Canada (Attorney General) v. Caisse Populaire Desjardins de Lebel-sur-Quevillon, 2002 FCT 1071

Date: 20021011

Docket: T-1423-00

Neutral citation: 2002 FCT 1071

OTTAWA, ONTARIO, OCTOBER 11, 2002

BEFORE: LUC MARTINEAU J.

BETWEEN:

THE ATTORNEY GENERAL OF CANADA

for and on behalf of Her Majesty the Queen in right of Canada

(Minister of National Revenue)

Plaintiff

- and -

CAISSE POPULAIRE DESJARDINS DE LEBEL-SUR-QUEVILLON

Defendant

REASONS FOR ORDER AND ORDER

            WHEREAS by a simplified action the plaintiff is claiming from the defendant the sum of $18,633,44 on account of source deductions withheld but not paid to Her Majesty by the numbered company 2972-9886 Québec Inc., doing business under the trade name "Entreprises Forestières Lajoie" (the debtor);

WHEREAS this claim is disputed by the defendant;

            WHEREAS the case at bar was heard with the action brought by the plaintiff against the Caisse Populaire of Amos in Court file T-1422-00;

            IN VIEW OF the admissions, affidavits and exhibits entered in the record, the authorities cited by the parties and the arguments contained in the memorandums and made at the hearing held in Montréal on June 11, 2002, in files T-1422-00 and T-1423-00;

FACTS

            WHEREAS the facts that follow were not in dispute;

            WHEREAS according to the plaintiff's submissions the debtor failed to remit to Her Majesty:

            (a)        the sum of $16,845.85 which it withheld from the remuneration paid to its employees under the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the ITA) for the period from October 1, 1997 to September 30, 1998; and

            (b)        the sum of $1,787.59 which it withheld from the remuneration paid to its employees as employee premiums payable by its employees under the Employment Insurance Act, S.C. 1996, c. 23 (the EIA) for the period from October 1, 1997 to September 30, 1998;

            WHEREAS the source deductions mentioned above represent a total of $18,633.44;

            WHEREAS the plaintiff is now claiming the sum of $18,633.44 from the defendant following the seizure and judicial sale of a delimber owned by the debtor, which the defendant purchased in the circumstances set out below;

            WHEREAS the defendant was the debtor's hypothecary creditor;

            WHEREAS the defendant's hypothecary right was prior to Her Majesty's beneficial ownership;

            WHEREAS on April 6, 1999 a judgment was rendered by the Quebec Superior Court in the defendant's favour against the debtor in case 605-05-000441-985 in the amount of $141,574.86 plus interest and costs;

            WHEREAS a writ of seizure in execution concerning the debtor's movable property was issued by the Superior Court on May 26, 1999, following the obtaining of that judgment;

            WHEREAS in execution of that writ the delimber mentioned above was seized;

            WHEREAS a public notice of a judicial sale of the seized property appeared in the Amos newspaper L'Echo on June 9, 1999;

WHEREAS the judicial sale was held on June 22, 1999;

WHEREAS the delimber was awarded to the defendant for the sum of $18,000;

WHEREAS a certificate of sale was prepared by the officer responsible for the sale, pursuant to article 611.1 of the Code of Civil Procedure, R.S.Q. c. C-25 ("C.C.P.");

WHEREAS the plaintiff filed no claim with the officer;

WHEREAS following expiry of the deadlines specified in article 614 C.C.P., the officer proceeded to distribute the sum of $18,000;

WHEREAS by letter of July 7, 1999, the plaintiff notified the defendant that the debtor owed Her Majesty source deductions totalling $18,633.44 and that amount was in fact covered by the deemed trust established by subsections 227(4) or (4.1) ITA and 86(2) or (2.1) EIA;

WHEREAS by the same letter the plaintiff notified the defendant that it must forward in priority the sum of $18,633.44 from the proceeds of sale of any property whatever of the debtor, after deducting the costs of sale;

WHEREAS following the defendant's failure to comply with this notification and the one that followed on November 10, 1999, the plaintiff brought the instant action against the defendant;

WHEREAS the original claim of $18,000 against the defendant contained in the plaintiff's statement of claim filed on July 31, 2000, was increased to $18,633.44, as appears from the amended statement of claim of July 13, 2001, which also alleged that a few months after the judicial sale of June 22, 1999, by which the defendant purchased the delimber, the latter sold it to a third party for $30,000;

FEDERAL PROVISIONS

            WHEREAS the burden of proving that her claim against the defendant is valid rests with the plaintiff;

            WHEREAS the plaintiff based her claim against the defendant on subsections 227(4) and (4.1) ITA and 86(2) and (2.1) EIA (the federal provisions);

            WHEREAS the federal provisions create a deemed trust;

            WHEREAS the federal provisions create certain legal presumptions;

            WHEREAS under subsections 227(4) ITA and 86(2) EIA, a tax debtor is deemed to hold any amount deducted or withheld under the ITA in trust for Her Majesty;

            WHEREAS under subsections 227(4.1) ITA and 86(2.1) EIA, Her Majesty enjoys beneficial ownership of any property covered by the deemed trust, and in that case the said property is deemed not to be part of the tax debtor's estate;

            WHEREAS subsections 227(4.1) ITA and 86(2.1) EIA cover, first, the tax debtor's property, and second, the property held by his secured creditor within the meaning of subsection 224(1.3) ITA, which, in the absence of security within the meaning of that subsection, would be property of that person;

            WHEREAS these presumptions apply once a tax debtor fails to remit to Her Majesty the amounts contemplated by subsections 227(4) ITA and 86(2) EIA within the deadlines specified in the ITA;

            WHEREAS these presumptions apply despite other provisions of the ITA, the BIA (except subsections 81.1 and 81.2 BIA), any other legislative or provincial provision or any rule of law;

            WHEREAS the primary purpose of these presumptions is to facilitate recovery proceedings brought on behalf of Her Majesty against a tax debtor and prevent objections which exercise of Her Majesty's beneficial right may prompt from other creditors of the tax debtor, in particular secured creditors within the meaning of subsection 224(1.3) ITA;

            WHEREAS under subsections 227(4.1) in fine ITA and 86(2.1) in fine EIA, the proceeds of realization of this property are paid to the Receiver General in priority;

            WHEREAS the federal provisions do not indicate the manner or specific procedure whereby Her Majesty may assert her beneficial ownership and priority claim;

            WHEREAS under section 222 ITA, all taxes, interest, penalties, costs and other amounts payable under the ITA are debts due to Her Majesty and recoverable as such in the Federal Court or any other court of competent jurisdiction or in any other manner provided by the ITA;

            WHEREAS the source deductions specified in section 153 ITA were exclusively to be made by the employer, here the debtor, the tax debtor;

            WHEREAS under subsection 223(3) ITA the Minister may cause to be registered in the Federal Court on behalf of Her Majesty a certificate stating that a tax debtor who has not made certain source deductions is indebted for the amount indicated in the said certificate;

            WHEREAS subsections 223(5) and (6) ITA also authorizes the registration on behalf of Her Majesty, in the province where the debtor's property is located, as a charge on the said property, in accordance with provincial law, of a document issued by the Federal Court evidencing the content of the certificate registered in the Federal Court pursuant to subsection 223(3) ITA;

            WHEREAS when execution proceedings are brought on behalf of Her Majesty against a tax debtor following registration of a certificate in the Federal Court pursuant to section 223 ITA, unless otherwise provided in the Rules, writs of seizure and sale are to be executed as nearly as possible in the manner determined by the law of the province in which the property to be seized is located, as provided in subsection 56(3) of the Federal Court Act, R.S.C. 1985, c. F-7 (the Act) and Rule 448 of the Rules;

            WHEREAS it was not alleged nor proven that recovery proceedings were brought by the plaintiff against the debtor under the ITA;

PROVINCIAL PROVISIONS

            WHEREAS since no specific procedure has been provided in the ITA or the EIA to assert the beneficial ownership enjoyed by Her Majesty under the federal provisions, the provincial rules of law apply in the alternative and by analogy, mutatis mutandis;

Beneficial ownership and trust

            WHEREAS the expression "beneficial ownership" contained in subsections 227(4.1) ITA and 86(2.1) EIA has not been defined by the federal legislator;

            WHEREAS the concept of "beneficial ownership" is a concept originating in the common law;

            WHEREAS in the province of Quebec it is the civil law in effect which governs matters of property and civil rights;

            WHEREAS the concept of "beneficial ownership" is unknown to Quebec civil law;

            IN VIEW OF articles 947 et seq. and 1260 et seq. C.C.Q.;

            WHEREAS under article 1261 C.C.Q. the trust patrimony, consisting of the property transferred in trust, constitutes a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary and in which none of them has any real right;

            IN VIEW OF article 1263 C.C.Q., by analogy, and also article 1290 C.C.Q.;

Priorities and hypothecs

          WHEREAS under article 2646 C.C.Q., creditors may institute judicial proceedings to cause the property of their debtor to be seized and sold;

            WHEREAS if creditors rank equally the price is distributed proportionately to their claims, unless some of them have a legal cause of preference;

            WHEREAS under article 2647 C.C.Q., prior claims and hypothecs are the legal causes of preference;

            WHEREAS under article 2650 C.C.Q., a claim to which the law attaches the right of the creditor to be preferred over the other creditors, even the hypothecary creditors, is a prior claim;

            WHEREAS under article 2651(4) C.C.Q., claims of the State for amounts due under fiscal laws are a prior claim;

            WHEREAS under article 2655 C.C.Q., prior claims may be set up against other creditors, or any third parties when they constitute a real right, without being published;

            WHEREAS further under article 2725 C.C.Q., legal hypothecs of the State, including those for sums due under fiscal laws, may be charged on movable or immovable property;

            WHEREAS such hypothecs take effect only from their registration in the proper register;

WHEREAS registration by the State of a legal movable hypothec for sums due under fiscal laws does not prevent it from exercising its prior claim;

            WHEREAS under article 2732 C.C.Q., a creditor who has registered his legal hypothec preserves his right to follow it on movable property which is not alienated in the ordinary course of business of an enterprise, as though he was the holder of a conventional hypothec;

Rights of hypothecary creditors

            WHEREAS in the province of Quebec, under the C.C.Q., a hypothecary creditor is not owner of the property covered by the security;

            WHEREAS the situation is different in other provinces, where property subject to fixed and specific common law charges confers a right of ownership on the secured creditor;

            WHEREAS under article 2748 C.C.Q., in addition to their personal right of action and the provisional measures provided in the C.C.P., hypothecary creditors, when their debtor is in default and their claim is liquid and eligible, may exercise any of the following hypothecary rights:

            (a)        taking possession of the charged property to administer it;

            (b)        taking it in payment of their claim;

            (c)        having it sold by judicial authority; or

            (d)        selling it themselves;

                                              Seizure and court sale of movable property

WHEREAS the seizure and sale of movable property by a creditor pursuant to the obtaining of a judgment in the province of Quebec are governed by articles 580 et seq. and 605 et seq. C.C.P.;

WHEREAS under article 580 C.C.P., a writ of seizure in execution requires the competent officer to levy against the debtor's movable property the amount of the debt in principal, interest and costs, including those of the execution;

WHEREAS under article 592.3 C.C.P., when the seizing officer ascertains that rights have been granted by the debtor in the seized property he must promptly serve, subject to all damages, on the holders, at the address entered in the Register of Personal and Movable Real Rights ("RPMRR") a certified copy of his minutes, of seizure and the notice of sale;

WHEREAS under article 611 C.C.P., the officer conducting the sale must make minutes containing the list of the articles put up for sale and, opposite each, the names and residence of the purchaser and the purchase price;

WHEREAS under article 614 C.C.P., if the seizing officer ascertains that rights have been granted in the seized property, he prepares a statement of collocation and serves a certified copy on the debtor and creditors;

WHEREAS under article 614 C.C.P., if within ten days of service of the scheme the debtor or a creditor has not contested it, the seizing officer proceeds to distribution of the moneys;

WHEREAS otherwise the officer returns the moneys to be adjudged by the court, and the same applies in the case of insolvency of the person seized;

WHEREAS under article 615 C.C.P., the distribution of the proceeds of the sale is made as follows:

1.          legal costs;

2.          claims of prior or hypothecary creditors, if they have filed a statement of their claim, supported by an affidavit and the necessary vouchers;

3.          the claim of the seizing creditor, if he is unsecured;

WHEREAS when a judicial sale has taken place at the initiative of a creditor other than Her Majesty, the effect of subsections 227(4.1) in fine ITA and 86(2.1) in fine EIA is to allow Her Majesty to be collocated in priority to the proceeds of the sale;

WHEREAS the provincial provisions are neither contrary to nor inconsistent with the federal provisions, and do not prevent Her Majesty asserting her beneficial right and relying on her preferred claim;

            WHEREAS the federal provisions do not exempt Her Majesty from the duty to assert her beneficial right and priority claim at the proper time, within the deadlines and in the manner specified in the Act;

CROWN IN RIGHT OF CANADA BOUND BY CIVIL CODE OF QUEBEC

AND CODE OF CIVIL PROCEDURE

            IN VIEW OF the argument cited by counsel for the plaintiff, that Her Majesty is not bound by the provisions of the C.C.Q. and the C.C.P. which may apply in the case at bar;

            IN VIEW OF sections 1, 42 and 61 of the Interpretation Act (Quebec), R.S.Q., c. I-16;

            IN VIEW OF sections 2, 17 and 35 of the Interpretation Act (Canada), R.S.C. 1985, c. I-21;

            IN VIEW OF the general rules laid down by the case law and commentary;

            WHEREAS the Crown may be subject to legislation not only in the event of an express provision binding it, but also when the context of a provision or its purpose indicates that Parliament intended to bind the Crown;

            WHEREAS subsections 227(4.1) ITA and 86(2.1) EIA refer expressly to the BIA, any other enactment of Canada or of a province or any other rule of law;

            WHEREAS a contrario Her Majesty is bound by subsections 81.1 and 81.2 BIA, and by necessary implication by any other federal or provincial legislation or any rule of law relating to the purpose of the federal provisions, the trust, the property, securities and priorities, and which is also not contrary to or inconsistent with exercise of the beneficial ownership and priority conferred on Her Majesty by subsections 227(4.1) ITA and 86(2.1) EIA;

            WHEREAS when the federal provisions at issue are interpreted in the context of the other provisions of the ITA - such as sections 222 and 223 ITA and the Federal Court Act, supra, p. 8 - which refer to the application of rules of provincial law in matters of recovery, execution of judgments, registration and publication of rights -, it is clear that Parliament intended to bind the Crown in right of Canada, to the extent that the applicable provincial rules are not inconsistent with the provisions of the ITA;

            WHEREAS further the federal provisions and sections 222 and 223 ITA would lose all meaning if Her Majesty were not bound by the said rules of provincial law;

            WHEREAS making the rule of the Crown in right of Canada subject to the ordinary law is a requirement of the rule of law;

            WHEREAS in the province of Quebec the C.C.Q. and C.C.P. are the "ordinary law" of the province, although they are legislation;

            WHEREAS a distinction must be made between the nature of a right and the way in which that right is exercised;

            WHEREAS the provincial provisions of a general nature applicable in the case at bar apply to all creditors;

            WHEREAS the said provisions do not diminish the beneficial ownership and do not negate the priority claim Her Majesty enjoys under the federal provisions;

            WHEREAS, therefore, Her Majesty is bound by these provincial provisions;

            WHEREAS, in the action at bar brought against the defendant, the plaintiff is seeking to rely on the provisions of the C.C.Q., since in the conclusions of her action she asks, inter alia, that the Court order the defendant to pay her, in addition to the amount of the claim, the additional indemnity mentioned in article 1619 C.C.Q.;

WHEREAS when the Crown chooses to rely on the law, it assumes the obligations and disadvantages of so doing;

            WHEREAS under subsection 39(1) of the Federal Court Act, except as expressly provided by any other Act, the laws relating to prescription and the limitation of actions in force in any province between subject and subject apply to any proceedings in the Court in respect of any cause of action arising in that province;

            WHEREAS since the federal provisions indicate no deadline for asserting Her Majesty's beneficial ownership and priority claim, she should have asserted them within the deadlines which the creditors of a debtor must observe;

            WHEREAS if Her Majesty decided not to institute a personal action herself against the tax debtor or not to exercise the remedies conferred on her by the ITA for realizing her priority claim, she cannot assert her beneficial right unless she herself observes the provincial provisions applicable in the case at bar;

LEGAL ACTS WHICH MAY BE SET UP AGAINST HER MAJESTY

            WHEREAS the seizure and judicial sale of the delimber were carried out in accordance with the conditions laid down in the C.C.P. for the execution of judgments;

            WHEREAS there is no evidence in the record to indicate that the defendant obtained the judgment of April 6, 1999, from exercising any of the hypothecary rights mentioned in article 2748 C.C.Q.;

            WHEREAS it is the general rules set out in articles 580 et seq. C.C.P. that apply here;

            WHEREAS according to the certified statement of the RPMRR, filed by the plaintiff (exhibit 1 of the affidavit of documents signed by Louise Vallière on October 17, 2000), Her Majesty's name does not appear therein;

            WHEREAS the plaintiff submitted no claim to the officer responsible for seizure and sale of the delimber and the deadlines laid down in article 614 C.C.P. have expired;

            WHEREAS at the hearing counsel for the plaintiff mentioned that the Crown is frequently unaware that she has a claim against a tax debtor at the time proceedings are brought at the initiative of other creditors for a judicial sale of a tax debtor's property;

            WHEREAS in the case at bar this allegation is not based on any evidence;

            WHEREAS, further, the Crown's ignorance clearly would not as such prevent the application of the general provisions of the C.C.P. on the execution of judgments;

            WHEREAS it would have been advisable for Her Majesty to take recovery proceedings against the debtor under the ITA or to register a legal hypothec against the debtor's property;

            WHEREAS, unlike the situation considered by the Federal Court in the decision rendered on September 13, 2002, in Les Entreprises Forestières P.S. Inc. andNewCourt Financial Ltd., 2002 FCT 968, now on appeal, there was no seizure by Her Majesty of the debtor's movable property;

IN VIEW OF article 612 C.C.P.;

            WHEREAS, in the absence of a judgment rendered by a competent court quashing the seizure and sale under judicial authority of the delimber, these legal acts must be considered valid and capable of being set up against the plaintiff and Her Majesty with their full effect;

NO REAL RIGHT OR RIGHT OF PURSUIT OVER MOVABLE PROPERTY

            WHEREAS subsections 227(4.1) in fine ITA and 86(2.1) in fine EIA apply to cases of judicial sales or other similar cases where the proceeds of realization of property must be shared between creditors;

            WHEREAS the beneficial right specified in subsections 227(4.1) ITA or 86(2.1) EIA does not as such confer any real right or right of pursuit over the property;

NO PERSONAL ACTION AGAINST THE DEFENDANT

            WHEREAS the federal provisions confer no right to a personal remedy against a bona fide purchaser of property subject to the deemed trust, whether the latter is a creditor of the tax debtor or not;

            WHEREAS in the absence of clear language in the ITA the Court cannot accept the interpretation suggested by the plaintiff of the effect of the federal provisions, which in the absence of fraud or collusion amounts to holding secured or unsecured creditors and bona fide third party purchasers severally and personally liable for the non-payment of source deductions, which must be made exclusively by the tax debtor under section 153 ITA;

            WHEREAS the Court must interpret the federal provisions consistent with, first, the achieving of predictable results in commercial transactions, and second, the distribution of the exclusive powers assigned to Parliament and the provincial legislatures by sections 91 and 92 of the Constitution Act, 1867;

            WHEREAS if the Court accepted the interpretation suggested by the plaintiff of the federal provisions, this would be likely to create legal uncertainty that would be harmful to the security of commercial transactions and would also compromise the operation and effectiveness of the provincial provisions in the province of Quebec;

            WHEREAS when the federal Parliament decides to allocate liability for payment to a third party other than the tax debtor, it does so expressly, providing that a request for payment shall be sent to the third party, as in the case of section 224 ITA, where inter alia it has conferred a right of seizure in execution on the Minister when the particular conditions mentioned in that provision have been met;

            WHEREAS it would have been desirable for the federal Parliament to intervene clearly and to specify the joint liability of persons other than the tax debtor, as indicated inter alia in sections 160 or 227.1 ITA;

            WHEREAS Her Majesty has no right of action against a third party unless the latter was in a position in which he could have been held jointly and severally liable in a personal action brought by Her Majesty against the tax debtor;

WHEREAS the proceedings for recovery, execution of judgments and judicial sales contained in the C.C.P. apply to all creditors and are intended to ensure predictable results;

            WHEREAS the sum of $18,633.44 claimed from the defendant personally is not a tax, interest, penalty, costs or any other amount payable by the defendant personally under section 222 ITA;

            WHEREAS the plaintiff has no cause of action under the federal provisions against the defendant and her claim is without basis;

            FOR THESE REASONS, THE COURT ORDERS THAT:

            The plaintiff's action is dismissed;

The whole with costs against the plaintiff.

Certified true translation

Suzanne M. Gauthier, C. Tr., LL.L.

                                                    FEDERAL COURT OF CANADA

                                                                 TRIAL DIVISION

                              NAMES OF COUNSEL AND SOLICITORS OF RECORD

COURT No.:                                                                  T-1423-00

STYLE OF CAUSE:                                                     Attorney General of Canada

and

Caisse populaire Desjardins de Lebel-sur-Quevillon

PLACE OF HEARING:                                                Montréal, Quebec

DATE OF HEARING:                                                  JUNE 11, 2002

REASONS FOR ORDER AND ORDER BY:         MARTINEAU J.

DATED:                                                                           OCTOBER 11, 2002

APPEARANCES:

Nadine Dupuis                                                                  FOR THE PLAINTIFF

Patrick Vézina

Jocelyn Geoffroy                                                               FOR THE DEFENDANT

SOLICITORS OF RECORD:

Morris Rosenberg                                                              FOR THE PLAINTIFF

Deputy Attorney General of Canada

Jocelyn Geoffroy                                                               FOR THE DEFENDANT

Geoffrey, Matte, Kélada & Associés

Amos, Quebec