1074022 B.C. Ltd. v Li, 2020 BCSC 65

On a court-approved sale (arising in connection with foreclosure proceedings) of a Vancouver property owned by a resident of Hong Kong (Mr. Li), no s. 116 certificate had been obtained by the owner (Mr. Li, a resident of Hong Kong), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. CRA determined that Mr. Li’s tax liability was $46,000. Although Mr. Li had provided CRA with an irrevocable direction to pay the excess funds of $154,000 to his lawyer (which would then have resulted in the funds being paid (in accordance with the court order) to the secured creditors of Mr. Li, including the petitioner as the second mortgagee), the Attorney General (“Canada”) refused to so direct the funds on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., them).

Before determining (at para. 16) that “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated (at para. 16):

In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.

Although the point was now moot, Harper M also found (at para. 47):

Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.

In this regard, Canada had argued (at para. 18) that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.” In rejecting this position, Harper M stated inter alia (at para. 33):

[T]he funds that CRA refers to as a “refund” are part of the funds that were encumbered by the mortgage security held on Mr. Li’s property. Those funds remain in place and stead of the lands. Accordingly, the “refund” cannot be properly considered a tax refund owing to Mr. Li.

After noting (at para. 41) the suggestion of Canada that “one of the mortgagees petition the debtor into bankruptcy because federal legislation permits tax refunds to be paid to a trustee in bankruptcy to be dealt with in the bankruptcy,” she stated (at para.49):

I do not accept Canada’s argument that bankruptcy is a solution to the problem that Canada itself has created by taking an overly-restrictive approach to s. 116.

No s. 116 certificate was obtained on a court-approved sale of a Vancouver property (arising in connection with foreclosure proceedings) by the Hong Kong owner (Mr. Li), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. Mr. Li’s tax liability was only $46,000 and he had provided CRA with an irrevocable direction to pay the excess funds (i.e., $154,000) to his lawyer (so that such funds would then be paid, in accordance with the court order, to the secured creditors of Mr. Li, including the second mortgagee, the petitioner in this case). However, CRA refused to do so on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., a mortgagee).

Before determining (at para. 16) “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated:

In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.

Harper M went on to indicate (at para. 47) that “Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.” In this regard, she rejected the Attorney General’s argument (at para. 18) that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.”