Canadian Imperial Bank of Commerce v. Florsheim Inc., [1991] 1 CTC 570

Wetmore, J.:—Some facts are first necessary.

1. August 4, 1989—Shirlar Holdings Ltd. gave a general assignment of book accounts to the plaintiff.

2. September 9,1989—Shirlar received a work order from the defendant.

3. October 5, 1989—The plaintiff made demand on Shirlar for the account owing by Shirlar to the plaintiff bank in the amount of $270,000.00.

4. October 27,1989—Shirlar was in bankruptcy.

5. February 20,1990—The Trustee of Shirlar wrote the defendant demanding details of the account owing and raised the issue of a Department of Revenue demand.

6. March 8, 1990—The Trustee wrote the defendant as follows:

Further to our telephone conversation of March 8, 1990 we confirm our request that no funds be advanced to Revenue Canada Taxation pursuant to their demands until the matter of their priority over the security held by the Canadian Bank of Commerce, has been dealt with by the Court.

As mentioned to you Revenue Canada was unsuccessful in its application before the Alberta Courts to obtain priority over a registered assignment of book debts in favour of a secured creditor. An application is being made in British Columbia to have the matter dealt with in this province as well, hopefully, with the same result as Alberta.

Should Revenue Canada contact your office with regard to payment, we would have no objection to having the funds paid into Court pending the resolution of this matter by the Court.

So it is clear that the defendant was aware of the plaintiff's claim to the accounts receivable by actual notice about March 8, 1990.

March 30,1990—The defendant wrote the Trustee as follows:

Contrary to your request regarding payment of our account with Shirlar Holdings Ltd., we have forwarded the funds to Revenue Canada at their request. Revenue Canada has advised me that should the Court's decision be in favour of the Trustee in Bankruptcy, the funds will be forwarded to you.

May 3, 1990—Solicitors for the plaintiff demanded from the defendant $54,127 pursuant to the assignment. On the same date, a similar demand was made upon the Department of Revenue.

At this stage there is no doubt, on the basis of priorities at that time, the funds were payable to the plaintiffs. See Lloyd's Bank Canada v. International Warranty Co., [1990] 2 C.T.C. 360; 60 D.L.R. (4th) 272 (Alta. C.A.); Concorde International Travel Inc. v. T.I. Travel Services (B.C.) Inc. (1990), 47 B.C.L.R. (2d) 188 (B.C.C.A.), In the Matter of Shirlar Holdings Ltd. in Bankruptcy, B.C.S.C., No. 1639/89, March 29, 1990 (unreported).

The difficulty is that on June 27, 1990, the Income Tax Act was amended by the proclamation of Bill C-51, which provided, inter alia:

1. (3) All that portion of subsection 224(1.2) of the said Act following paragraph (b) thereof is repealed and the following substituted therefor:

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.

(4) Any moneys received by the Receiver General pursuant to a letter issued after December 17, 1987 by the Minister of National Revenue under subsection 224(1.2) of the said Act shall be deemed to have been paid to the Receiver General as required under that subsection as if subsection (3) were applicable at the time the letter was issued.

I will resist comment on the effect this section will have on the financing of legitimate business activity in financing on accounts receivable.

It is also regrettable that the Department of National Revenue, despite its undertakings, has refused to honour that undertaking. Those funds were payable to the plaintiffs prior to June 27, 1990. Had they been repaid pursuant to that undertaking, this litigation would have been unnecessary. The Department goes even further. On May 10, 1990, before Bill C-51 was proclaimed, it wrote the defendant purporting to discharge the defendant's debt to Shirlar Holdings pursuant to the Income Tax Act, subsection 224(2). It is of some interest that the Department was a party in the Shirlar case, referred to earlier in these reasons, wherein their claim to a priority was clearly denied.

This action, of course, is against the defendant Florsheim Inc. Further, it is an application under Rule 18, thus based upon the pleadings and the affidavits.

Defence counsel does not raise the issue of whether this is money paid under mistake of law as opposed to fact. Properly so I would think from the exhibits attached to the affidavits. They were duly warned of the law and urged to interplead, at least, by the Trustee for Shirlar. The defendant simply succumbed to the blandishment or other inducements of the Tax Office.

The defendant argues that the indebtedness no longer exists. Neither counsel argued this issue on the constitutionality of section 224 and the "discharge" the Minister may give under that section, before or after the amendment.

As I understand the argument, the defendant says that because it owed money to Shirlar, which was paid to the Tax Department, there then was no money owing to Shirlar. Hence, the plaintiff's action, which is founded in debt, not negligence or some other claim, cannot succeed, because the debt was extinguished by operation of the sections of the Tax Act.

In paragraphs 34 to 36, counsel puts it thus:

Mr. Justice Hinkson in Concorde International Travel Inc. v. T.I. Travel Inc. unreported, June 26, 1990, a decision of the British Columbia Court of Appeal, speaking for the majority, stated that:

In my opinion, s. 224 styled as it is" Garnishment” deals in subsection (1) and in subsection (1.2) with the mechanics of garnishment. The Minister in serving a demand pursuant to that section must be proceeding upon the basis that he asserts a tax debtor's liability to him. That justified garnishing the funds in the hands of a creditor of the tax debtor. But, I am unable to see in that section any provision that would have the effect of transferring the property in the funds to the Minister or establishing a priority of Revenue Canada’s claim. That was the point dealt with by the Alberta Court of Appeal . . . .

In my opinion, the subsections in question do not result in the property in the funds being transferred to the Minister simply by serving the notice that he did in this case nor does it purport to establish a priority of his claim. All, in my opinion, that is accomplished by proceeding under these subsections of s. 224 is to transfer the funds from the taxpayer's creditor to the Minister. Where there is a contest over priorities it is then necessary to resolve those priorities apart from the provisions of s, 224. That is what happened here.

[Emphasis added. ]

It is our submission that the above statement of Mr. Justice Hinkson stands for the proposition that once the funds are actually transferred to Revenue Canada, the recipient of the Requirement to Pay has no interest remaining in the fund, nor any continuing indebtedness to the original tax debtor, nor any part to play in the priorities contest. In other words, the payment by a recipient pursuant to a Requirement to Pay takes that recipient out of the realm of the priority dispute altogether.

Therefore, whether this court considers it necessary to look at the nature of the transfer of funds from the defendant to Revenue Canada (i.e. the payment) or not, it is our submission that the plaintiff cannot get beyond the first issue set out above; namely, that there is an "indebtedness" which remains in effect between the defendant and Shirlar.

With respect, I do not think the judgment of Hinkson, J.A. supports this argument. The Concorde case, supra, was dealing with funds held in trust in essence, pending a determination of priorities and indeed those priorities were between competing authorities having statutory priorities. It well may be the amendment in Bill C-51 supplies the missing ingredient, vis-a-vis Shirlar, Florsheim Inc. and the Receiver General.

This lawsuit, however, does not involve either Shirlar or the Receiver General. On May 10 the Tax Department wrote:

Taxation Canada

The Florsheim Shoe Company

Box 1090

19 Concession Street

Cambridge, Ontario

N1R 5Y2

Attention: Carol Hackney, Section 165-42

Controller K. Bergon

Tel: (604) 666-6695

Dear Sirs:

Re: Shirlar Holdings Ltd.

Account Number: AXD 12694 6

Further to our discussion of May 10, 1990 this is to advise you that Florsheim’s liability to Shirlar has been discharged to the extent of the $37,972.80 payment by virtue of Section 224(2) of the Income Tax Act.

If there are any questions please contact the writer at (604) 666-6695.

Yours truly, ,

"K. Bergon"

Collections Section

This lawsuit is between Canadian Imperial Bank of Commerce and Flor- sheim. The cases from Alberta and British Columbia turn on the transference of property when the assignment is crystallized by notice and a demand. This was done before payment by Florsheim to the Department. At that point all property in an account payable vested in the CIBC. The nature of that chose in action was a claim in debt. Whatever release the Tax Department purported to give to any liability between Shirlar and Florsheim is irrelevant. In so far as this particular claim is concerned, no debt was owing from Florsheim to Shirlar at that time, or at the time Florsheim decided to make a payment to the Department. The only debt Florsheim had was to the plaintiff. And the plaintiff's claim is, therefore, properly in an action for debt.

It is argued the assignment from Shirlar to the Bank is subject to the equities, nemo dat quod non habit. That is true. But when this particular assignment crystallized by the demand, there was no overriding equity as has apparently been created by Bill C-51 in June 1990.

In Ryder v. Ryder and Swallowfield Farms Ltd. (1978), 7 B.C.L.R. 264, a similar problem of priorities arose, through error of the debtor. There money was paid into court and by mistake paid out to a judgment creditor in priority to the assignee's right to the fund. Ruttan, J. held that the debtor or holder of a fund cannot after notice of the assignment, alter his rights to the prejudice of the assignee.

See also Bradford Banking v. Briggs (1886), 12 App. Cas. 29 and West v. Williams (1899), Ch. 132. See also the Law and Equity Act, section 32.

In the case at bar, Florsheim Inc. chose to act, before any statutory change to the Income Tax Act. It cannot by improper payment after the demand for payment alter the rights to payment of the debt to the plaintiff to the prejudice of the assignee.

There is an interesting argument, under the Income Tax Act, subsection 224(2), whether the purported discharge given by the department is effective, the funds at the actual time of not having been required under the section at the time of payment orthe issuance of the purported discharge. I do not have to resolve that issue.

In this case, the action is between an assignee and a debtor. As between themselves that debt continues.

There will be judgment for the plaintiff with costs.

Judgment for the plaintiff.