Bank of Montreal v. Minister of National Revenue, [1992] 1 CTC 2292, 92 DTC 1133

Garon, T.C.C.J. [Orally]:—This is an appeal from an income tax assessment numbered 1662, dated September 11, 1989, made by the Minister of National Revenue. This assessment was made on the basis that the appellant failed to comply with a requirement issued under subsection 224(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). On account of this failure, the Minister of National Revenue assessed the appellant in respect of its liability under subsection 224(4) by virtue of the assessing power granted to him by subsection 227(10) of the Income Tax Act.

Most of the facts relevant to this appeal are contained in an agreed statement of facts signed by counsel for both parties and filed as an exhibit at the hearing of this appeal. This statement of facts reads as follows in its essential parts:

1. The tax debtor in this matter is Henry D. Morgan, who is a Barrister and Solicitor practising in the city of London. Mr. Morgan maintained both a general account and a trust account at a branch of the Bank of Montreal located at Market Square, 398 Talbot Street, London, Ontario.

2. Mr. Morgan has designated his trust account as account number 1024-256.

3. On or about June 7, 1989, the Bank received a Requirement to Pay naming the tax debtor as Henry Morgan and indicating that the maximum payable was $90,059.79. Attached as Schedule "A" is a copy of the Requirement to Pay.

4. During the summer of 1989, various cheques drawn on Mr. Morgan's trust account and payable to persons other than Henry Morgan were honoured.

5. On or about September 11, 1989, the Bank was served with the Notice of Assessment #1662 in the amount of $3,486.15 alleging that the Bank had failed to comply with the aforementioned Requirement to Pay.

6. The Notice is based upon the negotiation of two cheques drawn on Mr. Morgan's Trust Account. Cheque number 1682 is dated August 15, 1989, and is in the amount of $2,646.95. The payee is Henry Morgan. The cheque was presented for payment by Mrs. Lynn Morgan. It had been endorsed in blank by Henry Morgan prior to presentment at the Bank. There are no restrictions on the endorsement. Mrs. Morgan endorsed the cheque at the time of presentment. There were sufficient funds in the account to cover the amount of the cheque. Mrs. Morgan was paid the amount set on the cheque. Mr. Morgan's trust account was debited for this payment. Attached as Schedule" B" is a copy of the front and back of this cheque.

7. The second transaction concerns cheque number 1688 dated August 25, 1989, and is in the amount of $839.20. The circumstances of presentment and negotiation are the same as the first transaction. Attached as Schedule” C" is a copy of the front and back of this cheque.

Two witnesses were produced by the respondent at the hearing of this appeal. The first witness was the assistant manager of the Market Square branch of the Bank of Montreal in London, Ontario. He was at the relevant time the acting manager of that branch. The second witness was Mr. Henry D. Morgan, the tax debtor mentioned in the document "Requirement to Pay” dated June 7, 1989. Their evidence does not add anything of much significance for the purposes of the present litigation. In this connection, it is perhaps of some interest to point out that in her testimony the assistant manager of the branch of the Bank of Montreal stated that she was not familiar with the Regulations of the Law Society of Upper Canada and the substance of the particular subsections to which reference will be made later.

Submissions of the Parties

It is the respondent's position that Mr. Henry D. Morgan should not have endorsed in blank the two cheques and made Mrs. Lynn Morgan the bearer of the cheques. Counsel for the respondent referred specifically to subsections 8 and 10 of section 14 of the Regulations applicable to the Law Society of Upper Canada and its members. These subsections read as follows:

(8) Money shall not be drawn from a trust account other than,

(a) money properly required for payment to or on behalf of a client;

(b) money required to reimburse the member for money properly expended

on behalf of a client or for expenses properly incurred on behalf of a client;

(c) money properly required for or toward payment of the member's fees for which a billing or other written notification has been delivered;

(d) money that is directly transferred into another trust account and held on behalf of the client;

(e) money that may by inadvertence have been paid into the trust account in contravention of this section,

but in no case shall the money so drawn exceed the unexpended balance of the money held in the trust account for the client.

(10) A cheque drawn on a trust account shall not be,

(a) made payable either to cash or to bearer; or

(b) signed by a person who is not a member except in exceptional circumstances, and except when the person is bonded in an amount of least equal to the maximum balance on deposit during the immediately preceding fiscal year of the member in all the trust accounts on which signing authority has been delegated to the person.

It was also the submission of counsel for the respondent that the branch manager of the particular branch of the Bank of Montreal should have known that money drawn from a lawyer's trust account should not be paid to a person who is not a member of the Law Society. According to counsel for the respondent the bank should be fixed with the knowledge of those Regulations.

The appellant's position is well stated in paragraph 9 of the notice of appeal which reads as follows:

The Bank's position is that, at no time, during the course of presentment and negotiation of these cheques by the holder, Lynn Morgan, was the Bank liable to make any payment to the tax debtor.

Analysis

The question in issue is whether the appellant in paying to Mrs. Lynn Morgan the amounts set on the two cheques drawn on the trust account of Mr. Henry D. Morgan on the occasion of the negotiation of the two subject cheques failed to comply with the requirement issued under the authority of subsection 224(1) of the Income Tax Act.

It is trite law to say that a cheque is a bill of exchange and that its form and negotiation are governed by the provisions of the Bills of Exchange Act. It was also common ground here that the two cheques in question, endorsed in blank by Mr. Henry D. Morgan, who was the drawer and payee of the bill, became payable to the bearer Mrs. Lynn Morgan. It was also agreed by both counsel that the moneys held in trust in the trust account of Mr. Henry D. Morgan were not subject to seizure and garnishment. See Gray's Ltd. v. Mountview Construction Ltd., [1967] C.T.C. 176, 67 D.T.C. 5112.

The wording of subsection 224(1) of the Income Tax Act makes it clear that the obligation imposed on the person who is liable to make a payment to a tax debtor to comply with the requirement made under that subsection arises only when the moneys are payable to the tax debtor.

In the present case the moneys payable by virtue of the two cheques in issue were not payable to the tax debtor, since at the time of presentment of the cheques to the bank, after the endorsement by Mrs. Lynn Morgan, Mr. Morgan was no longer the bearer of these cheques. He was not at that point in time entitled to receive the proceeds of the cheques. These conclusions are in my view clearly supported by the following provisions of the Bills of Exchange Act:

2. In this Act,

"holder means the payee or endorsee of a bill or note who is in possession of it, or the bearer thereof;

40. Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor or endorser, a valid and unconditional delivery by him is presumed until the contrary is proved.

59. (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.

62. (1) The simple signature of the endorser on a bill, without additional words, is a sufficient endorsement.

66. (2) An endorsement in blank specifies no endorsee, and a bill so endorsed becomes payable to bearer.

It must also be remembered that by virtue of section 206 of the Bank Act a bank is not bound to see to the execution of any trust to which any deposit made under the Bank Act is subject.

In my view, I am not called upon here to determine whether Mr. Henry D. Morgan contravened the Regulations of the Law Society by endorsing in blank the cheques drawn on his trust account and in transferring the said cheques to Mrs. Lynn Morgan. Nor am I called upon to pass judgment on the actions of the bank in negotiating these two cheques or on the propriety of such actions.

The only matter for a decision by this Court in the present appeal is whether the bank was liable to make payments to Mr. Henry D. Morgan in connection with the negotiation and presentment of the two cheques in question. The simple answer to this question is clearly in the negative. Since there was no obligation on the bank to pay anything to Mr. Henry D. Morgan at the time of the presentment of the two cheques, it follows that the application of subsection 224(1) of the Income Tax Act cannot come into play. I am therefore in total agreement with the appellants position.

For these reasons the appeal is allowed, with costs.

Appeal allowed.