The Queen v. TransGas Ltd., 93 DTC 5391, [1993] 1 CTC 280 (Sask. C.A.), briefly aff'd (1994), 120 DLR (4th) 715, [1994] 3 SCR 753

Tallis, J.A.:— In these consolidated appeals, we are confronted with the constitutionality of the garnishment provision found in subsection 224(1.2) of the Income Tax Act, S.C. 1970-71-72, c. 63 [enacted 1987, c. 46 section 66; amended, 1990, c. 34 section 1]. The respondents challenge this provision under the” distribution of legislative powers" sections of the Constitution Act, 1867. They also contend that it infringes section 8 of the Canadian Charter of Rights and Freedoms. If this constitutional challenge is not sustained, we must decide whether, in this instance, the appellant Minister effectively attached certain moneys in priority to the respondents' claims under the Builders’ Lien Act, S.S. 1984-85-86, c. B-7.1.

I. Introduction

As an administrative matter, we observe that Parliament has established administrative means and procedures for the collection of income tax and “social security" taxes. Under certain "wage-withholding" provisions, an employer is required to collect, account for and remit an employee's income tax and "society security" taxes to the Receiver General. Subsection 153(1) of the Income Tax Act (I.T.A.) provides:

Ray me nt of Tax

153(1) Withholding.—Every person paying at any time in a taxation year

(a) salary or wages or other remuneration,

(b) a superannuation or pension benefit,

(c) a retiring allowance,

(d) a death benefit,

(d.1) an amount as a benefit under the Unemployment Insurance Act, 1971,

(e) an amount as a benefit under a supplementary unemployment benefit plan,

(f) an annuity payment or a payment in full or partial commutation of an annuity,

(g) fees, commissions or other amounts for services,

(h) a payment under a deferred profit sharing plan or a plan referred to in section 147 as a revoked plan,

(i) a training allowance under the National Training Act,

(j) a payment out of or under a registered retirement savings plan or a plan referred to in subsection 146(12) as an“ "amended plan”,

(k) an amount as, on account or in lieu of payment of, or in satisfaction of, proceeds of the surrender, cancellation or redemption of an income-averaging annuity contract,

(l) a payment out of or under a registered retirement income fund or a fund referred to in subsection 146.3(11) as an "amended fund”,

(m) an amount as a benefit under the Labour Adjustment Benefits Act,

(m.1) an income assistance payment made pursuant to an agreement under section 5 of the Department of Labour Act,

(n) one or more amounts to an individual who has elected for the year in prescribed form in respect of all such amounts,

(o) an amount described in paragraph 115(2)(c.1),

(p) a contribution under a retirement compensation arrangement,

(q) an amount as a distribution to one or more persons out of or under a retirement compensation arrangement, or

(r) an amount on account of the purchase price of an interest in a retirement compensation arrangement

shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee's tax for the year under this Part or Part Xl.3, as the case may be.

Under subsection 153(3) of the Act, such deduction is deemed to have been received by the employee and subsection 227(1) precludes any action against any person for withholding or deducting any sums of money in compliance with the statutory provisions. Furthermore, subsection 227(4) impresses the withheld funds with a trust. It reads:

(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.

Since the timely remittance of taxes withheld at source goes to the root of any collection scheme and is necessary to the very existence of government, one can understand the need for administrative expediency in the collection process. Otherwise, "trust" moneys could be diverted into the hands of other creditors or converted to personal use.

Until June 27, 1990, the pertinent garnishment provisions under subsections 224(1.2) and (1.3) [S.C. 1987, c. 46, subsection 66(1)] read thus:

(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;

“similar provision” means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act.

The legislative history of this legislation evidences a continuing concern over unremitted source deductions and the consequent burdens placed on other taxpayers by such losses. As well, conflicting judicial decisions emerged with respect to the Minister's priority over “security interests". Parliament responded by adding the following passage to subsection 224(1.2):

. . . and on receipt of that letter by the particular person, the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest.

[See S.C. 199, c. 34, subsection 1(3).]

The issue on this appeal is whether these provisions, as amended, are constitutionally valid, and if so, whether their proper application to the facts of this case mandates an order affirming the Minister's claim to the moneys in issue.

II. Procedural history and facts

We find it convenient to now summarize the relevant procedural history and facts. During the period May to July, 1990, TransGas Limited, a Crown Corporation within the meaning of the Builders’ Lien Act (B.L.A.), entered into four contracts with Mid-Plains Contractors Ltd. for the construction and installation of pipe line systems and natural as works. After completing one of these contracts and doing substantial work on the other three, Mid-Plains gave notice to TransGas on November 15, 1990 that it would be unable to complete the remaining work. TransGas stopped all payments under the contracts. At the time of abandonment by Mid-Plains, TransGas held "holdback" funds as stipulated in the B.L.A. together with additional contract funds payable to MidPlains for the work done under the abandoned contracts. At that stage, TransGas could not determine the allowable set-off for completion costs of the contracts.

Following this turn of events, numerous creditors of Mid-Plains took steps to attach any moneys payable to it under the TransGas contracts. On audit, the Minister determined that Mid-Plains had failed to remit taxes and other statutory payroll deductions from employees. Accordingly, the Minister invoked subsection 224(1.2) and on November 21, 1990, served TransGas with a" requirement to pay" the sum of $231,392.42. Following reassessment of Mid-Plains' liability at $473,780.04, the Minister served TransGas with a second "requirement to pay" that sum on December 10, 1990. Mid-Plains does not challenge this assessment or its liability for this amount.

Since many workers, suppliers and construction contractors were unpaid, they filed lien claims under the B.L.A. and asserted priority over the Minister under the “trust” provisions of that Act: See sections 6 and 7. As well, the Saskatchewan Workers' Compensation Board (WCB) served TransGas with a claim for unpaid payments by Mid-Plains. [1]

Faced with these competing claims, TransGas obtained an order in Queen's Bench which vacated all the B.L.A. lien claims served on it upon payment into court of $999,900.32. This payment into court was characterized as follows:

Since the Minister made no claim to the" holdback" funds, a consent order issued in Queen's Bench under which the claim of the Director of Labour Standards on behalf of unpaid workers was paid in full therefrom, with the balance of the holdback" funds paid to the various non-labour lien claimants on a pro rata basis.

The Minister brought an application in Queen's Bench chambers to settle the entitlement of the various claimants to the "contract funds" remaining in court. The learned chambers judge directed counsel for the parties to address the constitutionality of subsections 224(1.2) and (1.3) of the Income Tax Act. Accordingly, a notice under the Constitutional Questions Act was served by solicitors for P.E. Ben Industries Limited et al. contending that subsection 224(1.2):

(a) contravenes, inter alia, the rights of the Applicant Lien Claimants to be secure against unreasonable search or seizure, as guaranteed by section 8 of the Canadian Charter of Rights and Freedoms and is therefore of no force or effect; and

(b) is not necessarily incidental or ancillary to the federal taxation power in subsection 91(3) of the Constitution Act, 1867, such that it intrudes upon provincial jurisdiction over property and civil rights and is therefore ultra vires the Federal Parliament.

In written reasons now reported at [1992] 2 C.T.C. 151, 91 D.T.C. 6074, the learned chambers judge held that subsection 224(1.2) was ultra vires the Parliament of Canada and gave consequential directions for payment out of the money in court in accordance with the B.L.A. Since this determination of the constitutional issue effectively defeated the Minister's claim to priority, an appeal was brought to this court.

TransGas also appealed from the decision in respect of its liability under section 133 of the Workers’ Compensation Act and section 53 of the Labour Standards Act as well as its right of set off under section 13 of the B.L.A. Although these issues were not passed upon by the learned chambers judge, TransGas brought its appeal to preserve and protect its position.

III. Distribution of legislative powers

The Income Tax Act is obviously an enactment which, in pith and substance, is taxation legislation and therefore falls within the legislative powers conferred on Parliament by subsection 91(3) of the Constitution Act, 1867. To that extent no issue arises. However, the respondents contend that subsection 224(1.2) intrudes upon matters of property and civil rights within the legislative competence of the province under subsection 92(13) and, accordingly, is ultra vires. [2]

It has long been established that the right to levy taxes under subsection 91(3) of the Constitution Act, 1867 includes the right to collect them: R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, [1990] 2 C.T.C. 103, 90 D.T.C. 6243, Pembina on the Red Development Corp. Ltd. v. Triman Industries Ltd., [1992] 1 C.T.C. 133, 92 D.T.C. 6174 (Man. C.A.) and Sun Life Assurance Co. of Canada v. Canada (Department of National Revenue), [1992] 4 W.W.R. 504 (Sask. Q.B.). Although the learned chambers judge accepted this basic governing principle, he concluded that the moneys attached under the Minister's requirement to pay" did not constitute "taxes", and that subsection 224(1.2) was not a tax collection provision. We refer to the following passages of his decision ([1992] 1 C.T.C. 151, 92 D.T.C. 6074) at page 161 (D.T.C. 6081-82):

A question arises whether money seized under a requirement to pay can be properly described as "taxes". Under Parliament's subsection 91(3) taxation powers, Parliament is not empowered to identify something as a tax when in fact it is not a tax. There is no assessment under the provisions of the Income Tax Act against the persons subject, directly or indirectly, to a requirement to pay. The affidavit of Betty Lou Felsing filed by Revenue Canada in support of its notice of motion, states that Revenue Canada's claim is pursuant to an assessment against Mid-Plains “in respect of unpaid payroll deductions, together with penalties and interest, pursuant to the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act." (Presumably, where the affidavit uses the word “unpaid”, it should properly have used the word “ unremitted”.) What must have happened was that Mid-Plains deducted from the wages due to its employees the amounts required to be deducted by the aforesaid Acts, but then failed to remit those moneys to Revenue Canada. The amounts so deducted together with penalties and interest, were due and owing, and by the terms of the Income Tax Act, were required to be remitted, to Revenue Canada. When Mid-Plains failed to remit as required, Revenue Canada then sought to recover the amount of Mid-Plain's indebtedness by proceeding against TransGas under subsection 224(1.2). At this point, there was no tax owing or assessed against either TransGas or the lien claimants. There was only a debt due in respect of taxes from Mid-Plains to Revenue Canada, and Revenue Canada simply proceeded to use the mechanism of subsection 224(1.2) to “ make-up” the money which Mid-Plains owed to Revenue Canada, and which Revenue Canada was unable to recover from Mid-Plains.

It is interesting that the Income Tax Act does not attempt to classify the money being seized as a tax, even assuming it had the power to do so, which I would question. As mentioned above it neither assesses, nor sends a notice of assessment to, the "particular person” to whom the requirement to pay is sent, and the Income Tax Act does not make it an offence if the "particular person" fails to pay, as it does in cases where the failure follows a notice of assessment. Subsection 224(4) simply provides that failure to pay by the "particular person" makes him "liable to pay" to Revenue Canada the amount claimed in the requirement to pay. So there would seem to be an implicit acknowledgment in this taxation statute that the money purporting to be seized under subsection 224(1.2) is not a tax or tax money.

The following passages at pages 164-66 (D.T.C. 6084-85) bring this issue into sharper focus:

Applying the foregoing decisions, I have serious reservations as to whether subsection 224(1.2) of the Income Tax Act is, in pith and substance, dealing with the subject of a "system of taxation”. It seems to me that to treat the money as taxes is to "confuse nomenclature with analysis”. The obvious aim of the section is to provide a method whereby Revenue Canada can collect money in lieu of tax money where Revenue Canada has been unable to recover from a company such as Mid-Plains the wage deductions which Mid-Plains deducted from its employees, plus penalties and interest. I would be inclined to categorize the impugned section as a unique form of debt recovery legislation falling under subsection 92(13) of the Constitution Act, 1867, rather than taxation legislation falling under section 91(3). To paraphrase the statement of the unanimous decision of the Supreme Court of Canada in Attorney-General of British Columbia v. Smith, [1967] S.C.R. 702, 65 D.L.R. (2d) 82 at page 713 (D.L.R. 90), the impugned section is not genuine legislation in relation to subsection 91(3) in its comprehensive case.

In my view, the core federal responsibility under subsection 91(3) is to raise money by a system of taxation, and raising money in lieu of taxes cannot fall within “any penumbra sufficiently proximate to satisfy the test.

Earlier in this judgment I referred to the recent decision of the Manitoba Court of Appeal in Pembina on the Red v. Triman Industries Ltd., [1992] 1 C.T.C. 133, 92 D.T.C. 6174, and in that case the constitutionality of subsection 224(1.2) was considered and found to be intra vires. While not binding on me, that decision is persuasive, but with the greatest respect, I must disagree with that conclusion.

I, therefore, declare subsection 224(1.2) of the Income Tax Act to be ultra vires to the extent that it impinges on provincial laws relating to ownership of property pursuant to subsection 92(13) of the Constitution Act, 1867, and I specifically declare that the said section is ultra vires and has no application in respect of the trust money which has been paid into Court in this matter.

With respect, we find ourselves unable to agree with the analysis of the learned chambers judge. In determining whether subsection 224(1.2) is or is not ultra vires, it matters little, in our opinion, that the moneys which can be attached do not in themselves constitute "taxes". The more germane consideration is that such moneys are rendered attachable to satisfy taxes which the person to whom the moneys are payable ought to have remitted but did not. Nor, in our opinion, is it accurate to characterize the section as "a unique form of debt recovery legislation" as opposed to“ axation legislation”. If the section was to be characterized in these terms, it would be more accurate to say that it is” tax debt recovery legislation". It is a measure aimed at the realization of a tax indebtedness and is in that sense "taxation legislation".

In this case, Mid-Plains collected certain taxes by withholding the required sums from its employees' wages. Although these funds were impressed with a trust under subsection 227(4) of the Income Tax Act, Mid-Plains failed to pay over this collected tax money to the Minister. If this tax money had been paid over as it should have been, no issue as to priority or availability of such money to other creditors including the respondent lien claimants would have arisen. We further observe, that subsection 224(1.2), unlike the general garnishment provisions of subection 224(1), only applies in respect of tax debtor liability under subsection 227(10.1) — liability that relates to the obligation on a tax debtor to remit the tax moneys previously withheld from payments made by the tax debtor to certain creditors, primarily employees. Therefore, in our opinion, the purpose of the impugned provision is clear — to effect expedient collection of the withheld tax money and thereby prevent its misappropriation or diversion to the tax debtor's other creditors. As such, it is part of the general scheme established by the Government of Canada for the collection of taxes and falls squarely within subsection 91(3) of the Constitution Act, 1867.

While we recognize the potential intrusion of subsection 224(1.2) upon provincial jurisdiction under subsection 92(13) of the Constitution Act, 1867, we are all of the opinion that subsection 224(1.2) meets the controlling test prescribed by the Supreme Court of Canada in Reference Re Goods and Services Tax, [1992] 2 S.C.R. 445, [1992] 4 W.W.R. 673 and other controlling authorities in that Court.

In that case, the Supreme Court passed upon a challenge to the G.S.T. Act — a statute which created, inter alia, collection and remittance obligations on commercial entities operating within the province. These federally imposed administrative burdens were "necessarily incidental” to the G.S.T. scheme of taxation. Assessing the interaction between subsections 91(3) and 92(13) of the Constitution Act, 1867, Lamer, C.J. (Sopinka, Gonthier, Cory, McLachlin and lacobucci, JJ. concurring) articulated the controlling test in the following passages at pages 468-71 (W.W.R. 689-92):

Canada concedes, and I am of the same view, that the GST Act affects matters which fall within the provincial jurisdiction under subsection 92(13) to pass legislation in relation to property and civil rights in the province. It is therefore necessary to answer two questions in order to determine whether this incursion into provincial jurisdiction is justified. First, it is necessary to decide whether the GST Act is a valid exercise of any federal head of jurisdiction under section 91 of the Constitution Act, 1867. Secondly, it must be decided whether the effect the GST scheme has on matters traditionally within the province's jurisdiction can be said to be necessarily incidental to the exercise of this federal power.

In my view, the answer to the first question is quite simple. The GST Act has no purpose other than to raise revenue for the federal government, and it does in fact raise revenue at the point of consumption of taxable supplies. As such, it would be hard to dispute that the Act itself is properly characterized as being in relation to a mode or system of taxation in the meaning of subsection 91(3) of the Constitution Act, 1867. While the GST Act certainly affects matters falling under provincial jurisdiction, it cannot reasonably be said to be aimed at a provincial purpose.

With respect, in my opinion, the Attorney General for Alberta's attack on the GST Act at this level is implausible . . . .

The GST Act has significant effects upon matters within provincial jurisdiction, but it is impossible to say that the purpose of the Act is to produce these effects. The purpose of the Act is to raise revenue for the federal government, and the effects produced by the scheme on matters within provincial jurisdiction are incidental to this purpose.

It must still be decided, however, whether these incidental effects are sufficiently a part of the scheme of the GST Act that they are justifiable, despite the incursion upon provincial jurisdiction, on the "necessarily incidental" doctrine. The appropriate test has been stated by this Court on a number of occasions, but in substance what is required is a high degree of integration between a scheme enacted pursuant to a valid federal objective, and those portions of the scheme which impinge upon provincial jurisdiction. In Reference re Exported Natural Gas Tax, [1982] 1 1S.C.R. 1004, 136 D.L.R. (3d) 385, 37 A.R. 541, 43 N.R. 361, the majority of the Court (Martland, Ritchie, Dickson, Beetz, Estey and Chouinard, JJ.) had this to say about the “necessarily incidental” doctrine at pages 1052-53 (D.L.R. 424-25, A.R. 554, N.R. 374):

One has to bear in mind. . . in dealing with the abrogation of property rights by federal authority in the exercise of some other right, that, whatever the terminology may be, it is only such part of the property right and such extent of the taking of that right, as may be tied inherently and of necessity to the exercise of the authority in question by the federal level of government that the constitution will permit.

[Emphasis added.]

The test is clearly a strict one. However, in General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R. 641, 58 D.L.R. (4th) 255, 24 C.P.R. (3d) 417 at page 669 (D.L.R. 274, C.P.R. 436), Dickson, C.J. indicated that a degree of judicial moderation was appropriate, for the reason that a federal system requires both levels of government to be accorded a degree of latitude in the pursuit of valid objectives:

In determining the proper test it should be remembered that in a federal system it is inevitable that, in pursuing valid objectives, the legislation of each level of government will impact occasionally on the sphere of power of the other level of government; overlap of legislation is to be expected and accommodated in a federal state. Thus a certain degree of judicial restraint in proposing strict tests which will result in striking down such legislation is appropriate.

Dickson, C.J. continued at pages 671-72 (D.L.R. 276-77, C.P.R. 437-38) to set out an analytical scheme for the evaluation of federal incursions upon matters within provincial jurisdiction under the necessarily incidental” doctrine. The first step is to decide whether the impugned scheme in fact touches matters within provincial jurisdiction. If it does not, the inquiry ends, but if it does, then it is necessary to ask whether the legislation in question is enacted pursuant to some valid federal head of power. If the legislation is not enacted pursuant to a valid purpose, then of course it must be struck down. However, if it is enacted pursuant to a valid federal purpose, then it is necessary to determine whether the impugned provisions are sufficiently integrated with the scheme that [they] can be upheld by virtue of that relationship.” If the impugned provisions are not sufficiently integrated into the scheme as a whole, then they cannot be sustained as a valid exercise of federal power. However, if the test of integration is passed, then the provisions are supportable as an exercise of federal jurisdiction notwithstanding that they affect matters falling within the jurisdiction of the provinces.

I conclude that the GST Act is enacted pursuant to a federal head of power under section 91 of the Constitution Act, 1867, and that while the scheme it establishes does intrude upon matters traditionally falling under the provincial power over property and civil rights, the scheme is sufficiently well integrated into the GST Act as a whole that the intrusion upon provincial jurisdiction is justified. The second constitutional question therefore must be answered in the negative.

Applying this test to subsection 224(1.2), and having already noted that the legislation at issue has been enacted pursuant to a valid federal purpose, we conclude that intrusion by the provision upon provincial jurisdiction is justified. The provision enables the Minister to collect withheld taxes by garnishee- ing funds payable to the delinquent employer — funds that would not have been available to other creditors if they had been remitted as required by law. In order to ensure the collection of “withheld” tax money, the government has enacted this garnishment provision with the result that it constitutes an integral and essential part of the collection scheme as it is clearly designed to attack the problem of tax deficiencies due to conversion or other types of misappropriation at the source of the deductions.

Since there are conflicting decisions in this jurisdiction, we observe that our conclusion supports the analysis of Armstrong, J. in Sun Life Assurance Co. of Canada v. Canada, supra. In that case, the Queen's Bench was faced with a constitutional challenge to subsection 224(1) of the Income Tax Act based on its perceived clash with section 19 of the Pension Benefits Act, R.S.S. 1978,

c. P-6. [3] In addressing the ultra vires issue, Armstrong, J. stated at pages 506-09:

I do not find anything in the circumstances of the case that should give rise to the first question. Subsection 224(1) provides a form of garnishment for use throughout Canada as compared to calling upon Revenue Canada to utilize the various processes that may be available in the various provinces of Canada, such, for example, as the Attachment of Debts Act, R.S.S. 1978, c. A-32, in Saskatchewan. Also subsection 224(1) provides for a continuing garnishee thus avoiding the necessity of perhaps having to obtain and serve a number of garnishee summonses until a debt is fully collected. It also avoids payment into court and application for payment out as required by the Attachment of Debts Act. With respect, Sun Life seems to be simply arguing that subsection 224(1) is ultra vires solely because of section 19. In my view, the only question raised is not one of “vires”. It is not a question of exceeding power to legislate. At most, there may be a conflict between two jurisdictions, each keeping within the confines of its jurisdiction. This does not mean that one must be acting ultra vires.

There does not appear to be any question that the right to levy taxes includes the right to collect them.

Sun Life relies heavily on TransGas Ltd. v. Mid-Plains Contractors Ltd., [1992] 1 C.T.C. 151, 92 D.T.C. 6074, 48 C.L.R. 39, 86 D.L.R. (4th) 251, [1992] 2 W.W.R. 256, a decision of Chief Justice MacPherson of this court in which he concluded that section 224(1.2) is ultra vires the Parliament of Canada. But for the decision of the Chief Justice, I would have thought that the question in the TransGas case, supra, was whether the Crown in right of Canada (again, Revenue Canada) was entitled to priority over other creditors, i.e., third party claimants, regardless of the procedure adopted. . . .

Sun Life argued that subsection 224(1) "massively" encroaches on the provincial jurisdiction over civil rights and specifically over pensions. This argument appears, however, to be prompted solely by the effect on Young's pension payments. But it is no intervention at all as between Revenue Canada and the only person affected, namely Young. It does not alter in any way the substantive rights as between Young and Revenue Canada. It does not decide whether Young is debtor and Revenue Canada is creditor. If Young has any quarrel with Revenue Canada, nothing in subsection 224(1) precludes him from continuing that quarrel. The effect of subsection 224(1) is not to deprive Young of rights. It is, instead, a procedural mechanism for giving effect to the established rights of Revenue Canada. Section 19 deprives creditors of rights they would otherwise have. The question, which is also the second question to be answered pursuant to R. 188 is whether section 19 deprives Revenue Canada of rights it otherwise would have. It seems to me a better illustration of something that would be a massive intervention would be to think that section 19 could deprive Revenue Canada of the ability to garnishee a bank account in Montreal, a business contract debtor in Newfoundland, or indeed anybody anywhere in Canada, obligated to pay a tax debtor. Surely if subsection 224(1) was previously intra vires, the passing of section 19 by the provincial legislature, did not cause subsection 224(1) to become ultra vires. If a requirement to pay under subsection 224(1) had been directed to a bank in which Young had an account, I dare say it would not have prompted a cry of ultra vires.

lf Revenue Canada had obtained judgment in this court and served a garnishee summons under the Attachment of Debts Act, it would hardly result in a claim of ultra vires. The concern would have to be whether Revenue Canada, i.e., the Crown in right of Canada, is subject to section 19. And that, in my view, is the only question that is raised in the circumstances.

Having rejected the respondents' challenge under the "distribution of powers" clause, we now turn to the Charter challenge.

Charter issue: unreasonable seizure

Section 8 of the Charter reads:

8. Everyone has the right to be secure against unreasonable search or seizure.

Counsel for the respondents argued that subsection 224(1.2) of the ITA authorizes unreasonable seizures contrary to section 8 of the Charter and accordingly should be declared to be unconstitutional. After considering and applying the principles articulated by the Supreme Court of Canada in Hunter v. Southam Inc., [1984] 2 S.C.R. 145, 11 D.L.R. (4th) 641, 14 C.C.C. (3d) 97, Re B.C. Motor Vehicle Act, [1985] 2 S.C.R. 486, [1986] 1 W.W.R. 481, Irwin Toy Ltd. v. Quebec (Attorney General), [1989] 2 S.C.R. 927, 94 N.R. 167, 58 D.L.R. (4th) 577, Thomson Newspapers Ltd. v. Canada, [1990] 1 S.C.R. 425, 76 C.R. (3d) 129, 67 D.L.R. (4th) 161 and R. v. Kokesch, [1990] 3 S.C.R. 3, [1991] 1 W.W.R. 193, 61 C.C.C. (3d) 207, the learned chambers judge rejected this argument and stated his conclusion in the following passage at page 168 (D.T.C. 6087, W.W.R. 282):

. .. I must hold that section 8 applies only to a seizure which invades the privacy of the person from whom the seizure was made, and that since, in our case, the seizure of the trust money does not give rise to an incursion into the privacy of either the lienholders or TransGas, the impugned section does not violate section 8 of the Charter in these circumstances.

The respondents attack this conclusion and contend that subsection 224(1.2) itself infringes section 8 of the Charter. In this case, we are not being asked to consider the reasonableness or otherwise of the manner in which the Minister carried out his statutory authority. The respondents say that the ''seizure" that occurred in the ordinary administration of this statutory garnishment provision is an "unreasonable" seizure within the intendment of section

8. We do not agree.

The purpose of section 8 is to protect individuals from unjustified state intrusion of their privacy: see Hunter v. Southam Inc., supra. In this case, subsection 224(1.2) was invoked by the Minister to collect tax withheld by MidPlains from its employees. Mid-Plains does not challenge the assessment or its liability to pay over the withheld funds. Although the respondent lien claimants enjoy status to attack the Minister's garnishment and any consequent entitlement arising from it, no invasion of "privacy" has been demonstrated in this case. However, the respondents urge this court to extend the scope of section 8 to embrace purely economic interests. They argue that the Supreme Court has not foreclosed protection of other interests under section 8. In Hunter v. Southam Inc., supra, Dickson, J., as he then was, said at pages 158-59 (D.L.R. 651-52, C.C.C. 107-08):

In my view the interests protected by section 8 are of a wider ambit than those enunciated in Entick v. Carrington (1765), 19 State Tr. 1029. Section 8 is an entrenched constitutional provision. It is not therefore vulnerable to encroachment by legislative enactments in the same way as common law protections. There is, further, nothing in the language of the section to restrict it to the protection of property or to associate it with the law of trespass. It guarantees a broad and general right to be secure from unreasonable search and seizure.

Like the Supreme Court of the United States, I would be wary of foreclosing the possibility that the right to be secure against unreasonable search and seizure might protect interests beyond the right of privacy, but for purposes of the present appeal I am satisfied that its protections go at least that far.

And in R. v. Dyment, [1988] 2 S.C.R. 417, 55 D.L.R. (4th) 503 at page 426 (D.L.R. 512), La Forest, J. stated with reference to Hunter v. Southam Inc., Supra:

That case dealt specifically with section 8. It underlined that a major, though not necessarily the only, purpose of the constitutional protection against unreasonable search and seizure under section 8 is the protection of the privacy of the individual. . . .

Given the clear purpose of section 8 of the Charter, we decline to extend its scope to cover pure economic interests. Different considerations might well apply if this garnishment affected rights of personal dignity or privacy as well as property rights. We are not persuaded that this section has such an effect.

However, if one assumes that garnishment under subsection 224(1.2) does involve “intrusion” of interests protected under section 8, then the question arises whether such garnishment provision is reasonable. Although the Supreme Court passed only upon subsection 231(3) of the Income Tax Act in R. v. McKinlay Transport Ltd., supra, the analysis of Wilson, J. at pages 647-50 (C.T.C. 113-14, D.T.C. 6250-51) is instructive:

I refer to these cases not to approve or disapprove the results achieved but rather as evidence of the need to take a flexible and purposive approach to section 8 of the Charter. It is consistent with this approach, I believe, to draw a distinction between seizures in the criminal or quasi-criminal context to which the full rigours of the Hunter criteria will apply, and seizures in the administrative or regulatory context to which a lesser standard may apply depending upon the legislative scheme under review. I do not believe that when the Chief Justice said in R. v. Simmons, [1988] 2 S.C.R. 495, 55 D.L.R. (4th) 673 at page 527 (D.L.R. 696) that departures from the Hunter criteria would be rare he was applying his mind to searches or seizures in the context of regulatory legislation. I think he was addressing as in the cases of Hunter and Simmons themselves searches or seizures in a criminal or quasi-criminal context. It is with these considerations in mind that I examine the reasonableness of subsection 231(3) of the Income Tax Act.

At the beginning of my analysis I noted that the Income Tax Act was based on the principle of self-reporting and self-assessment. The Act could have provided that each taxpayer submit all his or her records to the Minister and his officials so that they might make the calculations necessary for determining each person's taxable income. The legislation does not so provide, no doubt because it would be extremely expensive and cumbersome to operate such a system. However, a selfreporting system has its drawbacks. Chief among these is that it depends for its success upon the taxpayers’ honesty and integrity in preparing their returns. While most taxpayers undoubtedly respect and comply with the system, the facts of life are that certain persons will attempt to take advantage of the system and avoid their full tax liability.

Accordingly, the Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers' returns and inspect all records which may be relevant to the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the tax system can be maintained. If this is the case, and I believe that it is, then it is evident that the Hunter criteria are ill-suited to determine whether a seizure under subsection 231(3) of the Income Tax Act is reasonable. The regulatory nature of the legislation and the scheme enacted require otherwise. The need for random monitoring is incompatible with the requirement in Hunter that the person seeking authorization for a search or a seizure have reasonable and probable grounds, established under oath, to believe that an offence has been committed. If this Hunter criterion is inapplicable, then so too must the remaining Hunter criteria since they all depend for their vitality upon the need to establish reasonable and probable grounds. For example, there is no need for an impartial arbiter capable of acting judicially since his central role under Hunter is to ensure that the person seeking the authorization has reasonable and probable grounds to believe that a particular offence has been committed, that there are reasonable and probable grounds to believe that the authorization will turn up something relating to that particular offence, and that the authorization only goes so far as to allow the seizure of documents relevant to that particular offence.

This is not to say that any and all forms of search and seizure under the Income Tax Act are valid. The state interest in monitoring compliance with the legislation must be weighed against an individual's privacy interest. The greater the intrusion into the privacy interests of an individual, the more likely it will be that safeguards akin to those in Hunter will be required. Thus, when the tax officials seek entry onto the private property of an individual to conduct a search or seizure, the intrusion is much greater than a mere demand for production of documents. The reason for this is that, while a taxpayer may have little expectation of privacy in relation to his business records relevant to the determination of his tax liability, he has a significant privacy interest in the inviolability of his home.

In my opinion, subsection 231(3) provides the least intrusive means by which effective monitoring of compliance with the Income Tax Act can be effected. It involves no invasion of a taxpayer's home or business premises. It simply calls for the production of records which may be relevant to the filing of an income tax return. A taxpayer's privacy interest with regard to these documents vis-a-vis the Minister is relatively low. The Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them. At the same time, the taxpayer's privacy interest is protected as much as possible since section 241 of the Act protects the taxpayer from disclosure of his records or the information contained therein to other persons or agencies.

Applying this standard of review to subsection 224(1.2), we hold that it does not infringe section 8 of the Charter. The section is an instrument for collection of federal taxes. Since it would be impractical to require a government to resort to a court to collect such taxes, Parliament has established an expedient means whereby "withheld" tax deductions may be collected through administrative means.

Although no issue arises between the Minister and Mid-Plains, the garnishment or seizure does not prevent the respondents from seeking an adjudication in court on the "entitlement" issue. TransGas, when faced with competing claims, paid the money into court so that entitlement to the moneys could be determined by the Court. The Minister does not challenge this procedure — indeed, he brought an application in Queen's Bench to have the entitlement issue settled. Accordingly, given the rights and protection afforded by law to the respondents in terms of the “ entitlement” issue before the court, we hold that any alleged "seizure" under section 8 is not unreasonable.

We accordingly decline to give effect to the Charter challenge.

Interpretation issue

Having concluded that subsection 224(1.2) is constitutionally valid, we now consider whether the Minister has effectively attached the money in question held in the hands of TransGas. Since the instant issue focuses on the statutory construction of subsection 224(1.2) as amended in 1990, and subsection 224(1.3), we reproduce those provisions for ease of reference.

(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 (in this subsection referred to as the "tax debtor") who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, 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, and on receipt of that letter by the particular person, the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest.

(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 whatever arising created, deemed to arise or otherwise provided for;

“similar provision” means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act.

[Emphasis added.]

The respondent's argument on this issue was rejected by the learned chambers judge in the following pertinent passages of his reasons on pages 266-68 (D.L.R. 259-61):

Turning to the specific application of subsection 224(1.2), counsel for Revenue Canada argued that the claims of the lienholders are a secured interest as defined in subsection (1.3), based on the Saskatchewan Court of Appeal decision in Royal Bank v. Canada, [1991] 1 C.T.C. 532, [1991] 1 W.W.R. 1, 73 D.L.R. (4th) 257 and because the words "lien" and "deemed or actual trust" appear in the definition of security interest in subsection (1.3).

On the other hand, counsel for the lien claimants argue that the trust money does not fall under either paragraph (a) or paragraph (b) of subsection (1.2) as those moneys were not payable to Mid-Plains and were not payable to the lien claimants by reason of any reason of [sic] any security interest in the moneys, but rather by reason of the statutory payment scheme provided for in the B.L.A. Counsel point out that in Royal Bank, supra, the question which our Appeal Court considered was set forth as follows at pages 534-35 (W.W.R. 6, D.L.R. 262):

The simple issue is whether the power granted to the Minister of National Revenue under subsection 224(1) of the Income Tax Act to require payment of a debt owed to a taxpayer to the Minister of National Revenue takes priority over a prior perfected security interest and deprives the secured creditor of the secured position.

It is argues [sic] that the position of the lienholders is different in that they are beneficial owners of the money and not secured creditors within the meaning of subsection 224(1.2) or (1.3), and that consequently these subsections do not apply to them.

Arguments were filed and heard from two counsel representing lienholders — Mr. Sawatzky representing the non-labour lienholders and Mr. Hodson representing six specifically named non-labour lienholders, I will not attempt to separate or distinguish as between these two arguments, and will treat them as one for the purposes of this judgment.

The arguments point out that the lienholders are the beneficial owners of the trust money by virtue of the trust created by section 7 of the B.L.A., and since some liens were validly filed prior to Revenue Canada having served its notices of requirements to pay, the priorities provided by subsections 15 and 70 of the B.L.A. are applicable. They argue that the trust and the priorities were triggered by the filing of liens and that consequently the lienholders were beneficial owners prior to any steps being taken by Revenue Canada, and that being the case, they are not secured creditors with the right to receive the money" but for a security interest in favour of the secured creditor” under paragraph 24(1.2)(b). Nor is it a situation, they argue, where under paragraph 224(1.2) the“ moneys are immediately payable” or will become payable at some future time. They argue that while the definition of “security interest” found in subsection (1.3) refers to a "deemed or actual trust” this definition can have no application because at the time of the filing of the notices of requirement to pay by Revenue Canada, lienholders were already legally the beneficial owners and the" but for” provision of paragraph 224(1.2)(b) can have no application. The situation had crystallized as of the filing of the first liens so as to take the moneys out of the ambit of subsection 224(1.2) and (1.3).

While the arguments of the liens claimants' counsel are persuasive, I have difficulty with what seems to me to be the plain wording and meaning of paragraph (1.2)(b) together with the definitions in subsection (1.3). At the time that the requirement to pay was served on TransGas by Revenue Canada, TransGas was still holding the money and was doing so subject to the trust provisions in the B.L.A. At that time, TransGas was subject to a“ "deemed or actual trust" within the meaning of the definition in subsection (1.3). I think it is clear, however, that as stated in paragraph (1.2)(b),"but for" that trust, TransGas would have been liable to pay the money to Mid-Plains.

I recognize that the definition of "secured creditor” in subsection (1.3) states that it means a person having a security interest “in the property of another person,” and that because of the provisions of the B.L.A., at the time the requirement to pay was served, the money was not” property of another person”, but was property of which the lien claimant was the beneficial owner. Again, however, and “but for” those trust provisions, TransGas would have been liable to pay the money to Mid-Plains.

They argue as well that for there to be a" security interest” within the definition of subsection (1.3), there must be an interest in the money which secures payment “of an obligation.” The argument states: “ Quite simply the money belongs to the beneficiaries of the trust and is not merely an interest to secure payment or performance of an obligation.” I have been unable to find any cases dealing with the word obligation” where it is used in the context of a statutory duty. However, it seems to me that TransGas has a statutory duty under the B.L.A. to hold the money in trust and pay it to the lien claimants, and where that duty exists, in my view, that duty creates an obligation, and at the risk of being repetitive, “ but for" that obligation, the money would be payable by TransGas to Mid-Plains.

I have reviewed the authorities referred to by the lien claimants’ counsel, but in view of the findings of our appeal court and what I consider to be the plain meaning of subsection (1.2) as it now reads, I cannot rely on those authorities. . . .

The respondents attack this conclusion and contend that on a proper interpretation and application of subsections 224(1.2) and (1.3), builders’ lien claimants are not "secured creditors" or "holders of a security interest” within the intendment of the provision.

In Royal Bank of Canada v. Saskatchewan Power Corp. et al., [1991] 1 C.T.C. 532, 73 D.L.R. (4th) 257, [1991] 1 W.W.R. 1, this Court held that subsection 224(1.2), as it read before the 1990 amendment, empowered the Minister to require payment of a debt owed to a taxpayer to the Minister in priority over a prior perfected security interest. In that case, the bank security interests were registered under the Personal Property Security Act, S.S. 1979-80, c. P-6.1 and the Bank Act, R.S.C. 1985, c. B-1.

After reviewing the controlling principles of interpretation, Vancise, J.A., speaking for the Court at page 540 (W.W.R. 13-14, D.L.R. 260-70), stated:

The scope of the applicability of section 224 is clear. Secured creditors fall within the general class of stated garnishees as persons potentially liable to make payment to tax debtors under the Act. Subsection (1.2) makes specific reference to garnishment applicability to secured creditors, and the garnishment section encompasses third parties. There are no listed or implied exceptions.

Revenue Canada's power to receive funds on account of the tax debtor's liability is equally clear. The power granted is not merely custody of the funds pending a determination of priority status. The redirected funds are to be applied to the tax debtor's account. The words “on account of the tax debtor's liability” mean something more than the limited extra-judicial attachment interpretation contended by the bank.

A transfer of property in the funds is the logical implication; otherwise the minister lacks the ability to apply the funds to the taxpayer's account and to subsequently use the funds in furtherance of income tax objectives.

Nowhere in subsection 224(1.2) is there a provision that Revenue Canada is to receive a charge on property or priority status. However, subsection (1.2) makes it clear that when the stated procedure is complied with, Revenue Canada is to receive the funds in preference to a secured creditor, notwithstanding other enactments. Priority and a corresponding charge upon property are thus clearly intended if not specifically stated.

This section did not exist at the time of the Lamarre decision ([1978] 2 W.W.R. 465, 85 D.L.R. (3d) 392, 78 D.T.C. 6155). It gives primacy to the provisions of the Income Tax Act and clearly takes precedence over all other laws. Thus the Act takes precedence over the assignment sections in the Bankruptcy Act which state that attachments do not have primacy over the rights of a secured creditor. The assignment provisions in the Bankruptcy Act were a major underpinning of Lamarre and subsection 224(1.2) fundamentally changed the rights between the competing parties.

However, there were conflicting decisions which held that this provision was not sufficiently clear and unambiguous to effect the transfer of property in the funds or establish the priority of the Minister's claim (Pembina on the Red Development Corp. v. Triman Industries Ltd., supra; Lloyds Bank Canada v. International Warranty Co., [1989] 1 C.T.C. 401, 89 D.T.C. 5279, [1989] 3 W.W.R. 152, 72 C.B.R. (N.S.) 88, 64 Alta. L.R. (2d) 340 (Alta. Q.B.)) The 1990 amendment which was passed in response to those decisions added the following words to the subsection:

. . . and on receipt of that letter by the particular person,the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty and shall be paid to the Receiver General in priority to any such security interest.

[See S.C. 1990, c. 34, subsection 1(3).]

The respondents argue that builders’ lien claimants do not fall within the section 224(1.3) definition of "secured creditor” and "security interest”. They submit that a proper interpretation of this subsection would limit its applicability to secured creditors within the meaning of the Personal Property Security Act and the security interests that arise under voluntary relations between debtor and creditor.

As in Royal Bank of Canada v. Saskatchewan Power Corp, et al., supra, this argument raises a general question of statutory construction of subsection 224(1.2) and the definitions of "secured creditor” and “security interest” in subsection 224(1.3) of the Income Tax Act. In our opinion, the language of these provisions is clear and unambiguous. The definition of "security interest" is not limited in its application to security interests arising under the Personal Property Security Act, a provincial statute, or a security interest that arises under consensual arrangements between a debtor and creditor. The term "deemed or actual trust” makes this clear. However, the respondents argue that "an interest created by or arising out of a'deemed or actual trust’ is not a security interest under subsection 224(1.3) unless that interest'secures payment or performance of an obligation'".

Under the terms of the B.L.A., three distinct trusts are created: “the owner's trust, the contractor's trust and the subcontractor's trust” (Graham Construction & Engineering (1985) Ltd. v. Weyburn (City) (1989), 33 C.L.R. 207 at page 209 (Sask. Q.B.).) As TransGas is a Crown corporation under the Act, it is subject to the "owner's trust” provisions in section 6 which reads:

6(1) All amounts received by an owner, other than the Crown, that are to be used in the financing of an improvement, including the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor.

(2) Where the owner provides his own capital or where the owner is the Crown, and where amounts become payable under a contract to a contractor, the moneys in the hands of the owner or received by him for payment under the contract at any time thereafter constitute a trust fund for the benefit of the contractor.

(3) Where the owner's interest in an improvement is sold by the owner, an amount equal to the positive difference between:

(a) the value of the consideration received by the owner as a result of the sale;

and

(b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any encumbrances which are entitled to priority under this Act;

constitutes a trust fund for the benefit of the contractor.

(4) The owner is the trustee of the trust fund created by subsections (1) to (3), and he shall not appropriate or convert any part of the trust fund to his own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to him by the owner.

In turn, as amounts become owing or are received by the contractor, a contractor's trust is created under section 7 which reads:

7(1) All amounts:

(a) owing to a contractor, whether or not due or payable;

or

(b) received by a contractor;

on account of the contract price of an improvement constitute a trust fund for the benefit of:

(c) subcontractors who have subcontracted with the contractor and other persons who have provided materials or services to the contractor for the purpose of performing a contract; and

(d) labourers who have been employed by the contractor for the purpose of performing the contract.

(2) The contractor is the trustee of the trust fund created by subsection (1) and he shall appropriate or convert any part of the trust fund to his own use or to any use inconsistent with the trust until all persons for whose benefit the trust is constituted are paid all amounts related to the improvement owned to them by the contractor.

The subcontractor's trust under section 8 of the B.L.A. has no application to this case.

When Mid-Plains abandoned the TransGas contracts, all the moneys constituting the B.L.A. trusts were in the hands of TransGas (owners). Subsection 6(2) clearly states that “where amounts become payable under a contract to a contractor” the moneys in the owner's hands for payment under the contract constitute a trust fund for the contractor's benefit. As well, these moneys owing or payable to the contractor, constitute trust funds for the benefit of the subcontractors. Under subsection 19(1) of the Act, a trustee’s obligations continue for at least one year after the abandonment of a contract.

In the light of these statutory provisions, we decline to hold that TransGas is trustee for only the subcontractors and not the contractor who has abandoned the project. After allowing for a set off, there were substantial moneys owing to the contractor at the time of abandonment and subsequent termination of the uncompleted contracts.

In this case, and under the provisions of the "contractor's trust”, the debtor is Mid-Plains and the secured party, by virtue of the trust, is the class of persons who have contracted with the contractor "for the purpose of performing the contract". The contractor, as trustee, is subject to the condition that until "all persons for whose benefit the trust is constituted are paid all amounts relating to the improvement owed to them by the contractor", no part of the trust fund can be used for" his own use or any use inconsistent with the trust”. Consequently, if the contractor (debtor) does not perform its obligation to pay the amounts owing, the trust fund provides a source of payment or compensation. Given the language of sections 6 and 7 of the B.L.A., we conclude that TransGas is trustee for Mid-Plains and that the trust fund is a "security interest" under subsection 224(1.3) of the Income Tax Act.

In reaching this conclusion that the "contractor's trust" falls within the definition of a security interest under subsection 224(1.3), we refer to the following passage in D.W. Waters: Law of Trust in Canada, 2nd ed. at pages 451-52:

Mechanics' Lien Act trusts constitute a statutory provision of security. The contract price paid by the owner to the building or contractor is held on trust by the recipient, and the legislation gives a first priority over that trust fund to the unpaid subcontracting supplier of goods or services. The owner of the land may himself be a trustee of the purchase moneys in his own hands. Such a trust arises when the owner is informed in a required manner that the work is satisfactorily completed, so that the obligation to make payment becomes due. The trust is in favour of all those who have supplied goods or services as subcontractors, as well as the head contractor himself. The objective of this legislation is to implement the policy decision that subcontractors can be ensured of payment, and have priority in the bankruptcy of the head contractor.

In advancing their argument on this issue, the respondents urge that MidPlains has "no property interest" in the trust fund; and accordingly, the “ but for" provision in paragraph 224(1.2)(b) has no application. Given the clear language of sections 6 and 7 of the B.L.A., we reject this contention. The contractor's trust and the subcontractor's recourse to this trust fund is conditional on amounts being owed to the contractor. According to the contracts between TransGas and Mid-Plains, their abandonment or termination did not relieve TransGas from having to pay Mid-Plains for the work done to the date of the abandonment or termination. TransGas "concedes there were amounts owing" to Mid-Plains on account of the contract price for improvements. We accordingly cannot give effect to the respondents' contention that the trust created under the B.L.A. is a “true trust" in contradistinction to a "security trust”. Our conclusion that builders’ lien claimants are “secured creditors" within the meaning of subsections 224(1.2) and (1.3) is reinforced by other provisions of the B.L.A. In this case, TransGas paid the "trust fund" into court under subsection 56(2) which reads:

(2) Any person may apply to the court, on notice to such persons as the court may direct, for an order vacating a registered claim of lien or written notice of a lien, and where an application is made, the court may order that the registration of the claim of lien or written notice of a lien be vacated, on payment into court or posting of security in an amount that the court considers reasonable in the circumstances.

On payment in, subsection 56(6) is the controlling provision:

(6) Where an order is made under subsection (1) or (2):

(a) the lien:

(i) ceases to attach to the holdback and to the amounts subject to a charge under section 33;

(ii) in the case of a claim of lien registered pursuant to section 50, ceases to attach to the land; and

(iii) becomes instead a charge on the amount paid into court or security posted; and

(b) the owner or payer shall be, in respect of the operation of sections 34, 37 and 40, in the same position as if the claim of lien had not been registered or written notice of a lien had not been given.

(See Town-N-Country Plumbing & Heating Ltd. v. Schmidt, (1991), 93 Sask. R. 278, 86 D.L.R. (4th) 716, 49 C.L.R. 1 (C.A.) at page 288 (D.L.R. 727, C.L.R. 14).)

The amount paid into court, if found to constitute "trust funds pursuant to Part II", must then be distributed in accordance with the priorities established in Part VI and also depends on the validity of the claim of each lien claimant. Section 33 of the B.L.A. also provides:

33. Every lien is a charge on the holdback required to be retained by section 34, and subject to subsection 28(3), is a charge upon any additional amount owed in relation to the improvement by a payer to the contractor or to any subcontractor whose contract or subcontract was in whole or in part performed by the provision of services or materials giving rise to the lien.

We refer to these provisions to illustrate and emphasize that the B.L.A. not only provides for the "trusts" as a statutory basis for security, but also provides for "liens" on the statutory holdbacks and the remainder of the contract price as an additional security device.

Since the lien claimants are "secured" creditors under subsection 224(1.3), and “but for" their liens, TransGas would have been liable to make payment to Mid-Plains, as opposed to paying the money into court for distribution among the lien claimants, we agree with the learned chambers judge's conclusion on this issue.

Although not expressly raised before the learned chambers judge, the respondents contended before the Court that there was no evidence to support the requirement under subsection 224(1.2) "that a particular person is or will become, within 90 days, liable to make a payment". While we are reluctant to pass upon an issue not properly raised or presented in the Court below, we are prepared to deal with this submission in the circumstances of this case.

We note that the first "requirement to pay" was served on TransGas on November 21, 1990 — following the abandonment of the contracts by MidPlains on November 15, 1990. Thereafter, TransGas stopped all further payments under the contracts. Then the Minister served a second requirement to pay" on December 10, 1990. The learned chambers judge observed that the Minister had mainly relied on this second notice to support his priority claim. The relevant period, then, was from December 10, 1990 to March 10, 1991.

It should be noted that notwithstanding the abandonment of the contracts by Mid-Plains, TransGas remained liable thereunder to pay Mid-Plains for the work it had done before abandonment, subject to set off. This is clear from clause 23 of the contract which provides in pertinent part:

23.1 If the contractor:

23.1.6 in the opinion of the administrator, abandons the contract;

then TransGas may, without notice, terminate the services of the contractor;

23.2 In the event of termination of the services of the contractor, TransGas may:

23.2.3 withhold further payments to the contractor until final completion of the services to the satisfaction of the administrator; and

23.2.4 upon final completion of the services, charge the contractor the amount by which the full cost of finishing the services, as certified by the administrator, exceeds the unpaid balance of the contract price.

In light of this, and given the facts of the matter, TransGas was clearly indebted to Mid-Plains as of December 10, the day the Minister served the second “requirement to pay". The extent of the indebtedness was not then known, and of course the debt was not then payable. On February 11, however, the amount owing was finally determined. Adjusted for set-off, it came to $473,815.62 in total. Whether at that stage TransGas might have been contractually liable to pay that amount to Mid-Plains, had it not been for the liens which had earlier been served on it, is not altogether clear. But that is neither here nor there, for once the amount was determined, TransGas was statutorily liable, in one way or another, to make payment to the lien claimants.

Under the B.L.A., TransGas had either to pay the amount to the lien claimants, which in the circumstances was impracticable, or to pay the moneys into court for the benefit of the lien claimants. Since the lien claims exceeded the amount of moneys available, TransGas appropriately made application, on February 15, 1991, to have the moneys paid into court. By order of the learned chambers judge, issued March 6, 1991, TransGas was required to pay this amount, inter alia, into court "forthwith". The payment in had the effect of vacating the liens and of discharging the contractual liability to Mid-Plains, as well as the statutory liability to the lien claimants in relation to the amounts paid in.

All this occurred, of course, within the 90-day period. Accordingly, we hold that upon receiving the Minister’s second," requirement to pay”, TransGas was in fact a "particular person” who, within 90 days, became liable to make a payment, if not to the tax debtor, then to secured creditors, namely the lien claimants.

Although subsections 224(1.2) and (1.3) were characterized by the respondents as a harsh rule on priority of federal tax "liens", it is not for this Court to pass upon the propriety or wisdom of such legislation. If the appellant is entitled to priority under the clear meaning of the impugned provision, that is the end of the matter. We have in earlier passages referred to the Minister's argument that the lien claimants should not benefit from the unlawful conduct of Mid-Plains in failing to remit deductions withheld from employees for income tax and "social security" taxes.

We allow the Minister's appeal and affirm the constitutional validity of subsections 24(1.2) and (1.3) of the Income Tax Act. We accordingly hold that the garnishment under this section entitles the Minister to priority over the respondents’ claims under the B.L.A.

Since there are outstanding issues that were not passed upon in Queen's Bench chambers, and particularly with respect to TransGas and the Workers’ Compensation Board, we remit these issues to Queen's Bench for disposition in a manner not inconsistent with this decision.

We reserve the issue of costs and invite counsel to file written admissions on this question within ten days from the filing of these reasons.

In reasons for judgment filed on March 1, 1993, this Court left open the question of costs and invited counsel to make written submissions on that issue.

We have considered those submissions and make the following orders:

1. We confirm the entitlement of the non-labour lien claimants to their costs of representation in Queen's Bench and this Court under the terms of the orders in Queen's Bench and this Court (chambers) appointing Mr. M. Sawatzky as counsel. These taxable costs will include reasonable solicitor and client costs for receiving and distributing the judgment to the various parties represented by Mr. Sawatzky.

2. With respect to TransGas, there will be no order as to costs in either appeal. TransGas did not file a factum in the Minister's appeal. Since the claim of TransGas under its appeal has been remitted to Queen's Bench, the costs of proceedings in that Court will be passed upon by the presiding Queen's Bench judge.

3. The Minister shall have a joint and several judgment against the respondents, P.E. Ben Industries Co., A.M. Inspection Ltd., Certified Rentals Ltd., Arrow Welding and Industrial Supplies Inc., Permanent Concrete (Division of Lafarge Canada) and Japa Industries Ltd., for costs in Queen's Bench on the governing tariff and for costs in this Court under double Column V except those items governed by the Queen's Bench tariff which will be taxed in the ordinary way and with fees for only one counsel to be taxed throughout.

4. With respect to the Workers' Compensation Board, there will be no order as to costs. We observe that the Board has undertaken to bear its own costs to date. Since its claim has been remitted to Queen's Bench, the costs of those proceedings will be passed upon in that Court.

Appeal allowed.