C.I.B.C. v. The Queen, 84 DTC 6426, [1984] CTC 442 (FCTD)

Muldoon, J:—The court is here adjudicating upon two actions, by way of stated cases pursuant to Rule 475, with the same plaintiff and defendant in each action. Thus, the first paragraph is identical in both stated cases:

1. The plaintiff, Canadian Imperial Bank of Commerce, hereinafter referred to as the “Bank”) is a bank chartered under the laws of Canada, having its head office in the City of Toronto, in the Municipality of Metropolitan Toronto.

In suit no T-6039-81, the stated case continues:

2. Original Interior Designers Limited (hereinafter referred to as the “Company”) is a company incorporated pursuant to the laws of the Province of Ontario, with its head office in the Borough of Scarborough, in the Judicial District of York, which carried on business at 2272 Brimley Road, Agincourt, Ontario, and at all material times was a customer at the Bank’s Bloor and Lansdowne Branch, Toronto, Ontario. The company was a “licensed manufacturer’’ within the meaning of section 26 of the Excise Tax Act, RSC 1970, E-13.

3. The Company was indebted to the Bank with regard to certain loans given by the Bank to the Company and as security for the indebtedness the Bank held the following security:

(a) General Assignment of Accounts dated the 14th day of January, 1976, registered by way of financing statement pursuant to the Personal Property Security Act, Ontario on January 28, 1976 as No 760128 1146 43 0278;

(b) Security pursuant to Section 178 of the Bank Act, (formerly Section 88) as follows:

(i) Notice of Intention to give security dated the 7th day of December, 1978;

(ii) Application for Credit and promise to give security dated January 1, 1980;

(iii) Assignment under Section 88 dated January 1st, 1980;

(iv) Contract relative to Section 88 security dated January 1st, 1980;

(v) Application for Credit and promise to give security dated January 1st, 1981;

(vi) Assignment under Section 88 dated January 1st, 1981.

4. Demands pursuant to section 52 of the Excise Tax Act RSC 1970, Ch E-13 (“third party demands’’) with respect to the indebtedness of Original Interior Designs Ltd (“OID”) were sent by the Defendant as follows:

(a) on April 14, 1980 with respect to OID’s then indebtedness in the amount of $11,605.83 plus accrued penalty interest, to Arrow Furniture (also known as M & S Furniture Centre Ltd) Furniture Nu Systems Ltd, Lounsbury Co Ltd and Saul Whiteman and Sons;

(b) on January 23, 1981 with respect to OID’s then indebtedness in the amount of $15,359.31 plus accrued penalty interest, to Booth Furniture Appliances Ltd, Wunder Furniture Company, Linnenbank & Manno Furniture Ltd, Toromark Furniture House Limited, Grimsby Furniture, DeJong Furniture Limited and Arrow Furniture;

(c) on January 30, 1981 with respect to OID’s then indebtedness in the amount of $15,359.31 and accrued penalty interest to Rope Factory, Shoreline Furniture and Carpet, Tate Furniture Company Limited, Tinga Furniture & Appliances Limited and Assly Furniture and Carpet Inc.

5. Pursuant to the third party demands, payments totalling $6,836.36 were made to the Receiver General for Canada as follows:

	Amount of	Date of
	Payment	Payment
Booth Furniture & Appliances Ltd	$ 432.68	Feb 4, 1981
Toromark Furniture House Ltd	1,090.00	Feb 5, 1981
Assaly’s Furniture & Carpte Inc	561.35	Feb 6, 1981
Shoreline Carpet & Furniture	547.18	Feb 6, 1981
DeJong Furniture Ltd	1,035.49	Feb 6, 1981
Shoreline	582.06	Feb 18, 1981
M & S Furniture Centre Ltd (Arrow Furniture)	2,587.60	Feb 20, 1981
TOTAL	$6,836.36

6. The Company defaulted with regard to the repayment of the loans to the Bank and the Bank demanded payment on the 11th day of February, 1981.

7. The Company made an assignment in Bankruptcy on the 12th day of February, 1981 and Price Waterhouse Limited was appointed the Trustee in Bankruptcy.

8. On February 12th, and February 16th, 1981 the Bank made formal demand upon the customers of the Company which list of customers is outlined below, pursuant to the aforesaid security, for the payment of all the outstanding indebtedness of the Company:

Booth Furniture & Appliances Ltd	$ 971.20
Toromark Furniture House Ltd	3,784.91
Assaly’s Furniture & Carpet Inc	3,268.91
Shoreline Carpet & Furniture	5,043.02
De Jong Furniture Ltd	2,652.51

9. Thereafter, the Defendant received notice from the Plaintiff of its claim under section 178 of the Bank Act and of its claim under its General Assignment of Accounts Receivable.

10. All of the said invoices relate to inventory produced by the Company.

11. Questions to be answered

(1) Does the Plaintiffs 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 Section 2(a) [sic] 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?

12. Agreement by the Parties as to Judgment to be Delivered by the Court According to its Conclusions on the Questions Raised by the Special Case

If the answers to questions 1 and 2 are in the negative, the parties agree that this Court should order:

(a) that this action as against the defendant be dismissed; and

(b) costs of the stated case to the defendant.

If the answers to questions 1 or 2 is in the affirmative, the questions 3 and 4(a) are answered in the affirmative, the parties agree that this Court should order:

(a) that this action as against the Defendant be dismissed.

If either questions I or 2 is answered in the affirmative and question 3 is answered in the affirmative and question 4(b) is answered in the affirmative, the parties agree that this Court should order:

(a) judgment for the Plaintiff in the sum of $6,836.36.

The parties hereto by their respective solicitors, hereby consent pursuant to Rule 475 of the Federal Court Rules to the herein Stated Case and ask this Court to adjudicate upon the questions set out above.

In suit no T-4901-82, the stated case continues:

2. Wiscot Manufacturing Limited (hereinafter referred to as “Wiscot”) is a company incorporated pursuant to the laws of the Province of Ontario, with its head office in the Town of Grimsby, in the Regional Municipality of Niagara, and at all material times was engaged in the manufacturing of boat trailers, and as such Wiscot was a “licensed manufacturer” within the meaning of section 26 of the Excise Tax Act, RSC 1970, c E-13.

3. Wiscot was indebted to the Bank with regard to certain loans given by the Bank to Wiscot, and as security for the indebtedness the Bank held the following security:

(a) General Assignment of Accounts dated the 15th day of April, 1980, registered by way of financing statement pursuant to the Personal Property Security Act, Ontario, on April 24, 1980 as Number 800424 0835 88 9684;

(b) General Security Agreement dated the 15th day of April, 1980, and registered by way of financing statement pursuant to the Personal Property Security Act on May 6, 1980, as Number 800506 1432 43 8275;

(c) Security pursuant to Section 178 of the Bank Act, Canada (formerly Section 88) as follows:

(i) Notice of Intention to Give Security dated the 17th day of April, 1980, and filed pursuant to the provisions of the Bank Act on April 18, 1980 as Number 282191;

(ii) Application for Credit and promise to give security dated April 18, 1980;

(iii) Assignment under Section 88 dated April 18, 1980;

(iv) Contract relative to Section 88 security dated April 18, 1981;

(v) Application for Credit and promise to give security dated April 15, 1981;

(vi) Assignment under Section 178 dated April 15, 1981;

(vii) Contract relative to Section 178 security dated April 15, 1981.

(d) A Demand Debenture in the amount of $700,000.00 dated the 1st day of April, 1980 and registered pursuant to the Personal Property Security Act on April 16, 1980 as Number 800416 1512 43 3108, and under the Corporations Securities Registration Act on April 16, 1980 as Number 47388.

4. On the 2nd day of July, 1981, the Bank demanded payment from Wiscot of its indebtedness to the Bank.

5. On or about the 8th day of July, 1981, as a result of Wiscot’s indebtedness to the defendant under the provisions of the Excise Tax Act in the amount of $54,437.10, the Defendant delivered a Formal Demand on Third Parties pursuant to section 52 of the Excise Tax Act, on the following parties who paid to the defendant the amount set out hereunder:

Company Amount Amount

Don Campbell Boats	$ 1,334.76
Trans Canada Marine	4,808.90
Trans Canada Marine	10,650.32
Silent Sports	3,892.55
Phillips Marine	5,422.16
Simpsons Sears	32,495.64
Canadian Tire	13,875.34
TOTAL —	$72,479.67

6. The funds recovered on behalf of the defendant in excess of the $54,437.10 indebtedness of Wiscot, under the Excise Tax Act, were held by the defendant pursuant to the provisions of section 224.1 of the Income Tax Act, RSC 1952.

7. On the 13th day of July, 1981, the Bank appointed Peat Marwick Limited as Receiver and Manager of Wiscot and as its Agent under the aforesaid General Assignment of Accounts and Sections 88 and 178 security to take all necessary action to seize, protect and realize the properties of Wiscot subject to the aforesaid security of the Bank. On the 14th day of July, 1981, Peat Marwick Limited made formal demand upon the following companies with regard to the following receivables owing to Wiscot and assigned to the Bank:

Don Campbell Boats	Vineland Station	$ 1,363.14
Trans Canada Marine	Welland	21,182.50
Silent Sports	Sutton	6,764.15
Phillips Marine	Kingston	7,359.90
Simpsons Sears	Toronto	48,864.62
Canadian Tire Corporation	Toronto	63,466.04
		$148,980.35

8. Notice of the Bank’s appointment of Peat Marwick Limited as Receiver and Manager of Wiscot was given to the defendant only on August 7, 1981.

9. All of the said invoices related to inventory produced by Wiscot.

10. Questions to be Answered

(1) Does the Plaintiffs 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 Section 2(a) [sic] and section 27 of the Excise Tax Ac ft

(4) If the answer to question 3 is in the affirmative,

(a) is the Plaintiff liable for all excise tax arrears owing by Wiscot 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?

11. Agreement by the Parties as to Judgment to be Delivered by the Court According to its Conclusions on the Questions Raised by the Special Case

If the answers to questions 1 and 2 are in the negative, the parties agree that this Court should order:

(a) that this action as against the Defendant be dismissed; and

(b) costs of the Stated Case to the Defendant.

If the answers to questions 1 or 2 is in the affirmative, and questions 3 and 4(a) are answered in the affirmative, the parties agree that this Court should order:

(a) that this action as against the Defendant be dismissed.

If either questions 1 or 2 is answered in the affirmative and question 3 is answered in the affirmative and question 4(b) is answered in the affirmative, the parties agree that this Court should order:

(a) judgment for the Plaintiff in the sum of $54,437.10.

The parties hereto by their respective solicitors, hereby consent pursuant to Rule 475 of the Federal Court Rules to the herein Stated Case and ask this Court to adjudicate upon the questions set out above.

Counsel have cited a large number of authorities, which, if painstakingly analysed here, would yield reasons of encyclopaedic proportions. Reference must be made to some of them and, for the profit of those who are more particularly interested, the whole list is appended to these reasons.

That unique and formidable security interest which was formerly prescribed in section 88 of the Bank Act has retained its existence and vigour, now pursuant to section 178 of the Bank Act (SC 1980, c 40, s 2) as amended. In each action here, the notice of intention to give security was given to the plaintiff pursuant to section 88 of the previous Act (RSC 1970, c B-l) but each security continues to operate, nevertheless, for the purposes of these actions and stated cases, as if given pursuant to section 178 of the new Act.

Although questions 1 and 2 are both basic and fundamental in these cases, they are posed in alternative fashion. In opening his argument for the plaintiff, counsel stated that the bank documents, and not the Personal Property Security Act ones are the relevant documents for consideration as to their effect in law. The defendant’s counsel seemed to accept that statement with equanimity. In any event, it would take a negative answer to both of the first two questions to produce one result on which the parties agree, but it would take an affirmative answer to only one of the questions to produce another, different, result upon which the parties are equally agreed. Therefore, the court will first consider the second question which was the one emphasized by the plaintiffs counsel and then it can be determined whether the first question needs to be addressed. That second question asks if the section 88 and/or 178 Bank Act security has priority over the defendant’s demand on third parties.

The “bank documents” (hereinafter called the section 178 security, for convenience and to include the section 88 security, since nothing turns on their differences here) are well known in Canadian jurisprudence. The effect and force of the section 178 security have been clearly described in cases of high authority. Thus, a good and conclusive starting point is the unanimous judgment of the Supreme Court of Canada in Christopher H Flintoft, Trustee v The Royal Bank of Canada ([1964] SCR 631). In speaking for the court, Mr Justice Judson said (Ibid at 634-5):

Section 88 is a unique form of security. I know of no other jurisdiction where it exists. It permits certain classes of persons not of a custodier character, in this case a manufacturer, to give security on their own goods with the consequences above defined. Notwithstanding this, with the consent of the bank, the one who gives the security sells in the ordinary course of business and gives a good title to purchasers from him. But this does not mean that he owns the book debts when he has sold the goods. To me the fallacy in the dissenting reasons is the assumption that there is ownership of the book debts in the bank’s customer once the goods have been sold and that the bank can only recover these book debts if it is the assignee of them.

We are not concerned here with the rights of a purchaser for value without notice of the proceeds of the sale of the bank’s security. It is true that s 63 of the Bankruptcy Act avoids in favour of the trustee the assignment of book debts held by the bank because of defective registration. Subject to this, the trustee has no higher rights than the bankrupt and he takes the property of the bankrupt merely as a successor in interest and not as an innocent purchaser for value without notice. He takes the property of the bankrupt subject to the express trust created by the agreement noted above, which, in my opinion, cannot be characterized as an assignment of book debts in another form. When these debts, the proceeds of the sale of the s 88 security, come into existence they are subject to the agreement between bank and customer. As between these two the customer has nothing to assign to the bank. The actual assignment of book debts which was signed does no more than facilitate collection. Any other assignment, whether general or specific, of these debts by the customer to a third party would fail unless the third party was an innocent purchaser for value without notice.

Considering the report of the case of Union Bank of Halifax v Spinney & Churchill ((1907), 38 SCR 187), Judson, J continued (at 635):

I can find in the report no mention of any written agreement similar to the one in existence in the present case but it is clear that the oral understanding between bank and customer was to the same effect. Any other understanding would be inconceivable in commercial dealings. Why would any lender who lends for the purpose of enabling another to acquire and manufacture goods, permit the sale of goods on which he holds security except on terms that the borrower must bring in the proceeds of the sale of those goods?

Judson, J further considered the report of Re Goodjallow, Traders' Bank v Goodfallow (1890), 19 OR 299 again noting (at 636):

Again, I can find in the report no mention of any agreement in writing, but even in its absence the principle is plainly to be spelled out that if you sell my goods with my consent, it is on terms that you bring me the money in place of the goods. Although the bank’s customer does not sell as agent for the bank, he does not sell free of the bank’s claim to the proceeds. There is an analogy with the case where goods are consigned to a factor to be sold by him and reduced to money. There has never been any doubt of the right of the owner to trace the money or any other form of property into which the money has been converted. (Underhill’s Law of Trusts and Trustees, 11th ed, p 561.)

Equally important to note is the manner in which Judson, J interpreted the majority judgment of the Québec Court of Appeal in Banque Canadienne Nationale v Lefaivre et al, [1951] BR 83, asserting (at 636):

. . . The majority judgment is founded squarely on the ground that the claims against the buyers of the goods became the property of the bank by virtue of its s 88 security and never were the property of the customer so as to be affected by the assignment in bankruptcy.

On the authority of the Flintoft decision arises the principle that the goods, inventory and the proceeds of them are all secured by the section 178 security and thereby cease to be, or never become, the property of the bank’s customer. In these actions at bar, then, the plaintiff bank was and is the owner of the inventory which was sold and which yielded the proceeds in question, as well as those proceeds. The interest of the bank in those proceeds is a legal interest.

The agreements between the plaintiff bank and its respective customers, Original Interior Designers and Wiscot Manufacturing, specifically provided that the proceeds of all sales of property so secured forthwith became the bank’s and if held by the customer the proceeds were held in trust for the bank and until the bank would actually receive them. The documentation for these purposes sets out in writing that which Mr Justice Judson remarked must be the essential purport and understanding of a section 88 (now a section 178) security when he said in Flintoft (at 635):

I can find in the report no mention of any written agreement similar to the one in existence in the present case but it is clear that the oral understanding between bank and customer was to the same effect. Any other understanding would be inconceivable in commercial dealings. Why would any lender who lends for the purpose of enabling another to acquire and manufacture goods, permit the sale of goods on which he holds security except on terms that the borrower must bring in the proceeds of the sale of those goods? [Italics added. ]

The documentation herein refers to and, in part, recites the words of section 178 and its predecessor in regard to the bank’s lending money to anyone engaged in business as a manufacturer. Thus in the Wiscot matter, for example, the application for credit and promise to give bills of lading, warehouse receipts and security under section 178 (Exhibit 2), as well as the form of assignment, under section 178 security, on all property of specified kinds (Exhibit 3) speak in powerfully all-inclusive terms. They both offer to the plaintiff as security:

. . . all property of the kind(s) hereinafter described of which the undersigned is now or may hereafter become the owner, to wit: all the goods, wares and merchandise, manufactured, in process of manufacture, and the goods, wares and merchandise used in or procured for the packing of same, including but not so as in any way to limit or restrict the generality of the foregoing [here follows a short general list of actual items in inventory].

These documents speak, in both instances, of the security being given “under section 178 of the Bank Act’’, and they are drawn in terms similar to those of paragraph 178(l)(b) of the Act. So are the like forms executed by Original Interior Designers. As was noted in the Supreme Court of Canada, in the Flintoft decision, (supra), what is expressed in these documents is inherent in the Bank Act security, and the two documents, Exhibits 2 and 3, do not appear to accord to the plaintiff bank more than Parliament has provided in either section 178 and section 179 of the present Act nor in their respective predecessors, section 88 and section 89 of the previous statute.

In effect the bank’s customers, Original Interior Designers and Wiscot, have given the bank a unique and effective security on all of their then actual and future inventories and on all of the proceeds which those manufacturers would otherwise be entitled to earn upon the articles which they produce or manufacture from that inventory and which they sell to others. In effect, the bank’s customers in such instances assign all they have, and all they become entitled to have, in regard to their inventory and the proceeds of sales. They can assign no more to the bank pursuant to that unique security, because nothing is reserved to them from their inventory and their proceeds of sale. It goes almost without saying that the bank’s customers cannot, even under a section 178 security, give more than they have. Nemo dat quod non habet.

There are some exceptions specifically provided in subsection 178(6) of the Bank Act in regard to that which the customer can assign and over which the bank can exert priority. Thus if, under the Bankruptcy Act a receiving order or an assignment is made, claims for employees’ remuneration are made in respect of the three months’ period preceding the making of the receiving order or assignment, those claims have priority to the rights of the bank, even though the sums they represent would ordinarily have been the customer’s to be spent in meeting its overhead. Employees’ remuneration claims do not, however, figure in the cases at bar.

In the case of Canadian Imperial Bank of Commerce v The Queen, ([1981] CTC 435; 81 DTC 5345), Mr Justice Grant of this Court found that the section 88 security overrides a demand on third parties served pursuant to section 224 of the Income Tax Act. (Here, it should be noted that in form and operation, if not in purpose, the foregoing provision is, for all practical purposes, the same as subsection 52(6) of the Excise Tax Act, RSC 1970, c E-13.) Grant, DJ, dealing with the decision in Royal Bank of Canada v Attorney General of Canada ([1977] 6 WWR 170; 25 CBR 233) from which the Minister appealed, concluded his reasons thus (444-5 [5350-1]):

Such decision was approved by the Appellate Division of the Alberta Supreme Court found at [1979] 1 WWR 479; 29 CBR (NS) 227, where it is stated, at page 229 by McGillivray, CJA:

We are all of the view that the decision of this court in University of Calgary v Receiver Gen of Can, [1978] 2 WWR 465, CBR (NS) 41, 85 DLR (3d) 392, 8 AR 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.

In this regard, we respectfully differ from the alternate reasons for judgment given by the Ontario Court of Appeal in Bank of Montreal v Union Gas Co, [1969] 2 OR 776 at 781. [1969] CTC 686, 69 DTC 5441, 7 DLR (3d) 25.

I prefer, in this case, to follow the judgment of the Alberta Court of Appeal and hold that the Crown had not secured an equitable interest in the monies in question, by virtue of the notice served by it. It is also important to note that in the Bank of Montreal v Union Gas case, the bank did not have security under section 88 of the Bank Act in that they relied on as assignment of book debts.

[Conclusion]

The answer, therefore, to the question:

“Does the Section 88 security pursuant to the Bank Act, Canada, and the General Assignment of Accounts held by the Bank have priority over the Demand on Third Parties of the Defendant?” is “Yes”.

(It is noted, in regard to the above, that the Ontario Court of Appeal has now abandoned its view that the rights given to the Minister under section 52 of the Excise Tax Act (or under the Income Tax Act) create an equitable charge. In deciding In the Matter of Zurich Insurance Company and Troy Woodworking Limited (released February 21, 1984), Weatherston, JA, speaking also for Dubin and Goodman, JJA, held, concurring with the Alberta Court, that the Minister’s rights are purely statutory. He said: “Neither section creates an equitable charge. In so far as the court said otherwise in the Union Gas case, I respectfully disagree”.)

Mr Justice Grant, in CBIC v The Queen, (supra), carefully analysed the authorities, and concluded in effect that because the taxpayer-customer had already parted with all its interest in its inventory and in the proceeds thereof in favour of the bank, there was nothing belonging to the taxpayer-customer which the Crown could attach for arrears of income tax. It is difficult to gainsay the reasoning of Grant, DJ in that case. Income tax indeed is levied on the net annual revenues (generally speaking) of the taxpayer and not upon specific operations and transactions as defined in the Excise Tax Act. While the taxable income of a corporate manufacturer is no doubt in large measure, and generally, derived from its principal business operations, taxable income may also be derived from other sources and remains in a sense “personal” even to a corporate taxpayer. Income tax is the classical form of direct taxation, and is and remains the liability of the taxpayer. In taking a section 178 security, the bank in no sense becomes liable for the taxpayer-customer’s income tax merely because the bank is given proprietary rights over the taxpayer-customer’s inventory and the proceeds thereof.

By contrast, the tax levied under subsection 27(1) of the Excise Tax Act is clearly distinguishable from income tax. That charging provision runs essentially as follows:

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.

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 proprietary title in them passing, to the purchaser. Certainly, the provisions of subsections 26(1) and (6) also, in defining the sale price and in detailing the manner of calculating it and the tax, strongly reinforce the characterization of a tax on the price of specified goods levied and payable upon the occurrence of specific events in regard to those very goods, that 1s, production or fabrication and physical delivery of, or legal conveyance of property in, those very goods.

Herein, assuredly, resides the important distinction for purposes of answering the questions posed to the Court in the case at bar. 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 section 178 security. Why? It is because as already noted, the taxpayer-customers, Original Interior Designers and Wiscott 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. Hence, the applicability of that ancient maxim of law and logic, nemo dat quod non habet, already mentioned. Of course, by holding its section 178 security, the bank is in no way rendered liable for the past defaults or indebtedness of its taxpayer-customers.

This contest for efficacy in relation to the section 178 security, involves only two laws enacted by Parliament. For this question, one is not concerned with the operation of the Bankruptcy Act, as was the court in the Flintoft case, (supra), nor is one concerned with provincial legislation such as the Personal Property Security Act. In the interpretation of the Bank Act security enunciated by the Supreme Court of Canada and latterly by Grant, DJ, one can appreciate the great commercial utility and overriding importance which is inherent in Parliament’s creation of that security. The bank obtains and may assert its right to the goods and their proceeds against the world, except as only Parliament itself may reduce or modify those rights. 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 section 178 security, once the Minister’s third party demand intervenes.

Now, subsection 27(1) of the Excise Tax Act exacts that the tax shall be “payable . . . by the producer or manufacturer’’. In regard to this particular tax, the intention of Parliament does not appear to comprehend that the amount of the tax can be given away to, or appropriated by, an assignee, for the definition of a “manufacturer or producer” in subsection 2(1) of that Act 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 proprietary, sales or other right to goods being manufactured, 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.

In this regard one must note just how Parliament was configured the bank’s security. Subsection 179(1) of the Bank Act accords potent, but not indiscriminate, rights to the bank. Its relevant provision runs, thus:

179. (1) All the rights and powers of a bank in respect of the property mentioned in or convered by a warehouse receipt or bill of lading acquired and held by the bank, and those rights and powers of the bank in respect of the property covered by security given to the bank under section 178 that are the same as if the bank had acquired a warehouse receipt or bill of lading in which such property was described, have, subject to subsection 178(4) and subsections (2) and (3) of this section, priority over all rights subsequently acquired in, or on in respect of such property, and also over the claim of any unpaid vendor, but this priority does not extend over the claim of any unpaid vendor who had a lien on the property at the time of the acquisition by the bank of the warehouse receipt, bill of lading or security, unless the same was acquired without knowledge on the part of the bank of such lien, . . .

The above provision clearly accords rights and powers to the bank in respect only of the property covered by a security given to the bank under section 178 and such property only. It is abundantly clear that Original Interior Designers and Wiscot, the taxpayer-customers, could not give the bank security on the tax levied under section 27 of the Excise Tax Act, that tax was never part of the property on which they gave the security nor to which it could attach itself, and that accordingly when the Minister identified it in and among the still unpaid proceeds of sales, his timely demand on third parties must be effective as Parliament obviously intended it to be.

It is also clear that if the Minister fails to exercise his statutory right in a timely manner, permits the sales to be completed without intervention, and later seeks to recover historic arrears of this particular tax by means of a third party demand he cannot succeed. The unique security provided under section 178 is emphatically not to be evaporated by the taxpayer-customer’s past defaults lest that security be rendered nugatory in derogation of what Parliament seems clearly to have intended. Nowhere does Parliament appear to render the secured bank an insurer for any tax arrears of the taxpayer-customer.

If the bank had to insure that its customer paid taxes as they fall due, that would drastically change the norms of commercial practice. Given the longstanding force and effect of a section 178 security, such a result should not be permitted without some clear, further indication by Parliament to that effect.

It does not appear, in view of the profile of powers and rights accorded to the bank under sections 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 taxpayercustomer thereupon becomes a “manufacturer or producer’’. The bank then is “the assignee . .. of any manufacturer or producer and ... [is a] person who . . . disposes 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”. [Italics added. I

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 section 27. If the bank actually receives the proceeds it must remit the section 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 subsection 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 section 178 of the Bank Act. That security has priority, therefore, over the Minister’s demand except in regard to the amount of the 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.

Counsel for the defendant contended that, because under subsection 52(7) of the Excise Tax Act, the Minister’s receipt for moneys intercepted under subsection 52(1) constitutes a good and sufficient discharge of the liability of the person paying them, the defendant must be regarded as an innocent purchaser for value without notice. That contention is answered by the judgment of Grant, DJ in CBIC v The Queen, in which he opined (at 443 [5350]):

It is urged that the Defendant was a purchaser for value by reason of the fact that it gave to Ecodyne a discharge of its liability to pay either the bank or Canbury by virtue of section 224(2) (supra). Such also refers to Williams v Leonard and Sons (1896) 26 SCR 406.

While the giving of such a release by the Crown may amount to valuable consideration, it is my opinion that the Crown is not a purchaser of such debt, but the giving of the notice under section 224(1) is entirely a process of attachment. There is no element of purchase in the seizure.

While Grant, DJ was there considering a garnishment or attachment under the Income Tax Act, his opinion remains valid for purposes of the case at bar, since the attachment provisions, albeit for different kinds of tax, are essentially the same.

The question of priority between the general assignment of accounts held by the bank and the Minister’s demand on third parties is also posed. That question was presented to Mr Justice H J MacDonald in the Trial Division of the Alberta Supreme Court in Royal Bank of Canada v Attorney General of Canada, (supra). There, unlike the case at bar, the garnishment was attempted under the Income Tax Act and was referred to by Grant, DJ in CBIC v The Queen, (supra), some few years later. MacDonald, J rejected the reasoning in Bank of Montreal v Union Gas Co, (supra), founded upon who gave first notice to the debtorpurchaser. He held that the assignee of book debts obtains immediate title to the book debts and that there remained to the assignor no title to the chose in action which could be attached by the Minister’s third party demand under section 224 of the Income Tax Act. That decision was confirmed ([1979] 1 WWR 479; 29 CBR 277) unanimously by the Appellate Division of the Supreme Court of Alberta. The correctness of the decision in regard to income tax proceedings cannot be doubted.

However, upon the same reasoning as applies in the case of a section 178 security in relation to current consumption and sales tax under paragraph 27(l)(a) of the Excise Tax Act, where the purchaser has still to pay for the manufactured goods, a third party demand must also be effective; a general assignment of accounts cannot convey any greater right or title to an assignee than can the section 178 security. That such was the intention of Parliament may be gleaned from the provisions of subsections 52(10) and (10.3) of the Excise Tax Act which are as follows:

52. (10) When the Minister has knowledge that any person has received from a licensee an assignment of any book debt or of any negotiable instrument of title to any such debt, he may, by registered letter, demand that such person pay over to the Receiver General out of any moneys received by him on account of such debt after the receipt of such notice, a sum equivalent to the amount of any tax imposed by this Act upon the transaction giving rise to the debt assigned.

(10.3) Where, under this section, the Minister has made a demand of any person to pay over to the Receiver General moneys otherwise payable to a licensee on account of the licensee’s liability under this Act, the demand shall be deemed to apply to all moneys that are or will become payable by such person to the licensee until the licensee’s liability under this Act is satisfied.

In strictly construing this taxing statute the words “are or will become payable’’ must not be read to say “have been, are or will become payable”. A strict interpretation exacts reference only to current tax, where the purchaser has not yet paid for the goods. As it stands, the provision is ineffectual to intercept tax arrears On previous transactions, which are not to be levied against the assignee’s right, title or interest but which will, rather, remain the assignor’s responsibility.

The defendant’s counsel urged that the Minister’s demand should be capable of effecting a clean sweep of both current tax and arrears on the proper application of section 16 of the Interpretation Act (RSC, 1970 c 1-23) which provides:

16. No enactment is binding on Her Majesty or affects Her Majesty or Her Majesty’s rights or prerogatives in any manner, except only as therein mentioned or referred to.

Counsel argued, that, in light of this provision, neither section 178 nor the assignment of book debts could affect the position of the Crown. The mentioned rights and prerogatives are, of course, lawful rights and prerogatives and in so far as the case at bar is concerned they are subject to statutory definition by Parliament in the provisions of the Excise Tax Act. In addition, there is the well known right of priority of the Crown’s interest in property where the Crown’s interest is equal to those of its competitors. However, in view of the demise of the Union Gas case, (supra), as being definitive of the Crown’s rights upon third party demand, the latter right of priority does not arise because the Crown’s interest is now seen to be neither superior nor even equal to those of the assignee.

But in a more fundamental way, section 16 of the Interpretation Act is beside the point here. The assignments in question have been held, on high and consistent authority, to vest legal title in the assignee leaving no property in the inventory and its proceeds in the assignor — here the taxpayer-customer of the plaintiff bank. Her Majesty is not, by prerogative or by statute — the Excise Tax Act, entitled to confiscate the bank’s property. From the time at which the securities were given, the bank’s property was simply none of the Crown’s business. One can hardly assert that the relevant enactments are binding on the Crown, or affect the Crown’s rights and prerogatives, where there is no legal nexus between the Crown’s rights and the banks rights. Section 16 of the Interpretation Act is simply not engaged here any more than it is when any other person, firm or corporation asserts private property rights. It is true that both the plaintiff and the defendant here are asserting claims to moneys otherwise payable to the taxpayer-customers, but since their respective claims can be correctly sorted out according to law, the legitimate invocations of the section 178 security and of the general assignment of accounts do not run afoul of section 16 of the Interpretation Act.

It will be seen that the questions posed by agreement of the parties cannot all be answered with simple affirmative or negative responses. This is so because, in regard to the demand under the Excise Tax Act in face of the existing section 178 security and the general assignment of accounts, the parties’ claims do require sorting out in distributing the proceeds.

Answers to identical questions in T-6039-81 and T-4091-82

1. The plaintiffs general assignment of accounts does have priority over the demand on third parties except in regard to the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercised its rights under its assignment.

2. Since the exception in the first answer is a negative element, it is necessary to hold that the plaintiffs section 178 Bank Act Security does also have priority over the demand on third parties except in regard to the excise tax owing with respect to each particular sale transaction entered into after the plaintiff exercised its rights under its security.

3. The plaintiff does come within the scope of the definition of “manufacturer or producer” under paragraph 2.(l)(a) and section 27 of the Excise 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.

4. The answer to question 3 being in the affirmative

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

(b) the plaintiff 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.

Judgment will be pronounced and entered in each of the cases in accordance with the parties’ agreements regarding the court’s answers to their questions. In further accordance with their agreements, no costs will be awarded for or against either party.

APPENDIX: Authorities cited by counsel

Canadian Imperial Bank of Commerce v Her Majesty the Queen, [1981] CTC 435; 81 DTC 5344;

Christopher Henry Flintoft as Trustee in Bankruptcy of Canadian Western Millwork Ltd v The Royal Bank of Canada, [1964] SCR 631; 47 DLR (2d) 141 (SCC) (1964), 44 DLR (2d) 47; 47 WWR 65 (Man CA); (1963), 44 WWR 651; 6 CBR

(NS) 6 (Man QB);

Royal Bank of Canada v Government of Manitoba, [1978] 1 WWR 712; 27 CBR

(NS) 30, (Man. QB);

Canadian Imperial Bank of Commerce v Surkan (1978), 84 DLR (3d) 548; 27 CBR (NS) 167, (Alta Dist Ct);

Royal Bank of Canada v Bob Caouette’s Trucking Ltd, et al, [1975] WWR 150, (Alta Dist Ct) (Appeal dismissed without written reasons by Alberta Court of Appeal);

The Union Bank of Halifax v Edgar K Spinney and George B Churchill (1907), 38 SCR 197;

Re Otto Grundman Implements Ltd (1970), 9 DLR (3d) 206; 72 WWR 1 (Man CA);

Re Goodfallow, Trader's Bank v Goodfallow (1890), 19 O.R. 299 (Ch D);

Landry Pulpwood Company Ltd v La Banque Canadienne Nationale, [1927] SCR 605; [1928] 1 DLR 493;

The Royal Bank of Canada v Workmen’s Compensation Board of Nova Scotia, [1936] SCR 560;

Bank of Montreal v Guaranty Silk Dyeing and Finishing Co Ltd, [1934] OR 625 (Ont CA);

Canadian Imperial Bank of Commerce v Gulf Transport Ltd, 19 DLR (3d) 104 (PEI CA);

Attorney General of Canada v Workmen’s Compensation Board (1968), 63 WWR, 480; 68 DTC 5072 (BCSC);

Bank of Montreal v Attorney General of Canada, [1971] CTC 91; 71 DTC 5091;

Bank of Montreal v Union Gas Company of Canada Limited (1970), 7 DLR (3d) 25; [1969] 2 OR 776 (OCA);

Bank of Montreal v Her Majesty the Queen, 80 DTC 6024;

Canadian Credit Men's Trust Association Limited v Beaver Trucking Limited, [1959] SCR 311;

Community Building Supplies Ltd v Kipling Paving Co Ltd, [1970] 2 OR 194;

Crowther v Attorney General of Canada (1959), 17 DLR (2d) 437;

Attorney General of Canada v Royal Bank of Canada, [1979] 1 WWR 479; 29 CBR (NS) 227, (Alta SC App Div) [1977] 6 WWR 170; 25 CBR (NS) 233 (Alta SC Trial Div);

Rhyno v Fireman’s Fund Insurance Company of Canada (1980), 34 CBR (NS) 215, at 219, (NSSC);

Royal Bank of Canada v Minister of Finance of Manitoba, [1979] 2 WWR 501; 29 CBR (NS) 250, at 254, 255 (Man CA);

Re Lamarre; University of Calgary v Morrison and Receiver General of Canada, [1978] 2 WWR 465; 78 DTC 6155, (Alta SC App Div);

Holt v Heatherfield Trust, Ltd and G & T Bridgewater Ltd, [1942] 1 All ER 404, at 408 (King’s Bench Division);

St George Jellett v Daniel R Wilkie and others (1897), 26 Can SCR 282;

The Queen v Luck (1980), 28 OR (2d) 391, (Div Ct);

Edward Tailby v The Official Receiver (1888), 13 AC 523 (HL);

Great Lakes Petroleum Co Ltd v Border Cities Oil Co Ltd, [1934] 2 DLR 743; [1934] OR 244, (OCA);

Evans, Coleman & Evans Ltd v R A Nelson Construction Ltd (1958), 16 DLR (2d) 123, at 127 (BCCA);

Young v Royal Bank of Canada (1978), 20 OR (2d) 708, at 714 (Ont SC);

Re Trilateral Enterprises Ltd (1977), 14 OR (2d) 712, at 714, (Ont SC);

Canadian Imperial Bank of Commerce v Sitarenios et al (1977), 73 DLR (3d) 663; 14 OR (2d) 345, (OCA);

Campeau Corporation v Provincial Bank of Canada, Receiver General of Canada, Simpson, Aubin, Pelletier, Cafco Building Cleaning Limited and Schumer (1975), 20 CBR (NS) 99;

Siebe Gorman & Co Ltd v Barclays Bank Ltd, [1979] 2 Lloyd’s L Rep 142 (Slade,

J) Ch D;

Alberta Energy Company Ltd v Project Management Corporation, [1981] 2 WWR 50, at 56, (Alta QB);

Dearie v Hall (1823), 3 Russ 1, [1824-1834] All ER Rep 28;

Francis Ridout Ward and Charles Pemberton v Thomas Matthew Duncombe, [1893] AC 369, (HL);

Dauphin Plains Credit Union Ltd v Xyloid Industries Ltd, [1980] CTC 247; 80 DTC 6123; [1980] 1 SCR 1182 at 1199; 108 DLR (3d) 257 at 267;

The Queen v H R Doane Ltd et al (1981), 122 DLR (3d) at 609;

Regina v Lega Febricating Ltd et al, (1980);

The Queen v Nest Mfg Ltd, [1978] 1 FC 624 (FCTD);

IRB v Avco Financial Services Realty Ltd, [1979] 2 SCR 699;

Royal Bank of Canada v The Queen (1979), 93 DLR (3d) at 398;

Hamilton Avnet International (Canada) Ltd v Canatron Controls Ltd, 20 OR (2d) 54:

Household Realty Corp Ltd v Attorney General of Canada, 105 DLR (3d) 266; Robert E Jamison v Federal Business Development Bank et al, 78 DTC 6482;

The Queen v Bank of Nova Scotia, (1885), 11 SCR 1;

Royal Bank of Canada v Attorney General of Canada, [1977] 6 WWR, 170;

Williams v Leonard & Sons (1896), 26 SCR 406;

Attorney General of Canada v Canadian Imperial Bank of Commerce, [1974] I WWR 186 (Alta SC);

La Banque Canadienne Nationale v The Queen, [1979] 2 FC 170;

Rexair of Canada v The Queen, [1958] CTC 215; 58 DTC 1158 (SCC);

The King v Reuben Shore, [1949] CTC 159; 49 DTC 570 (Ex Ct);

Palmolive Manufacturing Co (Ontario) Limited v The King, [1933] SCR 131;

Turnbull Elevator Company of Canada Limited v The Queen, 63 DTC 1001, at 1005;

Goodyear Tire and Rubber Company of Canada Limited v The T Eaton Co Limited, [1955] Ex CR 229; [1956] SCR 610;

Board of Industrial Relations v Avco Financial Services Realty Limited, [1979] 2 SCR 699;

Globe Furniture Co Ltd, 14 CBR 136.