Canada (Attorney General) v. Caisse populaire de la Vallée de l'or, 2005 FC 119

Date: 20050125

Docket: T-68-02

Citation: 2005 FC 119

BETWEEN:

ATTORNEY GENERAL OF CANADA

Plaintiff

and

LA CAISSE POPULAIRE DE LA VALLÉE DE L'OR

Defendant

REASONS FOR JUDGMENT

RICHARD MORNEAU, PROTHONOTARY

Introduction

[1]        In the case at bar the plaintiff is relying on the vehicle of the deemed trust referred to in subsections 227(4.1) of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1, as amended (the Act), and 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, as amended (the EIA), as a basis for claiming from the defendant what she regards as the proceeds of the sale of a trailer in a situation where the tax debtor itself sold the property and remitted to the defendant, the tax debtor's secured creditor, the proceeds obtained from the sale.

[2]        In the plaintiff's submission, based on the relevant legislative provisions and the principles laid down by the Supreme Court in First Vancouver Finance v. M.N.R., [2002] 2 S.C.R. 720 (First Vancouver), and by the Federal Court of Appeal in Canada (M.N.R.) v. National Bank et al., 2004 FCA 92 (leave to appeal to the Supreme Court of Canada denied on October 14, 2004, docket SCC 30311, hereinafter National Bank), the trailer at the time of the sale was property deemed to be held in trust pursuant to subsections 227(4.1) of the Act and 86(2.1) of the EIA, and the amount received by the tax debtor from the sale and then remitted to the defendant was clearly under the same legislative provisions "proceeds thereof" which continued to be subject to the deemed trust. Consequently, in the plaintiff's submission, she has special priority over the defendant in claiming those proceeds of sale (up to the amount of the unpaid source deductions - SDs), namely the sum of $5,849.67.

[3]        The defendant did not admit that the amount which it received from the sale of the trailer was "proceeds thereof" within the meaning of subsection 227(4.1) of the Act. Further, the defendant argued it was essential and of capital importance to take into account the time at which the plaintiff, for all practical purposes, asserted or made known her deemed trust. In its written submissions, the defendant used the term [TRANSLATION] "materialize" to convey this idea - when deciding whether it or the plaintiff had special priority in claiming the proceeds of the sale of the trailer.

[4]        In the defendant's submission, certainty in the law and the security of commercial transactions require here that the defendant be able to retain these proceeds of sale, as in practice the plaintiff did not assert her rights under the Act until after the trailer had been sold by the debtor and the proceeds of its sale remitted to the defendant.

[5]        On account of the amount at issue, the plaintiff's action in the case at bar was treated as a simplified action and heard on the merits together with the action brought by the plaintiff against another financial institution in case T-949-02, as it involved facts and considerations which in law are similar.

[6]        These reasons for judgment will accordingly apply mutatis mutandis to both cases and a copy of these reasons will be included in each record. As for the judgments as such, a short judgment will be rendered in each case as the amounts at issue are somewhat different.

Factual background

[7]        In the case at bar, as in case T-949-02, the facts as already mentioned essentially result from the same process and were the subject of an agreement between the parties in each case. At the hearing, therefore, there was quite properly no cross-examination of witnesses or oral evidence in rebuttal.

[8]        In the case at bar, namely T-68-02, the facts were as follows.

[9]        In February 1999, 2430-1277 Québec Inc. (the debtor) converted to a secured loan guaranteed by a movable hypothec a credit line granted to it earlier by the defendant.

[10]      The debtor's property which was the subject of the defendant's security was a 1989 Témisco RBLG trailer (the trailer), which the defendant had already held as security since 1995 to secure another loan to the debtor.

[11]      In December 1999, the debtor sold the trailer to 9028-9901 Québec Inc. (the buyer) for the sum of $10,000, which was paid by cheque made out to the debtor on December 22, 1999.

[12]      On December 22, 1999, the sum from the cashed cheque, namely $10,000, was remitted in its entirety to the defendant, who the same day proceeded to strike the movable hypothec that it held on the trailer.

[13]      At that time, the debtor had failed to pay, and has still not paid, SDs to Her Majesty, namely the sum of $5,849.67, for the amounts deducted from the salary paid to its employees for the months of February 1998 to November 1999, for taxes payable by those employees under the Act, and for employee premiums payable by those employees under the EIA.

[14]      The debtor ceased operations in November 1999.

[15]      On February 2, 2001, the Canada Customs and Revenue Agency (the Agency) sent the defendant a formal demand informing it that the debtor owed the plaintiff money for SDs and that the debtor's property was subject to the provisions of subsections 227(4.1) of the Act and 86(2.1) of the EIA.

[16]      The defendant refused to pay the plaintiff that sum, although it was required to do so by the formal demand.

[17]      On January 11, 2002, the plaintiff filed her simplified statement of claim in the Registry of this Court.

[18]      For case T-949-02, the facts are the following.

[19]      On June 30, 1999, the defendant made a loan of $45,000 to LRC Forestiers Inc. (the debtor), secured by a hypothec on all debts and accounts receivable and on all the debtor's property, including in particular a John Deere conveyor (the conveyor).

[20]      On October 17, 2000, the debtor sold the conveyor to Entreprises Perfort Inc. (the buyer) for the sum of $15,500, plus applicable taxes.

[21]      On October 18, 2000, the sum of $17,828.88, representing the proceeds of sale of the conveyor, including applicable taxes, was deposited in the debtor's bank account.

[22]      On October 19, 2000, that sum was withdrawn from its bank account with the defendant and applied to the loan which the defendant had made to the debtor.

[23]      On October 23, 2000, the defendant proceeded to the voluntary reduction of the movable hypothec which it held on the conveyor.

[24]      On September 7, 2001, the Agency sent the defendant a letter informing it that the debtor owed the plaintiff sums of money for SDs and that the debtor's property was subject to the provisions of subsections 227(4.1) of the Act and 86.(2.1) of the EIA.

[25]      In particular, the debtor was and still is indebted to the Agency in the amount of $8,988.55, including $5,462.39 for SDs withheld from the salaries paid to its employees pursuant to the Act and the EIA, but which it had not remitted to Her Majesty.

[26]      On June 20, 2002, the plaintiff filed her simplified statement of claim in the Registry of this Court and served it on the defendant on June 25, 2002.

[27]      To date, the sum of $5,462.39 claimed by the defendant has still not been paid.

[28]      For the sake of simplicity, these reasons will concentrate on the facts in case T-68-02 and on subsection 227(4.1) of the Act.

Analysis

[29]      The plaintiff's cause of action is based primarily on the following legislative provisions of the Act (here we will simply note that the EIA contains similar provisions in its subsections 86(2) and (2.1)).

[30]      In First Vancouver, Iacobucci J. summarized the general treatment of SDs under the Act as follows at page 723:

Section 153(1) of the ITA [the Act] requires employers to deduct and withhold amounts from their employees' wages ("source deductions") and remit these amounts to the Receiver General by a specified due date. By virtue of s. 227(4), when source deductions are made, they are deemed to be held separate and apart from the property of the employer in trust for Her Majesty. If the source deductions are not remitted to the Receiver General by the due date, the deemed trust in s. 227(4.1) of the ITA becomes operative and attaches to property of the employer to the extent of the amount of the unremitted source deductions. As well, the trust is deemed to have existed from the moment the source deductions were made.

[31]      The Court went on to indicate more specifically the general context of and reason for the vehicle of the deemed trust. The Supreme Court considered that the collection of SDs was at the very heart of tax collections. This, together with the fact that where SDs are concerned the plaintiff is an involuntary creditor of a tax debtor and, unlike a financial institution, cannot familiarize herself with the debtor's affairs and financial situation, justifies the vehicle of the deemed trust by which the Act gives the plaintiff, that is to say the Agency, special priority when the Agency and secured creditors concurrently assert a right to the property of a tax debtor. The following are the applicable comments of the Supreme Court in this regard, at pages 729 to 733 of the judgment:

The collection of source deductions has been recognized as "at the heart" of income tax collection in Canada: see Pembina on the Red Development Corp. v. Triman Industries Ltd. (1991), 85 D.L.R. (4th) 29 (Man. C.A.), at p. 51, per Lyon J.A. (dissenting), quoted with approval by Gonthier J. (dissenting on another issue) in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, at para. 36. Because of the importance of collecting source deductions, the legislation in question gives the Minister the vehicle of the deemed trust to recover employee tax deductions which employers fail to remit to the Minister.

It has also been noted that, in contrast to a tax debtor's bank which is familiar with the tax debtor's business and finances, the Minister does not have the same level of knowledge of the tax debtor or its creditors, and cannot structure its affairs with the tax debtor accordingly. Thus, as an "involuntary creditor", the Minister must rely on its ability to collect source deductions under the ITA: Pembina on the Red Development, supra, at pp. 33-34, per Scott C.J.M., approved by Cory J. in Alberta (Treasury Branches), supra, at paras. 16-18. For the above reasons, under the terms of the ITA, the Minister has been given special priority over other creditors to collect unremitted taxes.

. . .

In response to Sparrow Electric, the deemed trust provisions were amended in 1998 (retroactively to 1994) to their current form. Most notably, the words "notwithstanding any security interest . . . in the amount so deducted or withheld" were added to s. 227(4). As well, s. 227(4.1) (formerly s. 227(5)) expanded the scope of the deemed trust to include "property held by any secured creditor . . . that but for a security interest . . . would be property of the person". Section 227(4.1) was also amended to remove reference to the triggering events of liquidation, bankruptcy, etc., instead deeming property of the tax debtor and of secured creditors to be held in trust "at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act". Finally, s. 227(4.1) now explicitly deems the trust to operate "from the time the amount was deducted or withheld".

It is apparent from these changes that the intent of Parliament when drafting ss. 227(4) and 227(4.1) was to grant priority to the deemed trust in respect of property that is also subject to a security interest regardless of when the security interest arose in relation to the time the source deductions were made or when the deemed trust takes effect. This is clear from the use of the words "notwithstanding any security interest" in both ss. 227(4) and 227(4.1). In other words, Parliament has reacted to the interpretation of the deemed trust provisions in Sparrow Electric, and has amended the provisions to grant priority to the deemed trust in situations where the Minister and secured creditors of a tax debtor both claim an interest in the tax debtor's property.

[Emphasis added.]

[32]      I agree with the plaintiff in finding that three issues must be decided in this action:

            1.         Was the trailer deemed to be held in trust at the time of the sale pursuant to subsection 227(4.1) of the Act?

            2.         Was the amount received by the defendant following the sale of the trailer "proceeds thereof" within the meaning of subsection 227(4.1) of the Act?

            3.         If so, does the Act create a duty for the defendant to remit these "proceeds thereof" in priority to the Receiver General for Canada, i.e. the plaintiff?

[33]      On the first issue, namely whether at the time of the sale the trailer was deemed to be held in trust pursuant to subsection 227(4.1) of the Act, the situation is as follows.

[34]      The debtor collected SDs under the Act and failed to remit them to the plaintiff for the period from February 1998 to November 1999.

[35]      Consequently, the trailer, which was the property of the debtor at the time the SDs were collected, became subject to a deemed trust from the time of the debtor's first default in February 1998.

[36]      Accordingly, at the time of the sale in December 1999, as the SDs collected in 1998 and 1999, had still not been remitted to the plaintiff and amounted to $5,849.67, the trailer was deemed to be held in trust within the meaning of subsection 227(4.1) of the Act up to an amount of $5,849.67.

[37]      On the second issue, namely whether the amount received by the defendant following the sale of the trailer constituted "proceeds thereof" within the meaning of subsection 227(4.1) of the Act, for the reasons that follow this question must be answered in the affirmative.

[38]      As the Supreme Court mentioned in First Vancouver, at paragraph 42:

42.    . . . In this way, when an asset is sold by the tax debtor, the deemed trust ceases to operate over that asset; however, the property received by the tax debtor in exchange becomes subject to the deemed trust. As such, the trust is neither depleted nor enhanced; it simply floats over the property belonging to the tax debtor at any given time, for as long as the default in remittances continues.

[Emphasis added.]

[39]      I agree with the plaintiff in saying that on the basis of the principles laid down by the Supreme Court in First Vancouver, the amount obtained from the sale of property held in trust constitutes "proceeds thereof" within the meaning of subsection 227(4.1) of the Act, whether those proceeds come from a sale by the debtor as in this case or from the realization of a security as in National Bank, supra, paragraph [2]. In that case, the Federal Court of Appeal held that creditors realizing their securities on property covered by the deemed trust had a positive duty to pay the Receiver General the proceeds of realization of the property, in priority over their own security.

[40]      There is also reason to support the proposition that, in order to be subject to the deemed trust, it will suffice if the sum of money comes from property covered by the deemed trust, regardless of whom is holding it, since the Act provides that the "proceeds thereof" must be remitted to the Receiver General in priority, and does not limit this duty to the person through whom the proceeds thereof first pass. Whether the proceeds of the sale are paid to the secured creditor directly, or first to the debtor and then to the secured creditor, the secured creditor still receives proceeds of property subject to the deemed trust. If the vehicle of the deemed trust only applied when a security was realized, it would be easy for a secured creditor to avoid responding to a claim by the defendant based on that vehicle. The creditor in question would only have to ensure that the subject of his security was sold by the debtor [TRANSLATION] "voluntarily", and then demand the proceeds of the sale from the debtor.

[41]      At this stage of our analysis, we cannot agree with the defendant that it did not benefit from the proceeds of the sale due to the fact that the amount paid to the debtor was initially placed in its current savings account, thereby confusing this sum with the other monies that were in the bank account. Ultimately, in the defendant's view, that sum lost its identity or nature of "proceeds" of the sale before it was applied to the defendant's secured loan.

[42]      The fact that in a situation of seizure before judgment without judicial authorization the courts have developed such a concept is clearly admissible (see inter alia Hudson's Bay Company v. Hawkins, REJB 1998-09249), but in my opinion such a very special concept cannot apply in more general circumstances and in view of the reason behind the vehicle of the deemed trust, or in view of the facts of the case at bar, where it is quite clear from the fact that the relevant banking transactions were contemporaneous (taking place on the same day, as in the case at bar, or the following day as in case T-949-02) that the selling price - and not any other sum - was received by the defendant. The defendant thus benefited from the proceeds of sale of the trailer within the meaning of subsection 227(4.1) of the Act. This finding is not affected by the fact that the defendant was passive in the sale of the trailer, and was not actively involved. Further, even accepting the argument that the defendant struck the hypothec to enable the buyer of the trailer to receive a clear title to it, such altruism, even it were to be admitted, does not alter the initial benefit received by the defendant, namely repayment of the loan in whole or in part.

[43]      Additionally, we should consider here an argument which the defendant addressed in particular in its written submissions, namely that since the plaintiff's position materialized after the trailer or its proceeds of sale left the debtor's estate, certainty in the law and the security of commercial transactions require that the plaintiff could not then assert her rights under subsection 227(4.1) of the Act.

[44]      In the defendant's submission, this must be so since otherwise a financial institution could not agree to have its debt repaid and to release a movable hypothec without ensuring that the plaintiff was paid first. Otherwise, in the defendant's submission, an institution might have to repay the plaintiff up to the amount of the SDs owed, when such an institution might also have lost any right of recourse against third parties, such as a surety released by the payment made by a debtor.

[45]      For the reasons that follow, I do not consider that this temporal limitation which the defendant seeks to raise against the plaintiff's action can stand up.

[46]      First, the very wording of subsection 227(4.1) of the Act contains no such limitation, unlike the wording of subsection 224(1.2) of the Act, dealing with the garnishment procedure which materializes in the plaintiff's favour when a third party is sent a letter requiring the third party to pay the plaintiff an amount otherwise payable to a tax debtor. Subsection 224(1.2) reads:

[47]      Additionally, it is apparent from First Vancouver and National Bank that the only limitation on the vehicle of the deemed trust is that affecting third parties who acquire for value property of which the tax debtor divests himself in the ordinary course of business. The Supreme Court was concerned with avoiding uncertainty and a general chilling effect on commercial transactions with respect to such third parties. In First Vancouver, the Supreme Court mentioned the following on these points at pages 739 and 740:

It is significant in this regard that purchasers for value are not included in ss. 227(4) and 227(4.1) whereas secured creditors are.

. . . . .

. . . to allow s. 227(4.1) to override the rights of purchasers for value would result in an unprecedented level of uncertainty. In fact, in oral argument, counsel for the Minister conceded that such an interpretation would, in theory, allow the Minister to go so far as to assert an interest in assets sold by tax debtors to ordinary consumers. In my view, it is no exaggeration to say that adopting this interpretation of the deemed trust would have general chilling effect on commercial transactions.

. . . . .

In summary, the deemed trust does not operate over assets which a tax debtor has sold in the ordinary course to third party purchasers.

[Emphasis added.]

[48]      In National Bank, the Federal Court of Appeal did not hesitate to acknowledge, at paragraphs 27 and 34 of its reasons, the absolute nature of the deemed trust with regard to secured creditors, even over property taken by them in the exercise of their security. It is quite clear to the Court that a secured creditor remains as such and does not become a purchaser in good faith, as the defendant would hope, so as to benefit from the exception noted by the Supreme Court. The Court said the following:

[27]          The Court held that the property, at the time of its acquisition by the tax debtor, was part of the deemed trust but that its sale to a third party in the normal course of business had removed it from the trust. Throughout its reasons, the Court compares the situation of the third party purchaser for value to that of the secured creditor, and finds that while property acquired by the third party purchasers was not caught by the amendments to the deemed trust provisions, in the absence of specific language to that effect, property taken in payment by the secured creditors in the exercise of their security interest was covered. In respect of the secured creditors, the Court was unambiguously of the view that the new provisions responded to the invitation it had issued to Parliament to give the Crown an "absolute priority".

. . .

[34]          However, the ITA and EIA deemed trust provisions are complete and explicit as to their effect on property taken in possession by secured creditors in the exercise of their security interest, judging from the Supreme Court's reasons in First Vancouver: the Crown has an absolute priority over the proceeds from the property subject to the deemed trust, which must be paid to the Receiver General. Where this obligation is breached, section 222 of the ITA provides the following remedy:

222.          All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to her Majesty and recoverable as such in the Federal Court or any other court of competent jurisdiction or in any other manner provided by this Act.

222.          Tous les impôts, intérêts, pénalités, frais et autres montants payables en vertu de la présente loi sont des dettes envers Sa Majesté et recouvrables comme telles devant la Cour fédérale ou devant tout autre tribunal compétent, ou de toute autre manière prévue par la présente loi.

[Emphasis added]

Subsection 86(1) of the Employment Insurance Act is to the same effect.

[49]      The temporal limitation which the defendant seeks to establish would ultimately run contrary to the general context and reason for the vehicle of the deemed trust, as seen in paragraph [31].

[50]      This rejection of the temporal limitation relied on by the defendant is consistent with the interpretation to be given to subsection 227(4.1) of the Act and the related provisions, according to the rulings of the Supreme Court in Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, where a majority of the Court said at page 975:

In interpreting sections of the Income Tax Act, the correct approach, as set out by Estey J. in [1984] 1 S.C.R. 536">Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to apply the plain meaning rule. Estey J. at p. 578 relied on the following passage from E.A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.

[51]      It should be noted that in National Bank the Federal Court of Appeal was ultimately considering a situation similar to the one at bar, that is, it had to rule on the proceeds of the sale of property in the hands of a secured third party.

[52]      Here, only the route taken by the proceeds of sale to arrive in the hands of the secured creditor differs. In my opinion, the way in which a security was realized in this case does not lose any of its impact because the sale was made by the debtor.

[53]      Any inequity in the affairs of the defendant on account of the nature of the deemed trust could very well be avoided.

[54]      First, as the Supreme Court held in First Vancouver at paragraph 23, a financial institution has an opportunity to become familiar with a tax debtor's business and finances, and can organize its affairs accordingly.

[55]      In this case, we cannot disregard the possibility that the defendant, if it had wanted to, could easily have obtained the information needed to determine whether a deemed trust existed and thereby avoided being exposed to this action by the plaintiff. In order to do this, it only had to require its debtor, as a condition of granting the loan, to make a waiver of confidentiality pursuant to subsection 241(5) of the Act. This would have enabled it to determine the state of the SDs at any time, or better still, to impose on its customer a duty to satisfy it of the amount of the sums deducted and that those amounts had been remitted.

[56]      In view of the foregoing, the third issue is whether the Act imposes a duty on the defendant to remit the "proceeds thereof" in priority to the Receiver General of Canada. This question must also be answered in the affirmative. This is clear from paragraph 40 of National Bank, where the Court said:

[40]          It seems obvious to me that a secured creditor who does not comply with his statutory obligation to "pay" the Receiver General the proceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable for the unpaid amount. The amount is "payable" out of the proceeds flowing from the property and, as we have seen, section 222 of the ITA provides that "All . . . amounts payable under this Act are debts due to Her Majesty and recoverable as such . . .

[Emphasis added.]

[57]      In this case, as I have determined that the defendant received the "proceeds thereof" from the trailer within the meaning of subsection 227(4.1) of the Act, and did not perform its positive duty to remit the proceeds, up to the amount of the unpaid SDs, namely the sum of $5,849.67, the plaintiff is entitled to claim that amount from the defendant.

[58]      For these reasons, the plaintiff's action will be allowed and the defendant ordered to pay the plaintiff the sum of $5,849.67, with interest pursuant to subsections 36(2) and 37(2) of the Federal Courts Act, R.S.C. 1985, c. F-7, as amended, at the rate specified in the Act compounded daily from December 22 ,1999, until payment is made in full.

[59]      I am persuaded, based on Markevich v. Canada, [2003] 1 S.C.R. 94, National Bank and paragraph 36(2)(a) of the Federal Courts Act, that December 22, 1999, can be accepted in this case as the starting date for computing interest before judgment.

Montréal, Quebec

January 25, 2005

Certified true translation

K. Harvey

                                                             FEDERAL COURT

                                                      SOLICITORS OF RECORD

DOCKET:                                                                   T-68-02

STYLE OF CAUSE:                                                   ATTORNEY GENERAL OF CANADA

Plaintiff

and

LA CAISSE POPULAIRE DE LA VALLÉE DE L'OR

Defendant

PLACE OF HEARING:                                             Montréal, Quebec

DATE OF HEARING:                                               December 15, 2004

REASONS FOR JUDGMENT BY:                          Richard Morneau, Prothonotary

DATED:                                                                      January 25, 2005

APPEARANCES:

Nadine Dupuis                                                               FOR THE PLAINTIFF

Patrick Vézina

Jocelyn Geoffroy                                                           FOR THE DEFENDANT

SOLICITORS OF RECORD:

Morris Rosenberg                                                          FOR THE PLAINTIFF

Deputy Attorney General of Canada

Geoffroy, Matte, Kélada & Associés                             FOR THE DEFENDANT

Amos, Quebec