                                                                                                                                  Date: 20050708

                                                                                                                               Docket: T-949-02

Citation: 2005 FC 949

BETWEEN:

THE ATTORNEY GENERAL OF CANADA

Applicant

- and -

LA CAISSE POPULAIRE DESJARDINS DE

LYSTER / INVERNESS / VAL-ALAIN

Respondent

REASONS FOR ORDER

PINARD J.:

Introduction

[1]        By this motion, the respondent is appealing the judgment of Prothonotary Morneau, dated January 25, 2005, ordering it, pursuant to subsections 227(4.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), 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 $5,462.39, with the interest provided for by 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 provided for by the ITA, and capitalized daily from October 19, 2000 until paid in full, with costs.

The Facts

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

1.         On June 30, 1999, the respondent made a loan to LRC Forestiers Inc. (the debtor) in the amount of $45,000 secured by an hypothec charging the whole of the claims and accounts receivable and the whole of the assets of the debtor, including, more particularly, a John Deere skidder (the skidder).

2.         On October 17, 2000, the debtor sold the skidder to Entreprise Perfort Inc. (the purchaser) for $15,500 plus the applicable taxes.

3.         On October 18, 2000, the sum of $17,828.88, representing the proceeds of the sale of the skidder including the applicable taxes, was deposited into the debtor’s bank account.

4.         On October 19, 2000, this sum was withdrawn from the debtor’s bank account to be credited to the respondent with respect to the loan.

5.         On October 23, 2000, the respondent made a voluntary payment on the movable hypothec it held on the skidder.

6.         On September 7, 2001, the Canada Customs and Revenue Agency (the Agency) sent the respondent a letter informing it that the debtor was liable to the applicant for money owing as source deductions and that its property was subject to subsection 227(4.1) of the ITA and subsection 86(2.1) of the EIA. More specifically, the debtor still owed the Agency $8,988.55, including $5,462.39 in source deductions withheld on the compensation paid to its employees under the ITA and EIA.

7.         The $5,462.39 claimed by the applicant is still unpaid to this day.

Analysis

[3]        The relevant provisions contained in subsections 86(2) and (2.1) of the EIA are similar to those in subsections 227(4) and (4.1) of the ITA; it will thus suffice to reproduce only the ITA provisions:

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

[5]        The respondent essentially submits that the prothonotary erred in law in determining that the proceeds from the sale of the skidder constituted, in its possession, “proceeds thereof” within the meaning of subsection 227(4.1) of the ITA. The respondent argues that the prothonotary thus erred in requiring it to remit this money to the applicant.

[6]        More particularly, the respondent submits that, as a secured creditor of the tax debtor, it never officially realized its security interest. It simply received from the debtor an amount corresponding to the proceeds from the sale of the skidder and deposited it into the debtor’s account, where it merged with the other amounts therein. The respondent asks that it be considered a bona fide third party, citing as well the need for certainty in the law and stability of business transactions.

[7]        I am unable to accept the respondent’s arguments, in view of the amended language of subsection 227(4.1) of the ITA and the way in which it was applied by the Supreme Court of Canada in First Vancouver Finance v. M.N.R., [2002] S.C.R. 720 (First Vancouver) and later by 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, October 14, 2004, SCC 30311).

[8]        In the first place, in First Vancouver the Supreme Court, at pages 729 to 733, relates the deemed trust mechanism made available to the Minister by the ITA to the importance of the collection of source deductions; at the same time the Court, to justify the absolute priority of this deemed trust, notes the opportunity financial institutions have of familiarizing themselves with the business and finances of a tax debtor, and considers as well the significant changes now reflected in subsection 227(4.1) of the Act, in response to the judgment in 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. (4^th) 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 fail 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 and 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 deductions 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 “notwithstanding 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 this case, it is true that the respondent did not officially realize its security interest against the debtor. However, there is nothing in the language of subsection 227(4.1) of the ITA that would subordinate the Crown’s beneficial right to a similar official execution of a security interest against a tax debtor. The effect of the sale by a tax debtor of a property to which the deemed trust attaches is clearly explained by the Supreme Court in First Vancouver, at pages 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 light of this interpretation, it is clear in this case that the monetary amount realized on the sale of the skidder by the tax debtor was the “proceeds” of a property subject to the deemed trust and that consequently, since this trust had ceased to attach to the skidder, the monetary consideration received by the tax debtor was now itself held in trust.

[11]      It was precisely these “proceeds” in which the applicant had a beneficiary interest, that immediately, the very next day, were remitted in full by the tax debtor to the respondent by way of a deposit into its bank account for the purpose of reducing its debt to the respondent, thereby depleting the deemed trust by a corresponding amount. In these circumstances, because the respondent has received the monetary proceeds from the sale of the skidder, a property of the deemed trust, this cannot prevent the applicant from exercising against it its beneficial interest under subsection 227(1.4) of the ITA. This personal liability to the respondent is confirmed, it seems to me, by the following extract from the National Bank judgment, 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 acknowledged, by way of exception, that the effect of the sale by the tax debtor to a third party, in the normal course of business, of property that is part of the deemed trust, effectively removes it from the trust. In the case at bar, it is clear that this is not a sale made by the tax debtor in the normal course of business.

[13]      Finally, concerning the date of computation of the pre-judgment interest, it must be taken into account that the capital amount awarded to the applicant is an amount payable under the ITA and therefore a debt due to Her Majesty and recoverable as such pursuant to section 22 of the ITA. I am therefore satisfied, as was the prothonotary, on the basis of Markevich v. Canada, [2003] 1 S.C.R. 94, National Bank and paragraph 36(2)(a) of the FCA, that October 19, 2000 may be deemed to be the starting date in this case.

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

Judge

OTTAWA, ONTARIO

July 8, 2005

Certified true translation

François Brunet, LLB, BCL

FEDERAL COURT

SOLICITORS OF RECORD

DOCKET:                                           T-949-02

STYLE:                                               ATTORNEY GENERAL OF CANADA v. LA CAISSE POPULAIRE DESJARDINS DE LYSTER / INVERNESS / VAL-ALAIN

PLACE OF HEARING:                     Montréal, Quebec

DATE OF HEARING:                       June 6, 2005

REASONS FOR ORDER:               Pinard J.

DATE OF REASONS:                       July 8, 2005

APPEARANCES:

Patrick Vézina

Nadine Dupuis                          FOR THE APPLICANT

Reynald Auger                          FOR THE RESPONDENT

SOLICITORS OF RECORD:

John H. Sims, Q.C.

Deputy Attorney General

of Canada                                            FOR THE APPLICANT

Langlois Kronström Desjardins

Québec, Quebec                                  FOR THE RESPONDENT