Joseph Dias v. Angus Kenneth Maclean, Deborah Ann Maclean and Fundy Housing & Recreation Limited, [1994] 1 CTC 127

Bateman, J.:—This is an application by lien claimant Dias to determine entitlement to the funds as between the lien claimants and Revenue Canada. At issue is the effect of the requirement to pay.

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") provides:

(1.2) Idem.—Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province of 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 (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 becomes 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.

Subsection 224(1.3) defines "security interest":

(1.3) In subsection (1.2),

“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" 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;

“similar provision” means a provision, similar to subsection 227(10.1) of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act.

[Emphasis added.]

If the funds are immediately due, the person receiving the notice must pay (Revenue Canada) "forthwith"; in any other case, "when the moneys become payable”.

The sum in dispute is a combination of statutory "holdback funds" and moneys in excess of the holdback, sometimes called "contract funds".

The applicant Dias submits that the issue is the meaning of “liable to pay" and of “liable to make a payment". It is submitted on behalf of Mr. Dias that, at the time of service of the requirement to pay, the MacLeans were under no obligation to pay Fundy and that they never became liable to pay Fundy the balance of the funds. He says that the lien claims, filed prior to the requirement to pay, effectively froze any further payment, not only of the holdback funds, but also of the excess funds.

Revenue Canada submits that, on the wording of subsection 224(1.2), it has absolute claim to the entire fund. The lien claimants, it submits are in the same position as secured creditors.

It is settled that Revenue Canada has priority over secured creditors (see Berg v. Parker Pacific Equipment Sales, [1991] 1 C.T.C. 442 (B.C.S.C.)).

Revenue Canada says that the effect of the requirement to pay on lien claimants was determined in TransGas Ltd. v. Mid-Plains Contractors, [1993] 1 C.T.C. 280; 93 D.T.C. 5391 (Sask. C.A.). Revenue Canada submits that TransGas stands for the proposition that the Minister has priority notwithstanding that the liens had been registered before the requirement to pay.

TransGas involved a dispute over "contract funds" as distinct from "holdback funds". The Minister, in that case, made no claim to the holdback funds.

The applicant Dias submits that the decision in TransGas can be distinguished in that "contract funds”, under the Builders Lien Act, S.S. 1984-85-86, c. B-7.1, are subject to trust provisions.

The B.L.A. creates certain trusts. All moneys payable by a Crown owner under a contract constitute ‘a trust fund for the benefit of the contractor". As amounts become owing to a contractor, whether due or payable, they'"constitute a trust fund for the benefit of” subcontractors and others.

It was the submission in TransGas that the lien claimants were the beneficial owners of the funds as distinct from secured creditors.

Thus, when the contractor abandoned the contracts, the moneys still in the hands of owner TransGas, but payable under the contract, were trust funds for the benefit of the subcontractor lien claimants. It was held by the Court that, but for the operation of the trust sections of the B.L.A., TransGas would have been liable to pay the funds to the contractor.

At page 298:

We accordingly cannot give effect to the respondents' contention that the trust created under the B.L.A. is a "true trust" in contradistinction to a“ security trust".

The Court held that the definition of "security interest” clearly applied in that factual situation. Specifically, that lien claimants are "secured creditors" within the meaning of the section.

The Court says at page 299:

. . . [T]he B.L.A. not only provides for the "trusts" as a statutory basis for security, but also provides for "liens" on the statutory holdbacks and the remainder of the contract price as an additional security device.

While the Mechanics Lien Act does not contain similar trust provisions, the lien claimants here cannot be in a stronger position than those in TransGas. One would have expected that the trust sections might place the TransGas lien claimants in the better position. The Court having rejected that submission, however, it would appear that the TransGas lien claimants were in exactly the same position as the lien claimants here.

The question as to whether the funds were “ payable” at the relevant time was not specifically argued before the Court, in TransGas. The Court says, however, at page 297:

According to the contracts between TransGas and Mid-Plains, their abandonment or termination did not relieve TransGas from having to pay Mid-Plains for the work done to the date of the abandonment or termination.

The applicant relies upon C.P. Masonry Ltd. v. Royal Bank Realty (1984), 64 N.S.R. (2d) 338, 143 A.P.R. 338 (Co.Ct.).

In that case, as in TransGas, the Minister did not pursue its claim as against the statutory holdback. The Court was concerned with entitlement to ^contract funds”.

Section 15(1) of the Mechanics Lien Act provides:

15 (1) The lien shall have priority over all judgments, executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises, and over all payments or advances made on account of any conveyance or mortgage after notice in writing of the lien to the person making such payments or after registration of a claim for such lien as hereinafter provided.

While in C.P. Masonry the Minister did not pursue entitlement to the holdback funds, the Director of Labor Standards did so. In considering that claim, MacDonnell, J. says at page 345:

. . . Once the said mechanics’ lien claims had been filed there was no possibility whatsoever that the statutory holdback required by subsection 12(2) of the Mechanics Lien Act, R.S.N.S. 1967, c. 178, could have been paid by Lindsay to Geo- Rob until such time as said liens had been satisfied. The statutory holdback fund in these circumstances was not, and never had been, an asset of Geo-Rob, and thus, would not be subject to a lien, charge or mortgage under the provisions of subsections 84(1) and 34(1) of the Labour Standards Code, S.N.S. 1972, c. 10.

The Court's decision on this point appears to have turned on the wording of the Labour Standards Code.

MacDonnell, J. went on to hold that the lien claimants had a"charge on the statutory holdback". He held that the lien claimants had priority over the Minister of Revenue.

Judge MacDonnell, however, was dealing with subsection 224(1) of the Income Tax Act. The wording has now changed substantially with the addition to the section of "Notwithstanding any other provision of this Act, the Bankruptcy Act, any other enactment of Canada, any enactment of a province or any law” and "notwithstanding any security interest in those moneys".

Subsection 13(4) states:

The lien shall be a charge upon the amount directed to be retained by this section in favor of subcontractors whose liens are derived under persons to whom such moneys so required to be retained are respectively payable.

[Emphasis added.]

In my view the lien claimants are, as regards subsections 224(1.2) and (1.3) of the Income Tax Act, "secured creditors”, being holders of a security interest. That is the plain meaning of subsection 13(4).

The argument that the funds paid into Court would never become” payable to” the tax debtor (Fundy), is initially attractive. Those funds are, however, under the contract, payable by the owners to Fundy and to no one else. The Mechanics Lien Act simply creates a statutory scheme to divert those funds to the lien claimants in certain circumstances. Although diverted through the operation of the Act, the funds are nevertheless payable (to the lien claimants) on behalf of Fundy. The Act simply operates to suspend the movement of funds to ensure the security interest of the lien claimants is satisfied.

I share the views of Mr. Justice Robinson, as expressed in Berg, supra, that one must feel some sympathy for the secured creditors, here, the lien claimants. As he notes, however, the funds over which Revenue Canada claims priority are for the benefit of the employees of Fundy, which company failed to remit to Revenue Canada moneys deducted from its employees for tax, Canada Pension and Unemployment Insurance purposes.

I see no rationale for distinguishing between the “contract funds" and "holdback funds” on this issue.

It is submitted on behalf of Mr. Dias that to allow interception of the funds by Revenue Canada exposes the owners to a continuing obligation for the holdback. Subsection 224(2) of the Income Tax Act specifically states that the payment to Revenue Canada in response to the demand is a discharge of the payor's liability. I do not, therefore, accept that submission.

The applicant Dias has challenged, as well, the constitutionality of the subsection 224(1.2). As this issue was first raised in a post-hearing memorandum and without notice under the Constitutional Questions Act, I am without jurisdiction to adjudicate upon it. I add, however, that the constitutional issue was raised in TransGas and the provision held to be valid.

In summary, I find that the Minister of Revenue is entitled to the funds paid into Court in priority to the lien claimants.

Notwithstanding the above, I am satisfied that the applicants Joseph Dias, C.E. Harrison and Sons Ltd., and J. & K. Electric Ltd. have proved their claims in the amounts of $4,300, $29,288.90 and $7,469.79 respectively.

Application granted.