Caisse Desjardins de Limoilou – Quebec Court of Appeal finds that a mortgagee’s prescribed security interest was reduced under Reg. 2201(2)(a) by the shareholders’ guarantee

Reg. 2201 provides a carve-out, from the super-priority of the Crown under ITA ss. 227(4) and (4.1) regarding unremitted source deductions and withholding taxes, for a prescribed security interest (“PSI”). Under Reg. 2201(2)(a), the PSI of the Caisse at the time of a mortgage borrower’s failure to remit source deductions was equal to the mortgage balance owing at that time minus "all rights of the secured creditor securing the [mortgage] obligation.”

The federal Crown successfully took the position that the Caisse’s PSI was reduced by the portion of the mortgage loan that was guaranteed by shareholders of the borrower – notwithstanding that this security was evidently not of much value to the Caisse, as it released those shareholders from their guarantee after the source deduction remittance failure and before the sale of the mortgaged property pursuant to a court-approved sale.

Gagné JCA stated:

First, the ordinary meaning of the words "rights of the secured creditor …" refers to all the economic rights of the secured creditor securing the obligation. There is nothing in the text of [Reg.] 2201(2)(a) … to limit these rights to the real property rights of the secured creditor [as argued by the Caissse]. …

Second, the legislator was careful to add "including guarantees …” … The word "guarantees" must be taken in its broad sense, which includes suretyship. …

Third, the [Finance] Explanatory Notes to the Regulations support this interpretation. …

In rejecting a further argument of the Caisse that the Reg. was contrary to “the rule prohibiting the granting of pure discretion by Regulation,” she stated that the Reg. was not purely discretionary and, in fact, its meaning “can easily be determined by applying the modern method of interpretation.” She also gave short shrift to an argument that the Reg. was contrary to s. 7 of the Charter.

Neal Armstrong. Summaries of Attorney General of Canada v. Caisse Desjardins de Limoilou, 2020 QCCA 1612 under Reg. 2201(2)(a) and Statutory Interpretation – Regulations/Statutory Delegation.