National Trust Co. v. R., [1997] 1 CTC 2549, 96 DTC 1832

Sobier J.T.C.C.: — The Appellant appeals from the assessment by the Minister of National Revenue (the “Minister”) made under subsection 224(1) of the Income Tax Act (the “Act”) for failure to comply with a Requirement to Pay.

The following is an edited version of a Statement of Agreed Facts filed by counsel for the parties. I have not reproduced the Exhibits.

1. The Appellant is a trust company having a head office in Stratford, Ontario.

2. James R. Smith (the “tax debtor”) is a lawyer in Winnipeg, Manitoba.

3. On February 17, 1987, the tax debtor established a self-directed retirement savings plan (the “RSP”) bearing RSP account number GD-9410321, with the Appellant.

4. The constating documents for the RSP are an Application and a Memorandum of Agreement, a copy of which is appended hereto as Exhibit I. [1]

5. The amount initially deposited to the RSP on February 17, 1987 was $7,500.00, and the designated beneficiary named to received benefits under the RSP in the event of the tax debtor’s death was Carol Smith. Over time, the amount of funds in the RSP increased.

6. In February, 1988, pursuant to instructions from the tax debtor, the Appellant invested the funds in the RSP in a five-year guaranteed investment certificate (the “GIC”) which matured on February 24, 1993.

7. By letter dated June 21, 1991, the tax debtor inquired about the requirements and costs of transferring the RSP funds to the Royal Bank of Canada (the

“Royal Bank{). By letter dated June 27, 1991, the Appellant responded by advising the tax debtor that the Appellant was unable to transfer the amount until the maturity date of the GIC, which was February of 1993. Copies of the said letters dated June 21, 1991 and June 27, 1991 are appended hereto as Exhibits 2 and 3, respectively.

8. On or about July 4, 1991, the Appellant received a T2033 Form signed by the taxpayer and an officer of the Royal Bank, wherein the tax debtor, with the concurrence of the Royal Bank, requested the Appellant to transfer the RSP funds to the Royal Bank. The T2033 Form constituted “written instructions in a form acceptable” to the Appellant, within the meaning of the paragraph in the Memorandum of Agreement relating to “Notice Period for Transfers to Other Plans”. The Appellant did not transfer the RSP funds to the Royal Bank because the Appellant was prevented by the terms and conditions of the GIC from transferring the funds prior to maturity of the GIC, i.e. prior to February 24, 1993. By letter dated July 8, 1991, the Appellant advised the Royal Bank that the Appellant was unable to comply with the instructions contained in the T2033 at that time, and invited the Royal Bank to resubmit the request at a later date. Copies of the said T2033 Form and letter dated July 8, 1991 are appended hereto as Exhibits 4 and 5, respectively.

9. On or about September 24, 1992, the Minister of National Revenue (the “Minister”) served the Appellant with a Requirement to Pay dated September 24, 1992, a copy of which is appended hereto as Exhibit 6.

10. By letter dated October 5, 1992, and addressed to Revenue Canada Taxation, the Appellant advised that it did not propose to comply with the demand. By concurrent letter dated October 5, 1992, addressed to the tax debtor, the Appellant informed the tax debtor of the Minister’s demand. Copies of the said letter dated October 5, 1992 to Revenue Canada Taxation and letter dated October 5, 1992 to the tax debtor are appended hereto as Exhibits 7 and 8, respectively.

(Paragraphs 11 and 12 of the Statement are similar to paragraphs 9 and 10.)

13. On or prior to February 24, 1993, the Appellant received a second T2033 Form from the tax debtor, requesting transfer of the RSP funds to the Royal Bank. The said second T2033 Form constituted “written instructions in a form acceptable to” the Appellant, within the meaning of the paragraph of the Memorandum of Agreement relating to “Notice Period for Transfers to Other Plans”. By letter dated February 24, 1993, and addressed to the Royal Bank, the Appellant advised the Royal Bank that it was unable to comply with the request for a transfer as there was a demand from Revenue Canada on the funds. A copy of the said letter dated February 24, 1993 to the Royal Bank is appended hereto as Exhibit 12.

14. The Appellant also received a letter dated February 24, 1993 from the tax debtor wherein the tax debtor confirmed his earlier instructions to collapse the RSP, deduct the requisite amount of withholding tax and release the net proceeds to the tax debtor, and requested that pending completion of his instructions, that the funds be transferred from the GIC to a daily interest savings account. A copy of the said letter dated February 24, 1993 from the tax debtor (with certain handwritten notes having been added thereon by officer(s) or employee(s) of the Appellant) is appended hereto as Exhibit 13.

15. On February 24, 1993, when the GIC matured, the Appellant invested the RSP funds in a daily savings account (the “savings account”) at the Appellant’s local branch in Winnipeg, Manitoba. The funds have remained in the savings account since February 24, 1993.

16. On March 12, 1993, the Appellant received a letter dated March 8, 1993 from the tax debtor, wherein he requested cancellation of the RSP and remission of the proceeds directly to the tax debtor. A copy of the said letter dated March 12, 1993 is appended hereto as Exhibit 14.

(Paragraphs 17, 18, 19, 20, 21, 22, 23 and 24 are further Requirements to Pay served on the Appellant and the Appellant’s replies.)

25. But for the receipt by the Appellant of the Requirements to Pay aforementioned, the Appellant’s usual practice would have been to comply with written demands or requests made by its retirement savings plan planholders for cash payment or collapse of the plan, or transfer of the funds held in the plan to another institution, prior to what is described as “the maturity of a Registered Retirement Savings Plan” in the Memorandum of Agreement. According to that usual practice, provided that the funds are not “locked into” a GIC or other investment account with a fixed term, upon receipt of a written demand or request for cash payment, collapse or transfer, the transaction is concluded by either remitting a cheque to the planholder for the proceeds of the plan, net of income tax withheld and any administrative charges of the Appellant, or remitting a cheque directly to the transferee requesting a transfer.

26. Prior to the maturity of the GIC, the Appellant was prevented by the terms and conditions of the GIC from transferring or cashing out the funds being held in the tax debtor’s RSP. Subsequent to the Respondent’s delivery of its various Requirements to Pay, the Appellant did not consider itself to be at liberty to pay the RSP funds, or any portion thereof, either to the Receiver General, or to the tax debtor or another institution at the tax debtor’s request.

27. On April 5, 1994, the Minister issued and mailed a Notice of Assessment No. 34306 to the Appellant, assessing the amount of $13,707.98. A copy of the said Notice of Assessment is appended hereto as Exhibit 24.

28. At the time of service of each of the Requirements to Pay referred to herein, the tax debtor was liable to make a payment to the Receiver General in an amount in excess of the amount of funds in the RSP.

29. On July 4, 1994, the Appellant filed an Objection in Form T400A, a copy of which is appended hereto as Exhibit 25.

30. The Minister issued a Notification of Confirmation dated January 13, 1995, a copy of which is appended hereto as Exhibit 26.

31. At no time did the tax debtor provide any instructions to the Appellant to comply with any Requirement to Pay issued by the Minister, or confirm that to the Appellant that the Appellant would be dischargered of any liabilities to the tax debtor were it not make payment in compliance with any such Requirement to Pay. At no time did the tax debtor otherwise consent to any payment by the Appellant to the Minister pursuant to the Minister’s demands in that respect.

The issue is whether the Appellant was required to pay pursuant to the Requirement to Pay.

Subsection 224(1) of the Act, as it was at the time the Requirement to Pay in question was made, i.e. prior to June 15, 1994, is to be read as follows as a result of a 1994 amendment to the Act:

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 in writing require the 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 in whole or in part to the Receiver General on account of the tax debtor’s liability under this Act.

The Appellant’s argument is that the RSP was established as a trust with the Appellant as trustee and the tax debtor as cestui que trust and that there was no debtor/creditor relationship between them. This being so says the Appellant, there was no debt to be garnisheed under subsection 224(1).

The Respondent takes the position that even though there is a trustee/cestui que trust relationship, it matters not because subsection 224(1) does not require that a debtor/creditor relationship be in existence for the Appellant to be required to comply with the Requirement to Pay. All that is required is that there be an amount which is payable to the tax debtor by the Appellant.

The emphasis in this argument by the Respondent is on the meaning of the word “payable” and several cases dealing with the meaning of that word were cited by counsel for the Respondent. Counsel referred to in Minister of National Revenue v. Gero, (sub nom. Gero, Re) [1979] C.T.C. 309, 79 D.T.C. 5228 (F.C.T.D.). In that matter, there was a motion to show cause under a garnishee order at which neither the garnishees nor the judgment debtor were represented. At page 310 (D.T.C. 5229), Mr. Justice Walsh said:

On a strict interpretation of Rule 2300 of the Rules of this Court it is arguable that these sums are not debts “owing or accruing” to the judgment debtor unless and until he requests the trust companies to make payment to him, but it would be contrary to the whole principle of garnishment proceedings to adopt such an interpretation and hence provide a means for an individual to shelter his assets from seizure by his creditors.

The latter half of this statement has been commented upon in Bliss v. Doyle, (sub nom. Bliss, Kirsh & Doyle, Re) 44 O.R. (2d.) 129, 3 D.L.R.

(4th) 425 (H.C.), Krever, J., as he then was, referred to the reasoning of Mr. Justice Fulton of the British Columbia Supreme Court in Vancouver A & W Drive-Ins Ltd. v. United Food Services Ltd. (1981), 38 B.C.L.R. 30, 13 B.L.R. 89.

At page 134 (D.L.R. 431) of Bliss (supra), Mr. Justice Krever stated the following on commenting on Gero:

...Mr. Justice Walsh recognized the difficulty in fitting an R.R.S.P. into garnishment procedure but seems to have been persuaded that to fail to do so would result in injustice.

He then goes on to quote the passage from Mr. Justice Walsh’s reasons referred to above.

Mr. Justice Fulton’s reasons are further quoted on page 135 (D.L.R. 431-32):

Having thus equated the funds in the R.R.S.P. in that case to bank deposits “which are undoubtedly seizable” Walsh J. went on to uphold the garnishing orders issued with respect to those funds. There is, however, a clear conflict between the effect of that decision and the decision of our Court of Appeal in the McMahon case: for although there is no doubt that in law bank deposits do create a debtor-creditor relationship and are therefore subject to attachment by garnishing order, our Court of Appeal has held that the deposit of funds in an R.R.S.P. does not create a debtor-creditor relationship but rather an exclusively trustee- cestui que trust relationship. Since this Court is not bound by the Federal Court of Canada decision, but is bound by the decision of our Court of Appeal, it follows that I must respectfully conclude, as I do, that the funds in this R.R.S.P. are not subject to attachment by garnishing order.

Mr. Justice Krever then agrees with the conclusion of Mr. Justice Fulton.

As to the fact that under the terms of the R.R.S.P., the beneficiary could collapse it, Mr. Justice Krever states at page 136 (D.L.R. 432) of Bliss:

It seems to me that the rule in Saunders v. Vautier does not have the effect contended for by the appellants because it simply entitles the beneficiary of the trust to maintain an action for, or require payment of, the proceeds of the trust. But as long as the trust continues it does not cease to be a trust and the relationship between the parties does not cease to be that of cestui que trust and trustee, and not creditor and debtor.

In the present appeal, it is clear that the RSP has not been collapsed but continued as a trust, notwithstanding the ambiguous if not contradictory instructions given by the tax debtor to the Appellant.

In DeConinck v. Royal Trust Corp. of Can., (sub nom. De Coninck v. Royal Trust Corp.) (1988), [1989] 1 C.T.C. 179, 31 E.T.R. 169 (N.B.C.A.), the plaintiff brought an action against the trustee of his R.R.S.P. for collapsing it and paying the moneys over to Revenue Canada after receiving a demand pursuant to subsection 224(1) of the Act.

At pages 182-83 (E.T.R. 175), Chief Justice Stratton stated:

Notwithstanding that the funds held by Royal Trust for Mr. DeConinck under his Registered Retirement Savings Plan constitute a trust fund, can Revenue Canada, without Mr. DeConinck’s direction or consent, attack those funds pursuant to subsection 241(1) (sic) of the Income Tax Act? A similar question had to be answered by Gratton D.C.J. in Morgan Trust Co. v. Dellelce, 13 C.C.L.I. 33, [1985] 2 C.T.C. 370, 85 D.T.C. 5492 (Ont. H.C.). In that case, Revenue Canada had delivered a demand on third parties to the Morgan Trust Company in respect of Dellelce’s R.R.S.P. The demand was identical in form and content to that delivered to Royal Trust in the present case. Revenue Canada also delivered a requirement to pay to Morgan Trust Company which too was identical in form and content to that delivered to Royal Trust in the present case. Rather than collapsing the R.R.S.P. arbitrarily, Morgan Trust Company sought the direction of the Court as to whether the R.R.S.P. ought to be collapsed under the authority of subsection 224(1) of the Income Tax Act.

After reviewing the law the learned Judge concluded [at page 38 C.C.L.I.]:

In my view since the trustee has no moneys which are immediately payable to the tax debtor nor any moneys which the trustee would be within 90 days liable to pay to the debtor, then there is no obligation to pay any moneys nor to sell any of the assets which the trustee holds on behalf of the Dellelce pursuant to the declaration of trust. Consequently, the only obligation in this case is to reply to the Taxation Office in order to avoid liability under subsection 224(4) of the Act.

In my opinion, it is difficult to distinguish the Morgan Trust Co. case from the present one. Moreover, with respect, I am unable to agree with the conclusion of the Judge of first instance in the present case that a trustee who holds funds that are fully vested in a cestui que trust would fall within the definition of a person “liable to make a payment” pursuant to subsection 224(1) of the Income Tax Act. Rather it is my opinion that until a cestui que trust requests payment of the proceeds of an R.R.S.P. from his trustee, which he is able but not bound to do under the rule in Saunders v. Vautier (1841), Craig & Philipp’s Reports 240, 41 E.R. 482 (Ch.), no moneys are payable to him nor is his trustee liable to make a payment to him within the meaning of subsection 224(1) of the Act. Thus, in my view, the request to pay pursuant to subsection 224(1) of the Income Tax Act was not sufficient authority for Royal Trust to collapse Mr. DeConinck’s R.R.S.P. and pay the net proceeds to Revenue Canada.

As stated above, counsel for the Respondent emphasizes the meaning of the word “payable” in order to maintain that no debtor/creditor relationship is necessary under subsection 224(1). Chief Justice Stratton in my opinion was correct, not so much that the amounts were not payable but that the trustee does not fall within the definition of a “person liable to make a payment”. Those words in my opinion are the operative ones. Unless the trustee is liable to make the payment, subsection 224(1) is not applicable.

“Liable” and “liability” point to a debtor status with the person liable to pay being the debtor. A person who is liable to pay has the quality of a debtor and conversely the person to whom he is liable to make the payment is his creditor. In subsection 224(1), the person must be one who is liable to make a payment, not just that such a person will make a payment otherwise than under an obligation to do so. This again gives credence to the view that the person making the payment is a debtor. Here that relationship does not exist as the Appellant was not liable to make any payment to the tax debtor.

Counsel for the Respondent made very able arguments attempting to urge that I interpret subsection 224(1) in a manner contrary to the trustee/ceste que trust relationship established by the Memorandum of Agreement. If a legal or equitable relationship is in good faith established then it should not be ignored nor should it be analogized as or deemed to be anything other than what it is.

The appeal is allowed, with costs, and the is assessment vacated.

Appeal allowed.