Her Majesty the Queen v. Canadian Imperial Bank of Commerce, [1986] 2 CTC 267, 86 DTC 6390

Urie, J.:—This is one of two appeals argued together in this Court and tried together, on agreed statements of facts, in the Trial Division. In the two actions Mr. Justice Muldoon rendered judgment after trial in the sum of $6,836.36 in favour of the respondent in this case and, as well, awarded the sum of $54,437.10 to the respondent in the judgment appealed from in appeal No. A-1045-84.

Only a brief recitation of the facts is required for purposes of the appeals. Original Interior Designers Limited ("O.I.D.L.”), an Ontario company, was a customer at a branch of the respondent in Toronto and at all material times was a "licensed manufacturer” within the meaning of section 26 of the Excise Tax Act, R.S.C. 1970, c. E-13. To secure its indebtedness to the respondent, O.I.D.L. gave a General Assignment of Accounts Receivable on January 14, 1976 which was duly registered pursuant to the Personal Property Security Act of Ontario on January 28, 1976. The respondent also received from O.I.D.L. security pursuant to section 178 (formerly section 88) of the Bank Act and in accordance with its contractual obligations to provide such security contained in a contract dated January 1, 1981.

Demands pursuant to section 52 of the Excise Tax Act ("third party demands”) were sent by the appellant to certain debtors of O.I.D.L. on three occasions prior to February 1981. Payments in the aggregate sum of $6,836.36 were made by some of the debtors of O.I.D.L. in response to those demands.

O.I.D.L. made an assignment in bankruptcy on February 12, 1981. On the same day, and, as well, on February 16,1981 the respondent, pursuant to its security, served formal demands upon debtors to O.I.D.L. for payment of all outstanding debts due that company. Thereafter, the appellant was served with notice from the respondent of its claim under both its section 178 security and its security under its General Assignment Accounts Receivable.

Four questions were propounded for decision by Muldoon, J.

1. Does the plaintiff's General Assignment of Accounts held by the Bank have priority over the Demand on Third Parties of the Defendant?

2. If not, does the Section 178 Bank Act Security held by the plaintiff have priority over the Demand on Third Parties of the defendant?

3. If either the General Assignment of Accounts or the Section 178 security have priority over the Demand on Third Parties of the defendant, does the plaintiff come within the scope of the definition of "manufacturer or producer” under paragraph 2(a) and section 27 of the Excise Tax Act?

4. If the answer to question 3 is in the affirmative,

(a) is the plaintiff liable for all excise tax arrears owing by the Company or,

(b) is the plaintiff liable only for the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercised its rights under its security?

The learned trial judge answered questions 1 and 2 in the affirmative qualifying his answers by adding “except in regard to the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercises its rights under its assignment [or security]”. His answers to questions 3 and 4 will be dealt with later since they are the subject matter of the sole issue in the appeals.

In so far as appeal No. A-1045-84 is concerned, the basic facts are identical to those in the O.I.D.L. case. The relevant differences are that the respondent's customer in A-1045-84 was Wiscot Manufacturing Limited ("Wis- cot”). The amount in issue in that appeal is, as earlier stated, $54,437.10. Its General Assignment of Accounts Receivable was duly registered on April 24, 1980 and its security pursuant to section 178 (formerly section 88) of the Bank Act was filed on April 17, 1980. Its section 88 contract was dated April 18, 1980 and its section 178 security dated April 15, 1981. The same four questions as in the O.I.D.L. case were required to be answered and the same answers were given. The single issue on the appeal is the same.

The only ground of appeal of the appellant arising from the answers of the learned trial judge to the questions propounded is stated by the appellant to be that the trial judge erred in holding that the respondent did not become a “manufacturer or producer” within the meaning of section 2 of the Act at the time it took security under section 178 of the Bank Act, S.C. 1980-81-82-83, c. 40 but only became a "manufacturer or producer” when the respondent acted upon the loan default of O.I.D.L.

The relevant statutory provisions required to be considered in the resolution of that issue are paragraphs 2(1)(a) and (b) and subparagraph 27(1)(a)(i) of the Excise Tax Act in their relationship with sections 178 and 179 of the Bank Act. Paragraphs 2(1 )(a) and (b) and subparagraph 27(1 )(a)(i) of the Excise Tax Act read as follows:

2.(1) “manufacturer or producer” includes

(a) the assignee, trustee in bankruptcy, liquidator, executor, or curator of any manufacturer or producer and, generally, any person who continues the business of a manufacturer or producer or disposes of his assets in any fiduciary capacity, including a bank exercising any powers conferred upon it by the Bank Act and a trustee for bondholders.

(b) any person, firm or corporation that owns, holds, claims or uses any patent, proprietary, sales or other right to goods being manufacturerd, whether by them, in their name, or for or on their behalf by others, whether such person, firm or corporation sells, distributes, consigns, or otherwise disposes of the goods or not.

27.(1) There shall be imposed, levied and collected a consumption or sales tax of nine per cent on the sale price of all goods

(a) produced or manufactured in Canada

(i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier. [Emphasis added]

Mr. Justice Muldoon's careful and accurate analysis of both those subsections of the Excise Tax Act and of the applicable subsections of sections 178 and 179 of the Bank Act and, as well, his review of the principal jurisprudence relating thereto, discloses no material error, in my opinion, with the one exception to which I shall shortly direct my attention. No useful purpose would be served in re-examining the large number of authorities to which he referred, commenting thereon or in expressing in my own way the conclusions to which he has properly come.

Among the conclusions material to the issue before us are the following:

Referring to subparagraph 27(1 )(a)(i) of the Act he said ([1984] C.T.C. 442 at 450; 84 D.T.C. 6426 at 6433):

Here, what is taxed is the particular sale price of the specified goods, which tax is payable by the producer or manufacturer at a time related directly and solely to delivery of the goods, or of proprietory [sic] title in them passing, to the purchaser.

And further on he said at 450-51 (D.T.C. 6433-34):

Whereas income tax, and one might add, arrears of tax even under the Excise Tax Act (for past transactions) are, and remain, liabilities of the taxpayer personally and uniquely, the consumption or sales tax under the Act, when currently or actually payable, on a sale price not yet paid over to the taxpayer, may be lawfully intercepted by the Crown in Right of Canada at that time, and even in face of an existing s. 178 security. Why? It is because as already noted, the taxpayer-customers, Original Interior Designers and Wiscot assigned to the bank their inventory and its proceeds — they gave "their all”, so to speak, but they could not give or assign to the bank this specific tax on the sale price of their goods. The amount of that tax was, once identified, not yet paid, and demanded, — and it is still — not theirs to give.

But when this particular tax, under subsection 27(1) has become payable, but not yet paid, the amount levied is simply not included in the proceeds to which the bank has a right pursuant to the s. 178 security, once the minister's third party demand intervenes.

He then proceeds to analyze the relationship between subsection 27(1) of the Excise Tax Act and sections 178 and 179(1)* [1] of the Bank Act and makes the following findings at 452 (D.T.C. 6434-35):

It does appear, in view of the profile of powers and rights accorded to the bank under ss. 178 and 179 of the Bank Act, that for purposes of the Excise Tax Act, the bank in acting on the loan repayment default of the taxpayer-customer thereupon becomes a "manufacturer or producer”. The bank then is "the assignee .. . of any manufacturer or producer and . .. [is a] person who . .. disposed of [the manufacturer's or producer's] assets in any fiduciary capacity, including a bank exercising any powers conferred upon it by the Bank Act . ..” pursuant to paragraph (a) of the definition in subsection 2.(1) of the Excise Tax Act. Pursuant to paragraph (b) of that definition, it would appear that the bank is also included in the definition of a manufacturer or producer. The bank is a “. . . corporation that owns, holds, claims or uses any . . . right to goods being manufactured, whether by [the bank], in [the bank’s] name, or for or on [the bank’s] behalf by others, whether such [bank] sells, distributes, consigns, or otherwise disposes of the goods or not”.

These provisions amply confirm that the bank, once it declares the taxpayercustomer’s default, simply cannot proceed to appropriate the amount of the tax levied under s.27. If the bank actually receives the proceeds it must remit the s.27 tax generated by the pertinent current transactions since it is deemed to be a manufacturer or producer. If the proceeds be intercepted by the minister’s timely demand, the bank must equally countenance the deduction of the tax on the pertinent current sales of the particular inventory in accordance with subsections 52.(6) and (7) of the Excise Tax Act. In both situations, once the already noted exceptions which are prescribed by Parliament have been effected, the bank is entitled, seemingly against all the world, to receive and retain everything which the taxpayer-customer assigned and secured to it under s.178 of the Bank Act. That security has priority, therefore, over the minister’s demand except in regard to the amount of tax on the identified current sales of inventory whose proceeds were not paid at the time of the minister’s demands; and that is so because those sale transactions involving the very goods owned by the bank generated amounts of taxes which the taxpayer-customer was incapable of assigning to the bank in addition to the goods and their price.

The trial judge then answered questions 3 and 4 as follows at 454-55 (D.T.C. 6437):

3. The plaintiff [Respondent] does come within the scope of the definition of “manufacturer or producer” under paragraph 2.(1)(a) and s. 27 of the Estate Tax Act — but of equal importance where the bank has not actually received the sales proceeds, is the reality that the taxpayer-customer was incapable of assigning, and did not assign, to the plaintiff the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercised its rights under its securities. [Emphasis added]

4. The answer to question 3 being in the affirmative,

(a) the plaintiff [Respondent] is not liable for all excise tax arrears owing by Original Interior Designers Limited and Wiscot Manufacturing Limited; but,

(b) the plaintiff [Respondent] is liable only for the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercised its rights under its security. [Emphasis added.]

I am in complete agreement with the foregoing conclusions as they relate to the only issue before us. They not only are in conformity with the jurisprudence as understood by the learned trial judge but accord with my views of it. I do not feel it necessary, therefore, to re-examine the jurisprudence here. Suffice it to say that, in my opinion, the learned judge correctly answered each of the questions and, in particular, questions 3 and 4 relating to the issue here under review. I have, however, the one caveat to which I earlier alluded. In my view, Mr. Justice Muldoon was in error when he found that “Pursuant to paragraph (b) of that definition, [subsection 2(1) of the Act] it would appear that the bank is also included in the definition of a manufacturer or producer/'

Section 173 of the Bank Act provides that “a bank may engage in and carry on such business generally as appertains to the business of banking . . .” and, in subsection (1), enlarges this general direction by setting out a number of specific activities in which it may engage. Manufacturing or producing goods is not among those activities. Subsection (2) of section 174 states that:

Except as authorized by or under this Act and in accordance with such terms and conditions, if any, as are prescribed by the regulations, a bank shall not, directly or indirectly,

(a) deal in goods, wares and merchandise or engage in any trade or business;

Apparently, therefore, a bank is not entitled to engage in the business of being a manufacturer or producer. The Excise Tax Act, however, by virtue of its definition section namely, section 2, enlarges the ambit of those who, for the purposes of that Act, may be found to be “manufacturers or producers". As earlier noted, paragraph (a) of subsection 2(1), inter alia, includes as manufacturer or producer “the assignee . . . of any manufacturer or producer and generally any person who . . . disposes of his assets in any fiduciary capacity, including a bank exercising any powers conferred upon it by the Bank Act . .." The Bank, the respondent in these appeals, exercised its powers as against the assets of O.I.D.L. and Wiscot after demanding payment of their respective outstanding loans pursuant to the authority vested in it by section 178 of the Bank Act and the contracts which it had entered into with each under the authority of that section. As a result it fell within the definition of “manufacturer or producer" contained in paragraph 2(1 )(a) of the Excise Tax Act.

The question then arises, at what moment in time did the respondent become a “manufacturer or producer"? The learned trial judge correctly found that by virtue of subparagraph 27(1)(a)(i) and on the basis of the jurisprudence which he cited in support of his finding, the relevant time at which a manufacturer or producer becomes liable for payment of excise tax is the time at which the goods are delivered to the purchaser. Since the respondent, by virtue of subsection 179(4)* [2] of the Bank Act and the terms of its contracts with O.I.D.L. and Wiscot, was not entitled to deal with the goods in any way until default, it could not be liable for the payment of tax until after that time except where delivery had been made prior thereto and payment for the goods had not yet been made by the purchaser.

However, subparagraph 27(1)(a)(i) also provides that excise tax becomes also payable “at the time when the property in the goods passes, whichever is earlier." Counsel for the appellant argued that section 178 of the Bank Act gave a bundle of rights to the respondent which exceeded a simple security interest. Indeed, on the basis of the jurisprudence, counsel said, it “owned" the assets of the assigning creditors. Therefore, in his view, the respondent had “proprietary, sales or other right to goods being manufactured" within the meaning of paragraph (b) of subsection 2(1) of the Excise Tax Act. As a result, since it acquired those rights at the time the contracts were executed, and ownership of the goods, present and future passed at that time, no default had to occur before it became entitled to exercise its rights. By virtue of paragraph 2(1 )(b) it became, thus, a “manufacturer or producer" at the time the contract was executed.

I do not agree. There are several reasons for that disagreement.

(1) The definition of “manufacturer or producer" in subsection 2(1) of the Excise Tax Act has eight paragraphs. Each defines a particular class of purchaser who, for purposes of the Act, will be deemed to be manufacturers or producers. Paragraph (a) specifically refers to banks which are "exercising any powers conferred on [them] by the Bank Act.” In such circumstances, under normal rules of statutory interpretation, it is unlikely that the respondent would fall within another paragraph of the definition dealing with a different class of persons.

(2) The appellant relies on the jurisprudence holding that after obtaining section 178 security a bank owns the assignor’s assets to support its argument that paragraph (b) also includes the banks because it refers to “any person, firm or corporation that owns . . . proprietary . . . or other rights to goods being manufactured. ..” It seems to me that such an interpretation ignores the fact that the word “owns” in the paragraph is used together with the words “. . . holds, claims or uses any patent, proprietary, sales or other rights to goods. . . .” I think that clearly the word "proprietary" must be read ejusdem generis with "any patent . .. sales or other rights to goods." So read it envisages an ownership such as a licence, franchise or the like and not the ownership of the nature obtained under section 178.

(3) Reinforcing the view that paragraph (b) envisages an ownership of the kind to which I have just referred, are other words contained therein, namely, “. . . goods being manufactured by them, in their name, or for or on their behalf by others. . . .” A bank, in the circumstances of this case, is not a manufacturer directly nor is it having goods manufactured in its name. Its relationship to the manufacturers is in a financing context. At best a bank may become a manufacturer only when, by operation of law, it becomes such. Paragraph (b) does not so operate because it deals with a different class of person. In my view, an example of the purpose for which that paragraph was intended was to preclude companies from entering into arrangements the purpose of which is to disguise the real manufacturer in order to artificially lower sales prices and thereby reduce the excise tax payable (e.g., inter alia, Palmolive Manufacturing Co. (Ontario) Ltd. v. the King, [1933] S.C.R. 131).

(4) Further reinforcement for this view is found in the recent judgment of Carruthers J. in the High Court of Ontario, where after a thorough analysis of the jurisprudence he held in Armstrong et al. v. Coopers & Lybrand Ltd. et al. (1986), 53 O.R. (2d) 468 at 477; 24 D.L.R. (4th) 516 at 525 as follows: —

.. . From these authorities, it appears clear that, by the words of s. 178(2)(c), “the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading”, the bank, in whose favour security is given under s. 178 of the Bank Act, is vested with all the right and title of the owner by whom the goods recovered by the security are assigned to it. In short, the bank is considered to be the owner of the goods assigned to it under s. 178. This ownership, however, is not absolute. The bank cannot deal with the goods as its own in the absence of default under the loan; and the bank loses title upon the repayment in full of the loan, when the goods must be returned. In addition, during the course of the loan, and prior to there being a default, the borrower, in this case, Admiral, is given the right to sell the goods covered by the banks’ security in the ordinary course of business and, in turn, give good title to its purchasers. [Emphasis added.]

This reasoning accurately expresses the law, as I understand it, at this time.

For all of those reasons I am of the opinion, contrary to that expressed by Muldoon, J., paragraph 2(1 )(b) of the Excise Tax Act does not apply in the circumstances of this case.

In reaching the foregoing conclusions I have not overlooked the judgments of the Supreme Court of Canada in Bank of Nova Scotia v. The King, [1930] S.C.R. 174 and The Royal Bank of Canada v. The Deputy Minister of National Revenue for Customs and Excise, [1981] 2 S.C.R. 139; [1982] C.T.C. 183, in each of which a bank was found in the circumstances of those cases to be a manufacturer or producer, for the purpose of determining whether or not the bank was liable for the payment of consumption or sales tax as such a manufacturer or producer. In the first case, the Bank of Nova Scotia was found to be a manufacturer of in-house printing used exclusively for the bank's business. In the latter, the Royal Bank of Canada was found to be a producer of the electricity generated by its stand-by generators for use in one of its office towers in Toronto. Those were direct manufacturing and producing functions carried on as part of the bank's business. They did not, as here, arise from the exercise of their rights under security the banks had obtained from their customers. No consideration thus had to be given to the scope of either paragraph 2(1)(a) or (b) nor was it necessary for the Court in those cases to determine when, for the purposes of the Act, the banks there became manufacturers or producers. I do not think, therefore, that those decisions assist in the resolution of the case at bar.

Accordingly, for all of the foregoing reasons, I would dismiss the appeal with costs.

Appeal dismissed.