Taylor,
T.C.J.:—These
are
appeals
heard
on
common
evidence
on
July
31,
1990,
in
Charlottetown,
Prince
Edward
Island,
against
assessments
dated
October
28,
1988,
under
subsection
227(10)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
above
assessments
also
include
amounts
with
reference
to
the
Prince
Edward
Island
Income
Tax
Act,
Canada
Pension
Plan
and
the
Unemployment
Insurance
Act,
but
the
only
matter
at
issue
in
these
appeals
is
that
part
of
the
assessment
dealing
with
employees'
income
tax
deductions
covered
by
section
153
of
the
Act.
Using
the
notice
of
appeal
for
Brian
Currie,
which
is
similar
to
that
of
Debbie
Currie
for
purposes
of
this
appeal,
the
following
comments
are
noted:
Statement
Of
Facts
And
Reason
For
Objection
A.
Statement
Of
Facts
1.
Superior
Energy
Systems
Ltd.
is
a
body
corporate,
incorporated
under
the
laws
of
Prince
Edward
Island,
and
carried
on
business
as
a
supplier
and
installer
of
insulation
in
residential
and
commercial
premises.
2.
The
Company
experienced
financial
difficulties
during
the
fall
of
1987
and
the
early
part
of
1988.
The
end
result
of
the
difficulties
was
the
appointment
of
a
receiver
by
a
Chartered
Bank.
All
assets
of
the
Corporation
were
on
the
date
of
the
receivership
placed
in
the
care
and
control
of
the
receiver.
3.
Brian
Currie
was
the
President
of
the
Company
and
was
at
all
times
the
principal
person
involved
in
the
management
and
operation
of
the
business.
4.
Brian
Currie
was
a
Director
of
the
Corporation
and
was
appointed
pursuant
to
the
constating
documents
of
the
Corporate
Entity
and
the
Companies
Act
of
the
Province
of
Prince
Edward
Island.
5.
The
Companies
Act
explicitly
details
the
responsibilities
and
obligations
of
a
Director
of
a
Prince
Edward
Island
Corporation.
B.
Statutory
References
And
Appellant's
Submission
1.
The
appellant
relies,
inter
alia,
on:
(a)
Section
227.1
of
the
Income
Tax
Act
of
Canada;
(b)
The
Companies
Act
of
the
Province
of
Prince
Edward
Island;
(c)
The
Frauds
on
Creditors
Act
of
the
Province
of
Prince
Edward
Island;
(d)
The
Bankruptcy
Act
of
the
Dominion
of
Canada.
2.
The
Appellant
submits
that
the
Government
of
Canada
does
not
have
the
jurisdiction
to
impose
liability
on
a
Director
of
a
Company
incorporated
in
the
Province
of
Prince
Edward
Island
when
the
Companies
Act
of
the
Province
of
Prince
Edward
Island
clearly
specifies
the
responsibilities
and
obligations
of
Directors.
The
Provincial
Government
is
charged
with
the
responsibility
of
dealing
with
the
business
affairs
of
a
local
nature
pursuant
to
the
Canada
Act
and
as
such
the
Government
of
Canada
does
not
have
the
jurisdiction
to
dictate
additional
responsibilities
and
obligations
of
Directors.
3.
The
Appellant
is
not
liable
under
Subsection
227.1
(1)
pursuant
to
Section
227.1
(2)
of
the
Income
Tax
Act
as
the
Minister
of
National
Revenue
has
failed
to
comply
with
Paragraphs
(a)
(b)
or
(c)
of
Subsection
227.1
(2).
4.
The
Appellant
submits
that
the
Company,
Superior
Energy
Systems
Ltd.,
was
in
an
insolvent
condition
at
the
time
that
the
alleged
liability
to
Revenue
Canada
was
incurred
and
the
Company
and
its
Directors
were
precluded
from
making
preference
payments
to
Revenue
Canada
under
the
Frauds
on
Creditors
Act,
R.S.P.E.I.
Chapter
F-14
and
the
Bankruptcy
Act,
R.S.C.
Chapter
8.3.
Preference
payments
to
Revenue
Canada
could
have
resulted
in
the
interest
of
the
secured
creditors
being
jeopardized
and
would
be
subject
to
review.
In
the
circumstances,
the
Directors
could
not
make
such
preference
payments
without
potentially
violating
a
Federal
Statute
and
a
Provincial
Statute.
5.
The
Appellant
submits
that
he
took
all
reasonable
steps
to
ensure
that
the
liabilities
of
the
Company
to
Revenue
Canada
(and
to
other
creditors)
were
paid.
6.
The
Appellant
submits
that
he
exercised
the
degree
of
care,
diligence
and
skill
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances.
This
summary
of
the
basic
facts
is
provided
in
the
reply
to
notice
of
appeal:
-
The
Respondent
admits
the
allegations
of
fact
set
out
in
paragraph
3
of
the
Notice
of
Appeal
and
adds
that
the
Appellant,
together
with
his
wife,
Deborah
Currie
who
was
also
a
director,
shareholder
and
officer
(Secretary-Treasurer)
of
Superior
Energy
Systems
Ltd.
(the
"Company"),
was
engaged
in
the
management
and
operation
of
the
Company's
business.
-
the
Company
deducted
or
withheld
amounts
in
respect
of
federal
income
tax,
Canada
pension
plan
and
unemployment
insurance
contributions
(hereinafter
"'source
deductions")
from
the
wages
and
salaries
it
paid
in
September,
October,
November
and
December,
1987
and
in
January,
1988
in
accordance
with
section
153
of
the
Act;
the
Company
made
late
payment
of
its
source
deductions
attributable
to
wages
and
salaries
paid
for
August,
1987;
-
on
or
about
January
4,
1988,
after
a
payroll
audit
of
the
Company
by
the
Respondents
auditor,
the
Appellant
caused
the
Company
to
provide
the
Respond*
ent
with
two
cheques
for
$12,470.00
each,
post-dated
January
11
and
25,
1988,
respectively,
in
payment
for
unremitted
and
late-remitted
source
deductions
as
aforesaid;
-
both
of
the
aforesaid
post-dated
cheques
were
returned,
unhonoured,
for
lack
of
funds;
-
on
or
about
January
19,
1988
an
agent
was
appointed
by
a
creditor
of
the
Company
to
manage
the
Company;
-
on
or
about
January
29,
1988
the
Company
made
a
voluntary
assignment
in
bankruptcy;
-
a
claim
for
the
liability
of
the
bankrupt
Company
as
referred
to
in
paragraphs
4
and
5
herein
was
proved
by
notices
dated
February
12,
1988
which
were
filed
with
the
Trustee;
-
The
Respondent
relies,
inter
alia,
upon
sections
153(1),
227(4),
227(5),
227(9),
227(10),
227.1
and
248(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
as
amended
by
S.C.
1970-71-72,
c.
63,
section
1,
upon
sections
100,
101,
102
and
108(1)
of
the
Income
Tax
Regulations,
C.R.C.
1978,
c.
945
and
upon
section
107
of
the
Bankruptcy
Act,
R.S.C.
1985,
c.
B-3,
as
amended.
-
.
.
.
the
Appellant,
as
a
director
of
the
Company
at
the
times
it
was
required
to
remit
source
deductions,
is
jointly
and
severally
liable
with
the
Company
for
the
unremitted
and
late-remitted
source
deductions
and
penalty
and
interest
thereon
pursuant
to
section
227.1
of
the
Act.
-
.
.
.
neither
the
Frauds
on
Creditors
Act,
R.S.P.E.I.,
c.
F-14,
nor
the
Bankruptcy
Act,
R.S.C.
1985,
c.
B-3,
as
amended,
forbids
or
prevents
remittances
of
the
source
deductions
aforesaid
in
the
circumstances
herein.
.
.
.
section
227.1
of
the
Act,
affixing
directors
with
joint
and
several
liability
in
respect
of
corporate
unremitted
source
deductions,
is
intra
vires
the
Parliament
of
Canada.
There
was
little
dispute
about
the
facts,
and
certainly
nothing
critical
to
a
determination
of
the
appeals.
I
will
deal
with
the
appellants'
arguments
as
follows:
Appellants’
Argument
#1
The
appellants
argue
that
any
attempt
by
Parliament
to
regulate
or
impose
duties
on
directors
of
provincially
incorporated
companies
is
unconstitutional.
Counsel
for
the
appellants
submits
that
section
227.1
should
be
”
read
down"
so
as
to
exclude
directors
of
provincially
incorporated
companies
from
its
application.
Law
The
Canadian
Constitution
divides
the
legislative
powers
between
the
federal
government
and
the
provincial
legislatures
in
such
a
way
that
both
the
provinces
and
the
federal
government
nave
exclusive
control
over
matters
in
relation
to
the
subjects
assigned
to
them.
Where
one
level
of
government
transgresses
into
a
field
assigned
to
the
other,
it
is
the
duty
of
the
Courts
to
declare
its
action
invalid.
The
first
step
in
determining
the
constitutionality
of
any
law
is
to
identify
the"
matter"
or"
pith
and
substance”
of
the
law
in
question.
Once
the
matter
is
identified,
the
second
step
is
to
assign
it
to
the
class
of
subjects
enumerated
in
either
sections
91
or
92.
(a)
"matter"
of
the
challenged
law
The
"matter"
or”
pith
and
substance”
of
an
impugned
law
is
its
dominant
or
leading
feature.
There
is
no
specific
method
by
which
the
matter
of
a
chal-
lenged
law
is
identified.
In
identifying
the
matter
the
Courts
generally
consider
the
object
and
purpose
of
the
enactment
and
its
consequences
as
an
operating
measure
.
This
process
has
been
described
as
distilling
the
constitutional
value
inherent
in
the
legislation.
Where
a
law
is,
in
pith
and
substance,
related
to
a
matter
within
the
enacting
governments
jurisdiction,
it
is
not
unconstitutional
even
though
it
has
an
incidental
effect
on
matters
assigned
to
another
level
of
government.
“It
is
important
to
recognize
that
this
‘pith
and
substance’
doctrine
enables
one
level
of
government
to
enact
laws
with
substantial
impact
on
matters
outside
its
jurisdiction"
.
The
courts
have
developed
a
rational,
functional
connection
test
to
determine
the
constitutionality
of
those
provisions
which
have
an
incidental
impact
on
matters
outside
the
enacting
government's
jurisdiction.
This
test
was
first
articulated
by
Laskin,
J.A.
(as
he
then
was)
in
Papp
v.
Papp,
[1970]
1
O.R.
331;
8
D.L.R.
(3d)
389
(Ont.
C.A.).
In
holding
that
the
custody
provisions
of
the
federal
Divorce
Act
were
intra
vires,
his
Lordship
stated
at
pages
335-36
(D.L.R.
393-94):
Where
there
is
admitted
competence,
as
there
is
here,
to
legislate
to
a
certain
point,
the
question
of
limits
(where
that
point
is
passed)
is
best
answered
by
asking
whether
there
is
a
rational,
functional
connection
between
what
is
admittedly
good
and
what
is
challenged.
This
rational,
functional
connection
test
was
applied
by
the
Supreme
Court
of
Canada
in
Multiple
Access
v.
McCutcheon,
[1982]
2
S.C.R.
161;
138
D.L.R.
(3d)
13
and
R.
v.
Zelensky,
[1978]
2
S.C.R.
940;
86
D.L.R.
(3d)
1794.
(b)
the
reading
down
doctrine
"Reading
down”
is
employed
in
a
context
where
a
statute
appears
to
be
generally
valid
but
where
it
has
some
broad
terms
which
could
be
applied
in
a
way
to
contravene
the
constitution
.
Reading
down
is
considered
to
be
an
admission
of
partial
invalidity,
but
it
employs
a
limited
presumption
of
constitutionality.
In
short,
this
doctrine
requires
that
a
statutory
provision
which
may
extend
beyond
the
power
of
Parliament
will
be
construed
narrowly
to
keep
it
within
the
permissible
scope
of
power.
However,
it
may
be
applied
only
where
the
language
of
the
statute
bears
the
limited
meaning
.
(c)
federal
power
to
tax
The
federal
Parliament
is
granted
the
power
under
subsection
91(3)
of
the
Constitution
Act,
1867
to
raise
money
“by
any
mode
or
system
of
taxation"
.
Pursuant
to
this
power,
Parliament
clearly
has
the
authority
to
tax
provincially
incorporated
companies.
See
Bank
of
Toronto
v.
Lambe
(1887)
12
App.
Cas.
575;
56
L.J.P.C.
87
and
Caron
v.
R.,
[1924]
A.C.
999;
[1924]
4
D.L.R.
105
(P.C.).
The
jurisdiction
of
the
provinces
under
subsection
92(11)
extends
to
the
power
to
confer
on
a
company
its
legal
personality
and
to
regulate
its
organization
but
the
business
of
the
company
is
regulated
by
whatever
jurisdiction
possesses
the
power
to
regulate
that
kind
of
business®.
The
basic
distinction
lies
between
a
law
in
relation
to
the
incorporation
of
a
company
and
the
activity
of
the
company.
Analysis
The
uestion
in
this
appeal
is
whether
Parliament
may
impose
vicarious
liability
for
unpaid
tax
on
the
directors
of
provincially
incorporated
entities.
The
answer
to
this
question
depends
on
whether
the
collection
procedures
embodied
in
section
227.1
are
rationally
and
functionally
connected
to
the
federal
power
to
tax
for
the
purpose
of
raising
money.
In
other
words,
does
section
227.1
complement
rather
than
supplement
admittedly
valid
taxation
of
provincially
incorporated
companies?
I
submit
that
the
imposition
of
liability
on
directors
of
corporations
whether
they
be
federally
or
provincially
incorporated
bears
a
rational,
functional
connection
to
the
power
to
tax.
It
can
also
be
argued
that
such
collective
provisions
are
a
necessary,
even
essential
adjunct
to
the
federal
government's
power
under
subsection
91(3).
Therefore,
even
if
section
227.1
incidentally
affects
the
province's
jurisdiction
over
“the
incorporation
of
companies
with
provincial
objects”,
it
remains
a
valid
exercise
of
federal
legislative
power.
Lastly,
in
the
absence
of
clear
evidence
that
a
law
is
unconstitutional,
judicial
restraint
should
be
exercised
.
In
my
opinion,
the
appellant
has
not
discharged
the
burden
of
proving
the
law
is
invalid.
Appellants
Argument
#2
The
appellants’
argument
that
paragraphs
(a),
(b)
and
(c)
of
subsection
227.1(2)
have
not
been
complied
with
and
that
the
alleged
liability
to
Revenue
Canada
was
incurred
at
a
time
when
the
Company
and
its
directors
were
precluded
from
making
"preference"
payments
revolved
around
these
two
questions:
(i)
Is
it
possible
for
the
Minister
of
National
Revenue
to
prove
a
claim
against
a
bankrupt
corporation
as
required
by
paragraph
227.1(2)(c)10
for
moneys
the
corporation
failed
to
deduct,
withhold
or
remit?
and
(ii)
Do
remittances
to
Revenue
Canada
of
amounts
withheld
by
an
insolvent"
corporation
constitute
a
fraudulent
preference
within
the
meaning
of
the
Bankruptcy
Act
or
the
Frauds
on
Creditors
Act,
R.S.P.E.I.,
1988?
Conclusion
1.
The
Bankruptcy
Act
provides
the
means
by
which
the
Minister
may
prove
his
claim
for
unpaid
remittances
even
though
the
amounts
are
deemed
to
be
held
in
trust
and
thereby
excluded
from
the
bankrupt’s
estate.
A
claim
for
property
held
in
trust
is
proved
upon
the
beneficiary
filin
a
"proof
of
claim”
and
“
affidavit”
as
required
by
subsection
81(1)
of
the
Bankruptcy
Act,
R.S.C.
1985,
c.
B-3.
2.
The
payment
of
remittances
by
an
insolvent
person
to
Revenue
Canada
does
not
constitute
a
fraudulent
preference
within
the
meaning
of
the
Bankruptcy
Act
or
the
Frauds
on
Creditors
Act
of
Prince
Edward
Island.
The
fraudulent
preference
provisions
of
the
Bankruptcy
Act
and
the
Frauds
on
Creditors
Act
(P.E.I.)
only
extend
to
transactions
between
the
insolvent
and
his
creditors.
They
do
not
extend
to
a
payment
by
a
trustee
to
his
cestui
qui
trust
to
remedy
a
breach
of
trust
.
Question
#1
At
trial,
the
appellant
argued
that
the
Minister
was
precluded
from
proving
his
claim
for
amounts
withheld
under
the
Income
Tax
Act
on
the
ground
that
these
amounts
were
deemed
to
be
held
in
trust
and
therefore
excluded
from
the
estate
of
the
bankrupt.
The
appellant
claims
that
since
a
beneficiary
of
a
trust
is
not
a
creditor,
he
or
she
presumably
does
not
have
a“
claim
provable”
in
proceedings
under
the
Act.
Consequently,
as
a
beneficiary
of
a
deemed
trust,
the
Minister
cannot
prove
his
claim
as
required
by
paragraph
227.1(2)(c)
of
the
Income
Tax
Act.
At
first
glance,
this
argument
appears
to
have
some
merit.
However,
a
closer
examination
of
the
provisions
in
question
reveals
that
the
appellants
position
cannot
be
supported.
(a)
amounts
withheld
deemed
to
be
held
in
trust
Amounts
required
to
be
deducted
and
withheld
by
a
taxpayer
are
impressed
with
a
statutory
trust
by
subsection
227(4)
of
the
Income
Tax
Act.
Subsection
227(5)
deems
amounts
withheld
to
be
separate
from
the
bankrupt's
estate.
At
the
relevant
time,
subsections
227(4)
and
(5)
provided
:
(4)
Every
person
who
deducts
or
withholds
any
amount
under
this
Act
shall
be
deemed
to
hold
the
amount
so
deducted
or
withheld
in
trust
for
Her
Majesty.
(5)
Notwithstanding
any
provision
of
the
Bankruptcy
Act,
in
the
event
of
any
liquidation,
assignment,
receivership
or
bankruptcy
of
or
by
a
person,
an
amount
equal
to
the
amount
deemed
by
subsection
(4)
to
be
held
in
trust
for
Her
Majesty
shall
be
deemed
to
be
separate
from
and
form
no
part
of
the
estate
in
liquidation,
assignment,
receivership
or
bankruptcy,
whether
or
not
that
amount
has
in
fact
been
kept
separate
and
apart
from
the
person's
own
moneys
or
from
the
assets
of
the
estate.
Prior
to
May
24,
1985,
subsection
227(5)
required
that
all
amounts
withheld
by
a
person
under
the
Act
were
to
be
kept
"
separate
and
apart”
from
that
person's
own
assets.
In
interpreting
this
provision,
the
Courts
have
held
that
a
trust
did
not
arise
unless
the
amounts
were
actually
segregated.
(See
particularly,
Dauphin
Plains
Credit
Union
v.
Xyloid
Industries
Ltd.,
[1980]
C.T.C.
247;
80
D.T.C.
6123
(S.C.C.).)
Where
a
trust
could
not
be
established,
the
Crown
was
required
to
prove
its
claim
as
a
creditor
and
its
priority
was
determined
by
former
subsection
107(1)
of
the
Bankruptcy
Act
(now
subsection
136(1))
.
Subsection
227(5)
was
amended
by
1986,
c.
6,
subsection
118(1)14
to
deem
amounts
withheld
to
be
"separate
and
apart"
whether
or
not
they
have
been
so
held.
Further,
the
subsection
was
amended
to
operate
notwithstanding
the
Bankruptcy
Act.
The
effect
of
these
amendments
was
to
impress
a
trust
on
moneys
notionally
withheld
regardless
of
the
fact
that
the
funds
may
not
have
been
segregated.
(b)
how
the
Bankruptcy
Act
operates
There
are
essentially
two
types
of
claims
against
a
bankrupt.
Those
claims
made
by
the
creditors
of
the
bankrupt
and
those
made
by
persons
who
have
a
claim
to
property
in
the
bankrupt's
possession.
A
claim
entitling
a
creditor
to
share
in
the
distribution
of
the
bankrupt's
estate
is
defined
in
the
Act
as
a
"provable
claim”
or
a
"claim
provable
in
bankruptcy"
.
A
claim
by
a
person
to
a
property
interest,
other
than
a
security
interest,
is
left
undefined.
Upon
bankruptcy,
the
assets
of
the
bankrupt
devolve
to
the
trustee
appointed
to
administer
the
estate.
It
is
the
trustee's
duty
to
oversee
the
distribution
of
those
assets
in
accordance
with
the
scheme
prescribed
in
the
Bankruptcy
Act.
The
administration
of
the
bankrupt's
estate
is
dealt
with
under
Part
V
of
the
Act
(sections
102-157).
Subsection
121(1)
specifies
what
claims
are
“provable”
against
the
bankrupt:
All
debts
and
liabilities,
present
or
future,
to
which
the
bankrupt
is
subject
at
the
date
of
the
bankruptcy
or
to
which
he
may
become
subject
before
his
discharge
by
reason
of
any
obligation
incurred
before
the
date
of
bankruptcy
shall
be
deemed
to
be
claims
provable
in
proceedings
under
this
Act.
Pursuant
to
section
6716,
property
held
by
the
bankrupt
in
trust
for
another
does
not
form
part
of
the
estate
available
to
creditors.
The
procedure
for
recovering
"property"
held
in
trust
is
prescribed
by
Part
IV
of
the
Bankruptcy
Act.
Subsection
81(1)
provides
:
Where
a
person
claims
any
property,
or
interest
therein,
in
the
possession
of
a
bankrupt
at
the
time
of
the
bankruptcy,
he
shall
file
with
the
trustee
a
proof
of
claim
verified
by
affidavit
giving
the
grounds
on
which
the
claim
is
based
and
sufficient
particulars
to
enable
the
property
to
be
identified.
Subsection
81(5)
further
provides
that
the
only
means
by
which
property
in
the
possession
of
the
bankrupt
can
be
recovered
is
to
follow
the
procedure
set
out
in
subsection
81(1)18.
(c)
what
proving
a
claim
means
There
is
a
difference
between
having
a“
provable
claim”
and
"
proving”
a
claim.
A
"provable
claim”
is
a
debt
or
liability
which
is
enforceable
against
the
bankrupt's
estate.
Proving
a
claim
is
the
means
by
which
the
claimant
establishes
his
right
to
an
interest
in
the
property
held
by
the
bankrupt
or
his
right
to
participate
in
the
distribution
of
the
bankrupt's
estate.
It
is
accomplished
by
filing
a
proof
of
claim
and
any
other
documents
required
by
the
Act.
This
is
clearly
set
out
in
subsection
123(2)
which
provides:
"A
claim
shall
be
proved
by
delivering
to
the
trustee
a
proof
of
claim
in
prescribed
form."
Although
subsection
123(2)
applies
only
to
Part
V
of
the
Act,
claims
under
Part
V
are
proved
by
the
same
process.
See,
for
example,
subsection
81(4)
which
gives
the
trustee
the
discretion
to
require
any
person
to
prove
his
claim
to
property
in
the
possession
of
the
bankrupt
by
filing
a
proof
of
claim.
(d)
analysis
Admittedly,
a
beneficiary
under
a
trust
may
not
have
a
"claim
provable
in
bankruptcy”
or
“
rovable
claim”
within
the
meaning
of
the
Bankruptcy
Act.
However,
a
beneficiary
under
a
trust
does
have
a
valid
claim
to
property
in
the
possession
of
the
bankrupt.
Given
this,
the
Court
must
ask
itself
whether
such
a
claim
can
be
proved.
The
answer
to
this
question
depends
on
what
it
means
to
prove
a
claim.
Cutting
through
the
confusing
terminology
used
in
the
Act,
it
becomes
clear
that
a
claim
is
proved
by
filing
a
proof
of
claim
with
the
accompanying
documentation.
Where
the
property
which
forms
the
subject
matter
of
the
trust
is
in
the
possession
of
the
trustee,
the
beneficiary
must
follow
the
directives
in
the
Act
to
recover
that
property.
It
would
be
incongruous
to
hold
that
a
claim
by
a
creditor
under
Part
V
is
proved
by
filing
a
proof
of
claim
while
holding
that
a
claim
by
a
beneficiary
is
not
proved
upon
filing
the
requisite
proof
of
claim
and
affidavit
under
Part
IV.
Therefore,
I
submit
that
it
is
possible
for
the
Minister
of
National
Revenue
to
prove
his
claim
under
paragraph
227.1(2)(c)
of
the
Income
Tax
Act
for
amounts
withheld
and
deemed
to
be
held
in
trust.
Question
^2
Fraudulent
preference
legislation
is
designed
to
prohibit
an
insolvent
debtor
from
preferring
one
creditor
over
another.
In
this
case
the
appellant
has
argued
that
he
was
justified
in
not
making
the
required
remittances
under
the
Income
Tax
Act
because
it
would
amount
to
an
unjustified
preference
either
under
the
Bankruptcy
Act
or
the
Frauds
on
Creditors
Act
of
Prince
Edward
Island.
(a)
Bankruptcy
Act
Section
95
of
the
Bankruptcy
Act
prohibits
fraudulent
preferences.
The
provision
is
the
means
of
carrying
into
effect
the
principle
that
ordinary
creditors
shall
rank
equally
.
If
the
person
receiving
the
preference
is
not
a
creditor,
or
a
trustee
of,
or
a
surety
for
a
creditor
of
the
bankrupt,
section
95
has
no
application.
[/.C.
Kerkhoff
&
Sons
Contracting
Ltd.
v.
Royal
Bank
of
Canada,
(1985)
62
B.C.L.R.
117
at
121
(B.C.C.A);
leave
to
appeal
to
the
Supreme
Court
of
Canada
refused,
56
C.B.R.
(N.S.)
117
(S.C.C.)
(sub
nom.
Port
Hardy
Properties
Ltd.,
Re).
See
also
Re
Hansen
(1977),
26
C.B.R.
(N.S.)
57
(Ont.
H.C.).]
Therefore,
it
does
not
apply
to
the
Crown
for
unpaid
remittances
as
the
Crown
is
not
a
creditor
of
the
bankrupt
.
(b)
Frauds
on
Creditors
Act,
P.E.I.
In
many
cases,
a
trustee
in
bankruptcy
will
rely
on
provincial
legislation
dealing
with
fraudulent
preferences
to
attack
an
action
by
an
insolvent
debtor.
Like
the
federal
Bankruptcy
Act,
the
Frauds
on
Creditors
Act
of
P.E.I.
applies
only
to
preferences
among
creditors
and
does
not
apply
to
amounts
withheld
on
trust
or
deemed
to
be
held
on
trust.
Secondly,
even
if
the
Frauds
on
Creditors
Act
conflicts
with
the
remittance
requirements
of
the
Income
Tax
Act,
it
is
ineffective
to
the
extent
of
the
conflict
by
virtue
of
the
Paramountcy
doctrine.
Appellants'
Argument
#3
Finally,
the
appellants’
position
came
down
to
the“
"
due
diligence”
test
and,
in
my
opinion,
it
must
be
answered
in
the
way,
detailed
in
James
White
v.
M.N.R.,
[1990]
2
C.T.C.
2566;
91
D.T.C.
54
at
2574
(D.T.C.
59):
As
I
read
that
subsection,
it
would
seem
to
me
that
the
direct
responsibility
of
a
director—any
director—is
to
prevent
the
failure
(to
deduct
or
remit),
not
to
attempt
to
rectify
or
remedy
the
failure
at
a
point
in
time
subsequent
to
the
failure
itself.
[.
.
.]
The
nature
of
the
directors’
particular
functional
responsibilities
in
the
corporation,
if
completely
disconnected
from
the
realm
of
administrative
and
financial
operations,
might
provide
some
relief
to
a
director—if
such
disconnection
was
the
result
of
something
other
than
his
own
volition—but
I
have
seen
little
indication
or
evidence
that
this
would
be
anything
other
than
a
very
exceptional
situation,
not
merely
some
form
of
internal
division
of
day
to
day
authority.
I
recognize
that
counsel
for
the
appellants
relied
heavily
on
the
recent
case
of
Lucette
Robitaille
v.
M.N.R.,
[1990]
1
C.T.C.
121;
90
D.T.C.
6059,
and
in
doing
so
observed
"the
Robitaille
case
has
had
the
effect
of
making
less
onerous
the
duty
required
of
a
director
in
order
to
satisfy
the
defence
under
227.1(3)",
and
reading
from
pages
125-26
(D.T.C.
6062)
of
that
judgment:
I
would
be
prepared
to
hold
that,
even
without
considering
section
227.1(3),
there
would
be
no
liability
on
the
directors
under
section
227.1(1)
because
the
latter
obviously
contemplates
that
the
corporation
is
freely
acting
through
its
Board
of
Directors.
The
exercise
of
freedom
of
choice
on
the
part
of
the
director
is
essential
in
order
to
establish
personal
liability.
I
do
not
read
Robitaille,
supra,
in
a
manner
which
would
leave
room
to
apply
even
that
rather
all-encompassing
statement
to
the
set
of
circumstances
found
in
these
appeals
wherein
deductions
made
in
August,
1987,
were
remitted
after
the
due
date
of
September
15,
1987;
further
deductions
continued
for
September,
October,
November
and
December,
1987,
which
then,
in
turn,
went
totally
unremitted;
all
of
which
occurred
long
before
the
date
of
January
29,
1988,
at
which
time
the
company
made
an
assignment
in
bankruptcy.
I
am
quite
satisfied
(even
to
adopting
the
phraseology
above
from
Robitaille,
supra,)
that
during
these
periods
these
appellants
had
adequate,
normal
and
reasonable
"freedom
of
choice”
to
ensure
that
these
funds"
held
in
trust”
were
properly
remitted
as
opposed
to
using
these
dedicated
funds
for
different
corporate
purposes—no
matter
how
limited
the
total
funds
available
to
the
corporation
might
have
been.
In
the
same
vein,
I
do
add
that
counsel
for
the
appellants,
in
argument,
made
an
attempt
to
distinguish
the
January
1988
deductions
from
those
I
have
just
referenced,
with
the
following
comment:
.
.
.
my
position
is
that
the
remittances
for
January
were
incurred
up
to
the
date
of
the
appointment
of
the
receiver
on
January
the
19th.
There
was
no
way
that
these
Directors
could
have
any
power
over
that
payment
which
was
due
on
February
the
15th.
And
if
this
assessment
a
not
vacated
in
toto,
then
certainly
it
should
be
recalculated
so
that
these
Directors
are
not
personally
liable
for
those
amounts.
They
certainly
did
not
have
control
of
the
cheque
book
or
of
anything
else
on
February
the
15th.
And
for
those
reasons,
Your
Honour,
it
is
our
submission
that
the
assessment
of
the
Minister
ought
to
be
vacated,
or,
in
the
alternative,
that
it
be
recalculated
so
as
to
deduct
any
amounts
which
should
be
owing
in
respect
of
January's
remittances.
The
reply
of
counsel
for
the
Minister
to
this
contention
was:
But
I
submit,
Your
Honour,
that
the
due
diligence
defense
requires
Mr.
Currie,
under
these
circumstances,
by
January
to
have
made
arrangements
so
no
matter
what
happened,
those
monies
would
be
available
to
be
paid
over
to
the
Receiver
General.
It
is
not
a
situation
where
Mr.
Currie
was
entitled
to
say,
“I
can
wait
till
February
15th
to
make
arrangements.”
Mr.
Currie
knew
his
business
was
in
trouble.
Mr.
Currie
knew
that
he
had
not
been
able
to
make
a
payment
in
four
months.
And
my
submission,
very
simply,
Your
Honour,
is
that,
under
these
circumstances,
Mr.
Currie
was
not
entitled
to
wait
till
February
15th
to
see
if
he
could
raise
the
monies.
The
second
he
paid
out
the
payroll,
the
second
the
corporation
acquired
trust
funds,
he
should
have
made
arrangements
to
ensure
that
the
Receiver
General
would
get
those
trust
funds.
Perhaps
the
only
thing
by
that
time
he
could
have
done
would
be
to
set
up
a
special
trust
account
in
a
bank
and
hold
those
funds.
I
am
not
saying,
Your
Honour,
that
that
needs
to
be
done
from
day
one.
But
my
point,
Your
Honour,
is
this
is
the
fifth
month
in
a
row
no
remittances
had
been
made.
The
business
was
in
trouble.
And,
Your
Honour,
I
do
not
think
it
is
a
justifiable
excuse
to
say
that
Mr.
Currie
was
not
in
control
by
February
15th
and
to
say
therefore
he
could
not
have
made
the
payment.
By
the
time
January
rolled
around,
he
should
have
been
making
special
arrangements
for
these
funds
because
he
knew
he
was
in
a
lot
of
trouble
and
he
knew
he
had
not
made
a
payment
for
quite
some
time.
In
my
view,
the
point
made
by
counsel
for
the
appellants
regarding
the
deductions
made
for
the
month
of
January
1988
has
merit,
and
I
believe
fits
quite
appropriately
into
the
circumstances
arising
out
of
the
Robitaille,
supra,
judgment
by
the
learned
justice.
It
might
be
argued
that
the
bank
or
the
trustee
in
bankruptcy
assumed
some
or
all
of
the
responsibility
for
the
January
1988
deductions,
and
indeed
that
assertion
has
arisen
in
other
cases.
But
that
is
not
the
problem
for
this
Court
in
this
matter.
I
am
quite
satisfied
that
the
above
assertions
of
counsel
for
the
respondent
do
not
import
to
these
appellants
the
same
personal
responsibility
for
the
company
deductions
for
January,
1988,
as
I
see
with
respect
to
those
of
previous
months.
The
Court
is
at
least
entitled
to
theorize
that
for
some
good
reason
these
appellants
might
have
changed
course
and
remitted
the
January
1988
deductions
before
February
15,
1988,
absent
the
assignment
in
bankruptcy
on
January
29,
1988.
I
am
fully
aware
that
it
could
be
argued
the
assignment
in
bankruptcy
was
a“
oluntary”
one,
and
by
that
action
the
appellants
may
have
escaped
the
payment
of
the
deduction.
I
am
also
aware
that
as
of
January
19,
1988,
an
agent
of
the
creditors
had
already
assumed
some
control
of
the
operations
and
finances
(see
reply
to
notice
of
appeal).
Under
the
circumstances
of
these
appeals,
the
liability
of
the
appellants
for
the
deductions
made
in
January
1988
should
not
be
imposed.
I
make
no
attempt
to
calculate
the
amount
or
amounts
involved—that
is
left
to
Revenue
Canada.
Decision
The
appeals
are
allowed
in
order
that
the
employees'
income
tax
deductions
made
by
Superior
Energy
Systems
Ltd.
during
the
month
of
January
1988
shall
be
deleted
from
the
assessments
at
issue.
In
all
other
respects
the
appeals
are
dismissed.
The
entire
matter
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment.
Costs
are
set
at
one
amount
of
$300
to
cover
both
appeals.
Appeals
allowed
in
part.
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