Section 224

The taxpayer's husband had a tax debt. The Minister issued a garnishment order on an account held jointly by the taxpayer and her husband. Harrington J. granted the taxpayer's appeal against the order, on the basis that such an order could only be effective if it were established that the funds in the account were solely the taxpayer's husband's property (para. 23). On the contrary, the evidence showed that the taxpayer was the financial provider of the couple.

Mr. McLeod, who owed taxes, held two accounts with the appellant ("Trustco") - an account he held jointly with another person, and a trust account for his law practice. Mr. McLeod wrote cheques out to himself drawing on the trust account, and deposited them in the joint account. Although the Minister had issued a s. 224(1) requirement that Trustco pay its liabilities to the Receiver General instead of Mr. McLeod, Trustco transferred the funds from the trust account to the joint account in accordance with the cheques.

The Minister had conceded at trial that its s. 224(1) requirement did not apply to funds paid into or out of the joint account. The decision turned on whether Trustco was ever liable to make a payment to Mr. McLeod. A 4-3 majority found that it was not. In processing the cheques, Trustco was acting in two capacities - as the bank on which the cheques were drawn, and as the bank to which the cheques were deposited. Trustco had no liability to Mr. McLeod in either of these capacities. Deschamps J. stated (at para. 40):

A cheque operates neither as an assignment of funds in the hands of the payee nor as an assignment of funds in the hands of the drawee. It is a document by means of which a customer orders his or her banker to pay funds the banker owes to the customer to a person or to the order of that person out of the account specified on it. In and of itself, a cheque imposes no obligation on a drawee bank to the payee.

Trustco was not liable to pay Mr. McLeod in his capacity as drawer either. If Trustco had failed to pay the amount specified on the cheques to the recipient from the trust account, then it would be liable to pay Mr. McLeod damages for breach of their trust account contract. Because Trustco did pay, it did not become liable.

The respondent was liable under s. 224(4) for its failure to respond to s. 224(1) demands (made both before and after the maturity of the GIC in which the trust was invested) in respect of proceeds of an RRSP where the annuitant had instructed the respondent on maturity of the GIC held in the plan to pay the proceeds directly to him immediately after the expiry of the time covered by the last of such demands. In finding that s. 224(1) was not restricted to debtor/creditor relationships, Isaac C.J., for the majority, stated (at para. 46) that "the ordinary meaning of the word 'liable' in a legal context is to denote the fact that a person is responsible at law" and further stated (at paras. 57, 63):

The tax debtor had a contractual right, enforceable in law, to have the net proceeds paid to him. The respondent had a corresponding contractual obligation to make the payment requested. In my respectful view, this legal obligation was sufficient to bring the respondent within the scope of the phrase “a person liable to make a payment” to the tax debtor within the meaning of subsection 224(1). ...

[T[he proceeds of the RRSP were payable to the tax debtor at the time he requested payment following the maturity of the GIC.

In his concurring reasons, McDonald JA stated (at para. 4):

The only reason the respondent falls within the confines of subsection 224(1) is because the tax debtor instructed the trustee to pay the proceeds of his RRSP directly to him and because this instruction occurred within 90 days of the respondent receiving Revenue Canada’s demand letter. The respondent, therefore, became a person liable to make a payment to the tax debtor. If the terms of the trust forbid the tax debtor from cashing out the trust, the respondent would not fall within the confines of subsection 224(1). Similarly, if there had been no request for payment made by the tax debtor the respondent would not be required to make a payment as subsection 224(1) would not apply.

The Supreme Court of Canada ultimately reversed the courts below in finding that profits earned by a terminated employee of the appellant belonged to the appellant. Accordingly, an amount which had been garnished by the Department and which the appellant had been ordered by the Supreme Court of Quebec to pay to the Department became repayable to the appellant when the Supreme Court of Canada found that such funds had belonged to the appellant.

One of the appellants ("Ontario") was awarded $41,000 in an action which it had brought against another corporation ("Konvey"). As a result of a requirement to pay which the Crown previously had issued to Konvey, the solicitors for Konvey forwarded a cheque for $41,000 payable in favour of the Receiver General to Ontario. Ontario's counsel forwarded this cheque to Revenue Canada instructing that it be applied against unremitted source deductions. The cheque instead was applied by Revenue Canada against Ontario's arrears of provincial tax, and CPP and UIC premiums.

After noting (at p. 6215) that:

Where no direction is given by the debtor then the creditor is free to apply the monies received as the creditor sees fit. The debtor must expressly authorize how the funds he is paying to the creditor are to be applied and failure to do so leaves the creditor to decide ..."

Cullen, J. noted that Ontario was not in a position to direct Revenue Canada how to apply the $41,000 payment because it represented a payment of Konvey's property rather than Ontario's property. Accordingly, the unremitted source deductions remained unpaid.

A demand by Revenue Canada on the trustee of an RRSP was not sufficient authority for the trustee to collapse the RRSP and pay the new proceeds to Revenue Canada. "[U]ntil a cestui que trust requests payment of the proceeds of an RRSP from his trustee, which he is able but not bound to do under the rule in Saunders v. Vautier (1841), 41 E.R. 482, no moneys are payable to him nor is his trustee liable to make a payment to him within the meaning of s. 224(1) of the Act."

The taxpayer was subrogated (as guarantor) to a bank which had registered an assignment by a customer ("Kitkraft") of book debts on June 7, 1977. The effect of the assignment was to make Kitkraft the trustee of the book debts for the assignee bank and later, by subrogation, for the taxpayer. Therefore a later requirement to pay which the Minister issued to a debtor of Kitkraft was ineffective to transfer title to the Minister to the funds used to pay those book debts.

Since a tax debtor had not taken any steps to withdraw properties from his RRSP, the trustee of the RRSP had no moneys which were immediately payable to the debtor nor any moneys which it within 90 days would be liable to pay to the tax debtor. A s. 224(1) demand accordingly could not require the trustee to pay moneys to the Crown.

A bank, which perfected an assignment to it of book debts by registering pursuant to the Personnel Property Security Act (Manitoba) prior to a s. 224 demand being made, had priority over the Crown with respect to the moneys received by the Crown in payment of the book debts pursuant to the demand.

S.224(1) only creates the right in the Crown to demand payment of a debt and does not give the Crown a priority. "The crown simply acquires a debt like any other although that is subject to the settled principle of law that claims and debts of the Crown have priority over other creditors of equal degree."

The Minister of National Revenue was held to rank pari passu with the Saskatchewan Minister of Finance with respect to moneys paid by a garnishee of both into Court, notwithstanding that the s. 224 demand of the federal minister was made 10 days later than the demand by the Saskatchewan Minister under a provincial statutory equivalent of s. 224.

After a fire damaged the insured premises of a licensee under the Excise Tax Act and the licensee defaulted under a loan agreement with a bank secured by a floating charge on its assets, the bank appointed a receiver. After the appointment but before notice of the appointment had been given to the insurance company, a third party demand pursuant to s. 52(6) of the Excise Tax Act (similar to s. 224(1) of the Act) was served on the insurance company. Since the floating charge crystallized at the time of appointment, the insurance moneys thereafter were ultimately payable to the receiver, not the licensee, and so there was nothing for the third party demand to attach. Furthermore, even if the service of the demand were regarded as creating an equitable interest (which it did not) in the debt from the insurance company (which was not yet payable) the older equitable charge of the bank had priority.

It was indicated that the 70% exemption pursuant to s. 7(1) of the Wages Act (Ontario) is calculated before any deduction is made of the amount of a s. 224(1) demand. Otherwise, "at the whim of the person in the department [of National Revenue] who prepared the demand, the entire 70% exemption could be wiped out, if the amount of the demand is to be deducted from gross wage before the exemption is calculated."

Since s. 224 is a garnishee provision that only binds or attaches the interest of the taxpayer, it does not apply to book debts that were assigned to a bank prior to the issuance of the s. 224 demand, notwithstanding that such issuance was effected prior to receipt by the taxpayer's debtor of notice from the bank of the assignment of book debts.

There is no requirement that the Minister file a certificate under s. 223 before he may exercise the power given to him by s. 224 to require a person who is or is about to become indebted to a taxpayer to make payment to the Receiver General.

As a demand on third parties pursuant to s. 224 does not involve an interference with corporeal property, a wrongful demand cannot give rise to an action in trespass or conversion.

Book debts which are included in the security granted under s. 178 of the Bank Act by a taxpayer to a bank become the property of the bank from the moment that they arise, and are not subject to attachment under s. 224(1) irrespective of whether notice has been given to the Crown or the debtors of the bank's interest.

"[S]ervice of a demand should not be construed as altering generally the terms of a bona fide contract entered into between a judgment debtor and a third party." A s. 224(1) demand accordingly was insufficient to attach term deposit certificates which contained conditions requiring that the certificates be surrendered on redemption, or which prohibited partial redemptions. Service of the demands could not be treated as meeting those conditions.

An assignee of book debts ranks behind the Crown to the extent that the debtor pays the Crown pursuant to a s. 224(1) demand before the debtor has received notice of the assignment from the assignee. (Assignment of Book Debts Act (Alberta)).

Since the Crown "is given extraordinary powers" under s. 224(1) "to recover monies which normally by any other creditor would have to be attached by way of receivership or garnishment or other proceedings, the [Crown] must strictly and accurately set out its claim and could not demand from day to day different amounts all aggregating the total now claimed." Where the Crown, out of some confusion as to the amount owing to it, made two different demands of different sums, the amount of the second demand was deemed by the court to constitute the total amount owing to the Crown for taxes.

The Minister's decision to attempt collection by way of garnishment is purely an administrative decision that is not subject to review under section 18 of the Federal Court Act.

The funds standing to the credit of the annuitant in his registered retirement savings plans were not sheltered from seizure by the Crown under a requirement to pay issued pursuant to s. 224(1) to the trustee, notwithstanding that the annuitant (the tax debtor) had not requested the trustee to pay out those funds. Walsh J stated:

Although [the annuitant] has the option of withdrawing the funds from time to time on paying income tax on the withdrawals in the year when they are made, or converting the deposits to a pension at any time not later than attaining the age of 71, and hence the use of the funds are subject to his control, this does not mean that they are sheltered from seizure by his creditors, in the absence of a special provision to this effect. They resemble demand bank deposits made by him which are undoubtedly seizeable.

A trustee of bankruptcy, in its representative capacity, was liable with respect to a demand for payment of a receivable made 40 days after the date of bankruptcy of the debtor.

The Minister had priority under s. 224(1.2) of the Act and s. 317 of the Excise Tax Act over lending institutions that had taken general assignment of book debts as collateral security for their loans. Unlike the minority, who found that the lenders were not "secured creditors" because they did not have a security interest in the property of "another person", Cory J. found that because the lenders would have no further interest in the assignments once the secured loans were paid off, the assignments could not be considered absolute assignments and, instead, conformed with the definition of "security interest".

At a time a construction company ("Mid-Plains") abandoned work on a contract for a Crown agency ("TransGas"), TransGas, in addition to holding "holdback" funds as required under the Builders' Lien Act (which were not at issue in the action), held additional contract funds payable to Mid-Plains for the work done under the abandoned contracts. Before finding that the federal Crown had a priority under s. 224(1.2) over builders' lien claimants of Mid-Plains with respect to the additional contract funds, Tallis, J.A. found that s. 224(1.2) had as its purpose the expedient collection of withheld tax monies and, therefore, was intra vires the powers of the federal Crown under s. 91(3) of the Constitution Act, 1867. In addition, the Court rejected a submission that s. 244(1.2) should be regarded as authorizing unreasonable seizures contrary to s. 8 of the Charter.

The 90-day requirement in s. 224(1.2) was met given that within 90 days of a second requirement to pay issued by the Minister, TransGas was directed by court order to pay the amounts in question into Court "forthwith" which payments had the effect of vacating the liens and of discharging the contractual liability of TransGas to Mid-Plains, as well as the statutory liability to the lien claimants in relation to amounts paid in.

S.224(1.2) was part of the pith and substance of federal tax legislation and, accordingly, was not ultra vires.

In finding that the pre-1993 version of s. 224(1.2) of the Act was not ultra vires (before following Lloyds Bank), Scott C.J.M. stated (p. 6177):

"The purpose of the Act is not only to levy tax, but to collect it ... The machinery for collection and enforcement under the Act is part of the very subject matter of sec. 91(3) of the Constitution Act and not merely incidental to the raising of revenue".

A general assignment of accounts and debts made by a corporation to the plaintiff bank took priority over a subsequent requirement to pay made under s. 224(1.2). "Subsection 224(1.2) ... in order to effect what would amount to an expropriation of property from the Toronto-Dominion Bank, will have to be worded in such a way as to make this intention absolutely clear, and it is not" (p. 6642).

S.224(1.2) permits the Minister of National Revenue to issue the request for payment without any regard to the provisions of the Bankruptcy Act.

Wright, J. refused to follow the decision of the Alberta Court of Appeal in Lloyds Bank v. International Warranty Co. Ltd., and found that s. 224(1.3) was effective to give the Crown priority over a secured creditor.

A company ("IW") had made an assignment of book debts to the td Bank. After ceasing business operations, it paid salaries to its employees without withholding and paying source deductions. Revenue Canada thereafter issued a requirement to pay pursuant to s. 224(1.2)(b).

Stratton J.A. held:

"that the proceedings under s. 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."

Accordingly, the Minister did not have priority over the TD Bank.

After finding that the Caisse had a security interest in a term deposit of its customer (Canvrac) with the Caisse, the Court found that the proceeds of the term deposit were available to the Crown to discharge all the outstanding income tax (and employment insurance premiums) deducted at source by Canvrac, whether the unremitted deductions occurred before or after the creation of the security interest and until the date that the Caisse realized on its security.