Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd. (No. 2), [1992] 2 CTC 139

Twaddle, J.A. (Philp, J.A. concurring):—This case involves the failure of an employer to remit to Her Majesty the Queen moneys deducted from employee's wages on account of income tax, Canada pension plan contributions and unemployment insurance premiums. Some time later, the employer was placed in receivership by a secured creditor, the receiver collecting the accounts receivable. Her Majesty then claimed priority of interest in the funds realized from the receivables up to the amount due to Her. The issue on this appeal is whether such priority exists.

The employer was Ja-Sha Trucking and Leasing Ltd.; the secured creditor Roynat Inc. Ja-Sha borrowed a large sum of money from Roynat in 1988, giving Roynat in exchange for the loan a security interest in all its assets and undertaking. The debenture creating that interest was perfected pursuant to the Personal Property Security Act, R.S.M. 1987, c. P.35, on January 3, 1989. Amongst the assets so secured were accounts receivable.

Ja-Sha was permitted by Roynat to carry on its business. Indeed, that was the purpose of the loan. In order to do so, Ja-Sha found it necessary to use its cash receipts from accounts receivable to finance its business. Out of those it paid its employees' wages. Their services in turn were billed out to customers, thus becoming accounts receivable. And so the business continued, as businesses usually do.

Roynat was first alerted to a problem in June, 1990 when an instalment payment was not made. Default continued into August. On August 7, 1990, a receiver and manager was privately appointed, an appointment which was confirmed by order of the court on August 9.

‘It is unclear whether the receiver carried on the business for a period of time or immediately attended to the realization of assets. In either event, one thing is certain: the receiver found none of the source deductions Ja-Sha had made from its employees' wages. It is admitted now that, although the deductions were made, they were neither remitted to Her Majesty nor kept separate and apart from Ja-Sha’s own moneys and other assets.

The receiver did not know at first that Ja-Sha had failed to remit the deductions as required by law. The receiver only found this out in November 1990, when it was advised by Revenue Canada that $49,476.34 was due to Her Majesty on account of unremitted deductions.

In the course of its administration, the receiver has collected excess cash over disbursements in an amount greater than that owing to the Queen. This cash has come mainly from accounts receivable.

Her Majesty claimed priority to the cash excess up to the amount due to Her. The priority was claimed pursuant to subsections 227(4) and (5) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), subsections 23(3) and (4) of the Canada Pension Plan Act and subsections 57(2) and (3) of the Unemployment Insurance Act. Roynat maintained its claim to priority by reason of its earlier perfected security interest under the Personal Property Security Act.

The learned trial judge decided the priority issue in favour of Her Majesty. It is from that decision that Roynat now appeals.

The resolution of the issue raised on the appeal is not as simple as its statement. This is due, at least in part, to the language of the legislation. It might have come from Lewis Carroll's world of Alice and Humpty Dumpty where words mean anything you please and concepts are impenetrable.

The relevant federal legislation is this:

Income Tax Act

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.

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

Canada Pension Plan Act

23(3) Where an employer has 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) 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.

Unemployment Insurance Act

57(2) Where an employer has deducted an amount from the remuneration of an injured person as or on account of any employee's premium required to be made by the injured 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) Notwithstanding any provision of the Bankruptcy Act, in the event of any liquidation, receivership, assignment 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, receivership, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from employer's own moneys or from the assets of the estate.

There is no difficulty understanding the first-quoted of the subsections under each statute. Although each statute calls the trust created by it a deemed one, the trust is in truth a real one. The employer is required to deduct from his employees’ wages the amounts due by the employees under the statute. This money does not belong to the employer anymore. It belongs to the employees. The employer holds it in a statutory trust to satisfy their obligations.

In the event of a receiver being appointed, whether to manage the employer's business or to realize the assets, the receiver acquires no beneficial interest in the trust fund either on its own behalf or on behalf of those entitled to the assets. The moneys held in trust are merely transferred to it as a trustee bound by the same statutory trusts.

The difficulty arises when the moneys have been misappropriated by the employer. The subject of the trust is gone. The receiver on his appointment acquires no trust property at all.

Under the second-quoted subsection of each statute, the receiver's appointment triggers what appears to be a second trust, this is a deemed one. The subject of this trust is said to be an amount equal to the amount which was held in trust by the employer previously. There is thus certainty as to the amount due to the beneficiary of the trust, but no certainty as to which of the employer's assets are subject to it.

I would ordinarily have thought that even Parliament could not create a trust without a res: see Robinson, Little and Co., Re, [1986] 6 W.W.R. 655, 31 D.L.R.

(4th) 701 (Man. C.A.). Yet, if the legislative language means what it says, that is what happens here. Her Majesty's claim would then be that of a beneficiary under a non-existent trust.

The purist's point of view was expressed by Huband, J.A. in Manitoba (Minister of Labour) v. Omega Autobody Ltd., 59 D.L.R. 34, [1989] 5 W.W.R. 313. He said (at page 36 D.L.R.):

Legislators can call the arrangement whatever they choose, but by calling it a deemed trust, it does not make it a real trust unless the moneys have been specifically set aside.

Huband, J.A. was, however, in the minority on this point. Philp, J.A. delivered the majority judgment. As I understand his reasons, he was of the view that the trust deemed to exist under federal legislation similar to that involved in this case was a mechanism for tracing the original trust moneys which had been misappropriated. He explained it in this way (at page 42):

If the person making the deductions under the Income Tax Act keeps them separate and apart, it would appear that an effective trust has been created. However, if liquidation, assignment, bankruptcy or receivership had not occurred . . . the problem of identifying or tracing the property which is the subject of the deemed trust arises. In the event of liquidation, assignment, bankruptcy or receivership, the requirement upon the beneficiary of the trust to identify or trace the property subject to the trust is eliminated; on the happening of any of those events the enactment deems the trust property to be separate from and form no part of the estate.

This rationale to me makes sense. The deemed trust arising on the appointment of a receiver is not a trust at all. It is a mechanism for tracing. Her Majesty has a statutory right of access to whatever assets the employer then has, out of which to realize the original trust debt due to Her.

As my brother Philp pointed out in Omega, supra, the statutory deemed trusts of the kind we are dealing with here have previously been recognized as effective by this Court and the Supreme Court of Canada; see Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1979] 2 W.W.R. 514, 96 D.L.R. (3d) 65 (Man. C.A.); varied on appeal [1980] 1 S.C.R. 1182, [1980] C.T.C. 247, 80 D.T.C. 6123 (S.C.C.). They were viewed in that case as fictional trusts, rather than a means of tracing, but the result is the same. All that we are doing is explaining the operation of the fiction.

In Dauphin Plains, supra, the Supreme Court held that the employer's assets available to satisfy the Crown's claim did not include those which were subject to a fixed charge. Delivering the majority judgment, Pigeon, J. said at page 1199 (C.T.C. 254-55, D.T.C. 6129):

From the moment such charge was created, the assets subject thereto were no longer the property of the debtor except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing.

On the other hand, the Supreme Court held that the Crown was entitled to priority with respect to those assets which had only been the subject of a floating charge. In this regard, Pigeon, J. said, also at page 1199 (C.T.C. 255, D.T.C. 6129):

However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.

For the purpose of this case, it is necessary to take that reasoning further. A floating charge is an inchoate interest until crystallization. In the meantime, the debtor is free to use the charges assets. When those assets are used to pay wages, the statutory deductions become a trust fund which, if not kept separate from the other assets, is intermingled with them. The value of the assets is thereby increased by the amount of the deductions.

On crystallization, the trust fund is deemed to be traceable into the assets which have become the property of the charge holder. The charge holder is then accountable to the Crown for the trust moneys intermingled with his assets.

Roynat's position in this case is that, under The Personal Property Security Act, its interest in the receivables is akin to that enjoyed by the holder of what in Dauphin Plains was a fixed charge. It argues that, upon perfection, its interest became absolute, unassailable by even the Crown under the deemed trust provisions of federal legislation. In support of that position, Roynat relies on the majority decision of this Court in Pembina on the Red Development Corp. v. Triman Industries Ltd., [1992] 1 C.T.C. 133, 92 D.T.C. 6174.

Pembina on the Red also involved competition for priority between an assignee of accounts receivable and the Crown. The assignee had perfected its interest in the receivables by registration pursuant to the Personal Property Security Act. Subsequently, the assignor failed to remit to the Crown moneys deducted from its employees' wages on account of tax. The Crown served third party demands on those whose debts made up the receivables. The issue was whether the assignee had lost its priority by operation of the federal law which gave the Crown the right to demand payment of the receivables notwithstanding the prior right of a "secured creditor".

A majority of this Court held that the assignee of the accounts receivable, having a perfected interest in them, was not a "secured creditor” within the meaning of the federal legislation. The interest of the assignee was referred to by Scott, C.J.M. as "absolute" (at page 139 (D.T.C. 6178)); a "prior fixed and specific charge" (at page 142 (D.T.C. 6180)); and by me as "ownership", (at page 146 (D.T.C. 6183)).

I suspect that Humpty Dumpty would have praised my misuse of language in Pembina on the Red. I used the word "ownership" not because it was entirely accurate, but because it enabled me to make my point without resorting to the technical and sometimes confusing language of The Personal Property Security Act. Perhaps I should have used the more discreet language of Scott, C.J.M. and referred to the assignee's interest as absolute. Or, perhaps, I should have adopted the language in McLaren, Secured Transactions in Personal Property in Canada (2nd ed.), Carswell, Toronto, 1989, and referred to the assignee as the holder of "the greatest possible bundle of rights under the Act”.

In any event, the issue in Pembina on the Red was not how best to describe the assignee's interest, but whether it was that of a secured creditor. The majority decision reflected the view that the interest acquired by an assignee under the Personal Property Security Act was more than that of a creditor with a security interest in another's property.

In the case at bar, we are not concerned with the nature of Roynat's interest. Whatever that interest may be, Roynat permitted the use of the property which was subject to it. Receivables were turned into cash receipts and used to pay employees. The statutory deductions from their wages were not kept separate, as they should have been, from the other funds being used to earn new receivables.

In The Queen in Right of B.C. v. FB.D.B., [1988] 1 W.W.R. 1, the British Columbia Court of Appeal was faced with a question of priority between the interest of a secured creditor and that of the Crown. The property in question was stock-in-trade which the debtor had been allowed to sell despite F.B.D.B.’s charge on it. The proceeds of sale were invested in new stock which in turn was the subject of a licence to sell. In the course of the debtor's business, sales tax was collected but not remitted to the Crown. F.B.D.B. seized the stock pursuant to its debenture. The Crown claimed it had a statutory lien for the sales tax and that its lien had priority over the F.B.D.B.'s charge.

Although the majority preferred the view that the charge was a floating one which had not crystallized until after the lien had attached, the majority also considered what the result would have been if the charge had been fixed. Delivering the majority judgment, McLachlin, J.A. (as she then was) said (at page 40):

Assuming the charges were regarded as fixed subject to a licence to deal in the ordinary course of business, I am of the opinion that the licence or permission to deal must be taken to encompass all the usual legal incidents of dealing with the stock in the ordinary course of business. . . . When F.B.D.B. give (the debtor) the power to sell the mortgaged goods in the ordinary course of business, F.B.D.B. must be taken to have tacitly accepted that it would cede its priority not only to bona fide purchases for value, but to other persons who might acquire rights incidental to such sales. The Crown is such a person.

By analogy, the interest of Roynat in the receivables, whatever that interest may be, is subject to the deemed trust provisions of the federal legislation. By permitting Ja-Sha to use the cash receipts from receivables to pay wages, Roynat sanctioned the making of the statutory deductions which were then subject to the trust which results from making them. Although Roynat did not then sanction the breach of trust, Roynat's interest in the receivables was increased in value when the trust moneys were intermingled with them. The Statutes provide that the trust moneys are deemed to be traceable into the intermingled assets.

In the result, I am of the view that the appeal should be dismissed. The deemed trust provisions involved in this case entitle the Crown to recover the trust debt out of the moneys held by the receiver from receivables.

Roynat should pay the costs of this appeal to the Attorney-General of Canada.

Lyon, J.A.:—This appeal is a reprise, but only in part, of the questions of priority of claims which were recently adjudicated by this Court in Pembina on the Red Development Corp. v. Triman Industries Ltd., supra. To understand my general approach to such questions, reference may be made to my dissenting opinion in that judgment.

In the case at bar, I concur with the result arrived at by my brother Twaddle, J.A., although not with his reasons. Accordingly, I would dismiss the appeal with costs to the Attorney General of Canada.

Appeal dismissed.