Date: 20090915
Docket: GST‑6823‑07
Citation: 2009 FC 912
Ottawa, Ontario, September 15,
2009
PRESENT:
The Honourable Mr. Justice de Montigny
In
the matter of the Excise Tax Act
and
In the matter of an assessment or assessments
established by the Deputy Minister of Revenue of Québec under the Excise Tax
Act
against
POLYMÈRE EPOXY‑PRO INC.,
a legal person
legally constituted, whose head office is
located at
460 Roland‑Godard Blvd., in Saint‑Jérôme,
province of Quebec
J7Y 4G8
Judgment Debtor
and
FRARE & GALLANT LTÉE, a
legal person
legally constituted with its place of
business at
1355 Valleyfield Avenue, in Laval,
province of Quebec H7C 2K5
Moving Party‑Garnishee
REASONS
FOR ORDER AND ORDER
[1]
The
garnishee, Frare & Gallant Ltée, is appealing an order
issued June 22, 2009, by Protonotary Richard Morneau, which confirmed
an interim order issued August 1, 2008, stating that [translation] “ . . . any
amount owing or that will become owing by the garnishee to the judgment debtor
and, specifically, any contractual retention resulting from a contract between
the garnishee and the judgment debtor for the construction and/or renovation of
an immovable located at 150 Montréal‑Toronto Blvd. in Montréal,
province of Quebec, be garnisheed to satisfy the amount of $12,361.19 . . .”.
[2]
The
garnishee alleges essentially that the Protonotary erred because it does not
owe any amount to the judgment debtor, Polymère Époxy‑Pro, in view of the
right of retention that it can legally claim on the amounts it owes to the
judgment debtor to the extent and until the judgment debtor obtains
acquittances from all its suppliers.
[3]
After
considering the written and oral representations of the parties and their
respective records, I have reached the conclusion that the Protonotary’s order
should be upheld.
FACTS
[4]
The
facts are not in dispute for the most part and may be summarized as follows.
The garnishee obtained from the owner of the immovable located at 150 Montréal‑Toronto Blvd. in Montréal
(hereinafter the immovable) a contract as a general contractor to renovate the
immovable. To carry out this work, the garnishee hired the judgment debtor,
which subcontracted with various material suppliers including
Peinture Micca Inc. and Chemor Inc. These suppliers gave notice
of their respective contracts with the judgment debtor to the owner of the
immovable, but they never formally gave notice of them to the garnishee. At the
very most, these contracts were [translation]
“discussed” with the president of the garnishee (as it appears from his
affidavit), who also received a copy of the notices sent by the two suppliers
to the owner of the immovable.
[5]
Although
Micca and Chemor completed their respective contracts with the judgment debtor,
they were not paid in full and registered legal hypothecs against the owner as
material suppliers. They subsequently filed a prior notice of intention to exercise
a hypothecary right against the immovable.
[6]
In
addition, on November 12, 2007, this Court registered a certificate
that has the force and effect of a judgment for the amount of $12,361.19 (plus interest)
in favour of the Deputy Minister of Revenue of Québec and against the
judgment debtor, in accordance with the provisions of section 316 of the Excise
Tax Act (R.S.C. 1985 c. E‑15; hereinafter the ETA). It
should be noted here that the Deputy Minister of Revenue of Québec, for
purposes of this Act, represents Her Majesty in right of Canada and acts in
her name.
[7]
On
November 22, 2007, the Deputy Minister of Revenue of Québec sent a
formal requirement to pay to the garnishee under subsection 317(3) of the ETA.
It required the garnishee to pay to the Deputy Minister of Revenue of
Québec without delay the moneys otherwise payable to the tax debtor or to a
secured creditor of the tax debtor, not exceeding the amount owed by the tax
debtor to the Deputy Minister of Revenue of Québec, i.e., $12,391.70.
[8]
Since
the garnishee paid nothing to the Deputy Minister of Revenue of Québec after
receiving the formal demand, Protonotary Morneau issued an interim
garnishee order against the garnishee on August 1, 2008, as
previously stated.
[9]
While
acknowledging in its written statement dated August 11, 2008, that
there is a contractual balance owing to the judgment debtor in the amount of $81,506.32,
the garnishee maintains that the Deputy Minister of Revenue of Québec
cannot claim this amount because it has a right of retention.
ISSUE
[10]
This
appeal essentially raises the issue of whether the right of retention relied on
by the garnishee, assuming that it exists, can be set up as a defence against
the Deputy Minister of Revenue of Québec to defeat the garnishment issued
under the authority of section 317 of the ETA.
ANALYSIS
[11]
The
parties did not discuss the principles applicable to reviewing a prothonotary’s
decision. However, these principles were clearly established in Canada v.
Aqua‑Gem Investments Ltd., [1993] 2 F.C. 425 and Merck & Co.
v. Apotex Inc. [2004] 2 FCR 459. Discretionary orders of
prothonotaries ought not to be disturbed on appeal to a judge unless (a) the
orders are clearly wrong in the sense that the exercise of discretion by the
prothonotary was based on a wrong principle or a misapprehension of the facts
or (b) the orders raise questions that are vital to the final issue of the
case.
[12]
In
this case, there is no doubt that the prothonotary’s order raises a question that
is vital to the final issue of the case because it raises the question of the
validity of the garnishment itself. Since the parties did not argue that his
assessment of the facts was clearly wrong, the only issue is his interpretation
of the applicable law.
[13]
The
garnishee contends that it has both a contractual and legal right of retention.
With respect to the contractual aspect, the Protonotary found that there was
insufficient evidence to give effect to the garnishee’s arguments since the
purchase orders and the supplementary general conditions on which the garnishee
relied to assert its right were not signed by the judgment debtor. As to the
legal authority for the right of retention claimed by the garnishee, the Protonotary
was of the opinion in obiter that article 2123 of the Civil Code
of Québec did not apply because it is aimed only at the owner of the
immovable on which the renovation work was performed, not the garnishee, which
acted as a general contractor. In any event, the Protonotary determined that
the deemed trust in favour of Her Majesty in right of Canada under
section 222 of the ETA displaces and supersedes any right of retention that
the garnishee might claim.
[14]
The
moving party-garnishee did not emphasize, either in its written representations
or at the hearing, the contractual existence of the right of retention that it
claims to have. This seems completely justified to me based on the evidence in
the record. On the one hand, the garnishee admitted in its written submissions
before the Protonotary that there was never a formal contract between it and
the judgment debtor, only purchase orders, which refer to supplementary general
conditions.
[15]
On
the other hand, purchase orders that have been signed unilaterally cannot
ground a contractual right of retention. It appears, in fact, that none of the
purchase orders in the record were signed by the judgment debtor. As for the
document entitled [translation] “Supplementary
General Conditions” referred to in the purchase orders, it specifically
indicates in the second-last point on page 2, in the section entitled [translation] “Billing and payment”, that [translation] “where mutually agreed upon, a 10% retention
applies”. Not only was this document not signed by the judgment debtor, but a
review of the purchase orders themselves reveals that half of them were not
checked off [translation] “net
30 days with 10% retention”. In these circumstances, the contractual basis
for a right of retention in favour of the garnishee appears to me to be at the
very least tenuous, if not non‑inexistent.
[16]
Let
us now review the legal right of retention under the Civil Code of Québec.
In view of the Québec Court of Appeal decision in Dans l’affaire de la faillite
de Daltech Architectural Inc., 2008 QCCA 2441, the right of
retention may have both a contractual and a legal foundation. The
Chief Justice wrote in this decision: [translation] “Even where
the right of retention is provided in a contract, it nonetheless flows directly
from the exception for nonperformance expressly provided in the Civil Code of Québec.”
(paragraph 46).
[17]
In
this respect, the garnishee’s submissions also face some obstacles. First, it
seems clear that it cannot take advantage of the exception for nonperformance in
article 1591 of the Civil Code of Québec, of which the right of
retention is only one illustration. This provision reads as follows:
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1591. Where the obligations arising from a synallagmatic contract are
exigible and one of the parties fails to perform his obligation to a
substantial degree or does not offer to perform it, the other party may
refuse to perform his correlative obligation to a corresponding degree,
unless he is bound by law, the will of the parties or usage to perform first.
|
1591. Lorsque les
obligations résultant d’un contrat synallagmatique sont exigibles et que l’une
des parties n’exécute pas substantiellement la sienne ou n’offre pas de l’exécuter,
l’autre partie peut, dans une mesure correspondante, refuser d’exécuter son
obligation corrélative, à moins qu’il ne résulte de la loi, de la volonté des
parties ou des usages qu’elle soit tenue d’exécuter la première.
|
[18]
The
judgment debtor’s alleged obligation to provide acquittances to the garnishee
to obtain payment was simply not proven by the garnishee. In fact, the judgment
debtor’s obligation to provide the garnishee with acquittances from its subcontractors
in order to obtain payment of the work performed is nowhere to be found in the
documents the garnishee provided to the Prothonotary.
[19]
If
article 2123 of the Civil Code of Québec does not, strictly
speaking, constitute a right of retention but an illustration of the exception for
nonperformance as the Québec Court of Appeal stated in Daltech, and if
the garnishee did not prove the obligation it alleges the judgment debtor had
to obtain acquittances from Micca and Chemor and provide them to the garnishee
to obtain payment of the contractual balance, how can the garnishee benefit
from the right under article 2123 of the Civil Code of Québec?
[20]
Even
assuming that this provision applies nonetheless, again the conditions to exercise
it must be met. In that respect, two problems arise. First, it is not at all
certain that article 2123 of the Civil Code of Québec applies to a
general contractor. It is true, as the representative of the
Deputy Minister of Revenue of Québec notes, that this provision does not
refer to the owner of an immovable but to the “client”. The legislator referred
explicitly to the owner of an immovable in other provisions of the Code (see,
in particular, articles 2726 and 2731), which would suggest that
article 2123 must be given a wider application.
[21]
Although
tempting, this textual argument is not necessarily determinative per se.
Ultimately, it is the intention of the legislator that must prevail. Micca and Chemor
must give notice to the owner of their respective contracts with the judgment
debtor to acquire the right to register a legal hypothec under article 2728
of the Civil Code of Québec, as the representative of the
Deputy Minister of Revenue of Québec aptly puts it. Would that not be an
indication supporting an inference that the right of retention under
article 2123 is only aimed at the owner of an immovable, so that the owner
can retain sufficient moneys to deal with the legal hypothecs that
subcontractors can register against the immovable?
[22]
It
is not necessary for me to determine that question in this case for a number of
reasons. First, because the Québec Court of Appeal seems to have assumed
(although it did not really discuss the issue) that a general contractor could
claim the right of retention under article 2123 of the Civil Code of Québec:
see Daltech, above.
[23]
Second,
even assuming that the garnishee can take advantage of this provision, it has
not satisfied the pre‑conditions. Article 2123 states as follows:
|
2123. At the
time of payment, the client may deduct from the price of the contract an
amount sufficient to pay the claims of the workman, and those of other
persons who may exercise a legal hypothec on the immovable work and who have
given him notice of their contract with the contractor in respect of the work
performed or the materials or services supplied after such notice was given.
The deduction is valid until such time as the
contractor gives the client an acquittance of such claims.
The client may not exercise the right set out
in the first paragraph if the contractor furnishes him with sufficient
security to guarantee the claims.
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2123. Au moment du paiement,
le client peut retenir, sur le prix du contrat, une somme suffisante pour
acquitter les créances des ouvriers, de même que celles des autres personnes
qui peuvent faire valoir une hypothèque légale sur l’ouvrage immobilier et qui
lui ont dénoncé leur contrat avec l’entrepreneur, pour les travaux faits ou
les matériaux ou services fournis après cette dénonciation.
Cette
retenue est valable tant que l’entrepreneur n’a pas remis au client une
quittance de ces créances.
Il
ne peut exercer ce droit si l’entrepreneur lui fournit une sûreté suffisante
garantissant ces créances.
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[24]
As
previously stated, the suppliers Micca and Chemor did not give notice of their
contract with the judgment debtor to the garnishee, but only to the owner of
the immovable.
[25]
But
more fundamentally, the applicability of article 2123 of the Civil Code
of Québec becomes moot in view of subsections 222(1) and (3) and
subsection 317(3) of the ETA. These provisions read as follows:
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222. (1) Subject
to subsection (1.1), every person who collects an amount as or on
account of tax under Division II is deemed, for all purposes and despite any
security interest in the amount, to hold the amount in trust for Her Majesty
in right of Canada, separate and apart from the property of the person and
from property held by any secured creditor of the person that, but for a
security interest, would be property of the person, until the amount is
remitted to the Receiver General or withdrawn under subsection (2).
. . .
(3) Despite
any other provision of this Act (except subsection (4)), any other
enactment of Canada (except the Bankruptcy and Insolvency Act), any enactment
of a province or any other law, if at any time an amount deemed by
subsection (1) to be held by a person in trust for Her Majesty is not
remitted to the Receiver General or withdrawn in the manner and at the time
provided under this Part, property of the person and property held by any
secured creditor of the person that, but for a security interest, would be property
of the person, equal in value to the amount so deemed to be held in trust, is
deemed
(a) to
be held, from the time the amount was collected by the person, in trust for
Her Majesty, separate and apart from the property of the person, whether
or not the property is subject to a security interest, and
(b) to
form no part of the estate or property of the person from the time the amount
was collected, whether or not the property has in fact been kept separate and
apart from the estate or property of the person and whether or not the
property is subject to a security interest
and is property beneficially owned by
Her Majesty in right of Canada despite
any security interest in the property or in the proceeds thereof and the
proceeds of the property shall be paid to the Receiver General in priority to
all security interests.
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222. (1) La
personne qui perçoit un montant au titre de la taxe prévue à la section II
est réputée, à toutes fins utiles et malgré tout droit en garantie le
concernant, le détenir en fiducie pour Sa Majesté du chef du Canada,
séparé de ses propres biens et des biens détenus par ses créanciers garantis
qui, en l’absence du droit en garantie, seraient ceux de la personne, jusqu’à
ce qu’il soit versé au receveur général ou retiré en application du
paragraphe (2).
[…]
(3) Malgré
les autres dispositions de la présente loi (sauf le paragraphe (4) du
présent article), tout autre texte législatif fédéral (sauf la Loi sur la
faillite et l’insolvabilité), tout texte législatif provincial ou toute autre
règle de droit, lorsqu’un montant qu’une personne est réputée par le
paragraphe (1) détenir en fiducie pour Sa Majesté du chef du Canada
n’est pas versé au receveur général ni retiré selon les modalités et dans le
délai prévus par la présente partie, les biens de la personne ‑‑
y compris les biens détenus par ses créanciers garantis qui, en l’absence du
droit en garantie, seraient ses biens ‑‑ d’une valeur égale à ce
montant sont réputés :
a) être
détenus en fiducie pour Sa Majesté du chef du Canada, à compter du
moment où le montant est perçu par la personne, séparés des propres biens de
la personne, qu’ils soient ou non assujettis à un droit en garantie ;
b) ne pas faire partie du patrimoine ou des
biens de la personne à compter du moment où le montant est perçu, que ces
biens aient été ou non tenus séparés de ses propres biens ou de son
patrimoine et qu’ils soient ou non assujettis à un droit en garantie ;
Ces biens sont des biens dans lesquels Sa
Majesté du chef du Canada a un droit de bénéficiaire malgré tout autre droit
en garantie sur ces biens ou sur le produit en découlant, et le produit
découlant de ces biens est payé au receveur général par priorité sur tout
droit en garantie.
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|
317. (3) Despite
any other provision of this Part, any other enactment of Canada other than
the Bankruptcy and Insolvency Act, any enactment of a province or any law, if
the Minister has knowledge or suspects that a particular person is, or will
become within one year, liable to make a payment
(a) to
a tax debtor, or
(b) to
a secured creditor who has a right to receive the payment that, but for a
security interest in favour of the secured creditor, would be payable to the
tax debtor,
the Minister may, by notice in writing,
require the particular person to pay without delay, if the moneys are payable
immediately, and in any other case as and when the moneys become payable, the
moneys otherwise payable to the tax debtor or the secured creditor in whole
or in part to the Receiver General on account of the tax debtor’s liability
under this Part, and on receipt of that notice by the particular person, the
amount of those moneys that is so required to be paid to the Receiver General
shall, despite any security interest in those moneys, become the property of
Her Majesty in right of Canada to the extent of that liability as
assessed by the Minister and shall be paid to the Receiver General in
priority to any such security interest.
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317. (3)
Malgré les autres dispositions de la présente partie, tout texte législatif
fédéral à l’exception de la Loi sur la faillite et l’insolvabilité, tout
texte législatif provincial et toute règle de droit, si le ministre sait ou
soupçonne qu’une personne est ou deviendra, dans les douze mois, débitrice d’une
somme à un débiteur fiscal, ou à un créancier garanti qui, grâce à un droit
en garantie en sa faveur, a le droit de recevoir la somme autrement payable
au débiteur fiscal, il peut, par avis écrit, obliger la personne à verser au
receveur général tout ou partie de cette somme, immédiatement si la somme est
alors payable, sinon dès qu’elle le devient, au titre du montant dont le
débiteur fiscal est redevable selon la présente partie. Sur réception par la
personne de l’avis, la somme qui y est indiquée comme devant être versée
devient, malgré tout autre droit en garantie au titre de cette somme, la
propriété de Sa Majesté du chef du Canada, jusqu’à concurrence du montant
dont le débiteur fiscal est ainsi redevable selon la cotisation du ministre,
et doit être versée au receveur général par priorité sur tout autre droit en
garantie au titre de cette somme.
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[26]
Under
the first two paragraphs, a deemed trust is created in favour of Her Majesty
in right of Canada with respect to amounts collected for the Goods and Services
Tax (the GST) when the tax debtor fails to comply with its obligation to remit.
In addition, by virtue of the provisions of subsection 222(3)(a) of
the ETA, the judgment debtor’s property is deemed to be held in trust for
Her Majesty in right of Canada from the time the GST was collected, and
this deemed trust continues to apply until the day of payment. The equivalent
provisions of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.),
subsections 227(4) and (4.1)) were upheld by the Supreme Court in First
Vancouver Finance v. M.N.R., [2002] 2 S.C.R. 720.
[27]
These
particular provisions displace and supersede the provisions of provincial
legislation, including the Civil Code of Québec, as well as any legal
principle and create a priority in Her Majesty in right of Canada, not
only in relation to ordinary creditors of the tax debtor, but also in relation
to secured creditors. Moreover, subsection 317(3) of the ETA provides
that, when the debtor of the tax debtor receives the formal demand for payment
from Her Majesty in right of Canada, the garnishee’s claim against the
judgment debtor becomes the property of Her Majesty in right of Canada,
notwithstanding provincial law or any other legal principle.
[28]
The
garnishee did attempt to claim that its obligation towards the judgment debtor
had not yet arisen since the judgment debtor had not provided it with the acquittances
from its suppliers, and that the trust created in favour of Her Majesty in
right of Canada could not
create a debt that did not yet exist. With respect, this argument appears
specious to me. The right of retention, even assuming that it applies in this
case, and regardless of how it is characterized, cannot be anything other than [translation] “an interest in property
granted by statute to secure the performance of an obligation” (Jobin, P.‑G.
and J.L. Baudouin, Les obligations, 6th ed., Yvon Blais,
p. 816).
[29]
The
definition of a “security interest” in section 123 of the ETA is not
only very broad but corresponds exactly to the definition of the right of
retention given by authors Jobin and Baudouin. This definition reads as
follows:
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123. (1) In
section 121, this Part and Schedules V to X,
. . .
"security
interest"
"security
interest" means any interest in property that secures payment or
performance of an obligation, and includes an interest created by or arising
out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or
actual trust, assignment or encumbrance of any kind whatever, however or
whenever arising, created, deemed to arise or otherwise provided for.
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123. (1) Les
définitions qui suivent s’appliquent à l’article 121, à la présente
partie et aux annexes V à X.
[…]
« droit en garantie »
« droit en garantie » Droit sur un
bien qui garantit l’exécution d’une obligation, notamment un paiement. Sont
notamment des droits en garantie les droits nés ou découlant de débentures,
hypothèques, mortgages, privilèges, nantissements, sûretés, fiducies
réputées ou réelles, cessions et charges, quelle qu’en soit la nature, de
quelque façon ou à quelque date qu’ils soient créés, réputés exister ou
prévus par ailleurs.
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[30]
Based
on the clear wording of the ETA, there appears to me to be no doubt that the
garnishee cannot set up its alleged right to retain the moneys owing to the
judgment debtor against the garnishment issued in favour of the Deputy Minister
of Revenue of Québec, acting for Her Majesty in right of Canada. This
finding may appear harsh in that it puts the garnishee at risk of paying
amounts due to unpaid suppliers twice. But that is the effect of the Act, and it
is not for this Court to amend it.
[31]
For
all the foregoing reasons, the garnishee’s motion is dismissed, and the order issued
by Protonotary Richard Morneau on June 22, 2009, is
confirmed, with costs in favour of the Deputy Minister of Revenue of
Québec.
ORDER
THE COURT
ORDERS that the garnishee’s motion is dismissed and that the order issued
by the Protonotary on June 22, 2009, is confirmed, with costs.
“Yves
de Montigny”
Certified true translation
Mary Jo Egan, LLB
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