Lloyds Bank Canada v. International Warranty Company Limited and Attorney General of Canada v. International Warranty Company Limited, [1990] 2 CTC 360

Stratton, J.A.: — The issue in these two appeals involves the determination of entitlement to certain funds wherein Revenue Canada is the competing creditor in the first named action against the appellant, Lloyds Bank Canada ("Lloyds") and in the second action, against the appellant, Alberta Treasury Branches ("Treasury Branch”). Lloyds and Treasury Branch hold as security assignments of book debts from their respective debtors. Revenue Canada claims priority in each case under the provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) ("the Act") and the principal basis of its claim is common to both appeals.

The applications to Queen's Bench which launched the proceedings were under the respective statutes noted in the above styles of cause; however it is sufficient for our purposes to simply note that each statute properly authorized an application to Queen's Bench to settle the competing claims.

In chambers and before us the cases were heard together. The learned chambers judge framed his written reasons in terms of the Lloyds appeal but noted that his reasons "would apply mutatis mutandis" to the Treasury Branch appeal. I will follow the same format in that this memorandum of judgment will refer mainly to the facts and parties involved in the Lloyds appeal.

Soon after ceasing business operations, International Warranty Company Limited (I.W.) paid salaries to its employees out of an account in its name at the Toronto Dominion Bank. The required withholding sum of $53,870.68 was not paid to Revenue Canada. At all material times I.W. was indebted to Lloyds in the amount of 1.75 million dollars and had given to Lloyds an assignment of book debts to secure that debt.

It is common ground that the funds of I.W. which are subject to the dispute between Lloyds and Revenue Canada were either held by the Toronto Dominion Bank or, for the purposes of these proceedings, treated as being held by it.

The material parts of section 224 of the Act are:

224.(1) Where the Minister has knowledge or suspects that a person is or will be, within 90 days, liable to make a payment to another person who is liable to make a payment under this Act (in this section referred to as the "tax debtor"), he may, by registered letter or by a letter served personally, require that 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 in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.

[Emphasis added.]

(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. . .

(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;

On January 28, 1988 Revenue Canada served upon the Toronto Dominion Bank a written “requirement to pay" pursuant to paragraph 224(1.2)(b).

It is not disputed that I.W. was legally responsible for the withholding funds claimed by Revenue Canada.

In finding in favour of Revenue Canada the learned chambers judge considered subsection 224(1.2) to have a "plain meaning that is unambiguous”. Later in his judgment ([1989] 1 C.T.C. 401) he said at 410:

. . .subsection 224(1.2). . .empowers the Minister by letter to require a person (here, the Toronto-Dominion Bank) to pay "moneys otherwise payable to. . .the secured creditor. . .to the Receiver General on account of the tax debtor's liability. . .". If there are moneys that are otherwise payable to a secured creditor, it is clear that those moneys must be paid not to the secured creditor but to the Receiver General, and that the moneys are not to be held for some such purpose as safekeeping while entitlement is decided, but "on account of the tax debtor's liability". In other words, the section clearly provides by implication that the moneys so paid become the property of the Crown; there is no other way that the tax debtor's liability could be satisfied.

With the greatest respect we disagree. 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.

In Homeplan Realty Ltd. v. Avco Financial Services (1977), 81 D.L.R. (3d) 289; 5 B.C.L.R. 289; affd [1979] 2 S.C.R. 699; 98 D.L.R. (3d) 695, the B.C. Court of Appeal had for consideration a claim for priority under a provincial statute, which constituted a claim by an employee for wages, if certified under the act, as being payable “in priority over any other claim or right—including—every mortgage of real or personal property". Robertson, J.A. had this to say at D.L.R. page 292:

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 that was its intention only if the language of the statute compels that interpretation.

In Craies on Statute Law, 6th ed. (1963), this is said at p. 118:

As Brett M.R. said in Att.-Gen. v. Horner (1884) 14 Q.B.D. 245, 257: “It is a proper rule of construction not to construe an Act of Parliament as interfering with or injuring persons' rights without compensation unless one is obliged to so construe it.” Therefore rights, whether public or private, are not to be taken away, or even hampered, by mere implication from the language used in a statute, unless, as Fry, J. said in Mayor, etc. of Yarmouth v. Simmons (1879) 10 Ch.D. 518, 527, "the legislature clearly and distinctly authorises the doing of something which is physically inconsistent with the continuance of an existing right.”

This same concept was expressed in Maxwell on Interpretation of Statutes, 11th ed., 1962, page 276 as follows:

Proprietary rights should not be held to be taken away by Parliament without provision for compensation unless the legislature has so provided in clear terms. It is presumed, where the objects of the Act do not obviously imply such an intention, that the legislature does not desire to confiscate the property or to encroach upon the right of persons, and it is therefore expected that, if such be its

intention, it will manifest it plainly if not in express words at least by clear implication and beyond reasonable doubt.

[Emphasis added.]

As noted above, the learned trial judge was of the view that subsection 224(1.2) clearly provided by implication that the moneys paid in response to Revenue Canada's "requirement to pay" became the property of the Crown. This conclusion is not in accord with prior decisions of this court.

In Re Lamarre (1978), 85 D.L.R. (3d) 392; [1978] 2 W.W.R. 465, the Minister of National Revenue made a demand, similar to the one given in the present case, under the then applicable subsection of the Income Tax Act, namely 224(1). The question there was whether the demand took precedence over an assignment in bankruptcy. Subsection 224(1) then read as follows:

224. (1) When the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any payment to a person liable to make a payment under this Act, he may, by registered letter or by a letter served personally, require him to pay the moneys otherwise payable to that person in whole or in part to the Receiver General of Canada on account of the liability under this Act.

It will be noted that the words I have emphasized are, for all practical purposes, identical to the words I have emphasized in the section here under review, supra. Thus the difference between these two sections is not of significance for our purposes. In giving judgment of the court in Lamarre, Prowse, J.A. pointed out that section 224(1) seemed to neither create a trust nor pass property to the minister. At page 395 (W.W.R. 469) he said:

The distinction between garnishee proceedings and the remedy afforded the Minister is that the demand need not be issued in judicial proceedings and, further, the demand is broader in scope as it attaches payments arising out of a debt or a liability. The property in the debt or liability when due or determined is not impressed with a trust nor is it transferred to the Minister.

[Emphasis added.]

In Royal Bank of Canada v. A.-G. Canada (1978), 105 D.L.R. (3d) 648; [1979] 1 W.W.R. 479, McGillivray, C.J.A., in writing for the court, expressly followed the decision in Lamarre at page 649 (W.W.R. 479-80):

We are all of the view that the decision of this court in Re Lamarre (1978) 85 D.L.R.

(3d) 392; [1978] 2 W.W.R. 465, 27 C.B.R. (N.S.) 41, 8 A.R. 533, enunciated two propositions: firstly, a demand made under s. 224 does not convey the indebtedness to the Crown, nor does it impress it with a trust; and, secondly, the Minister does not, by virtue of the demand, become a holder of a security. In short, the Crown does not acquire an equitable interest in the indebtedness.

Following the decisions in Lamarre and Royal Bank I am of the view that the proceedings under subsection 224(1.2) are at the most a form of extra-judicial attachment which could bring the funds in question into the custody of Revenue Canada. The section falls short of effecting the transfer of property in the funds or establishing priority of Revenue Canada's claim. Something further is required to accomplish either purpose.

As pointed out by the learned trial judge a 1986 amendment to the Income Tax Act, which was never proclaimed, would have "made the Crown's position impregnable” on this point. This section, if it had been proclaimed, would have established the priority of Revenue Canada which, as I have said, subsection 224(1.2) fails to do. The unproclaimed subsection reads as follows:

(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.

In accordance with the understanding above mentioned, my conclusion applies equally to the Treasury Branch appeal.

In the Lloyds appeal, Revenue Canada raised a further argument not applicable to the Treasury Branch appeal; nor was it dealt with in the judgment of the learned chambers judge. The basis of this argument is International Warranty's letters of January 4, 1988 to the Toronto Dominion Bank directing payment of certain of its funds held by that bank to pay to the Receiver General for "employee benefits". The letter also purported to give notice that the "said funds are intended for the Receiver General and are being held in trust" by the bank for that purpose. Revenue Canada argued that a specific trust was established by International Warranty for the purposes of payment of employee benefits and that Lloyds waived its right under its assignment of book debts to give effect to that trust. We reject that contention. We can find from the material before us no evidence of Lloyds' waiver of its rights under its security and, as pointed out by counsel for Lloyds, International Warranty cannot validly create a trust covering moneys earlier secured by it unless that trust be made subject to that prior security.

The reasons for judgment of the learned chambers judge, dated January 19, 1989 (which we have just considered) by its express terms, did not cover funds claimed by Revenue Canada other than those sufficient to cover the penalty imposed by it upon International Warranty for non payment. He subsequently issued supplementary reasons for judgment on May 11, 1989 following further submissions by counsel. Because of the conclusions we have reached with respect to the January 19, 1989 judgment it is unnecessary to deal separately with the supplementary reasons.

In the result we allow both the Lloyds and Treasury Branch appeals. In the Lloyds appeal, I direct the sheriff of the Judicial District of Edmonton to pay to Lloyds the funds held by him in those proceedings. In the Treasury Branch appeal, Esso Resources is hereby directed to pay to the Treasury Branch the funds held by it in those proceedings.

Costs here and in the court below will follow the event.

Appeals allowed.