Archambault T.C.J.:
1 Réjean Hudon and La Coopérative d'habitation “Nolin” d'Alma (Coopérative) are disputing notices of assessment made by the Minister of National Revenue (Minister) on March 9, 1994. The Minister required the appellants to pay $4,562.86 for failing to comply with requirements to pay the tax liability of 123-727 Canada Inc. (at times doing business under the style Construction Pierre Durand enr.) (CPD). The appellants claimed they did not contravene subsections 224(1.2), 224(4) and 224(10) of the Income Tax Act.
2 The Minister relied on the following facts in making his assessment in respect of Coopérative:
[TRANSLATION](a) the debtor assigned its property on October 22, 1992, following which the Superior Court of Quebec, sitting in bankruptcy, opened file no. 150-11-000355-925;
(b) prior to the date of the bankruptcy, the debtor failed to remit to the Receiver General within the prescribed time period the federal income tax withheld from the salary it paid to its employees, which generated an income tax, penalties and interest account that reads as follows:
| DATE | PERIOD ASSESSED | FEDERAL TAX | PENALTIES & INTEREST | TOTAL |
|---|
| 92/07/29 | June 1992 remittances Penalty | $919.08 | $919.08 | |
| 92/10/01 | August 1992 remittances Penalty | | $375.84 | $375.84 |
| 92/12/14 | Difference T4-1992 | $8,631.99 | - | $8,631.99 |
| Total | | $8,631.99 | $1,294.92 | $9,926.91 |
(c) thus, on October 22, 1992, the debtor owed the Minister $9,926.91;
(d) on December 22, 1992, proofs of claim totalling $9,926.91 were filed by the Minister with the debtor's trustee in bankruptcy;
(e) before the debtor assigned its property, the appellant had entered into a contract with the debtor and, at the time of the bankruptcy, owed it a contract holdback of $60,000;
(f) on April 18, 1993, the respondent issued a requirement to pay to the appellant under subsection 224(1.2) of the Income Tax Act (the “Act”) claiming the sum of $9,926.91;
(g) the said requirement to pay was renewed on July 21, 1993, September 2, 1993, December 3, 1993 and December 24, 1993, on which dates the amount claimed was reduced from $9,926.91 to $7,363.86, then to $4,562.86, to reflect the following payments received from the debtor's other creditors during that period:
| 93/08/31 | Payment garnishment | $2,563.05 |
| 93/12/21 | Payment garnishment | $2,801.00 |
| Total | $4,562.86 |
(h) the appellant did not show that it had good reasons not to comply with the said requirements to pay issued by the Minister;
(i) as the appellant did not comply with the said requirements to pay, the Minister issued notice of assessment no. 7923 dated March 9, 1994, for an amount of $4,562.86.
(My emphasis.)
3 The Minister relied on the following facts in Mr. Hudon's case:
[TRANSLATION](a) the debtor assigned its property on October 22, 1992, following which the Superior Court of Quebec, sitting in bankruptcy, opened file no. 150-11-000355-925;
(b) prior to the date of the bankruptcy, the debtor failed to remit to the Receiver General within the prescribed time period the federal income tax withheld from the salary it paid to its employees, which generated an income tax, penalties and interest account that reads as follows:
| DATE | PERIOD ASSESSED | FEDERAL TAX | PENALTIES & INTEREST | TOTAL |
|---|
| 92/07/29 | June 1992 remittances Penalty | $919.08 | $919.08 | |
| 92/10/01 | August 1992 remittances Penalty | | $375.84 | $375.84 |
| 92/12/14 | Difference T4-1992 | $8,631.99 | - | $8,631.99 |
| Total | | $8,631.99 | $1,294.92 | $9,926.91 |
(c) thus, on October 22, 1992, the debtor owed the Minister $9,926.91;
(d) on December 22, 1992, proofs of claim totalling $9,926.91 were filed by the Minister with the debtor's trustee in bankruptcy;
(e) during the period in issue, the appellant held funds for the debtor's benefit, including an amount of $60,000 as contract holdback from La Coopérative d'Habitation “Nolin” d'Alma;
(f) on April 30, 1993, the respondent issued a requirement to pay to the appellant under subsection 224(1.2) of the Income Tax Act (the “Act”) claiming the sum of $9,926.91;
(g) the said requirement to pay was renewed on July 21, 1993, September 2, 1993, December 3, 1993 and December 24, 1993, on which dates the amount claimed was reduced from $9,926.91 to $7,363.86, then to $4,562.86, to reflect the following payments received from the debtor's other creditors during that period:
| 93/08/31 | Payment garnishment | $2,563.05 |
| 93/12/21 | Payment garnishment | $2,801.00 |
| Total | $4,562.86 |
(h) the appellant did not show that he had good reasons not to comply with the said requirements to pay issued by the Minister;
(i) as the appellant did not comply with the said requirements to pay, the Minister issued notice of assessment no. 7918 dated March 9, 1994, for an amount of $4,562.86.
(My emphasis.)
Facts
4 Coopérative is a housing cooperative whose purpose is to provide its members with living accommodations. In June 1992, having purchased a 13-unit housing complex (immoveable) in poor condition, Coopérative retained the services of CPD, a construction business, to carry out the renovation work. Laurentian General Insurance Company (Laurentian) acted as guarantor of CPD's obligations under the renovation contract, in particular with respect to the completion of the work.
5 To finance the purchase and renovation of the immoveable, Coopérative obtained a loan from Canada Life Mortgage Services Limited (Canada Life) and that loan was guaranteed by the Canada Mortgage and Housing Corporation (CMHC).
6 Having acted as executing notary with respect to the contract for the acquisition of the immoveable and the loan agreement, Réjean Hudon received and deposited the amounts advanced to Coopérative by Canada Life in his trust account. This trust account was used to pay CPD, the architect and the other suppliers on the renovation contract. Mr. Hudon stated that he had received his instructions from the CMHC representative, who indicated to him the amounts of the payments and to whom they had to be made. As was the practice in the construction field, the notary Hudon paid the amounts owed to CPD as the work progressed. The architect determined the progress on the projects and notified CMHC thereof. According to the practice in question, an amount representing approximately 10 per cent of the price agreed upon in the renovation contract was withheld until the renovation work was completed in full.
7 On October 22, 1992, though the renovation work was not yet completed, CPD assigned its property. Prior to the date of the bankruptcy, that company had failed to remit to the Receiver General within the prescribed time periods the income tax withheld from the salaries that it had paid its employees. The Minister fixed the amount of the tax liability at $9,926.91. On December 22, 1992, the Minister filed proofs of claim totalling $9,926.91 with CPD's trustee in bankruptcy.
8 Among the debts owed to the bankrupt at October 22, 1992, the trustee set out in his records accounts receivable of $97,718, the value of which amounted to approximately $75,000. These accounts receivable included one amount of $90,602.55 owed by Coopérative. However, the trustee stated in the said records that the accounts receivable belonged to the Caisse populaire St-Alexis de Grande-Baie (Caisse populaire) “by virtue of its assignment duly acknowledged as valid”. There was no evidence as to the circumstances of that transfer. In particular, the contract under which CPD had transferred the debts was not filed at the hearing. Nor did the evidence reveal the amount of any loan that Caisse populaire might have granted to CPD. During her argument, counsel for the Minister attempted to file a copy of the judgment by the Superior Court of Quebec obtained by Caisse populaire. I sustained the objection by counsel for the appellants to the filing of this judgment because the case was closed. However, counsel admitted that Caisse populaire had filed a claim against Coopérative and that the decision had been appealed.
9 After CPD declared bankruptcy, Laurentian, as guarantor, had to see to the completion of the renovation work. In November 1992, an agreement was entered into between Coopérative and Laurentian under which Laurentian undertook to finish the renovation work and to provide a release from all the privileges on the immoveable, in particular those of a number of subcontractors that had supplied materials or services to the renovation project. However, this agreement was not filed in Court. Laurentian had the privileges cancelled between January 25, 1993, and January 14, 1994. They had been registered against the immoveable held by Coopérative between October 28 and December 7, 1992.
10 On January 12, 1993, the Minister sent Coopérative a requirement to pay under subsection 224(1.2) of the Act, claiming an amount of $9,926.91. This requirement was subsequently renewed on April 8, 1993, July 21, 1993, September 2, 1993, December 3, 1993, and December 24, 1993. The amount claimed in the last requirement had been reduced to $4,562.86.
11 On April 30, 1993, the Minister sent Mr. Hudon a requirement under subsection 224(1.2) of the Act claiming the sum of $9,926.91. This requirement was subsequently renewed on July 21, 1993, September 2, 1993, December 3, 1993, and December 24, 1993. The amount claimed in the last requirement was also reduced to $4,562.86. The last requirement sent to the two appellants was worded as follows:
[TRANSLATION]
In respect of the obligation of the aforementioned tax debtor, in accordance with subsection 227(10.1) of the Income Tax Act or a similar provision or corresponding provisions of the Canada Pension Plan or the Unemployment Insurance Act, you are hereby required to pay to the Receiver General(1) forthwith, the moneys otherwise payable to the tax debtor, his legal representative 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 or his legal representative, and
(2) all other moneys otherwise payable to the tax debtor, his legal representative or the secured creditor described in paragraph 1 that you will be required to pay within 90 days as those amounts become payable,
12 At the hearing, Mr. Hudon filed an accounting statement describing the receipts and disbursements entered in the trust account held in respect of the renovation project. This statement revealed that all the amounts held by Mr. Hudon after the date of CPD's bankruptcy were paid to persons other than CPD, CPD's trustee in bankruptcy and Caisse populaire. Amounts were paid to members of a profession such as the architect and the legal counsel, to CMHC and to certain suppliers for supplies not provided for in the renovation contract. On December 9, 1993, following the agreement between Coopérative and Laurentian, Mr. Hudon paid the latter the sum of $67,168.43. On the same day, Mr. Hudon remitted the sum of $2,801 to the Receiver General of Canada in response to a requirement forwarded from the Minister to CMHC. The last payment out of the trust account was made to Coopérative on January 13, 1994, for $2,223.02.
Minister's Claims
13 According to counsel for the Minister, the relevant dates with respect to the failure to comply with the requirements are the dates of each of the requirements made by the Minister. At the time those requirements were made, Coopérative owed more than $9,926.91 to a secured creditor of CPD. The two secured creditors that counsel identified were Caisse populaire and Laurentian. Caisse populaire was apparently a secured creditor as a result of the assignment of the accounts receivable by CPD. In support of this claim, she cited a decision rendered on April 25, 1996, by the Supreme Court of Canada in Canada Trustco Mortgage Corp. v. Port O'Call Hotel Inc. (1996), 96 D.T.C. 6245 (S.C.C.). In that decision, the Supreme Court of Canada held that the assignee in a general assignment of book debts made in order to secure an obligation of the tax debtor was a secured creditor within the meaning of subsections 224(1.2) and 224(1.3) of the Act.
14 In her written submission, counsel for the Minister explained why Laurentian was a secured creditor, in the following terms:
[TRANSLATION]
47. Laurentian General intervened as surety in the contract between the tax debtor and the appellant. In this capacity, it performed the tax debtor's obligations to the appellant, which made it eligible for the moneys relating to its executed portion of the contract. On December 9, 1993, after a certificate of completion of work had been issued and the 10 per cent withheld by Canada Life Mortgage Services Limited had been released, the appellant paid Laurentian General the amount of $67,168.43. Furthermore, these actions are consistent with the law on surety:
Art. 1950. The surety who has paid the debt is subrogated in all the rights which the creditor had against the debtor.
48. The respondent's position is that, for the application of subsections 124(1.2) and 124(1.3) of the Act, the subrogation must be considered as a form of assignment and the surety simply as a secured creditor. This would appear to be the interpretation consistent with the objects of these statutory provisions:
It may therefore be considered that, in passing subsection 224(1.2), Parliament gave it this exhaustive character so as to ensure it would be viable. No other system is as crucially important for the overall collection procedure adopted by the State. Parliament clearly wanted to protect this system.
To ensure that the amounts collected for the MNR would be recovered, Parliament strove to ensure that the MNR's claims in the matter took precedence over those of other creditors. Most of the courts that have considered this question since the 1990 amendment have held that Parliament in fact achieved that objective: see TransGas Ltd. v. Mid-Plains Contractors Ltd. (1993), 101 D.L.R. (4th) 238 (Sask. C.A.)(...)
Analysis
15 It is recognized in well-settled case law that the burden is on the appellants to show that the Minister's assessment is ill-founded. In the well-known judgment in Johnston v. Minister of National Revenue (1948), 3 D.T.C. 1182 (S.C.C.), Rand J. wrote at 1183:
Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.
(My emphasis.)
16 In Minister of National Revenue v. Pillsbury Holdings Ltd. (1964), 64 D.T.C. 5184 (Can. Ex. Ct.), Cattanach J. described the manner in which a taxpayer may discharge the burden that is on him:
The respondent could have met the Minister's pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:(a) challenging the Minister's allegation that he did assume those facts;
(b) assuming the onus of showing that one or more of the assumptions was wrong, or
(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.
17 In this instance, the Minister made his assessment under the provisions of subsection 224(1.2), 224(1.3) and 224(4) of the Act. The most relevant for the purposes of these reasons are subsections 224(1.2) and (1.3), which provide:
224(1.2) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any enactment of a province or any law, but subject to subsections 69(1) and 69.1(1) of the Bankruptcy and Insolvency Act, where the Minister has knowledge or suspects that a particular person is, or will become within one year, 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,
224(1.3) 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 secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, 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;
“similar provision” — “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, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that act.
18 Certain conditions must be met in order for the Minister's assessment to be correct. In particular, the Minister must have issued a requirement to pay to a person who is, or will become within 90 days, liable to make a payment to a tax debtor or to a secured creditor of that tax debtor. Although it is not expressly stated in the statutory provision, it seems clear to me that it is in reference to the moment (relevant date) when the requirement is communicated to the taxpayer by the Minister that it must be determined whether that taxpayer is liable to make a payment to the tax debtor. Furthermore, the 90-day time period must be calculated starting on that date.
19 Subsection 224(1.1) of the Act grants the Minister the power to seize by garnishment moneys owed by a person to a tax debtor of the Minister. It is only when a person is, or will become within a given period of time, liable to make a payment to the tax debtor that the seizure may be made; otherwise, a third party who had in no way received a benefit from the tax debtorcannot be held liable for the latter's tax liabilities. If the third party has repaid all he owed to the tax debtor before he receives the requirement and will not become liable to make any other payment within the 90 days following the requirement, there can be no garnishment since that individual no longer owes anything to the tax debtor.
20 In the instant case, the Minister indicated in his reply to Coopérative's notice of appeal that he had assumed in making his assessment that Coopérative owed CPD $60,000 “at the time of the bankruptcy”. In his reply respecting Mr. Hudon's appeal, the Minister stated that he had relied on the fact that Mr. Hudon had held funds amounting to $60,000 for CPD's benefit“ during the period in issue”. In Coopérative's case, there is no fact in the reply to the notice of appeal indicating that, at the relevant date of each of the requirements, in particular January 12, 1993, the date of the first requirement, Coopérative still owed CPD or one of its secured creditors the sum of $60,000, or at the very least $4,562.86, or would be liable to make such a payment within 90 days of that date. I therefore believe that the third means of defence described by Cattanach J. in Pillsbury Holdings Limited applies here. The facts stated in the reply to the notice of appeal are insufficient to support the validity of the Minister's assessment.
21 In Mr. Hudon's case, the Minister's statement is very vague to say the least. What was the period in issue? The date of the bankruptcy, as stated in the reply to Coopérative's notice of appeal? Even if the Minister had to be given the benefit of the doubt, the evidence showed that Coopérative, for which Mr. Hudon held the funds,owed no amount to CPD on the relevant date of each of the requirements sent to Mr. Hudon. On October 22, 1992, the date of the bankruptcy, CPD held a claim of $90,602.55 against Coopérative. The trustee's records indicate that all CPD's accounts receivable had been transferred to Caisse populaire in accordance with a transfer recognized as valid. The Department's auditor, who testified at the hearing and filed the copies of the bankruptcy records, did not cast doubt on the validity of that transfer.No other amount appears as a debt owed by Coopérative to CPD in its bankruptcy balance sheet. I therefore conclude that, starting on October 22, 1992, the date of the bankruptcy, and on each of the relevant dates, Coopérative and its agent, Mr. Hudon, did not owe an amount to CPD. Thus it is the second means of defence described by Cattanach J. that applies here. One of the facts on which the Minister relied in making his assessment was incorrect. As Mr. Hudon did not owe an amount to CPD on the relevant dates, one of the essential conditions for the application of subsection 224(1.2) of the Act was not met.
22 However, although the facts assumed by the Minister were not sufficient to support his assessment, the Federal Court of Appeal has recognized that it is open to him to adduce evidence proving that his assessment is correct. In Pollock v. R. (1993), 94 D.T.C. 6050 (Fed. C.A.), Hugessen J.A. wrote at page 6053:
Where, however, the Minister has pleaded no assumptions, or where some or all of the pleaded assumptions have been successfully rebutted, it remains open to the Minister, as defendant, to establish the correctness of his assessment if he can. In undertaking this task, the Minister bears the ordinary burden of any party to a lawsuit, namely to prove the facts which support his position unless those facts have already been put in evidence by his opponent.
23 Counsel for the Minister further contended that, on each of the relevant dates, the appellants owed at least $4,562.86 to a secured creditor of CPD. It must therefore be determined whether the Minister adduced sufficient evidence showing that the appellants were liable to make a payment to a “secured creditor” of CPD on one of the relevant dates. As stated above, the assignee of accounts receivable obtained by providing an interest that secures payment or performance of an obligation was recognized as a secured creditor in Port O'Call Hotel, supra. Being the assignee of all of CPD's accounts receivable before its bankruptcy, Caisse populaire could have been considered as a secured creditor within the meaning of subsection 224(1.3) of the Act. However, I do not believe that the Minister discharged his obligation to show on the balance of evidence that Caisse populaire was a secured creditor of CPD or that he in fact established the amount of the debt owed to Caisse populaire on the relevant dates.
24 No evidence was adduced showing that Caisse populaire granted CPD a loan by virtue of which it obtained a right over CPD's accounts receivable as a security interest in that loan. No representative of Caisse populaire or CPD testified to describe the legal relationship that existed between those two parties. The evidence is not sufficient to enable me to determine whether the transfer was made by virtue of a guarantee or merely as a result of a sale. Only an assignment of debts as a security interest could confer on Caisse populaire the status of secured creditor within the meaning of that term in subsection 224(1.3) of the Act. (See Port O'Call Hotel, supra, at page 6251.)
25 Even if I had concluded that what we were dealing with here was a transfer of debts as an interest that secures the payment or performance of an obligation by CPD, I do not believe that the evidence was sufficient to enable me to determine whether the appellants owed an amount on the relevant dates and, if such was the case, how much they owed. It is true that counsel for the appellants admitted that Caisse populaire had made a claim on Coopérative. However, I do not know the amount of that claim. Furthermore, the claim was still the subject of a legal dispute at the time of the hearing of these appeals and the evidence brought before me does not enable me to determine whether, on the relevant dates, Coopérative had valid grounds for refusing to pay any amount whatever to Caisse populaire.
26 Obviously, if the Minister had alleged that the appellants owed at least $4,656.86 to Caisse populaire, the burden of proving that Caisse populaire was not a secured creditor and that Coopérative owed Caisse populaire nothing would have been on the appellants. This was not the case here, however.
27 Lastly, counsel for the Minister contended that Laurentian, which intervened as a guarantor in the renovation contract, allegedly became a secured creditor as a result of the subrogation. I see no basis for this claim. Under Article 1950 of the Civil Code of Lower Canada, Laurentian was entitled to exercise all the rights that Coopérative had against CPD, including the mortgage or any other right on a property that Coopérative might have held as a security interest.There was no evidence in the instant case that Coopérative held such a right. Neither the renovation contract nor the contract entered into with Laurentian was filed.
28 In conclusion, the appellants succeeded in showing that the assessment was ill-founded. For these reasons, their appeals are allowed and the Minister's assessments dated March 9, 1994 are reversed.
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