Berg (D.) v. Parker Pacific Equipment Sales, [1991] 1 CTC 442

No. CA011251, June 26, 1990, Taggart, Hinkson, Toy, JJ.A. (orally), unre- ported;

Lloyds Bank of Canada v. International Warranty Co., [1990] 2 C.T.C. 360; 60

D.L.R. (4th) 272;

Homeplan Realty Ltd. v. Avco Financial Services Realty Ltd. (1977), 5 B.C.L.R.

289; 81 D.L.R. (3d) 289;

Royal Bank of Canada v. Canada, [1990] 2 C.T.C. 285; 90 D.T.C. 6330.

Robinson, J.:—This application requires resolution of an issue between Revenue Canada and the respondent, Parker Pacific Equipment Sales (” Parker Pacific"), each of whom assert a prior proprietary right to an amount of $9,776 paid by way of interpleader into court by the petitioners, Berg and Hazell.

Parker Pacific is named as assignee of "an assignment of wages” dated August 30, 1990 from Madden Logging Ltd. This assignment makes specific reference to the said sum of $9,776. The assignment is directed to Slocan Forest Products, who, in compliance with such assignment, paid to the petitioner, Dan J. Hazell, the sum of $9,776. Hazell, in turn, paid this amount to the petitioner, Donald Berg, who designates himself as the corporate solicitor on behalf of Madden Logging Ltd. The payment from Slocan Forest Products was made in early October 1990 and the petitionér, Berg, received same on October 12, 1990. On October 22, 1990, a third party demand was made by Revenue Canada on Berg and Madden Logging Ltd. That third party demand recites, in part:

You are hereby required to pay to the Receiver General on account of the above- named tax debtor's liability (Madden Logging Ltd.) under subsection 227(10.1) of the Income Tax Act or similar provision, or under corresponding provisions of Canada Pension Plan or the Unemployment Insurance Act,

(1) forthwith, the moneys otherwise and immediately payable to the tax debtor, his legal representative, or a secured creditor who has a right to receive the moneys 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 a secured creditor described in (1) which you will be, within 90 days, liable to pay, as and when the moneys become payable,

but do not pay hereunder more than $50,013.82 (the maximum payable).

Although not particularly relevant, one might assume that the last- mentioned amount is the indebtedness of Madden Logging Ltd. to Revenue Canada, some part of which may well be employee deductions which Madden Logging Ltd. failed to remit to Revenue Canada. The affidavit of the collection enforcement officer, representing Revenue Canada, however, indicates an outstanding balance at January 1, 1991 of only $10,175.77. The reduction to this amount apparently comes about by a decrease in the assessment against Madden Logging and an accompanying penalty, in the total sum of $28,800.

The Revenue Canada demand document includes the following: "The words 'similar provision’, 'secured creditor’ and 'security interest' have the meaning assigned to them in subsection 224(1.3) of the Income Tax Act.”

These words, that is "similar provision", "secured creditor" and "security interest”, are derived from subsection 224(1.2) of the Income Tax Act, and it is on this particular subsection and in greater particular, the concluding words of same that Revenue Canada bases its claim for priority. The subsection reads:

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 (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 the 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.

Counsel for Revenue Canada contends that this subsection, as now worded, came into existence in response to a generally-determined judicial interpretation adverse to Revenue Canada in an issue of this kind, namely, Revenue Canada's third party demand against a specific or general assignment of funds made by the tax debtor to a third party. The legislation has been described as "draconian," and, in my view, the description is apt.

A British Columbia Court of Appeal decision, Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc., No. CA011251, June 26, 1990, Taggart, Hinkson, Toy, JJ.A. (orally), unreported, the provisions of subsection 224(1.2) of the Income Tax Act do not include the final words of 224(1.2) commencing". . . and on receipt of the letter. . . security interest.'"

The B.C. Court of Appeal made reference to the leading decision on this point of Lloyds Bank of Canada v. International Warranty Co., [1990] 2 C.T.C. 360; 60 D.L.R. (4th) 272. In that decision, the Alberta Court of Appeal reversed the trial judge, saying in part at page 362 (D.L.R. 275-76):

In particular we do not agree that the section has "the plain meaning that is unambiguous" attributed to it by the learned chambers judge. For Revenue Canada to succeed, the plain and unambiguous meaning of the section must be that it deprives the properly secured creditor, in this case Lloyds, of all or part of its security without compensation for the purpose of paying another debt entirely unrelated to the security. It is surely equivalent to the transfer of proprietary rights without compensation.

Reference is also made in that decision by Stratton, J.A. of the Alberta Court of Appeal to Homeplan Realty Ltd. v. Avco Financial Services Realty Ltd. (1977), 5 B.C.L.R. 289; 81 D.L.R. (3d) 289, a decision of the British Columbia Court of Appeal where Robertson, J.A. said at D.L.R. 292 of the Industrial Relations Board legislation under consideration: “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 that was its intention only if the language of the statute compels that interpretation.”

That decision, adverse to the I.L.R., was upheld by the Supreme Court of Canada.

An exception to the general judicial trend, where this issue arises is found in Royal Bank of Canada v. Canada, [1990] 2 C.T.C. 285; 90 D.T.C. 6330, a decision of Wright, J. of the Saskatchewan Queen's Bench, where he expressly refused to follow Lloyds Bank, supra, at the appellate level, preferring the reasoning of the trial judge, who had found in favour of Revenue Canada. In the view of Wright, J., the relevant legislation was clearly worded, and permitted no other interpretation than the conclusion contended for by Revenue Canada. There is no indication before me that the decision of Wright, J. was the subject of further appeal. Nonetheless, notwithstanding the positivity with which Wright expresses himself, he does not deal with the findings in previous cases, in which a different result obtained that the legislation “ falls short of effecting a transfer of property in the funds or establishing priority of Revenue Canada's claim.”

On May 18, 1990 the current provisions of section 224 came into force. I repeat the provisions of paragraph 224(1.2)(b):

. . . 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 the 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.

Despite the sympathy with which one must feel for an entity believing itself to have carefully effected a security interest, there is, in my view, no interpretation of this section which can now favour the secured creditor in priority to the claim of Revenue Canada. It should further be noted that any expression of sympathy for the secured creditor is, at least to some extent, countered by the position taken by counsel for Revenue Canada that the funds over which it claims priority is for the exclusive benefit of employees of the tax debtor, who has failed to remit to Revenue Canada, moneys deducted from its employees for tax purposes.

If my reasoning is valid, it is apparent that in situations similar to this, where a tax debtor or potential tax debtor gives the security interest to a secured creditor, such a creditor must be aware of the possibility of the defeat of his claim by Revenue Canada at some stage between the giving of the security, and the actual receipt of payment by the secured creditor.

It is perhaps necessary to add my view that in this instance, the interception by Revenue Canada was timely, in the sense that the funds in question had not reached the hands of the secured creditor.

In the end result, I must, and do find in favour of Revenue Canada, and I direct that the funds of $9,776, less the party-party costs of the petitioners, Berg and Hazell, be paid to Revenue Canada.

Because this appears to be an interpretation of legislation in the first instance, I think it appropriate that there be no costs for or against the respondents or either of them.

Judgment accordingly.