Date: 20070326
Docket: T-731-06
Citation: 2007 FC 313
Ottawa, Ontario, March 26, 2007
Present:
The Honourable Mr. Justice Simon Noël
BETWEEN:
ATTORNEY
GENERAL OF CANADA
Plaintiff
and
TORONTO
DOMINION BANK
Defendant
REASONS FOR JUDGMENT AND
JUDGMENT
[1]
This is a
simplified action under sections 292 to 299 of the Federal Courts Rules,
SOR/98‑106. The Attorney General of Canada (the plaintiff) is claiming
$7,784.70 from the Toronto Dominion Bank (the defendant). This claim is based
on the deemed trust provisions for the benefit of Her Majesty the Queen in
subsections 227(4) and (4.1) of the Income Tax Act, R.S.C. 1985, c.
1 (the ITA) and in subsections 86(2) and (2.1) of the Employment
Insurance Act, S.C. 1996, c. 23 (the EIA). The plaintiff is also
claiming interest at the rate prescribed by the ITA from April 8, 2003,
until payment in full, under subsections 36(2) and 37(2) of the Federal
Courts Act, R.S.C. 1985, c. F-7.
I. Admission
[2]
The
morning of the hearing, the defendant admitted owing $7,784.70 to the plaintiff
but asked that the interest payable be calculated from March 1, 2005, the date
of the first request for payment, instead of April 8, 2003, the date when the
defendant cashed in the certificate of deposit.
II. The facts
[3]
On August
28, 2001, 9093-0470 Québec Inc. (9093), a furniture company, signed a personal
property mortgage in favour of the defendant, a bank constituted under the Bank
Act, S.C. 1991, c. 46. Pursuant to this hypothec, 9003 signed a
document entitled “Power of Attorney to Transfer Bonds or Shares” in favour of
the defendant.
[4]
The mortgage
in question concerns a certificate of deposit bearing the number 8066224,
in the original amount of $41,500, which matured on August 28, 2002. It was
then renewed until April 8, 2003, when the defendant cashed it in for
$43,040.89.
[6]
On January
28, 2002, the defendant’s legal representatives sent a notice of default to
9093 stating that amounts were due, and that consequently the defendant was
planning to cash the certificate of deposit that it held as security.
[7]
On March
14, 2003, 9093 made an assignment in bankruptcy to the trustee KPMG Inc.
[8]
On April 8,
2003, the defendant cashed in the certificate of deposit for $43,040.89 (with
interest) and applied it to the line of credit in 9093’s name. The balance
owing on the line of credit was reduced from $64,020.97 to $20,980.08.
[9]
On March
1, 2005, Marie-France Langlois, a collection officer with the Canada Revenue
Agency, sent a letter to the defendant regarding Her Majesty’s claim of
$17,142.18 (the request for payment).
[10]
On April
19, 2005, the defendant’s representatives replied to Ms. Langlois’ letter. They
confirmed that the defendant had indeed applied as compensation the certificate
of deposit that it held as security.
[11]
On
February 23, 2006, the plaintiff sent a notice of default to the defendant for
payment in the amount of $7,784.70. This notice of default was based on 9093’s
failure to remit $7,784.70 to Her Majesty, which represents the amount that
9093 deducted from its employees’ wages. Specifically, 9093 failed to remit to
Her Majesty: (a) $6,487.23, which it deducted under the ITA as tax
payable by its employees from January to April 2002, and (b) $1,297.47, which
it deducted as employee contributions payable by its employees under the EIA
from January to April 2002.
[12]
According
to the plaintiff, the defendant was required to pay Her Majesty in priority
when it cashed in the certificate of deposit, pursuant to subsections 227(4)
and (4.1) of the ITA and subsections 86(2) and (2.1) of the EIA.
II. The relevant statutory provisions
[13]
For our
purposes, the relevant provisions are set out in subsections 86(2) and (2.1) of
the ITA and 227(4) and (4.1) of the EIA. Since these provisions
are very similar, it is sufficient to reproduce only the ITA provisions:
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227. (4) Every person who deducts or
withholds an amount under this Act is deemed, notwithstanding any security
interest (as defined in subsection 224(1.3)) in the amount so deducted or
withheld, to hold the amount separate and apart from the property of the
person and from property held by any secured creditor (as defined in
subsection 224(1.3)) of that person that but for the security interest would
be property of the person, in trust for Her Majesty and for payment to
Her Majesty in the manner and at the time provided under this Act.
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227. (4) Toute personne qui déduit ou retient
un montant en vertu de la présente loi est réputée, malgré toute autre
garantie au sens du paragraphe 224(1.3) le concernant, le détenir en fiducie
pour Sa Majesté, séparé de ses propres biens et des biens détenus par son
créancier garanti au sens de ce paragraphe qui, en l’absence de la
garantie, seraient ceux de la personne, et en vue de le verser à Sa Majesté
selon les modalités et dans le délai prévus par la présente loi.
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(4.1) Notwithstanding any other provision of
this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of
that Act), any other enactment of Canada, any enactment of a province or any
other law, where at any time an amount deemed by subsection 227(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, property of the person and property
held by any secured creditor (as defined in subsection 224(1.3)) of that
person that but for a security interest (as defined in subsection 224(1.3))
would be property of the person, equal in value to the amount so deemed to
be held in trust is deemed
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(4.1) Malgré les autres dispositions de la
présente loi, la Loi sur la faillite et l’insolvabilité (sauf ses articles
81.1 et 81.2), tout autre texte législatif fédéral ou provincial ou toute
règle de droit, en cas de non-versement à Sa Majesté, selon les modalités
et dans le délai prévus par la présente loi, d’un montant qu’une personne est
réputée par le paragraphe (4) détenir en fiducie pour Sa Majesté, les
biens de la personne, et les biens détenus par son créancier garanti au
sens du paragraphe 224(1.3) qui, en l’absence d’une garantie au sens du même
paragraphe, seraient ceux de la personne, d’une valeur égale à ce montant
sont réputés:
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(a)
to be held, from the time the amount was deducted or withheld by the
person, separate and apart from the property of the person, in trust for Her
Majesty whether or not the property is subject to such a security interest, and
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a) être détenus en fiducie
pour Sa Majesté, à compter du moment où le montant est déduit ou retenu,
séparés des propres biens de la personne, qu’ils soient ou non assujettis à
une telle garantie;
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(b)
to form no part of the estate or property of the person from the time the
amount was so deducted or withheld, whether or not the property has in fact
been kept separate and apart from the estate or property of the person and
whether or not the property is subject to such a security interest
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b) ne pas faire partie du
patrimoine ou des biens de la personne à compter du moment où le montant est
déduit ou retenu, que ces biens aient été ou non tenus séparés de ses propres
biens ou de son patrimoine et qu’ils soient ou non assujettis à une telle
garantie.
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and
is property beneficially owned by Her Majesty notwithstanding any security
interest in such property and in the proceeds thereof, and the proceeds of
such property shall be paid to the Receiver General in priority to all such
security interests.
[Emphasis added]
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Ces
biens sont des biens dans lesquels Sa Majesté a un droit de bénéficiaire
malgré toute autre garantie sur ces biens ou sur le produit en découlant, et
le produit découlant de ces biens est payé au receveur général par priorité
sur une telle garantie.
[Je
souligne]
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III. Analysis
[14]
As
mentioned above, the defendant admitted the amount in dispute at the hearing.
Accordingly, I need only determine the date that the interest on this amount
begins to accrue. Is it the date of the request for payment, i.e. March 1,
2005, or the date of the compensation when the certificate of deposit was
cashed, i.e. April 8, 2003?
[15]
I should
point out that because of the similar wording in subsections 86(2) and (2.1) of
the EIA and subsections 227(4) and (4.1) of the ITA, the same
result applies to the deductions for employment insurance and the deductions
for income tax.
[16]
The
Supreme Court of Canada, per Mr. Justice Iacobucci, dealt with source
deductions in First Vancouver Finance v. M.N.R, [2002] 2 S.C.R. 720 at
paragraphs 22-23 and 28. To assist in understanding these reasons, I reproduce
the following paragraphs:
22 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.
23 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.
. . .
28 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). . . .
[Emphasis
added]
[17]
I
summarize the Supreme Court’s statements as follows:
:
-
The
collection of source deductions is at the heart of income tax collection;
-
The tax
debtor’s bank is more familiar with the debtor’s business and finances than the
Minister;
-
Source
deductions have priority over other creditors with respect to the collection of
unremitted taxes;
-
The
special priority granted to the deemed trust prevails over property given as security,
regardless of whether the security interest arose before or after the
deductions for income tax or employment insurance were made;
[18]
From
January to April 2002, the deductions made by 9093 for tax and employment
insurance were not remitted to the plaintiff, and a deemed trust became
operative. These deductions were no longer part of 9093’s property. Thus, when
the certificate of deposit in the amount of $43,040.98 was cashed in on April
8, 2003, the defendant appropriated a part of the amount that no longer was
part of 9093’s property: this amount belonged to the plaintiff because of the
deemed trust and special priority.
[19]
On March
1, 2005, the plaintiff sent a letter to the defendant requesting payment of the
source deductions and employment insurance contributions. This date is one
factor to consider in determining the date on which interest begins to run.
[20]
However,
when the defendant applied the proceeds of the certificate of deposit as
compensation on April 8, 2003, the defendant misappropriated the amount of
$7,784.70. Indeed, subsections 227(4) and (4.1) of the ITA and 86(2) and
(2.1) of the EIA provide that when an employer fails to remit source
deductions for tax and contributions for employment insurance, a deemed trust
is created. This trust has priority over any security given before or after the
trust arises.
[21]
In this
case, the default in remitting the source deductions and the contributions
occurred in the first half of 2002, which means that the deemed trust existed
since that time. From that point on, 9093’s property no longer included
the amount of $7784.70. Therefore, when the certificate of deposit was cashed
on April 8, 2003, the defendant appropriated an amount to which it was not
entitled.
[22]
Two other
dates could also be determinative: the date of the request for payment or the
date the defendant became aware that an amount was due in priority. However, in
this case, it appears to me that the fact that the defendant appropriated an
amount to which it was not entitled is the decisive factor. Accordingly, I
adopt April 8, 2003 as the date for purposes of the interest calculation.
IV. Costs
[23]
Since the
defendant admitted owing the amount claimed, I am awarding costs to the
plaintiff.
JUDGMENT
FOR THESE REASONS, THE COURT:
-
Allows the
plaintiff’s action;
-
Orders the
defendant to pay the plaintiff the amount of $7,784.70 with interest at the
rate prescribed by the Income Tax Act from April 8, 2003, to payment in
full, in accordance with subsections 36(2) and 37(2) of the Federal Courts
Act;
-
Awards
costs to the plaintiff.
“Simon Noël”
Judge
Certified true
translation
Mary Jo Egan, LLB
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