Orsborn J.:—The Court holds $19,301.01, representing holdback funds paid in by the Town of Bonavista, as owner, to vacate various mechanics’ liens filed against the town arising out of its contract with Atlantic Technologists Ltd. (Atlantic). There are three claimants:
1. The Department of National Revenue, Taxation (Revenue Canada), claims under a requirement to pay served on the town on July 2, 1993. (Atlantic had been assessed on June 23, 1993, for unpaid taxes in excess of $100,000.) Priority was claimed under subsection 224(1.2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
2. The Guarantee Company of North America (Guarantee) claims as assignee of H.T. Durdle Limited, the Fifth Respondent. Durdle held a valid mechanics’ lien.
3. The Bank of Nova Scotia (the bank) claims under a specific assignment from Atlantic of the contract proceeds. The assignment was dated July 6, 1992, and notice of the assignment was given to the town on September 22, 1992.
Conclusion
Both the mechanics' lien and the assignment are security interests as defined in subsection 224(1.3) of the Income Tax Act. The bank and Guarantee are secured creditors. The wording of subsection 224(1.2) is clear. Revenue Canada’s claim enjoys priority over those of Guarantee and the bank.
Analysis of claims
Revenue Canada
Revenue Canada's claim was founded on subsections 224(1.2) and (1.3) of the Income Tax Act:
224 (1.2) Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within 90 days, liable to make a payment:
(a) to another person (in this subsection referred to as the "tax debtor”) who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, 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 registered letter or by a letter served personally, require the particular person to pay forthwith, where the moneys are immediately payable, 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 subsection 227(10.1) or a similar provision, and on receipt of that letter by the particular person, the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest.
(1.3) "secured creditor".—"secured creditor" means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator, or any other person performing a similar function;
"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;
Service of the notice to pay on the town effectively expropriates any funds payable by the town either to the tax debtor (Atlantic) or to a secured creditor of Atlantic.
This legislation was enacted in 1990 to counter judicial reluctance to give effect to confiscatory legislation unless the intention were clearly and unequivocally expressed. Since 1990, the courts, with one exception, have upheld the priority of Revenue Canada. See, for example, Transgas Ltd. v. Mid-Plains Contractors Ltd., [1993] 1 C.T.C. 280, 93 D.T.C. 5391 (Sask. C.A.); Berg v. Parker Pacific Equipment, [1991] 1 C.T.C. 442 (B.C.S.C); Coopers & Lybrand et al. v. Bank of Montreal et al., July 20, 1993 (Nfld. Supreme Court (Trial Division), (unreported). The one exception is Pigott Project Management v. Canada, [1994] 1 C.T.C. 108 (Alta. Q.B.). This decision has not been followed within Alberta.
Revenue Canada argued, quite simply, that both Guarantee and the bank are secured creditors of Atlantic, holding security interests. But for these security interests, the town would have paid the funds to Atlantic, the tax debtor. Upon service on the town of the requirement to pay, the moneys held by the town became "the property of Her Majesty in right of Canada”, and the rights of the secured creditors to their security were extinguished.
Guarantee Co. of North America
Guarantee, as assignee of Durdle, held a valid mechanic's lien. The amount is less than the amount paid into court, but this would be relevant only if I were required to adjudicate as between the bank and Guarantee.
It is not disputed that the funds paid into court represented the statutory holdback required of an owner by section 12 of the Mechanics’ Lien Act, R.S.N. 1990, c. M-3. Subsection 12(5) confirms that the lien upon the estate of the owner is a charge upon the holdback, and subsection 12(9) prohibits the holdback from being applied to the completion of the contract or in satisfaction of a claim against the contractor or subcontractor. Statutory priority of the lien is given by subsection 15(1) over “all judgments, executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises ..."
The funds paid into court to vacate the lien take the place of the property discharged. (Subsection 26(4)).
Counsel for Guarantee argued that the holder of a mechanic’s lien is an owner of property subject to the lien, and hence does not come within the definition in subsection 224(1.3) of a secured creditor: "a person who has a security interest in the property of another person . . . .”
Counsel pointed to section 21 of the Mechanics’ Lien Act:
21. Where a claim is registered, the person entitled to a lien shall be considered to be a purchaser to the extent of the value of the lien and a purchaser for valuable consideration within the provisions of the Registration of Deeds Act, but,except as otherwise provided here, that Act does not apply to a lien arising under this Act.
Essentially the argument was that the mechanics’ lien legislation gives to a person who has enhanced the value of property ownership of that property to the extent necessary to realize an in rem remedy against the property. The holdback funds, as distinct from the general funds owing under the contract, represent the property which is subject to the lien. These funds, so long as there is an unpaid lien claim, never become the property of the contractor (the tax debtor), and are not payable to the tax debtor while there is such a claim. Counsel argued that the funds were held back by the town because of the requirements of the Mechanics’ Lien Act. It would therefore be inequitable for Revenue Canada to be allowed to obtain a windfall from funds retained under a legislative scheme structured to protect contractors and workers.
I agree that the holdback funds take the place of the property charged, and that to the extent a lienholder has a claim against the land in question, that some claim is held against the holdback funds. But a lienholder is not an owner. A lienholder enjoys the benefit of a statutory scheme designed to provide a measure of protection to those who add value to property owned by others. The (eg.) subcontractor holds a "lien . . . upon the estate or interest of the owner" (subsection 6(1)). That lien is "a charge upon" the holdback. The wording of the legislation is directed to security, not to ownership. The fact that a lienholder may be considered a purchaser for the purposes of registration legislation does not convert that lienholder into an owner.
A mechanic's lien, in this case a charge upon holdback funds, is a security interest within the definition of subsection 224(1.3) of the Income Tax Act:
. . . any interest in property that secures payment or performance of an obligation and includes . . . lien ... or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for;
The whole purpose of the mechanics’ lien legislation is to secure payment to contractors and the like. The purpose is achieved by creating a statutory interest in the property or estate of the owner. The clear wording of the definition of "security interest" in the Income Tax Act easily embraces a mechanic's lien. Similarly, the definition of secured creditor—a person who holds a security interest in the property of another person—encompasses the holder of a mechanic's lien.
Subsection 224(1.2) expropriates the security of mechanic's lienholders and vests in the Crown moneys otherwise payable to lienholders.
The Bank of Nova Scotia
The bank's specific assignment of the contract proceeds was perfected by notice to the town on September 22, 1992. The bank argued that the assignment passed the property in the debt absolutely to the bank. As between the assignor and assignee, the transaction was complete. The bank owned the receivable and hence was not a secured creditor holding a security interest in the property of another person.
Counsel pointed to a number of authorities which confirmed that an assignment of book debts passes ownership in the debt to the assignee, with the assignee then enjoying the right to sue for the debt in its own name. See, for example, Bank of Nova Scotia v. Newfoundland Rebar Co. (1987), 67 Nfld. & P.E.I.R. 165 (Nfld. S.C., T.D.); Imperial Oil Ltd. v. Crane (1962), 5 C.B.R. (N.S.) 80 (Nfld. C.A.)). In the latter case, Furlong C.J., said at page 83:
There can no longer be any doubt as to what an absolute assignment is. Shortly it is an assignment which fully and completely gives to the assignee all the rights and remedies for default of those rights which the assignor has, without any reservation or retention by the assignor of any of them. The purpose for which an assignment is made is not a material factor, so that the words in the section, which say the assignment may not be one that is by way of charge only, do not prevent a bank taking an assignment of debts as a security for loans made by it to the assignor. The parallel to such an instance is a mortgage, which is an absolute assignment without any reservation other than an expressed right of redemption.
To put it another way; an absolute assignment may be ascertained by the test as to whether or not the rights of the assignor pass absolutely or conditionally to the assignee. The form of words is not material except in so far as they cast light on the true intention of the parties. Thus a mortgage, though only by way of security, is an absolute assignment.
Neither of these two decisions involved consideration of whether an assignment, even an absolute assignment, by way of security was a security interest within the definition of subsection 224(1.3) of the Income Tax Act.
I do note however that Furlong C.J., concluded that a mortgage given for security was nonetheless an absolute assignment. In my view, a mortgage is clearly a security interest in the property of another person. The property is that of the mortgagor. Title has been vested in the mortgagee to enable it to realize on the property should the mortgagor default in his or her obligation. In this context, the fact that an assignment may be considered to be absolute does not take it out of the definition of security interest. To do so would be an affront to common sense and to the accepted understanding of those giving and taking mortgages.
Furlong C.J., also referred to the "true intention of the parties” as reflected in the wording of the assignment. The wording of the assignment before me does not reflect absolute ownership; to the contrary, it suggests that the bank holds the book debts as security for only so long as Atlantic owes money to the bank:
2. This assignment and transfer shall be a continuing collateral security to the bank without impairment or novation of any other existing or future security and shall operate as a general security for all present and future indebtedness and other liability of the customer to the bank so long as the customer shall remain indebted or otherwise liable to the bank or shall continue to be receiving advances from the bank; but the customer shall be entitled at any time, upon the discharge of all indebtedness and other liability of the customer to the bank, to the cancellation hereof.
3. The bank shall have power at the cost of the customer to collect, dispose of, realize or enforce any of the premises hereby assigned at such time and in such manner as the bank may deem advisable, either in its own name or in the name of the customer, without notice to the customer and without prejudice to any rights the bank may have against other parties or to the right the bank may have against the customer for any deficiency; and upon a sale the bank shall have the right to buy in the whole or any portion of the premises hereby assigned offered for sale and the rights of the customer therein shall thereupon be extinguished.
[Emphasis added.]
One may ask, if the assignment is absolute to the point of ownership, why does it specifically give to the bank the power to collect or dispose of the debts. Are not such powers incidents of ownership? Similarly, if the assignment is absolute, what remaining rights reside in the customer that may be “extinguished” if the bank buys the accounts at a sale?
In my view, the assignment contemplates that it will operate as a security interest. It vests in the bank title to the debts owed to Atlantic, but such vesting is for the purpose of security; it is not to transfer ownership, as that term is commonly understood. As with the mechanic's lien, the assignment of book debts comes within the definition of "security interest". The bank is a "secured creditor". The nature of the interest held by the bank, even if considered to be an absolute assignment, cannot be divorced from the circumstances in which it arose. The commercial reality is that the bank held a security interest in the property of Atlantic. Atlantic transferred its receivable to the bank to secure payment of money Atlantic owed to the bank. Once Atlantic paid off the bank, it was entitled, not to a reassignment of the debt, but, by the wording of the assignment, "to the cancellation hereof". The bank was a secured creditor holding a security interest.
Two decisions from the Court of Queen's Bench of Alberta-Judicial District of Calgary have addressed the competing claims of an assignee of book debts and Revenue Canada. In Pigott Project Management, supra, filed April 20, 1993, Hunt J., concluded that a general assignment of book debts constituted an absolute assignment of property. The argument was then made, as it was here, that because of the absolute assignment, the tax debtor had no interest in the debts covered by the assignment, and the holder of the assignment therefore had no interest in the property of "another person". Hunt J., agreed with this submission, concluding that the wording of subsection 224(1.2) and (1.3) was not sufficiently clear to encompass unconditional assignments.
One month later, on May 21, 1993, MacLeod J., of the same Court filed a decision on the same issue in Toronto Dominion Bank v. Canada (Alta. Q.B., May 21, 1993, unreported). The bank had given notice under its general assignment of book debts prior to Revenue Canada's service of the requirement to pay. The bank naturally relied on Pigott Project Management. MacLeod J., wrote, at pages 3-4:
Mr. Vail is urges me to make the same distinction with respect to Canada Trust Co. as did Madam Justice Hunt and, in any event, to follow her analysis in Pigott and find that the bank here is not caught by the provisions of Section 317.
I find I am unable to do so. With the greatest respect to the conclusions of Madam Justice Hunt, I prefer the analysis of Mr. Justice MacDonald in the trial decision in Lloyd's Bank of Canada v. International Warranty Co., [1989] 3 W.W.R., page 152. In particular, his comments at page 164 as follows:
The definition of security interest is so broad as to include moneys which have been equitably assigned by the tax debtor to, for example, a bank. The ownership by the bank of the funds that are the subject of the assignment constitutes an interest in property. That interest in property is one which secures payment of the obligation of the tax debtor (I.W.). The provision of such security is the very purpose of the assignment of book debts. Moreover, the bank’s interest is one created by or arising out of an assignment of any kind however or whenever arising.
As Madam Justice Hunt points out, Mr. Justice MacDonald’s judgment was overturned by our Court of Appeal but the passage just quoted was not commented upon.
I also note that the general assignment itself in this case contains the following:
Provided always and it is hereby distinctly agreed, the presents are and shall be continuing in collateral security to the present and any future indebtedness of the assignor to the bank.
I might also say that I regard it as implicit in Mr. Justice Forsyth’s judgment in Canada Trusco that the holder of the general assignment is held to be a secured creditor within the meaning of subsection 317(4), otherwise Revenue Canada could not have prevailed over the general assignment.
Finally, I agree with the finding of Mr. Justice Forsyth in Canada Trusco that the “something further" has been met by the latest amendment in the Excise Tax Act and, accordingly, I find that Revenue Canada's claim takes priority over the bank’s claim under its general assignment.
I prefer the reasoning of MacLeod J.
The issue is whether the assignment, absolute or otherwise, is a “security interest" and whether the bank is a "secured creditor" within the definitions of subsection 224(1.3). In my opinion, they are. To conclude otherwise would be contrary to the intentions of both the bank and Atlantic, as those intentions are reflected in the assignment. It would also be contrary to the clearly-expressed intention of both the bank and Atlantic, as those intentions are reflected in the assignment. It would also be contrary to the clearly-expressed intention of Parliament. That clear intention, draconian and piratical though it may be, is to intercept moneys owing to creditors such as the bank, destroy the security given by the debtor to the creditor, and expropriate the moneys so intercepted. Expressed as clearly as it is, that intention must be respected.
Conclusion
Revenue Canada is entitled to be paid out of Court the sum of $19,301.01. Revenue Canada shall have its costs on a party-and-party basis, payable 50 per cent by each of Guarantee and the bank.
Order accordingly.
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