Canada (Minister of National Revenue) v. Caisse Populaire du bon conseil, 2005 FC 1563

                                                                                                                              Date:  20051122

                                                                                                                         Docket:  T-1253-02

                                                                                                                Citation:  2005 FC 1563

BETWEEN:

                              HER MAJESTY THE QUEEN IN RIGHT OF CANADA

                                                  (Minister of National Revenue)

                                        having an office at 284 Wellington Street

                                                   St Andrew’s Tower, 6th floor

                                                                Ottawa, Ontario

                                                                      K1A 0H8

                                                                                                                                              Plaintiff

                                                                        - and -

                                        CAISSE POPULAIRE DU BON CONSEIL

                                      A cooperative duly incorporated under the

                                                 Savings and Credit Unions Act

                                                        having its head office at

                                                         330 Notre Dame Street

                                           Notre-Dame-du-Bon-Conseil, Quebec

                                                                      J0C 1A0

                                                                                                                                        Defendant

                                                        REASONS FOR ORDER

PINARD J.

Introduction

[1]        This is a motion by the defendant appealing from the judgment of Mireille Tabib, Prothonotary, dated May 20, 2005, ordering the defendant, on the basis of subsection 227(4.1) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended (the ITA), and subsection 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, as amended (the EIA), to pay to the plaintiff the amount of $26,863.53 plus interest, as provided under subsections 36(2) and 37(2) of the Federal Courts Act, R.S.C., 1985, c. F-7, as amended (the FCA), at the rate set out in the ITA and capitalized daily effective February 26, 2001, until paid in full, with costs.

Facts

[2]        The facts in this case are not in dispute and may be summarized as follows:

(a)       On September 25, 2000, as consideration for a line of credit in the order of $277,000.00, Les Entreprises Camvrac Inc. (hereinafter, the “debtor”) deposited with the defendant, Caisse populaire du Bon Conseil, the amount of $200,000.00 to be held by the latter in the form of a term deposit certificate maturing on October 16, 2005.  The defendant and the debtor signed a security agreement, the most relevant terms of which read as follows:

[TRANSLATION]

1.             RIGHT OF RETENTION AND COMPENSATION

To guarantee the repayment in principal, interest, costs and incidental fees of all sums that are or may be payable to the Caisse by the depositor under a line of credit agreement for $277,000 which was granted to it on September 18, 2000, under all debts or obligations present or future, direct or indirect, of the depositor, the depositor undertakes to maintain and agrees that the Caisse shall retain, in the account(s) or on the certificate(s) of deposit referred to hereinafter, the sum of $200,000, as follows:. . .

7.             DEFAULT

 The depositor shall be in default in the following situations:

(a)           if any of the obligations provided in the credit agreement or herein are not complied with;

(b)           if the depositor or borrower becomes insolvent or bankrupt, or if they make a proposal and it is rejected or cancelled;

. . .

In case of default:

(a)           all sums owing under the credit agreements will forthwith become due and payable;

(b)           there will be compensation between the credit agreement(s) and the deposit certificate or sum of money indicated above, irrespective of whether they have or have not matured;               . . .

The consequences of a default are to the exclusive benefit of the Caisse and it may expressly waive them. It may, for example, without prejudice to its rights, await the maturity date of the deposit certificate(s) before exercising the rights provided in clauses (b) and (c) above.

(b)       From May to October 2000, the debtor failed to remit to Her Majesty deductions at source under the ITA and the EIA totalling $5,558.72.

(c)        On November 25, 2000, the debtor defaulted on the interest portion of its debt to the defendant.

(d)       From December 2000 to January 2001, the total deductions made but not remitted increased by $18,051.71, bringing the total deductions owed to Her Majesty to $26,863.53.

(e)       On February 7, 2001, the debtor made an assignment of its property.

(f)         On February 21, 2001, the defendant noted the compensation between the proceeds of the certificate of deposit for $200,000.00 and the amount of $277,000.00 owing to it by the debtor.

(g)       On June 12, 2001, Her Majesty gave the defendant formal notice to pay the amounts owing by the debtor as the proceeds of the property covered by the deemed trust.

Analysis

[3]        As the relevant provisions contained in subsections 86(2) and (2.1) of the EIA are similar to those in subsections 227(4) and (4.1) of the ITA, I will reproduce only the latter here:

[4]        Subsection 224(1.3) of the ITA reads as follows:

  224. (1.3) “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;

  224. (1.3) « garantie » Droit sur un bien qui garantit l’exécution d’une obligation, notamment un paiement. Sont en particulier des garanties les droits nés ou découlant de débentures, hypothèques, privilèges, nantissements, sûretés, fiducies réputées ou réelles, cessions et charges, quelle qu’en soit la nature, de quelque façon ou à quelque date qu’elles soient créées, réputées exister ou prévues par ailleurs.

[5]        The following provisions of the FCA are also relevant:

[6]        The following are the relevant sections of the Civil Code of Québec, S.Q. 1991, c. 64:

[7]        The defendant essentially argues that the Prothonotary erred in law by finding that the amounts that it had received as a result of cashing the certificate of deposit, after compensation was effected, represented “proceeds” within the meaning of subsection 227(4.1) of the ITA and that it should therefore remit those amounts in priority to the Receiver General of Canada.  The defendant argues that the Prothonotary also erred in finding that compensation was effected on February 21, 2001, when noted by the defendant.

[8]        To my mind, the defendant’s arguments must be rejected, in light of the amended wording of subsection 227(4.1) of the ITA and its application by the Supreme Court of Canada in First Vancouver Finance v. M.N.R., [2002] 2 S.C.R. 720, (First Vancouver) and later by the Federal Court of Appeal in Canada (Attorney General) v. National Bank of Canada et al., [2004] FCA 92, [2004] F.C.J. No. 372 (QL), (National Bank) [leave to appeal to the Supreme Court of Canada denied on October 14, 2004, SCC 30311].

[9]        First, at pages 729 to 833 of First Vancouver, the Supreme Court made a connection between the vehicle of the deemed trust granted to the Minister by the ITA and the importance of collecting source deductions; at the same time, in order to justify the absolute priority enjoyed by this deemed trust, the Supreme Court stressed the opportunity that these financial institutions have to become familiar with the tax debtor’s business and finances and also considered the major amendments now reflected in subsection 227(4.1) of the Act, in response to Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R. 411:

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.]

[10]      Subsequently, in National Bank, the Federal Court of Appeal confirmed the personal liability of the tax debtor’s secured creditor in the following terms at paragraph 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 . . .".

[11]      It is therefore clear, in this case, that when the defendant cashed the term deposit certificate, whether in November 2000 as it claims, or in February 2001 as the plaintiff claims, the term deposit certificate was deemed to be held in trust within the meaning of subsection 227(4) of the ITA and subsection 86(2) of the EIA, and that the proceeds of the certificate should have been paid in priority by the defendant to the plaintiff.

[12]      In the present context, I cannot accept the defendant’s argument that compensation is not a security interest but simply a method of extinguishing a debt.  Subsection 224(1.3) defines a “security interest” as “any interest in property that secures payment or performance of an obligation . . .”.

[13]      More often, compensation is primarily considered a form of security interest.  According to Jean-Louis Baudouin and Pierre-Gabriel Jobin, Les obligations, 5^th Edition, Cowansville, Les Éditions Yvon Blais Inc., 1998, at page 768:

[TRANSLATION]

 Second, compensation also serves as a security interest by making it possible to avoid the risks of debtor insolvency.  If compensation were not possible, the debtor would be obliged to pay and, if its creditor who also owed it money were insolvent, it would run the risk of not being able to collect its own debt.  Thus compensation gives an ordinary creditor a measure of priority by not forcing it to compete with other creditors . . . .

[14]      In this case, there is no doubt that the defendant held the certificate of deposit as a security interest for the amounts owed on the line of credit.  This is apparent prima facie  from the savings security agreement signed by the parties.  In fact, compensation itself was a security

mechanism.

[15]      Moreover, it was recently held in Attorney General of Canada v. Caisse populaire Desjardins de Lyster/Inverness/Val-Alain, 2005 FC 949 (notice of appeal filed in the Federal Court of Appeal September 27, 2005, A-426-05), that the deemed trust even applies outside the framework of enforcement of a security interest.

[16]      Regarding the meaning of the French term “produit découlant” and its English equivalent “proceeds” contained in subsection 227(4.1) of the ITA, although they are not defined in the legislation, they are given a non-restrictive meaning in standard dictionaries and in cases where they are interpreted judicially.

[17]      Le Nouveau Petit Robert, Paris, 2002, defines “produit” as follows:

[TRANSLATION]

That which produces a charge, a landed property, a patrimony; profit, benefit obtained from an activity.

[18]      ITT Commercial Finance Ltd. v. Co-op Centre Credit Union (1988), 59_Alta._L.R._(2d)_39, defines “proceeds” as follows at page 41:

     We are all of the view that the learned trial judge was correct to find, in the circumstances of this case, that the word “proceeds” in the assignment agreement meant not just any cash paid by a buyer but also any other property of value that was handed by a retail buyer to the dealer to help pay for the sale of the new motor-homes. . . .

These definitions give the English “proceeds” and the French “produit” a non-restrictive meaning and include any valuable consideration received in exchange in a transaction.  The term is broad enough in scope to include both proceeds received as a result of compensation and those received in the enforcement of a security interest.  In my view, this interpretation is also consistent in every respect with the direction provided by the Supreme Court of Canada in First Vancouver, supra, concerning the priority enjoyed by the deemed trust.

[19]      Finally, the defendant asserts that compensation was effected on November 25, 2000, when the tax debtor defaulted on the defendant, and not on February 21, 2001, when it appears that the defendant somehow cashed the term deposit certificate.  The defendant relies on article 1673 of the Civil Code of Québec, which states that legal compensation is effected by operation of law where the necessary conditions are met, that is, where there is coexistence of debts that are certain, liquid and exigible.

[20]      On November 25, 2000, the defendant defaulted and, according to the savings security agreement, the amount owed under the credit agreement immediately became exigible.  Furthermore, clause 4 of the term deposit agreement stated that [TRANSLATION] “no amount in capital or interest is reimbursable or payable before the date of maturity”.  Thus, in the absence of two exigible debts, there could be no legal compensation.

[21]      However, conventional compensation, on the mutual consent of the parties, was effected in this case.  Conventional compensation has the same effect as legal compensation, that is, the reciprocal debts are both extinguished in cases where, for some reason, legal compensation is impossible because the conditions set out by the law are not met (Les obligations, supra, at pages 781 and 782).

[22]      In this case, clause 7 of the savings security agreement states that [TRANSLATION] “compensation shall be effected between the credit agreement or agreements and the deposit certificate . . . whether or not they have matured”.  However, the clause goes on to stipulate that the Caisse [TRANSLATION] “may, for example, without prejudice to its rights, wait for the certificates of deposit to mature before exercising the rights set out in paragraphs (b) and (c) hereinabove”.

[23]      Two other facts are significant here.  First, the date stamp of February 21, 2001 appearing on the deposit agreement is evidence of the date on which the defendant, by noting the compensation, indicated its intention to avail itself thereof.  Second, the defendant continued to allow the interest owed on its debtor’s line of credit to accrue until February 2001.

[24]      In my opinion, these facts, considered together with clause 7 of the contract to secure savings, show that the defendant decided not to exercise its right to effect compensation prior to February 21, 2001, as noted on the deposit agreement, that is, when it stopped allowing the interest stipulated therein to accrue.

[25]      The defendant relies on Forge M. Dembiermont S.A. v. Acier Solac Ltée and Royal Bank of Canada (March 30, 1995), Montréal 500-05-002722-914 (S.C.), to assert that the Court must note the date when the right to compensation arises and not the date on which its registration is noted by the bank.  In that case, however, the situation was different.  The issue was one not of conventional but of legal compensation and whether, by delaying in putting its file in order, the bank in question had tacitly waived the compensation [TRANSLATION] “acquired much earlier” (page 9 of the decision).

[26]      Therefore, in this case, the Prothonotary correctly determined that compensation was effected on February 21, 2001.

[27]      For all these reasons, since the defendant failed to demonstrate that Prothonotary Tabib committed a material error in her decision, the intervention of this Court is not warranted, and the motion is dismissed with costs.

                          “Yvon Pinard”                       

       Judge

OTTAWA, ONTARIO

November 22, 2005

Certified true translation

Michael Palles

                                                             FEDERAL COURT

                                                     SOLICITORS OF RECORD

DOCKET:                                                      T-1253-02

STYLE OF CAUSE:                                    HER MAJESTY THE QUEEN IN RIGHT OF CANADA v. CAISSE POPULAIRE DU BON CONSEIL

PLACE OF HEARING:                               Montréal, Quebec

DATE OF HEARING:                                  November 1, 2005

REASONS FOR ORDER BY:                   The Honourable Mr. Justice Pinard

DATED:                                                         November 22, 2005 

APPEARANCES:

Nadine Dupuis                                              FOR THE PLAINTIFF

Christian Méthot                                            FOR THE DEFENDANT

SOLICITORS OF RECORD:

JOHN H. SIMS, Q.C.                                    FOR THE PLAINTIFF

Deputy Attorney General of Canada

BOUDREAU, MÉTHOT, TOURIGNY          FOR THE DEFENDANT

Drummondville, Quebec

                                                                                                                                Date: 20051122

                                                                                                                          Docket:  T-1253-02

Ottawa, Ontario, the 22nd day of November 2005

PRESENT:  THE HONOURABLE MR. JUSTICE PINARD

BETWEEN:

                              HER MAJESTY THE QUEEN IN RIGHT OF CANADA

                                                  (Minister of National Revenue)

                                        having an office at 284 Wellington Street

                                                   St Andrew’s Tower, 6th floor

                                                                Ottawa, Ontario

                                                                      K1A 0H8

                                                                                                                                              Plaintiff

                                                                        - and -

                                        CAISSE POPULAIRE DU BON CONSEIL

                                      A cooperative duly incorporated under the

                                                 Savings and Credit Unions Act

                                                        having its head office at

                                                         330 Notre Dame Street

                                           Notre-Dame-du-Bon-Conseil, Quebec

                                                                      J0C 1A0

                                                                                                                                        Defendant

                                                                       ORDER

The motion by the defendant appealing from the judgment of Mireille Tabib, Prothonotary, dated May 20, 2005, ordering it, on the basis of subsection 227(4.1) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended (the ITA), and subsection 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, as amended, to pay to the plaintiff the amount of $26,863.53 plus interest, as provided under subsections 36(2) and 37(2) of the Federal Courts Act, R.S.C., 1985, c. F-7, as amended, at the rate set out in the ITA and capitalized daily effective February 26, 2001, until paid in full, is dismissed with costs.

                       “Yvon Pinard”                          

                            Judge

Certified true translation

Michael Palles