In the Matter of an Interpleader by Total Petroleum Canada Ltd., [1992] 2 CTC 347

McKinnon, J:— Total Petroleum Canada Ltd. ("Total") contracted with Degenhardt Pipeline Contractors Ltd. ("Degenhardt") for the construction of two gas pipelines in northern British Columbia. Degenhardt "completed" the project but left the area owing subcontractors in excess of $300,000. Total conceded it owed a balance on the contract, but given competing claims, applied by way of interpleader and had the sum of $121,236.27 paid into court. Revenue Canada claims priority to these funds.

The issue on this application is to determine whether the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") gives Revenue Canada priority:

(a) when contractual terms between parties release one,"the owner”, from an obligation to pay the other, "the contractor" under defined circumstances;

(b) when those defined circumstances have been met and

(c) when the "contractor" is found liable and assessed for an amount owing under subsection 227(10.1) of the Income Tax Act.

There have been numerous court applications in this matter. The following chronology tracks key events.

1. January 12, 1990 Degenhardt contracted with Total to build the pipelines. Paragraph 38.7 of this contract permitted Total to withhold payments if Degenhardt failed to pay amounts due for” labour, materials, or subcontractors”.

2. February 27, 1991 Revenue Canada served Total with a direction to pay $78,557.47, alleging a tax debt due by Degenhardt.

3. This direction to pay was increased to $119,461.58 on March 7, 1991.

4. March 14, 1991, Total filed its Petition to pay a holdback amount of $126,803.04 into court. The Petition referred to claims by subcontractors of $374,414.02 and to Revenue Canada's demand.

5. April 11, 1991, Revenue Canada by motion claimed priority to $119,461.58.

6. May 6, 1991, Madame Justice Gill ordered publication of these matters.

7. June 3, 1991, Total amended its petition to pay in $121,236.27. June 18th, 1991, Mr. Justice Preston ordered payment into court in that sum, and relieved Total from further obligation.

8. December 9, 1991, Mr. Justice Singh closed the class of claimants and ordered the Registrar to ascertain the amounts due the creditors.

9. January 31, 1992, following seizure of funds in Alberta, Revenue Canada amended its claim, reducing the amount alleged due to $46,644.32.

The material in support of Revenue Canada suggests some reliance upon subsection 227(10.1) of the Act. However, subsection 227(10.1) provides authority for an assessment of a person for the amount payable by that particular person and does not refer to a third party, such as Total. Authority for assessment of a third party is found in paragraph 227(10)(a) if the third party is liable to make a payment to the tax debtor under subsection 224(4).

The Income Tax Act, subsection 227(10) states as follows:

(10) Assessment—The Minister may assess

(a) any person for any amount payable by that person under subsection (8), (8.1), (8.2), (8.3), (8.4) or 224(4) or (4.1) or section 227.1 or 235, and

(b) any person resident in Canada for any amount payable by that person under Part XIII, and, where he sends a notice of assessment to that person, Divisions I and J of Part I are applicable with such modifications as the circumstances require.

Subsection 224(4) states:

(4) Failure to comply—Every person who fails to comply with a requirement under subsection (1), (1.2), or (3) is liable to pay to Her Majesty an amount equal to the amount that he was required under subsection (1), (1.2) or (3), as the case may be, to pay to the Receiver General.

Thus, if Total is required to pay Revenue Canada under subsections 224(1), 224(1.2) or 224(3), and fails to comply, then Total would be liable for the amount due, (absent court order relieving it from liability). In addressing that issue I considered the principles enunciated by Hinkson, J.A. in Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc. (1990), 47 B.C.L.R. (2d) 188, 72 D.L.R. (4th) 405. In that case he adopted statements made in other decisions and particularly approved the following comments by Stratton, J.A. in Lloyd's Bank Can. v. International Warranty Co. (1989), 60 D.L.R. (4th) 272, 68 Alta. L.R.

(2d) 356, at pages 275-77 D.L.R.:

For Revenue Canada to succeed, the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor. . .of ail or part of its security without compensation, for the purpose of paying another debt entirely unrelated to the security. It (subsection 224(1.2)) is surely equivalent to the transfer of proprietary rights without compensation.

. . .the section falls short of effecting the transfer of property in the funds or establishing priority of Revenue Canada's claim. Something further is required to accomplish either purpose.

[Emphasis added.]

Stratton, J.A. then cited with approval the following passage by Robertson, J.A. in Homeplan Realty Ltd. v. Avco Financial Services Realty Ltd. (1977), 81 D.L.R.

(3d) 289, 5 B.C.L.R. 289:

If the Legislative Assembly intends to produce by statute results that are so brutal and piratical, it has the power to do so, but the Courts will hold that was its intention only if the language of the statute compels that interpretation.

In Craies on Statute Law, 6th ed. (1963), this is said at page 118:

As Brett M.R. said in A.G. v. Horner. . . "It is a proper rule of construction not to construe an Act of Parliament as interfering with or injuring persons’ rights without compensation unless one is obliged to so construe it. . .[and]. . .unless, as Fry, J. said in Major, etc. of Yarmouth v. Simmons . . ."the legislature clearly and distinctly authorises the doing of something which is physically inconsistent with the continuance of an existing right".

[Emphasis added.]

Although section 224 has been amended since Concorde, supra, the principles noted are, in my view, still applicable.

The current version of subsection 224(1) (with the underlined portions indicating the changes) states:

224.(1) Garnishment — Where the Minister has knowledge or suspects that a person is or will be, within 90 days liable to make a payment to another person who is liable to make a payment under this Act (in this subsection and subsections

(1.1) and (3) referred to as the "tax debtor”), the Minister may, by registered letter or by a letter served personally, require that 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. . .to the Receiver General on account of the tax debtor's liability under this Act.

In considering those principles I am of the view that subsection 224(1) does not meet the criteria necessary to support the position of Revenue Canada. I am also persuaded that the section is inapplicable here because money is not "otherwise payable to the tax debtor” pursuant to the contract. Although there are extensive provisions regulating payment in paragraph 38 of the contract, they can be fairly summarized by saying that Total had no obligation to pay Degenhardt if funds were still due for labour, material, or services.

Counsel for Revenue Canada relied upon a decision of Robinson, J. in Berg and Hazell v. Parker Pacific Equipment Sales and Revenue Canada unreported

(Feb. 19, 1991), Kamloops Registry #16881. In that case, however, the Court was confronted with facts that brought it directly within paragraph 224(1.2)(b). Robinson, J. referred to the Act's "draconian legislation”, but since funds were immediately payable he considered he had no alternative but to grant the priority claim.

In order for subsection 224(1.2) to apply here, the third party (Total) 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. Revenue Canada does not fall within either category in this instance.

The application by Revenue Canada is dismissed.

Application dismissed.