Canada (Minister of National Revenue) c. Entreprises Forestières PS Inc., 2002 FCT 968

Date: 20020913

Docket: ITA-1223-00

Neutral citation: 2002 FCT 968

OTTAWA, ONTARIO, SEPTEMBER 13, 2002

PRESENT: THE HONOURABLE MR. JUSTICE MARTINEAU

BETWEEN:

In re the Income Tax Act

-and-

In re one or more assessments made by the Minister of National Revenue

pursuant to one or more of the following statutes: the Income Tax Act, the

Canada Pension Plan and the Employment Insurance Act,

LES ENTREPRISES FORESTIÈRES P.S. INC.

Judgment debtor

-and-

NEWCOURT FINANCIAL LTD.

Objector-Appellant

REASONS FOR ORDER AND ORDER

[1]                 This is an appeal filed from an order by the prothonotary dismissing a motion objecting to a seizure in execution.

BACKGROUND

[2]                 Subsection 153(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 ("the ITA"), imposes on employers when they are paying a salary, wages or other remuneration a duty to deduct therefrom such amount as is determined by regulation as tax ("source deductions") and remit this amount to the Receiver General on the date specified by regulation. Subsection 82(1) of the Employment Insurance Act, S.C. 1996, c. 23 (the "EIA") imposes a similar duty in respect of amounts withheld under that Act.

[3]                 In 1999 Les Entreprises Forestières P.S. Inc. ("Forestières") failed to remit the source deductions owed Her Majesty under those two statutes at the prescribed times.

[4]                 On February 7, 2000, a certificate stating that Forestières was indebted to Her Majesty in the amount of $147,059.39, with interest compounded daily, was filed and registered in the Federal Court. Under subsection 223(3) ITA, the certificate is deemed to be a judgment of the Court: all proceedings may accordingly be taken based on the certificate as if it were a Court judgment. On the same day, a writ of seizure in execution was issued by the Court against the movable and immovable property of Forestières.

[5]                 In early March 2000 the Canada Customs and Revenue Agency (the "respondent") authorized a bailiff of the province of Quebec to proceed with the seizure in execution. Between March 1 and 17, 2000, Forestières' movable property was seized on behalf of Her Majesty. It included a 1997 Timberjack grapple skidder (the "property seized"), the subject of a motion in objection filed by Newcourt Financial Ltd. ("Newcourt") in spring 2000, claiming in the case at bar to be the owner since March 27, 2000.

[6]                 In September 2000 its objection was dismissed by the prothonotary Morneau: hence the appeal at bar. In the instant proceeding Newcourt is asking the Court to quash the prothonotary's decision, rule that its objection is good and valid, declare it the owner of the seized property and accordingly order a stay of the execution proceedings and release of the property seized.

[7]                 As provided in Rule 51 of the Federal Court Rules (1998), SOR/98-106 (the "Rules"), an order of a prothonotary may be appealed by motion to a judge of the Trial Division. In the case at bar, the prothonotary was not exercising a discretionary power. He had to interpret and apply various federal and provincial rules of law. Accordingly, interpretation of the legislative provisions applicable here must be undertaken in accordance with the standard of the correct decision: see Canada v. Aqua-Gem Investments Ltd., [1993] 2 F.C. 425 (F.C.A.); Pfizer Canada Inc. v. Apotex Inc. (1999), 172 F.T.R. 81 (F.C.T.D.); and Nolan v. Silex International Chemical Systems Inc. (2000), 183 F.T.R. 88 (F.C.T.D. - "Nolan").

[8]                 That being so, I will first set out the arguments made by the parties to the prothonotary, which were made again at the hearing of this appeal.

ARGUMENTS OF OBJECTOR-APPELLANT

[9]                 Newcourt admitted that Forestières was indebted to Her Majesty for the amounts indicated in the certificate. However, Newcourt maintained that it was the owner of the property seized: it said its ownership title dated back to March 27, 2000.

[10]            First, Newcourt noted that on November 20, 1997, it made a loan of $336,167.25 to Forestières, guaranteed at the time by a conventional hypothec of movable property without dispossession dealing with certain pieces of equipment, including the property seized. Since December 20, 1999, Forestières has been in default in repayment of its loan, so that the balance - $150,716.46 at that time - became payable in full.

[11]            Also, following the seizure made on Her Majesty's behalf between March 1 and 17, 2000, Newcourt quickly registered in the Register of Personal and Movable Real Rights ("RPMRR") prior notice of the exercise of a hypothecary right given pursuant to arts. 2757 et seq. of the Civil Code of Quebec, S.Q. 1991, c. 64 ("C.C.Q."). The prior notice was registered on March 27, 2000. Forestières was then asked to release the movable property mentioned, including the property seized, within 20 days of registration in the RPMRR so that Newcourt could take it in payment. Before that deadline expired Forestières, or any third party, could still remedy the default resulting from non-repayment of the loan by paying the full amount of the debt in capital and interest - $178,898.97 at that time.

[12]            Newcourt noted that its objection was made as owner and not as hypothecary creditor. Newcourt relied on arts. 2764 and 2783 C.C.Q., which read as follows:

[13]            Following the prior notice Forestières executed a release: Forestières acknowledged that Newcourt was fully entitled to take the movable property described in the prior notice as payment, and this release was executed by Forestières on March 30, 2000, and by Newcourt on April 4, 2000.

[14]            Newcourt based its objection on art. 597 of the Code of Civil Procedure, R.S.Q. c. C-25 ("C.C.P."), which allows an objection to the seizure in execution to be made by a "third party who has a right to revendicate any part of the property seized". Relying on [TRANSLATION] "the well-settled civil law principle of the creditor who acts most quickly", Newcourt argued that a seizure did not have the effect of preventing a hypothecary creditor from sending a prior notice pursuant to arts. 2757 et seq. C.C.Q., and in accordance with arts. 2764 and 2783 C.C.Q., from exercising its right to take the property seized as payment. Once it has become owner of the property under art. 597 C.C.P., the creditor can then claim it and object to sale of the seized property by another creditor.

RESPONDENT'S ARGUMENTS

[15]            Her Majesty, represented by the respondent, opposed Newcourt's argument on two primary grounds.

[16]            First, she argued that the hypothecary creditor cannot exercise the rights conferred in arts. 2757 et seq. C.C.Q. after another creditor has proceeded with seizure of the property covered by its hypothec, in view of art. 604 C.C.P., which provides:

[17]            Additionally, as to the ownership right relied on by Newcourt under the provincial rules of law, the respondent contended that the latter should be disregarded in view of the effect which the Court must give to subsection 227(4.1) ITA, with the result that the latter cannot be set up against Her Majesty. Subsection 227(4.1) ITA reads as follows:

[18]            In view of the fact that a certificate was registered pursuant to s. 223 ITA, the respondent concluded that she had the right to have the movable property of Forestières seized and sold and to be collocated in priority under subsection 227(4.1) ITA. As beneficiary, Her Majesty could claim the proceeds of realization of the seized property with priority over any security, in order to allow recovery of the amount held by Forestières in trust for Her Majesty, but which it failed to remit.

PROTHONOTARY'S DECISION

[19]            First, the prothonotary considered the method of objection used by Newcourt, namely art. 597 C.C.P., and summarily dismissed the respondent's argument based on the effect of art. 604 C.C.P.:

Even if art. 604 applies expressly to the hypothecary creditor, I am not persuaded that the precedents on the point are clear enough to interpret art. 604 as not authorizing such a creditor to take property in payment after the seizure but before the sale so as to be able to oppose the sale of the said property based on art. 597 C.C.P.

[20]            Nevertheless, the prothonotary decided to maintain the seizure, accepting the interpretation put forward by the respondent of the effect of subsections 227(4) and (4.1) ITA. Essentially, he considered that subsection 227(4.1) ITA applied despite any provincial rule of law, so that any taking in payment of the property of the tax debtor covered by a deemed trust could not be set up against Her Majesty:

It was not in dispute in the case at bar that from February to October 1999 the judgment debtor retained, but did not pay to the Agency, an amount of nearly $115,000 which under subsection 227(4) the debtor was deemed to hold for Her Majesty in trust.

Reading subsection 227(4.1) as a whole, therefore, one has to conclude that in February 1999 the judgment debtor's property, including the property at issue, was deemed to be held for Her Majesty in trust separate and apart from that of the judgment debtor. Further, Her Majesty was deemed at that time to have beneficial ownership in the property regardless of any other security, including a hypothec.

Finally, it is clear from the beginning of subsection 227(4.1) that this provision in favour of Her Majesty applies regardless of any provincial legislation or rule of law. There is thus no need to examine the provisions of the Civil Code of Quebec or any other rule of provincial law which may conflict with subsection 227(4.1): that subsection applies notwithstanding any provision of law to the contrary.

The provision is certainly one that constitutes an exception to the ordinary law, but it is the Act which the Court is obliged to apply.

The result of its application in the case at bar is that in February 1999, despite the movable hypothec which had been registered here since November 1997, the property at issue ceased to belong to the judgment debtor and was held separate and apart for Her Majesty in trust.

At the time the notice and taking of the property were registered, the effect of subsection 227(4.1) was that the property at issue could not be regarded as being at the disposal of the objector. At that time the property no longer belonged to the judgment debtor. Accordingly, and contrary to what was vigorously argued by the objector, I do not consider that the objector could assert a clear, valid and undisputed ownership title at any time after the seizure. Long before then, and regardless of the fact that the situation might conflict with various concepts in the Civil Code of Quebec, including the rule of publication of sureties, subsection 227(4.1) had decided otherwise.

[21]            The prothonotary accordingly dismissed Newcourt's objection, upheld the seizure and ordered that the proceeds of realization of the seized property be paid to Her Majesty in priority over any other security pursuant to subsections 227(4.1) ITA and 86(2) EIA.

GROUNDS OF APPEAL

[22]            On appeal, Newcourt restated the arguments set out above and maintained that the prothonotary erred in law in his interpretation of the scope of subsections 227(4) and (4.1) ITA. Alternatively, Newcourt challenged the constitutionality of subsections 227(4) and (4.1) ITA and 86(2) and (2.1) EIA. Essentially, Newcourt alleged that those provisions were unconstitutional and unlawful since they legislated within an exclusively provincial field of jurisdiction, namely that of property and civil rights. The constitutional argument was not made before the prothonotary at the first hearing. In the motion on appeal there was no mention of it and no conclusion of unconstitutionality was presented. In short, it was not until its reply to the respondent's record and memorandum that Newcourt for the first time raised this argument. Newcourt offered no explanation at the hearing to justify this omission.

DISMISSAL OF APPEAL

[23]            I have decided to dismiss Newcourt's appeal. It is not necessary for me to rule on the scope of subsections 227(4) and (4.1) ITA or on Newcourt's constitutional argument, as the validity of the objection can be decided on the procedural ground raised by the respondent and summarily dismissed by the prothonotary.

[24]            As mentioned, a certificate certifying that Forestières was indebted to Her Majesty in the amount of $147,059.39, with interest compounded daily, was filed and registered in the Court on February 7, 2000, pursuant to subsection 223(3) ITA, which states:

[25]            On February 7, 2000, under the said certificate, a writ of seizure in execution was issued by the Court. That writ directed the sheriff, or any other sheriff of the Gaspé judicial district, and any bailiff who was a member of the "Ordre professionnel des huissiers de justice du Québec", to seize the movable and immovable property at their disposal belonging to Forestières and to proceed to sell that property so as to realize the sum of $147,059.39, with interest compounded daily, plus costs, fees and expenses of realization.

[26]            Under subsection 56(3) of the Federal Court Act ("FCA"), unless otherwise provided by the Rules, all writs of execution are executed as nearly as possible in the same manner as similar writs of the province in which the property to be seized is situated: this principle is restated in Rule 448 of the Rules. Similarly, subsection 56(4) FCA states that unless otherwise provided by the Rules every claim made by any person to property seized under a writ of execution shall be heard and disposed of as nearly as may be according to the procedure applicable in the province where the property is seized.

[27]            To begin with, and with all due respect to the prothonotary, although I agree with the outcome I feel he erred in summarily dismissing the application of art. 604 C.C.P.

[28]            Let us look again at the wording of art. 604 C.C.P.:

[29]            In my opinion, this provision limits the hypothecary creditor's rights: when a seizure is made, the latter can no longer take the seized property in payment, but must exercise his rights to the proceeds of sale of the seized property. Interpreting the provisions in any other way would amount to allowing a hypothecary creditor to get around the prohibition of any creditor objecting to seizure or sale of the seized property. Article 604 C.C.P. would thus have no practical effect. Consequently, one has to exclude the possibility of a hypothecary creditor subsequently claiming seized property under art. 597 C.C.P.

[30]            Further, the most recent judicial interpretation of art. 604 C.C.P. has tended towards limiting the rights of hypothecary creditors to exercise their hypothecary rights over property under seizure: see in particular Cleary v. Côté (Bedford S.C., No. 460-17-000024-976, March 4, 2000 - "Cleary"); Nolan, supra, and Société d'Aluminium Reynolds du Canada Ltée v. G.P.M. Aluminium Ltée, [1998] B.E. 98BE 457 (C.Q.).

[31]            In Cleary, supra, Fréchette J. of the Quebec Superior Court analyzed the impact of art. 604 C.C.P. on the right of a hypothecary creditor to claim property which has been the subject of an ordinary seizure. In that case the hypothecary creditor, the Caisse populaire Ste-Christine de Bagot (the "Caisse"), objected to the seizure in execution by the plaintiff Cleary, relying on a movable hypothec with dispossession over the seized property as the basis of its claim under art. 597 C.C.P.

[32]            In his decision Fréchette J. noted that the question raised had been vigorously debated in cases prior to the amendments made to the C.C.P. in 1992, following adoption of the new C.C.Q.:

[TRANSLATION]

Accordingly, it has to be said that disagreement was total, and yet this contradictory case law resulting from interpretation of the same legislative provisions, namely arts. 597 and 604 of the Code of Civil Procedure in effect at that time . . .

. . .

Needless to say, such a situation attracted the attention and interest of the legislature, which in 1992, with the Civil Code of Quebec coming into effect, wished to put an end to the confusion.

[33]            After reviewing the process surrounding adoption of the amendments to the aforesaid articles of the C.C.P., the Court concluded:

[TRANSLATION]

In the circumstances, the Court has no hesitation in concluding that art. 604 as approved removed all ambiguity of interpretation. It is now clear that the preferred or hypothecary creditor cannot claim property over which it has a lien, and which has already been seized by another creditor: that is the actual wording of the legislation. Such creditors can only exercise their rights over the proceeds of the sale.

[34]            Although the aforesaid passage disposed of the case before him, Fréchette J. thought it best to deal with the point raised here, regarding the rights of a hypothecary creditor to claim seized property based on the exercise of his hypothecary rights to take in payment:

[TRANSLATION]

Accordingly, it will certainly be clear that an immovable hypothecary creditor whose debtor is in default can only submit its claim to the seizing officer if it has not itself taken the initiative of exercising the rights conferred on it by law before another creditor proceeds with seizure of the property. No objection or revendication will then be possible.

[My emphasis.]

[35]            Fréchette J. thus confirmed the rule that a hypothecary creditor cannot exercise the rights conferred on him by arts. 2748 et seq. C.C.Q. after another creditor has proceeded with seizure of the property covered by its hypothec, and his only remedy at that time is the one provided for in the second paragraph of art. 604 C.C.P. See to the same effect Société d'Aluminium Reynolds du Canada Ltée, supra.

[36]            In Nolan, supra, the Federal Court of Canada also had an opportunity to rule on the provisions at issue in the case at bar and endorsed the comments of Fréchette J. in Cleary, supra. In its analysis of arts. 597 and 604 C.C.P. the Federal Court, per Lemieux J., noted that "the interpretation of the said words must be undertaken in the entire context of the legislation and in keeping with the object and scheme of the Act and harmoniously with the intention of the legislature", and that legislation should be interpreted so far as possible to avoid "repugnancy or inconsistency between its members". Based on these rules of statutory interpretation, Lemieux J. referred to the aforementioned comments by Fréchette J., noting that the decision in Cleary, supra "has to do with the major changes made [since the C.C.P. amendments] regarding the exercise by hypothecary creditors of their rights when the property of one of their debtors is the subject of seizure by another creditor". In his decision, Lemieux J. concluded that art. 604 C.C.P. imposed a duty on a hypothecary or preferred creditor to file a statement of claim supported by an affidavit and vouchers within ten days of the sale. Accordingly, in the judge's view, failure to observe the provisions mentioned in the C.C.P. would exclude a hypothecary or preferred creditor from the distribution of proceeds of the sale.

[37]            In view of my conclusion on the application of art. 604 C.C.P. in the case at bar, Newcourt's claim based on art. 597 C.C.P. is inadmissible. It is therefore unnecessary to deal with the other arguments made by the parties.

[38]            That being so, even if I am wrong and in the case at bar art. 604 C.C.P. does not exclude application of art. 597 C.C.P., I am far from certain that Newcourt has established that it has the right to claim the seized property under provincial law. Nonetheless, as the subsidiary points discussed below were not argued before me, I will not base my dismissal of the appeal at bar on the following comments.

[39]            First, it should be borne in mind that the property claimed by Newcourt under art. 597 C.C.P. and arts. 2764 and 2783 C.C.Q. was at the time under the control of the guardian designated in the writ of seizure. In this regard, for surrender to be voluntary, art. 2764 C.C.Q. requires that before the period indicated in the prior notice expires the person against whom the hypothecary right is exercised should abandon the property to the creditor in order that the creditor may take possession of it or consent in writing to turn it over to the creditor at the agreed time. Article 583 C.C.P. provides that the debtor who is constituted guardian cannot remove or damage the seized property, on pain of contempt of court and damages. Accordingly, how can a seized creditor, without the Court's leave, abandon the seized property to another creditor so that he may take possession of it? How can he in any other way consent under art. 2764 C.C.Q. to hand the seized property over at the agreed time to another creditor, as the written authorization in effect constitutes permission to remove the seized property?

[40]            Further, arts. 6, 7 and 1375 C.C.Q. enshrine the well-settled civil law rule that any person is required to exercise his rights in accordance with the requirements of good faith. In light of the fact that Newcourt was informed that Her Majesty's rights were being exercised, can we say that Newcourt was in good faith when it requested Forestières to release the seized property? Can this act be seen as an attempt to defeat the application of Her Majesty's rights? Could Newcourt simply register its prior notice in the RPMRR, or should it also have sent a copy to the seizing creditor, namely Her Majesty? Since registration of the prior notice in the RPMRR took place on March 27, 2000, the 20-day deadline specified in art. 2758 C.C.Q. expired on April 16, 2000. In that case, how could Newcourt, in the affidavit of April 13, 2000, provided in support of its objection, claim to be the owner of the seized property on the latter date?

[41]            Additionally, I note that following registration of the certificate under subsection 223(3) ITA, a writ of seizure in execution was issued by the Court and given by Her Majesty to the sheriff or any other competent officer for execution.

[42]            Rule 447 of the Rules provides:

[43]            Notwithstanding the question of whether subsection 227(4.1) ITA gives Her Majesty a right to follow any property included in the deemed trust, should Rule 447 be interpreted as conferring such a right in the case at bar? This at least is what can be concluded in light of the judgment in Attorney General of Canada v. Boucher et al. (1979), 28 N.B.R. (2d) and 63 A.P.R. 211 (N.B.Q.B.), which held that the old Rule 2106, worded in a similar form to that contained in Rule 447 of the Rules, allowed execution of a judgment to be prosecuted against the new purchaser of an immovable.

[44]            I prefer to leave the aforementioned questions without any definite reply, but it would undoubtedly be helpful for the Court of Appeal to rule on those points alternatively if, as the result of an appeal of this judgment, it decided that art. 604 C.C.P. does not make the objection presented by Newcourt under art. 597 C.C.P. inadmissible.

ORDER

For these reasons, the Court dismisses the motion in appeal by Newcourt Financial Ltd. with costs.

Certified true translation

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

                                                    FEDERAL COURT OF CANADA

                                                                 TRIAL DIVISION

                                                          SOLICITORS OF RECORD

COURT No.:                                                                  ITA-1223-00

STYLE OF CAUSE:                                                     LES ENTREPRISES FORESTIÈRES P.S. INC.

-and-

NEWCOURT FINANCIAL LTD.

PLACE OF HEARING:                                                Montréal

DATE OF HEARING:                                                  June 10, 2002

REASONS FOR ORDER AND ORDER:              Martineau J.

DATE OF REASONS:                                                  September 13, 2002

APPEARANCES:

Étienne Trépanier                                                               FOR THE PLAINTIFF

Patrick Vézina                                                                  FOR THE PLAINTIFF

Paule Lafontaine                                                                FOR THE OBJECTOR

Robert L. Edinger                                                              FOR THE OBJECTOR