Pembina on the Red Development LTD v. Canada, [1991] 1 CTC 527, [1992] DTC 6171

Hirschfield. J.:—The respondent Coopers & Lybrand Limited (Coopers) as the Receiver and Manager of the respondent Triman Industries Ltd. (Triman) applies for a declaration that the Royal Bank of Canada (the Bank) has priority over Revenue Canada to all moneys paid into court in the instant suit and in suit numbers 90-01-44549, Winkler Building Supplies (1981) Limited v. Triman Industries Ltd. et al.; 90-01-43714, 90-01-43761 and 90-01-43762, Greentree Homes Ltd. et al. v. Price Waterhouse Limited, as Trustee for the Estate of Triman Industries Ltd. et al. The Bank claims priority because of a certain prior registered security agreement given to it by Triman and that it, therefore, is entitled to receive the moneys which have been paid into court. Revenue Canada claims priority because of requirements to pay it caused to be served on Triman's debtors, pursuant to the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”).

Revenue Canada on its part has moved for an order striking out certain paragraphs set forth in the affidavit of David Johnson filed in support of Coopers' motion on the grounds that statements contained therein are frivolous, scandalous and vexatious in that they refer to certain discussions with respect to the holding of the moneys which had been carried on between Coopers and Revenue Canada prior to the making of this application, pending a decision thereon. I would state immediately that the paragraphs in question, in my opinion, do not contain any statements which could be even remotely deemed to be either frivolous, scandalous or vexatious and I therefore dismiss this motion.

The relevant facts are:

1. The Bank advanced loans over a period of time to Triman, a manufacturer of kitchen cabinets. On July 9, 1987, Triman, as security for the loans, signed and delivered to the Bank an accounts receivable security agreement, an inventory security agreement and a chattel mortgage, all of which were properly registered under The Personal Property Security Act, R.S.M. 1987, c. P-35.

2. Triman defaulted on its loans, which were now in excess of $250,000, and on November 13, 1989, the Bank appointed Coopers as Receiver and Manager of Triman's property, assets and undertakings and its agent to collect all accounts receivables due, owing and payable to Triman. As at November 13,1989, the accounts receivables owing to Triman were in the approximate sum of $246,800.

3. Triman, during the course of its business operations and prior to Coopers' appointment as Receiver and Manager, contrary to subsection 227(10.1) of the Income Tax Act, had failed to remit to Revenue Canada the taxes payable by its employees which had been deducted at source, in the aggregate amount of $58,767.15. On November 14, 16 and 24, 1989 Revenue Canada issued to and served on Triman's business debtors "Requirements to Pay” (more commonly known as third-party demands) for the amounts owing by them to Triman.

4. Coopers as well had demanded the accounts receivable owing by Triman's business debtors.

5. As a result of the competing claims and demands, Pembina on the Red Development Corporation and Winkler Building Supplies (1981) Ltd. made applications for interpleader orders which were granted. Greentree Homes Ltd. made application for orders authorizing it to pay the moneys owing by it to Triman into court for the amounts required to vacate certain builders’ liens. It was granted such orders.

The issue to be determined is whether subsection 224(1.2) of the Income Tax Act gives to Revenue Canada priority over the Bank's prior pre-existing registered charge over Triman's accounts receivables. In other words, does Revenue Canada have priority for a debt not in existence at the time when the Bank's security was in place and loans advanced thereunder?

The material provisions of the Income Tax Act are subsections 224(1), (1.2) and (1.3) which read as follows:

Garnishment

224.(1) 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 section referred to as the "tax debtor”), he 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 in whole or in part to the Receiver General on account of the tax debtor's liability under this Act.

(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) or 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”), 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.

Idem

(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, hypothec, 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.

The issue as to prior rights to a fund in circumstances such as are in existence here was determined, in my opinion, by the Alberta Court of Appeal in the case of Lloyd's Bank Canada v. International Warranty Co., [1990] 2 C.T.C. 360; 60 D.L.R. (4th) 272. This decision has been followed and applied by the British Columbia Supreme Court in Re Shirlar Holdings Ltd., B.C.S.C., April 25, 1990 (unreported) and by the British Columbia Court of Appeal in Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc. (1990), 47 B.C.L.R. (2d) 188.

It was held in the Lloyd's case that section 224 of the Income Tax Act does not impress moneys due and owing to the Minister of Revenue with a trust, nor does it transfer any property right to the Minister. It provides at most for an extra judicial attachment to bring moneys into the custody of the Minister and that neither the section nor the third-party demand confer priority upon the Minister over moneys which are properly secured.

At page 362 (D.L.R 275), Stratton, J.A. said as follows:

For Revenue Canada to succeed, the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor, in this case Lloyd's, 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.

In Homeplan Realty Ltd. v. Avco Financial Services Realty Ltd. (1977), 81 D.L.R. (3d) 289; 5 B.C.L.R. 289; affd [1979] 2 S.C.R. 699; 98 D.L.R. (3d) 695, the B.C. Court of Appeal had for consideration a claim for priority under a provincial statute, which constituted a claim by an employee for wages, if certified under the Act, as being payable “in priority over any other claim or right—including—every mortgage of real or personal property". Robertson J.A. had this to say at D.L.R. page 292:

If the Legislative Assembly intends to produce by statute results that are so brutal and practical, 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.

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

As Brett M.R. said in Att.-Gen. v. Horner (1884) 14 Q.B.D. 245,257: 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." Therefore rights, whether public or private, are not to be taken away, or even hampered, by mere implication from the language used in a statute, unless as Fry, J. said in Mayor, etc. of Yarmouth v. Simmons (1879) 10 Ch.D. 518, 527, "the legislature clearly and distinctly authorises the doing of something which is physically inconsistent with the continuance of an existing right.

This same concept was expressed in Maxwell on Interpretation of Statutes, Tth ed., 1962, p. 276, as follows:

Proprietary rights should not be held to be taken away by Parliament without provision for compensation unless the legislature has so provided in clear terms. It is presumed, where the objects of the Act do not obviously imply such an intention, that the legislature does not desire to confiscate the property or to encroach upon the right of persons, and it is therefore expected that, if such be its intention, it will manifest it plainly if not in express words at least by clear implication and beyond reasonable doubt.

[Emphasis added.]

As noted above, the learned trial judge was of the view that subsection 224(1.2) clearly provided by implication that the moneys paid in response to Revenue Canada's " requirement to pay” became the property of the Crown. This conclusion is not in accord with prior decisions of this court.

In Re Lamarre (1978), 85 D.L.R. (3d) 392; [1978] 2 W.W.R. 465, the Minister of National Revenue made a demand, similar to the one given in the present case, under the then applicable subsection of the Income Tax Act, namely 224(1). The question there was whether the demand took precedence over an assignment in bankruptcy. Subsection 224(1) then read as follows:

224.(1) When the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any payment to a person liable to make a payment under this Act, he may, by registered letter or by a letter served personally, require him to pay the moneys otherwise payable to that person in whole or in part to the Receiver General of Canada on account of the liability under this Act.

It will be noted that the words I have emphasized are, for all practical purposes, identical to the words I have emphasized in the section here under review. Thus the difference between these two sections is not of significance for our purposes In giving judgment of the court in Lamarre, Prowse, J.A. pointed out that subsection 224(1) seemed to neither create a trust nor pass property to the minister. At page 395 (W.W.R. 469) he said:

The distinction between garnishee proceedings and the remedy afforded the Minister is that the demand need not be issued in judicial proceedings and further the demand is broader in scope as it attaches payments arising out of a debt or a liability. The property in the debt or liability when due or determined is not impressed with a trust nor is it transferred to the Minister.

[Emphasis added.]

In Royal Bank of Canada v. A.-G. Canada (1978), 105 D.L.R. (3d) 648; [1979] 1 W.W.R. 479, McGillivray, C.J.A., in writing for the court, expressly followed the decision in Lamarre at page 649 (W.W.R. 479-80):

We are all of the view that the decision of this Court in Re Lamarre (1978), 85 D.L.R. (3d) 392, [1978] 2 W.W.R. 465; 27 C.B.R. (N.S) 41, 8 A.R. 533, enunciated two propositions: firstly, that a demand made under s. 224 does not convey the indebtedness to the Crown, nor does it impress it with a trust; and secondly, that the Minister does not, by virtue of the demand, become a holder of a security. In short, the Crown does not acquire an equitable interest in the indebtedness.

Following the decisions in Lamarre and the Royal Bank, I am of the view that the proceedings under subsection 224(1.2) are at the most a form of extra-judicial attachment which could bring the funds in question into the custody of Revenue Canada. 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.

I adopt in its entirety the statement of Stratton, J.A.

Muldoon, J. in the case of Royal Bank of Canada v. R., [1984] C.T.C. 573; 84 D.T.C. 6439; 52 C.B.R. 198, in an application before him to determine the priority between the Royal Bank of Canada which held a general assignment of book debts and a third-party demand made by Revenue Canada held that because the assignor (the debtor) had conveyed all its right, title and interest in its book debts to the bank, such debts, whether existing or in the future, never were the property of the assignor and therefore could not be attached by the third-party demand which is, in effect, a statutory garnishing order.

In conclusion, I hold that Coopers, as Receiver and Manager of Triman, appointed as such by the Royal Bank of Canada and the Royal Bank of Canada have priority to the moneys paid into court and to all moneys owing by business debtors to Triman over Revenue Canada and its third-party demand. I therefore order that the moneys paid into court in all the actions referred to herein be paid out to Coopers.

Had certain amendments to section 224 of the Income Tax Act made in late 1989, which provide that a third-party demand issued by Revenue Canada shall have priority over a secured creditor, been proclaimed, which were brought to my attention by counsel for Coopers, the result may have favoured Revenue Canada.

Coopers is, of course, entitled to its costs which, if they cannot be agreed upon, may be spoken to.