Lloyds Bank Canada v. International Warranty Company Limited and Attorney General of Canada v. International Warranty Company Limited, [1990] 2 CTC 357

McDonald, J.:—In my previous reasons for judgment dated January 19, 1989, ([1989] 1 C.T.C. 401; 89 D.T.C. 5279) I held that, under subsection 224(1.2) and (1.3) of the Income Tax Act, Revenue Canada's claim overrides the existing rights of third persons such as the holders of assignments of book debts.

At the conclusion of my reasons I indicated that there was a further issue, namely, whether the amount payable to Revenue Canadais limited to the amount of the penalty involved. Counsel have now made submissions on that issue.

On behalf of the holders of assignments of book debts it is contended that the priority of Revenue Canada is limited to the amount of the penalty incurred by the taxpayer (CTS Western Ltd.) for having failed to remit amounts deducted or withheld from wages for income tax. On behalf of Revenue Canada, however, it is contended that the priority applies to:

(1) principal amounts deducted pursuant to the Income Tax Act, the Canada Pension Plan, the Unemployment Insurance Act, and the Alberta Income Tax Act;

(2) penalties; and

(3) interest.

The first issue is whether, limiting one's focus for the moment to income tax, the priority applies only to penalty. The date on which the taxpayer's liability arose was December 22, 1987. The issue is governed by subsection 227(9) as it read in 1987:

227.(9) Every person who has failed to remit or pay

(a) an amount deducted or withheld as required by this Act or a regulation, or

(b) an amount of tax that he is, by section 116 or by a regulation made under subsection 215(4), required to pay,

is liable to a penalty of 10% of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the prescribed rate per annum, for the period commencing on the 15th day of the month immediately following the month in which such amount was deducted or withheld.

The argument of counsel for the creditors appears to require one to stop reading subsection 227(9) after the words “a penalty of 10%”. They then invite the conclusion that subsection 227(9) legislated with respect to penalty only. That argument flies in the face of a plain reading of the entirety of subsection 227(9). It clearly imposes liability for penalty "in addition to the amount [deducted or withheld] itself, together with interest. . .”. The French version is to the same effect.

Counsel for the creditors argues that some amendments (specifically, found in subsection 227(9.1)) to the Income Tax Act that came into effect after December 22, 1987, would not have been necessary if the interpretation I have adopted was already sound. Whether or not any of those amendments would buttress the position of Revenue Canada, but on the assumption that they do, it does not follow that subsection 227(9) does not have the broad scope I have concluded it does have. The amendments in question may have been added ex abundant/ cautela. If those responsible for amending the Income Tax Act thought that there was a risk that the existing subsection 227(9) might be interpreted more narrowly than I have done, that in itself in no way tends to show that subsection 227(9) ought to be given a narrow interpretation.

The second issue is whether Revenue Canada's priority applies not only to federal income tax deductions, penalties, and interest, but also to similar amounts required to be deducted from the wages of employees, by the Canada Pension Plan, the Unemployment Insurance Act, and the Alberta Income Tax Act. This issue turns on the effect of the following provisions of the Income Tax Act:

224.(1.2) 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 who is liable to pay an amount assessed under subsection 227(10.1) of a similar provision, or to a legal representative of that other person (each of whom is in this subsection referred to as 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.

In regard to provincial income tax, the crucial words are "under subsection 227(10.1) or a similar provision”. The phrase “similar provision” is defined in subsection 224(1.3) as follows:

“similar provision” means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act. . .

The following provisions of the Alberta Income Tax Act, R.S.A. 1980, c. A-31, require the payment of principal amounts of deductions as well as applicable penalties and interest:

44.(7) Every person who has failed to remit or pay an amount deducted or withheld as required by this Act or a regulation is liable to a penalty of 10% of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the rate per year prescribed for the purposes of subsection 227(8) of the federal Act for the period commencing on the 15th day of the month immediately following the month in which the amount was deducted or withheld, but if a collection agreement is entered into the Minister may refrain from levying or reduce the penalty if the person who is liable therefor is liable to pay a penalty under subsection 227(9) of the federal Act by reason of the failure to pay an amount described in paragraph (a) of that subsection.

(8) The Provincial Treasurer may assess any person for any amount that has been deducted or withheld by that person under this Act or the regulations or that is payable by that person under this section or section 44.1 or 49 and, on his sending a notice of assessment to that person, Divisions I and J of Part I of the federal Act apply, with all necessary modifications.

In regard to the Canada Pension Plan and the Unemployment Insurance Act, Revenue Canada cannot rely upon subsection 224(1.3), for the phrase “similar provision” is there defined by reference only to provincial legislation. I cannot see any basis for Revenue Canada's argument that the priority applies to the amounts for which the employer would be liable under the Canada Pension Plan, R.S.C. 1970, c. C-5, or the Unemployment Insurance Act, 1971, S.C. 1970-71-72. Under the Canada Pension Plan, section 23 provides for assessments, and subsection 24(3) provides that amounts deducted are deemed to be held in trust for Her Majesty. However, there is no provision similar to subsection 224(1.2) of the Income Tax Act, which was the foundation of my reasoning in my previous reasons for judgment.

Consequently the claim under the Canada Pension Plan does not have priority over the interests of the assignees of book debts. That being so, there can be no issue as to whether that priority is limited to penalty. The matter is regulated differently in regard to liabilities that have come into existence since January 1, 1988. On that date (see S.C. 1986, c. 6, subsection 132(1), proclaimed SI/87-22, Canada Gazette Part II, Vol. 121, p. 353), an amended subsection 24(2) of the Canada Pension Plan came into effect. It reads as follows:

(2) Subsections 220(4) and (5), sections 223 to 224.3, 229, 236 and 244, (except subsections (1) and (4) thereof) and subsection 248(11) of the Income Tax Act apply with such modifications as the circumstances require in relation to all contributions, interest, penalties and other amounts payable by a person under this Act.

Thus, in regard to liabilities arising on or after January 1, 1988, subsection 224(1.2) of the Income Tax Act applies to the Canada Pension Plan in relation to all contributions, interests and penalties. Terminological adaptations "as the circumstances require" are implied.

The same reasoning applies to the claim under the Unemployment Insurance Act. Section 70 of that Act provides for assessments, and subsection 71(2) provides that amounts deducted are deemed to beheld in trust for Her Majesty. However, there is no provision similar to subsection 224(1.2) of the Income Tax Act. Consequently the claim under the Unemployment Insurance Act does not have priority over the interests of the assignees of book debts. That being so, there can be no issue as to whether that priority is limited to penalty. The matter is regulated differently in regard to liabilities that have come into existence since January 1, 1988. On that date the newly amended section 80 (enacted by S.C. 1986, c. 6, subsection 77(1) proclaimed SI/87-22, Canada Gazette Part II, Vol. 121, p. 353) came into effect. It is worded as follows:

80. Sections 224 to 224.3 and subsection 248(11) of the Income Tax Act apply to all premiums, interest, penalties and other amounts payable by a person under this Part with such modifications as the circumstances require.

Thus, in regard to liabilities arising on or after January 1, 1988, subsection 224(1.2) of the Income Tax Act applies to the Unemployment Insurance Act in relation to all premiums, interest and penalties. Terminological adaptations "as the circumstances require" are implied.

Costs may be spoken to.