The Guarantee Company of North America v. Carlson Construction Company, a Division of George Wimpey Canada Ltd. And Her Majesty the Queen, [1990] 2 CTC 244

Skipp, J.:—The petitioner (hereinafter called "Guarantee") seeks an order that it is entitled to $33,863.25 plus accrued interest presently held by Carlson Construction Company ("Carlson"), a division of George Wimpey Canada Ltd. Revenue Canada claims entitlement to these moneys pursuant to the provisions of subsection 224(1.2) of the Income Tax Act. Carlson has no claim. The issue is whether subsection 224(1.2) of the Income Tax Act operates to deprive Guarantee of the funds it would otherwise be entitled to.

The Canadian National Railway Company ("C.N.") contracted with the Carlson Construction Company ("Carlson") for the construction of a building referred to as the Pacific Business Centre. Carlson in turn retained Seahawk Construction Ltd. ("Seahawk") as a subcontractor to perform the drywall work. Guarantee issued a performance bond and a labour and material repayment bond with respect to the work to be performed by Seahawk. C.N. paid Carlson for its work. Carlson paid certain funds to Seahawk for its work, but retained the sum of $96,620.85 which was due and owing to Seahawk.

Seahawk made an assignment into bankruptcy pursuant to section 49 of the Bankruptcy Act. Carlson then called upon Guarantee to complete Seahawk's obligations under the subcontract and to pay the subtrades of Seahawk under the labour and material payment bond. Guarantee has done so and paid $95,683.35 to the various employees and suppliers of Seahawk for their labour, equipment and materials supplied and incorporated into the Pacific Business Centre. Guarantee has to date recovered a portion of this amount from Carlson which has retained $33,863.25. Guarantee has assignments from Seahawk's subcontractors in the sum of $65,910.14 as a result of paying their claims. Guarantee has requested Carlson to pay it the remaining sum of $33,863.25 pursuant to the assignments.

On or about July 22, 1988 Revenue Canada served a requirement to pay pursuant to subsection 224(1.2) of the Income Tax Act on Carlson for unpaid assessments of Seahawk in the amount of $44,058.90. Revenue Canada relies entirely on subsection 224(1.2), which I reproduce:

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 who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or to a legal representative of that other person (each of whom is in this subsection referred to as the "tax debtor"), 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.

Revenue Canada submits that the language in the section, particularly paragraph (1.2)(b), settles the issue. They argue that Seahawk subtrades and thus Guarantee by assignment, have a security interest in this money which money, if the assignments had not been made, would belong to Seahawk. Consequently it is submitted that the Income Tax Act clearly gives the Minister authority to intervene and claim the funds on account of Seahawk's liability to the Receiver General under the Income Tax Act.

Guarantee relies on two recent decisions for the proposition that subsection 224(1.2), which purports to transfer proprietary rights from a secured creditor to the Receiver General without compensation, must be strictly construed. The submission is that the language in this section must convey a plain meaning that is unambiguous. Guarantee submits that it does not do so and that the court should not construe subsection 224(1.2) in a manner that would deprive a third party of a pre-existing proprietary right without compensation. The two cases relied on by Guarantee are Lloyds Bank Canada v. International Warranty Ltd., [1989] 1 C.T.C. 401; 89 D.T.C. 5279; revd (1989) 60 D.L.R. (4th) 272; 68 Alta. L.R. (2d) 356 and Concorde International Travel Inc. v. T.I. Travel Services (B.C.N.) Inc. (1989), 27 C.C.E.L. 254 (B.C. Co. Ct.); 76 C.B.R. (N.S.) 73, a decision of His Honour Judge Sheppard in the B.C. County Court.

I am persuaded by the aforesaid decisions and I refer to the decision of the British Columbia Court of Appeal in Homeplan Realty v. Avco Financial Services Realty Ltd. (1977), 81 D.L.R. (3d) 289; 5 B.C.L.R. 289; affd (sub nom. Industrial Rel. Bd. v. Avco Financial Services Ltd.) 2 S.C.R. 699; 98 D.L.R. (3d) 695. Both the Lloyds and Concorde decisions rely upon this case in interpreting subsection 224(1.2) of the Income Tax Act. At page 292 of Homeplan, Mr. Justice Robertson writes in rather colourful terms as follows:

If the Legislative Assembly intends to produce by statute results that are so brutal and piratical, it has the power to do so, but the courts will hold that was its intention only if the language of the statute compels that interpretation.

In coming to the conclusion that I have I have adopted the words of the Alberta Court of Appeal in Lloyds at D.L.R. pages 275-76 as follows:

In particular we do not agree that the section has the “plain meaning that is unambiguous” attributed to it by the learned chambers judge. For Revenue Canada to succeed the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor, in this case Lloyds, of all or part of its security without compensation, for the purpose of paying another debt entirely unrelated to the security. It is surely equivalent to the transfer of proprietary rights without compensation.

With respect to Revenue Canada's submission that the plain meaning rule of statutory interpretation should apply I agree with the words of the Honourable Judge Sheppard at C.C.E.L. page 259 of Concorde as follows:

Even using this approach, I cannot say that the interpretation given to the section by the Alberta Court of Appeal was incorrect. Reading the words “harmoniously with the scheme of the Act", it must be noted that there is an unproclaimed amendment to the Income Tax Act which specifically addresses the issue of priority:

(10.2) Notwithstanding any other provision of this Act, any other enactment of Canada, any enactment of a Province or any law where a person has been assessed under subsection (10.1) or a similar provision the amount determined under subsection (10.3) is secured by a charge upon the property referred to in subsection (10.4) and the charge has priority over all other claims and all other security interests.

Counsel for Revenue Canada submits that this should not be a consideration due to the opening words of s. 224(1.2): “Notwithstanding any other provision of this Act". While these words would preclude consideration of another section in the case of a conflict, it would otherwise be against the rules of statutory interpretation to read the section in isolation.

I find that Revenue Canada is not entitled by virtue of subsection 224(1.2) of the Income Tax Act to the money held by Carlson for the payment of Seahawk's tax debts. The sum of $33,863.25, plus accrued interest is to be paid by Carlson to the petitioner, Guarantee. Costs to follow the event.

Petition granted.