Pigott Project Management Limited v. Her Majesty the Queen in Right of Alberta, Worker’s Compensation Board, Bob Wallace Excavating Limited, Province of Alberta Treasury Branches, Revenue Canada Taxation (Alberta) and Petro-Canada Incorporated and Land-Rock Resources Limited., [1994] 1 CTC 108

Hunt, J.:—This case concerns a question of priorities between Revenue Canada and the Alberta Treasury Branch (hereinafter referred to as "ATB"), as regards moneys known as the Pigott Fund which have been paid into Court.

Briefly, ATB claims by virtue of a general assignment of book debts (GABD) and a general security agreement; the former was executed by Land-Rock Resources Limited in favour of ATB on December 5, 1988 and was registered at Central Registry on December 13, 1988. This registration has been continued under the Personal Property Registry and, it was conceded by Revenue Canada, has been perfected. Revenue Canada’s claim to priority arises from the fact that, on or about May 3, 1991, Land-Rock became indebted to Her Majesty in Right of Canada as represented by Revenue Canada, for sums representing the employer portions and employee source deductions that Land-Rock was required to remit pursuant to the Canada Pension Plan Act, R.S.C. 1985, c. C-8, the Unemployment Insurance Act, R.S.C. 1985, c. U-1 and the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "ITA").

The argument before me concerned the legal effect of the GABD in view of Revenue Canada's priority claim, and that issue is the one addressed here. In a decision of October 30, 1992, Master Waller held that the ATB had priority, either as the owner of the funds or with a property interest that exceeded the property rights of a secured creditor as contemplated by subsection 224(1.2) of the ITA.

The relevant provisions of the ITA are:

(1.2) Idem.—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 a 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.

[Emphasis added.]

(1.3) Idem.—In subsection (1.2)

"secured creditor".—"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".—"security interest" means any interest in property that secured 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;

Subsection 224(1.2) was enacted in its present form on July 27, 1990. Its predecessor section of the same number was identical, save for the absence of the portion of subsection 224(1.2) underlined above. The definitions of "security interest" and “secured creditor" have not been altered.

The predecessor section was the object of considerable judicial scrutiny, with a number of courts in several jurisdictions considering how effective it was in reaching moneys subject to various kinds of interests. Broadly, two competing lines of authority developed. One line is perhaps best illustrated by the decision of the Alberta Court of Appeal in Lloyds Bank Canada v. International Warranty Co., [1990] 2 C.T.C. 360, [1990] 1 W.W.R. 749 (Alta. C.A.); rev'g [1989] 1 C.T.C. 401, 89 D.T.C. 5279, [1989] 3 W.W.R. 152 (Alta. Q.B.); leave to appeal to Supreme Court of Canada refused (1989), 70 Alta. L.R. (2d)iii (note). There it was concluded that Parliament's intention was not sufficiently clear, in the predecessor section, to permit Revenue Canada to take priority over a general assignment of book debts. At page 362 (W.W.R. 753), Stratton, J.A. held that the wording of the section was not sufficiently plain and unambiguous to deprive a properly secured creditor of all or part of its security without compensation. This, he said, would be equivalent to the transfer of proprietary rights without compensation. At page 364 (W.W.R. 755), he described the section as, at most, a form of extra-judicial attachment which brought the funds into Revenue Canada's control; he said "something further" would be required to effect a transfer of property in the funds or to establish the priority of Revenue Canada’s claim.

To similar effect are other cases including Toronto Dominion Bank v. R., [1990] 2 C.T.C. 542, 90 D.T.C. 6639 (F.C.T.D.); Pembina on the Red Development Corp. v. Triman Industries Ltd., [1992] 1 C.T.C. 133, 92 D.T.C. 6174 (Man. C.A.); and Concorde International Travel Inc. v. T.l. Travel Services (B.C.) Inc. (1990), 72 D.L.R. (4th) 405, 47 B.C.L.R. (2d) 188 (C.A.), aff’g (1989), 38 B.C.L.R. (2d) 298, 27 C.C.E.L. 254 (Co. Ct.). To opposite effect are decisions by courts in Saskatchewan and Nova Scotia, Royal Bank of Canada v. Saskatchewan Power Corp., [1991] 1 W.W.R. 1, [1991] 1 C.T.C. 532 (Sask. C.A.), aff’g [1990] 2 C.T.C. 285, 90 D.T.C. 6330 (Sask. Q.B.), and Touche Ross Ltd. v. M.N.R., 71 D.L.R. (4th) 648, [1991] 1 C.T.C. 505 (N.S.S.C.).

Since the above decisions, subsection 224(1.2) has been amended as outlined earlier. The question here is whether the alteration is sufficient to establish Revenue Canada's priority over a general assignment of book debts.

Counsel directed my attention to all cases known to them in which the new section has been considered, including a number of authorities arising since the decision of Master Waller. The following decisions have upheld Revenue Canada’s priority over the noted type of interest:

Berg v. Parker Pacific Equipment Sales, [1991] 1 C.T.C. 442, [1991] B.C.W.L.D. 902

(B.C.S.C.) (assignment of wages);

The Attorney General of Canada v. Zurich Insurance Co. and Caisse Populaire de

Beaujeu and Comptad Pro Ltée (oral judgment delivered by The Honourable Mr. Justice André Denis) (October 11, 1991) (commercial pledge, assignment of property, hypothec, assignment of insurance proceeds);

Spa Springs Parks Ltd. v. Mineral Water Co. of Canada Ltd., [1992] 2 C.T.C. 154,11

C.B.R. 123 (N.S.S.C. Tr. Div.) (debentures);

TransGas Ltd. v. Mid-Plains Contractors Ltd., [1992] 1 C.T.C. 151, 92 D.T.C. 6074

(Sask. Q.B.) and Canada v. Transgas Ltd., [1993] 1 C.T.C. 280 (Sask. C.A.) (statutory liens);

Proman Ltd. v. Canada, [1994] 1 C.T.C. 146 (N.B.Q.B.) (labour and material bond).

There are several other recent decisions of interest. In Canadian Asbestos Services Ltd. v. Bank of Montreal, [1993] 1 C.T.C. 48, 93 D.T.C. 5001 (Ont. Gen. Div.), it was held that the Crown is bound by the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (hereinafter referred to as "CCAA"); thus Revenue Canada must come in line behind certain claimants, such as parties who have advanced funds or supplied work and material in order to allow the company to complete its construction projects, after the company’s application to the courts under the CCAA. The same reasoning gave priority over the Revenue Canada claim to monitoring and legal fees connected to the CCAA application. More generally, in Canadian Asbestos, supra, Chadwick, J. seems to suggest that Revenue Canada would take priority over other creditors, by virtue of, inter alia, subsection 124(1.2); however, such priorities were not determined in the case before her.

In Royal Credit Union Ltd. v. Bank of Nova Scotia, [1992] 2 C.T.C. 343, 322 A.P.R. 333 (N.B.Q.B.), Revenue Canada was held not to have priority over funds held by a law firm in trust pending directions from the court as to disposition of the funds. This decision seems to be based on the general proposition that moneys held in court cannot be attached by garnishment. In Re Total Petroleum Canada Ltd. (1992), 70 B.C.L.R. (2d) 81, [1992] 2 C.T.C. 347 (B.C.S.C.), Revenue Canada was held not to be entitled to moneys held by a third party where, in a contract between the tax debtor and the third party, the third party would be released from the obligation to pay funds to the tax debtor under certain circumstances, and those circumstances had been met. At page 350 (B.C.L.R. 86), McKinnon, J. observed that, in order for subsection 224(1.2) to apply, the third party "must be liable to make a payment to either the tax debtor, or 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.”

In Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd., [1992] 2 C.T.C. 139, [1992] 10 C.B.R. (3d) 41, the Manitoba Court of Appeal considered whether Revenue Canada had priority over a secured creditor claiming under a debenture securing assets including accounts receivable. The court-appointed receiver collected certain accounts, which Revenue Canada claimed to be entitled to in respect of deductions from employees’ wages for income tax, Canada pension plan contributions, and unemployment insurance premiums. Revenue Canada was held to have priority by virtue of subsection 227(4) of the ITA, which deems deductions to be held in trust for Her Majesty. It should be stated that no arguments were made to me about the effect of the sections discussed in Roynat, supra and therefore I have not considered them in this case.

Reference should also be made to a decision of my brother Forsyth, J. in Canada Trustco Mortgage Corp. v. Port O’Call Hotel Inc., [1993] 1 W.W.R. 639, 15 C.B.R. (3d) 143 (Alta. Q.B.), which concerned subsection 317(3) of the Excise Tax Act, R.S.C. 1991, c. E-15. This provision contains language identical to the amended provision of the ITA that is before me in this case. In Canada Trustco, supra, tax debtors failed to remit goods and services taxes to Revenue Canada; the question was whether Her Majesty took priority for these sums as against the holder of a fixed and floating debenture security and as against the holder of various securities, including fixed and floating charge debentures, a general assignment of book debts and a general security agreement. Because of the fact that the language of the Excise Tax Act at issue was virtually identical to that of the ITA, Forsyth, J. considered many of the above decisions pertaining to the previous version of subsection 224(1.2). After having quoted from the judgment of Stratton, J. in the Lloyd's Bank case, supra, he concluded at page 645 (C.B.R. 149) that:

. . . the secured lenders as I have labelled them fall within the definition of secured creditor with security interests as defined in subsection 317(4) of the Excise Tax Act. I am accordingly satisfied that the words “something further", as set out in the quote from Stratton, J.A. that was required to accomplish the purpose apparently intended, has been met by the amendment to the section.

I note here that the definitions of "security interest" and "secured creditors" are, for all practical purposes, identical under both the ITA and the Excise Tax Act.

A reading of the authorities leads me to the conclusion that none of the cases decided since the most recent enactment of subsection 224(1.2) of the ITA (except for Canada Trustco) involved a general assignment of book debts. The argument put to me by the respondent does not seem to have been considered, in Canada Trustco or any of the other post-amendment decisions.

This argument is that, from the date of its execution, a general assignment of book debts operates as an unconditional transfer of property from the assignor (the tax debtor, in this case) to the assignee. Thus, by the time Revenue Canada attempted to attach the funds pursuant to subsection 124(1.2), the tax debtor/assignor had no interest in the funds. ATB submits that the section is not worded broadly enough to allow Revenue Canada to attach moneys in which the tax debtor has no interest. As a result, according to the respondent, ATB must be given priority.

Among the relevant provisions of the general assignment of book debts are these:

THE UNDERSIGNED Land-Rock Resources Ltd. for valuable consideration HEREBY ASSIGNS AND TRANSFERS to Province of Alberta Treasury Branches (herein called "Treasury Branches") all debts, demands and choses in action now due or hereafter to become due, together with all judgments and securities for the said debts, demands and choses in action, and all other rights and benefits in respect thereof which now are or may hereafter become vested in the undersigned

AND the undersigned hereby assigns and transfers and agrees to assign and transfer to Treasury Branches all books and accounts, letters, invoices, papers and documents in any way evidencing or relating to all or any of the debts, demands and choses in action hereby transferred or agreed to be transferred, and to furnish Treasury Branches with all information which may assist in the collection thereof

THE PRESENT assignment and transfer shall be a continuing collateral security to Treasury Branches for the payment of all and every present and future indebtedness and liability of the undersigned to Treasury Branches and any ultimate unpaid balance thereof with interest.

AND the undersigned expressly authorizes Treasury Branches to realize the said debts, demand and choses in action and securities hereby transferred from time to time in such manner and at such times as it may in its discretion deem advisable (but it shall not be bound to realize the same unless it sees fit) and may impute or appropriate the proceeds thereof in its absolute discretion on account of such parts of the said indebtedness and liability whether secured or unsecured as to Treasury Branches may seem best; and such appropriations or imputations may be changed or varied from time to time at the discretion of Treasury Branches; and Treasury Branches before appropriating or imputing the same as aforesaid may deduct all reasonable costs, charges and expense including reasonable commissions for collection and legal fees as between solicitor and client and interest on all of such sums at the rate or highest rate then payable by the undersigned to Treasury Branches on the principal amount of the said indebtedness or liability. . .

ANY of the said debts, demands or choses in action or any part thereof received b the undersigned (or any one or more of the undersigned), or by any agent thereof, shall be received in trust for Treasury Branches and shall be paid to Treasury Branches forthwith upon receipt.

There are a number of authorities that support the respondent's position as to the effect of a general assignment of book debts. Specifically, in Toronto- Dominion Bank v. R., supra, Jerome, A.C.J. concluded at page 105 (C.T.C. 544- 45, D.T.C. 6641) that a general assignment of book debts constituted "an absolute transfer of all property" previously held by the assignor in its accounts or other book debts, present or future. Accordingly, he said, the assignee "had full legal and equitable title in all accounts that were owing or that would become owing by debtors [of the assignor] unless such right was otherwise expropriated by competent and valid legislation.”

Much of the language of the assignment of book debts in Ontario Development Corp. v. Canada, [1989] 1 C.T.C. 319, 89 D.T.C. 5134 (F.C.T.D.) was similar to that of the instrument here held by ATB; in that case, Cullen, J. concluded at page 323 (D.T.C. 5137) that, once there has been a general assignment of book debts, the book debts no longer belonged to the assignor but became the property of the assignee. To similar effect is Royal Bank of Canada v. A.C. Canada, [1977] 6 W.W.R. 170, 25 C.B.R. (N.S.) 233 (Alta. S.C.), aff'd [1979] 1 W.W.R. 479, 29 C.B.R. (N.S.) 227 (Alta. C.A.) at page 179 (C.B.R. 241); Lettner v. Pioneer Truck Equipment Ltd. et al. (1964), 47 W.W.R. 343 (Man. C.A.) per Guy, J.A. at page 346; and Evans Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (1958), 16 D.L.R. (2d) 123, 27 W.W.R. 38 (B.C.C.A.).

ATB's instrument contains a provision to the effect that the assignment and transfer"shall be a continuing collateral security” to ATB. But the last two cases also are authority for the proposition that such a provision does not make the GABD any less absolute.

These and other authorities are reviewed in some detail in Royal Bank of Canada v. R., [1984] C.T.C. 573, 84 D.T.C. 6439, 52 C.B.R. (N.S.) 198 (F.C.T.D.); aff'd [1986] 2 C.T.C. 211, 86 D.T.C. 6390, 60 C.B.R. (N.S.) 125 (F.C.A.). In the trial decision, Muldoon, J. observed at page 576 (D.T.C. 6441, C.B.R. 202) that there may be a distinction between an absolute assignment and one that provides that, in the event of default and the non-remedy of the default, the bank may without further notice deal with the book debts. Muldoon, J. concurred with submissions made to him that, in any event, the instrument before him constituted an absolute transfer of property and, as he put it at page 578 (D.T.C. 6443, C.B.R. 206), after the assignment, the book debts "were never more" the property of the assignor.

Given these authorities as to the legal effect of a general assignment of book debts, it remains to consider whether the ATB falls within the definition of "secured creditor" under the ITA, and whether its GABD is a "security interest".

The definition of "security interest” set out above is broad. It means "any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of an . . . assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for". ATB suggests that the term "security interest" must be seen in light of its use in the term "secured creditor", for it is only if ATB is a "secured creditor” will the Minister's claim take priority. “Secured creditor" means a person who has a security interest "in the property of another person”. Given the nature of its GABD, ATB says it has no interest in the property of“ another person", because the tax debtor has no interest whatsoever in the debts covered by the GABD.

ATB says, moreover, that the term "assignment" in the definition of "security interest" is thus rendered ambiguous, in this sense: if there is an unconditional assignment, there is no "property of another person" in which a security interest can be held. There could only be a "secured creditor” in the case of some form of conditional or otherwise limited assignment, for in such a case there would be” property of another person" (i.e., the assignor's equity in the conditional or limited assignment) in which to hold a security interest.

This argument was alluded to in the decision of Twaddle, J.A. in Pembina on the Red Development Corp. v. Triman Industries Ltd., supra, at pages 501-02 (C.T.C. 146, D.T.C. 6183). It was his view that the predecessor section was not clear enough "that Parliament intended to permit Her Majesty to collect tax out of property that has previously been assigned, absolutely, to another.” He added that, if Parliament wished to collect a tax unremitted by one person from property which belongs to another, its intentions must be made clear. He said it was not clear from the ITA that Her Majesty should be entitled to collect "what were the tax debtor's accounts receivable in priority to the person who acquired ownership of them before the tax debt arose." In Roynat, supra, at pages 143-44 (C.B.R. 49), Twaddle, J.A. had these observations about the Pembina case:

Pembina on the Red also involved competition for priority between an assignee of accounts receivable and the Crown. The assignee had perfected its interest in the receivable by registration pursuant to the Personal Property Security Act. Subsequently, the assignor failed to remit to the Crown moneys deducted from its employee's wages on account of tax. The Crown served third party demands on those whose debts made up the receivables. The issue was whether the assignee had lost its priority by operation of the federal law which gave the Crown the right to demand payment of the receivables notwithstanding the prior right of a "secured creditor".

A majority of this Court held that the assignee of the accounts receivable, having a perfected interest in them, was not a "secured creditor" within the meaning of the federal legislation. The interest of the assignee was referred to by Scott, C.J.M. as “absolute” (at page 139 (D.T.C. 6178)); a “prior fixed and specific charge" (at page 142 (D.T.C. 6180)); and by me as "ownership" (at page 146 (D.T.C. 6180).

I suspect that Humpty Dumpty would have praised my misuse of language in Pembina on the Red. I used the work “ownership” not because it was entirely accurate, but because it enabled me to make my point without resorting to the technical and sometimes confusing language of the Personal Property Security Act. Perhaps I should have used the more discreet language of Scott, C.J.M. and referred to the assignee's interest as absolute. Or, perhaps, I should have adopted the language used in McLaren, Secured Transactions in Personal Property in Canada (2nd ed.) (Carswell: Toronto, 1989) (looseleaf), and referred to the assignee as the holder of "the greatest possible bundle of rights under the Act."

In any event, the issue in Pembina on the Red was not how best to describe the assignee's interest, but whether it was that of a secured creditor. The majority decision reflected the view that the interest acquired by an assignee under the Personal Property Security Act was more than that of a creditor with a security interest in another's property.

Revenue Canada replies that these arguments were considered and answered by D.C. McDonald, J. in his decision in the Lloyds Bank Can. v. Int. Warranty Co., supra, at pages 410-11 (D.T.C. 5285):

It remains to be considered whether the assignee of book debts is a “secured creditor" as that phrase is used in subsection 224(1.2) and defined in subsection 224(1.3). Mr. McCabe argues that the bank (and Mr. Reeson says the same for the Treasury Branches), by virtue of its absolute assignment by I.W., is the owner of the accounts assigned, including the funds held by the Toronto Dominion Bank. Thus, he argues, the bank is not a “secured creditor” because it does not hold a "security interest in the property of" I.W. but rather owns the property in question. The expression "a person who has a security interest in the property of another erson” would ordinarily ave to be interpreted as Mr. McCabe contends. However, the definition of “security interest" is so broad as to include moneys which have been equitably assigned by the tax debtor to, for example, a bank. The ownership by the bank of the funds that are the subject of the assignment constitutes an “interest in property". That interest in property is one which “secures payment” of the “obligation” of the tax debtor (I.W.). The provision of such security is the very purpose of the assignment of book debts. Moreover, the bank’s interest is one “created by or arising out of [an] assignment . . . of any kind whatever, however and whenever arising . . . .”

This decision was, as outlined earlier, overruled by the Court of Appeal, although the particular passage just quoted was not referred to. McDonald, J. emphasized the broad definition of "security interest" in order to conclude that the bank, a holder of an assignment of book debts, was a "secured creditor". Here, the ATB is really saying that, no matter how broad the definition of "security interest", it cannot have the effect of embracing property owned absolutely by another party. To accomplish this, it submits, the section would have to go further.

I find this argument persuasive, particularly in view of the fact that it does not rob the section of all meaning. There are still types of assignments (such as limited or conditional assignments of property, which allow the tax debtor to retain some interest in the property) that would come under the section.

I am of the view, moreover, that it is not clear whether the modifying provisions at the end of the definition of “security interest" (the words "of any kind whatever, however or wherever arising, created, deemed to arise or otherwise provided for") are meant to apply to each of the enumerated types of interests or instruments (debenture, mortgage, assignment, etc.) or whether these words are meant only to modify the term "encumbrance". McDonald, J. assumed the former to be the case, but in my view the meaning is not without doubt. There is a third way of reading the modifying words at the end, namely that the words “of any kind whatever" describe "encumbrance", with the balance of the words applying to each of the listed types of interests. The words "of any kind whatever” might also be taken to apply to assignments and encumbrances. Were this provision more clear, it would be easier to conclude that Parliament meant to include all types of assignments, including unconditional assignments, in the definition. This would make it plainer that, indeed, Parliament intended Revenue Canada's claim to take priority over the property of someone other than the tax debtor, such as an assignee of the tax debtor’s book debts.

I have referred above to the language of Twaddle, J.A. in the Pembina case, concerning the need for extremely clear wording before it can be concluded that Parliament intended Her Majesty to be able to collect tax out of property belonging to another. Scott, C.J.M. put the matter this way at page 493 (C.T.C. 140, D.T.C. 6179) in Pembina:

Counsel for the respondent does not ask this Court to return to the principle of the literal interpretation of the statute. Instead he relies on the well-known principle that, in the absence of clear and unequivocal terms, there is a presumption that proprietary rights are not to be taken away without provision being made for compensation, nor in the absence of clear and unequivocal language.

He added:

As Estey, J. observed in Johns-Manville Canada Inc. v. R., [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373, 21 D.L.R. (4th) 210, when all is said and done, "where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer” (at page 72 (C.T.C. 126, D.T.C. 5384, D.L.R. 229)).

The view put forward by ATB here, and accepted by me, does not lead to the conclusion that Parliament has accomplished nothing by the 1990 amendments. Clearly, there are many kinds of security interests that would not have been caught by the predecessor section (at least on the reasoning of the Alberta Court of Appeal in Lloyds Bank) but that would now fall under the purview of subsection 124(1.2). In my view, however, a general assignment of book debts is not one of them.

For these reasons, the appeal is denied. Costs may be spoken to if necessary.

Appeal denied.