Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd. (No. 1), [1992] 2 CTC 132

De Graves, J.:—This is an application by Ernst & Young Inc., the receiver and manager of the defendant, for direction and advice as to disposition of sale proceeds and of certain other funds in the hands of the receiver and manager.

The issue

Which of the competing claims of the plaintiff, Roynat Inc. (Roynat), a registered secured debenture holder and of Revenue Canada, a claimant and beneficiary under an alleged trust created by federal statutes, has priority to a claim on the assets of the defendant, an insolvent debtor in receivership?

Facts

Counsel for Roynat Inc., the Receiver General and for the receiver and manager have filed an agreed statement of facts. The following recital is a slightly edited version of those facts:

1. On or about December 30, 1988, the defendant Ja-Sha Trucking & Leasing Ltd. (Ja-Sha) granted Roynat a debenture as security for a loan to be advanced by Roynat to Ja-Sha.

2. The debenture was registered in the Personal Property Security Registry of Manitoba on January 3, 1989, as No. 980103-114107 and registered in the Winnipeg Land Titles Office against the lands commonly known as 2091 Logan Avenue, in the City of Winnipeg on January 4, 1989, as No. 1109341.

3. Roynat loaned Ja-Sha the moneys secured by the debenture.

4. The debenture granted Roynat fixed security to the debtor on the debtor's real, immoveable and moveable property and a floating charge on the:

”. . . undertaking of the Company and all its property and assets for the time being, both present and future, and of whatsoever nature and wherever situate (other than property and assets from time to time effectively subjected to the fixed and specific mortgages and charges created hereby or by any instrument supplemental hereto)."

5. Roynat perfected its security interest in the security pursuant to the abovereferred to registrations in the Personal Property Security Registry and the Winnipeg Land Titles office.

6. On or about June 15, 1990, Ja-Sha defaulted in repayment of the loan from Roynat and as at August 3, 1990, the sum due and owing by Ja-Sha to Roynat was $1,547,189.35. Interest and costs continue to accrue thereon.

7. On August 7, 1990, Roynat privately appointed Ernst & Young Inc. as receiver and manager of Ja-Sha.

8. On August 9, 1990, Ernst & Young Inc. was appointed receiver and manager by this Court.

9. During the months of March, June, July and August, 1990, Ja-Sha deducted and withheld from the wages of its employees statutory holdbacks pursuant to the relevant provisions of the Unemployment Insurance Act, R.S.C. 1985,

c. U-1, the Canada Pension Plan Act, R.S.C. 1985, c. C-8 and the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") but failed to remit these amounts to the Receiver General. The total amounts deducted but not remitted totalled $49,476.34.

10. At the time of the receiver appointment, Ja-Sha had not held separate and apart from its own moneys or assets the source deductions as required for income tax, CPP and UIC.

11. On or about the 7th day of November 1990, Revenue Canada gave notice to the receiver of its claim for $49,476.34 as un remitted source deductions from Ja-Sha.

12. As at December 17, 1990, the receiver held excess cash receipts over disbursements of $98,408.98 consisting primarily of accounts receivable owing to Ja-Sha which had been collected since the date of receivership.

13. As of March 1, 1991, the receiver has received the net proceeds of sale from 2091 Logan Avenue in the amount of $318,882.05

Deemed Statutory Trust

Revenue Canada claims priority over Roynat as a beneficiary under a deemed statutory trust by virtue of subsections 227(4) and (5) of the Income Tax Act, subsections 23(3) and (4) of the Canada Pension Plan Act, and subsections 57(2) and (3) of the Unemployment Insurance Act.

Subsections 227(4) and (5) of the Income Tax Act are as follows:

227(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.

227(5) Amount in trust not part of estate. Notwithstanding any provision of the Bankruptcy Act, in the event of any receivership or bankruptcy of or by a person, an amount equal to any amount

(a) deemed by subsection (4) to be held in trust for Her Majesty, or

(b) deducted or withheld under an Act of a province with which the Minister of Finance has entered into an agreement for the collection of taxes payable to the province under that Act that is deemed under that Act to be held in trust for Her Majesty in right of the province

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 that person's own moneys or from the assets of the estate.

Subsections 23(3) and (4) of the Canada Pension Plan Act are as follows:

23 Recovery of contributions, etc., as debt due to Her Majesty.

(3) Amount not remitted deemed in trust for Her Majesty.— Where an employer had deducted an amount from the remuneration of an employee as or on account of any contribution required to be made by the employee but has not remitted that amount to the Receiver General, the employer shall keep that amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.

(4) Amount in trust not part of estate.—Notwithstanding any provision of the Bankruptcy Act, in the event of any liquidation, assignment, receivership or bankruptcy of or by an employer, an amount equal to the amount that by subsection (3) is deemed 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 employer's own moneys or from the assets of the estate.

Subsections 57(2) and (3) of the Unemployment Insurance Act are as follows:

57(2) Trust funds. Where an employer has deducted an amount from the remuneration of an insured person as or on account of any employee's premium required to be made by the insured person but has not remitted the amount to the Receiver General, the employer shall keep the amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.

(3) Amount in trust not part of estate. Notwithstanding any provision of the Bankruptcy Act, in the event of any liquidation, assignment, receivership or bankruptcy of or by an employer, an amount equal to the amount that by subsection (2) is deemed 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 employer's own moneys or from the assets of the estate.

There has been some dispute or inconsistency in case law as to whether a trust, as created by these federal acts and such provincial statutes as The Payment of Wages Act, C.C.S.M., c. P. 31, The Employment Standards Act, C.C.S.M., c. E. 110 and The Vacations With Pay Act, C.C.S.M., c. V. 20, was effective as a trust. In Manitoba, it has now, however, been determined that such a trust, if properly framed in an enactment, is a valid and enforceable trust and prevails over the claims of a secured creditor.

Philp, J.A. for the Manitoba Court of Appeal held that claims under The Payment of Wages Act, the Income Tax Act, the Canada Pension Plan Act and the Unemployment Insurance Act were effective in establishing priority over other claimants to the debtor's property in Manitoba (Minister of Labour) v. Omega Autobody Ltd. (Receiver of), 59 D.L.R. (4th) 34 [1989] 5 W.W.R. 313, at pages 39 and 42 D.L.R.following an earlier Manitoba Court of Appeal decision in Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd. (1979), 96 D.L.R.

(3d) 65, [1979] 2 W.W.R. 514, (Man. C.A.) as approved on this issue by Pigeon, J. of the Supreme Court of Canada (Martland, Ritchie, Beetz and McIntyre J.J. concurring), [1980] 1 S.C.R. 1182, [1980] C.T.C. 247, 80 D.T.C. 6123.

He reviewed the authorities supporting this conclusion in Re Royal Bank of Canada and G.M. Homes Inc. (1984), 10 D.L.R. (4th) 439, 26 B.L.R. 297, (Sask. C.A.), Re Dairy Maid Chocolates Ltd. (1972), 31 D.L.R. (3d) 699, [1973] 1 O.R. 603, (Ont. S.C. in Bankruptcy), MacMillan v. Frizzell Plumbing & Heating Ltd. (1975), 56 D.L.R. (3d) 415, 23 N.S.R. (2d) 684 (N.S.S.C.) and Re Hillis & Sons, Ltd. (1968), 69 D.L.R. (2d) 80, [1965-69] 4 N.S.R. 59 (N.S.S.C.).

Philp, J.A. at pages 42 and 43 D.L.R. in Omega, supra, following Monnin, J.A. (as he then was) in Dauphin Plains Credit Union, held that under the Payment of Wages Act, Income Tax Act, Canada Pension Plan Act and Unemployment Insurance Act the statutory trust was an effective trust. Philp, J.A. fixed the time of appointment of the receiver as the effective date of the priority of the Crown's claim. He held that the trust in effect reached out and attached the debtor's property to satisfy the Crown's claim in priority to other claimants, notwithstanding that the funds deducted became intermingled with the debtor's other assets. He characterized at page 43 D.L.R. the nature and effect of the trust under the Income Tax Act thus:

What, then, is the effect of the deemed trust created under subsection 227(4) and

(5) of the Income Tax Act in the face of the trust created under subsection 3(4) of the Payment of Wages Act! There is no evidence that deductions required to be made under the federal statutes were kept by Omega in a separate account, or were traceable. Prior to liquidation, assignment, bankruptcy or receivership, the trust was not impressed upon Omega's property (as is the case under subsection 3(4)); nor was property to discharge the trust obligation deemed to have been set apart.

It is subsection 227(5) that removes the requirement of tracing the trust property, and deems the trust property to be separate and apart. It is that subsection that makes the deemed trust effective upon the property of a person who is required to make deductions.

In my view, the question of priority is to be determined, not by reference to the time the individual trusts are created, but rather, by reference to the time when the particular trust is impressed upon the property of the trustee. That time, with respect to the trust created under subsections 227(4) and (5), was the date of the appointment of the receiver, namely, October 9, 1985.

[Emphasis added.]

Huband, J.A., in a separate opinion (page 36 D.L.R.), considered that a statutory trust” under the Payment of Wages Act lacked the essential element of certainty of property to constitute a conventional or “real trust". However, Huband, J.A. did agree in the result that such “a mechanism for establishing a first charge" was effective in giving the Crown claimant a special priority.

In a more recent decision, Killeen, J. of the Ontario Court of Justice in Bankruptcy, In the Matter of the Bankruptcy of Xmco Canada Ltd., March 26, 1991, unreported, held that the statutory trust under subsections 227(4) and (5) of the Income Tax Act was even effective as a trust to override the scheme of distribution as set out in subsection 136(1) of the Bankruptcy Act, R.S.C. 1985,

c. B-3.

Counsel for Roynat relied on two decisions of the Supreme Court of Canada in Board of Industrial Relations v. Avco Financial Services Realty Ltd. et al., [1979] 2 S.C.R. 699 (Martland, J. on behalf of the Court) and on British Columbia v. Henfrey Samson Belair Ltd. (1989), 59 D.L.R. (4th) 726, 38 B.C.L.R.

(2d) 145 (McLachlin, J. for the majority of the Court, Cory, J. dissenting).

These cases, with respect, are only marginally relevant and distinguishable for the reasons as hereinafter outlined.

The issue in the Avco case was whether, under paragraph 5(a) of the Payment of Wages Act of British Columbia, 1962, c. 45 as amended by 1973, c. 68, the Board of Industrial Relations created under this Act was entitled to priority over the prior claims of two mortgages registered against a residence in which the debtor had a joint interest with his wife. The property was sold pursuant to sale and foreclosure proceedings. The contest was as to entitlement of the sale proceeds as between the mortgages and the Board's claim under the Payment of Wages Act.

Martland, J. held that the claimants under the mortgages took priority over the payment of wages claim because the "trust" under the provincial statute lacked clarity and thus was ineffective in that it failed to state:

1. the object of the lien and charge,

2. the identity of the property charged,

3. whether the charge must be made by an employer or by someone else. (page 705) of S.C.R.)

At page 706 S.C.R., Martland, J. in denying the director's claim said:

The property to which a s. 5A lien attaches is not defined nor identified. In the absence of a specific statutory provision to that effect, in my view it should not be construed in a manner which could deprive third parties of their pre-existing property rights.

In Henfrey, the Crown in right of British Columbia claimed priority pursuant to subsection 18(1) of the Social Service Tax Act, R.S.B.C. 1979, c. 388 under a statutory trust, while the bank claimed priority as a secured creditor under the Bankruptcy Act, R.S.C. (1970), c. B-3.

McLachlin, J. held, in disallowing the Crown's claim of priority, that under the Social Service Tax Act [T]here was no true trust, since there was no specific property impressed with a trust that could be identified.” (headnote page 726 D.L.R.)

She characterized the question as follows at page 728 D.L.R.:

Section 18 of the Social Service Tax Act creates a statutory trust which lacks the essential characteristics of a trust, namely, that the property impressed with the trust be identifiable or traceable. The question is whether the statutory trust created by the provincial legislation is a trust within subsection 47(a) of the Bankruptcy Act or a mere Crown claim under paragraph 107(1)(j).

In considering the effect of subsection 47(a) and paragraph 107(1)(j) of the Bankruptcy Act, she quoted with approval Wilson, J. at page 592 D.L.R. in Re Deloitte, Haskins & Sells Ltd. and Workers' Compensation Board, [1985] 1 S.C.R. 785, (1985) 19 D.L.R. (4th) 577, as follows at page 740 D.L.R.:

. . .the issue in Re Bourgault and Re Black Forest was not whether a proprietary interest has been created under the relevant provincial legislation. It was whether provincial legislation, even if it did create a proprietary interest could defeat the scheme of distribution under subsection 107(1) of the Bankruptcy Act. These cases held that it could not, that while the provincial legislation could validly secure debts on the property of the debtor in a non-bankruptcy situation, once bankruptcy occurred subsection 107(1) determined the status and priority of the claims specifically dealt with in the section.

[Emphasis added.]

Thus, Henfrey must be considered in the context of a bankruptcy and a claim under provincial legislation presuming to change priorities under the Bankruptcy Act, while the case at bar is one of conflicting claims of a secured creditor on a receivership in an insolvency and a statutory trust under federal legislation.

Accordingly, I do find that the trust under the Unemployment Insurance Act, the Canada Pension Plan Act and the Income Tax Act is a valid and enforceable trust and as such does have priority over the claim of Roynat.

The role of the Manitoba Personal Property Security Act, C.C.S.M. c. P35 and its relationship to the Income Tax Act, the Canada Pension Plan Act and the Unemployment Insurance Act.

Roynat relies on the effect of the registration of the debenture under subsection 12(1), section 21 and subsection 35(1) of The Personal Property Security Act. These sections are as follows:

When security interest attaches.

12(1) A security interest attaches when

(a) the parties intend it to attach;

(b) value is given; and

(c) the debtor has rights in the collateral.

Time when perfected.

21 A security interest is perfected when

(a) it has attached; and

(b) all steps required for perfection under any provision of this Act have been completed; regardless of the order of occurrence.

General rule as to priorities.

35(1) If no other provision of this Act is applicable, priority between security interests in the same collateral shall be determined

(a) by the order of registration, if the security interests have been perfected by registration;

(b) by the order of perfection, unless the security interests have been perfected by registration; or

(c) by the order of attachment under subsection 12(1), if no security interest has been perfected.

The Personal Property Security Act, being provincial legislation in conflict with federal taxing statutes, is subordinate to supervening federal legislation (Bank of Montreal v. Hall, [1990] 1 S.C.R. 121).

In any event, the Crown's claim as a beneficiary under the statutory trust qualifies as a lien claimant, and is thus exempt from the provisions of The Personal Property Security Act by virtue of clause 3(1)(a) which provides:

This Act does not apply

(a) to a lien given by statute or rule of law except as provided in section 32, clause 36(4)(b) and clause 37(2)(b);

Finally, on the question of The Personal Property Security Act, it only applies to consensual transactions and does not purport to regulate other transactions (C./.B.C. v. 64576 Manitoba Ltd., [1990] 5 W.W.R. 419, 79 C.B.R. (N.S.) 308 (Man. Q.B.); affirmed 77 D.L.R. (4th) 190, [1991] 2 W.W.R. 323 (Man. C.A.).

Conclusion

Accordingly, I declare that Revenue Canada does have priority over the claim of Roynat by virtue of subsections 227(4) and (5) of the Income Tax Act, subsections 23(3) and (4) of the Canada Pension Plan Act and subsections 57(2) and (3) of the Unemployment Insurance Act, and direct the Crown's claim be paid from the money presently held by the receiver with earned interest to the Receiver General of Canada. Costs will go to Revenue Canada, if asked.

Order accordingly.