Regulation 2201

On July 15, 2014, the date on which by a corporation ("Chambois") failed to remit source deductions that were due under the Income Tax Act (the “ITA”) and the Employment Insurance Act, the respondent (the “Caisse”) held a first-ranking hypothec on an immovable owned by Chambois as security for a loan to Chambois. In addition, $55,000 of the loan was guaranteed by Chambois shareholders.

On December 8, 2015, the Superior Court authorized the sale of the immovable and, at about the same time, the Caisse released the directors of Chambois from their guarantee. The immovable ultimately was sold in July 2017 for net proceeds of $212,402.

The Caisse acknowledged that the amount of its prescribed security interest (“PSI”) should reflect the deduction from the balance owing to it, on July 15, 2014, of $216,591 by the total of principal and interest payments made under the hypothec since that date of $57,684, but disputed that there also should be a reduction for the guarantee amount of $55,000.

In finding that the $55,000 should be deducted, Gagné JCA stated (at paras. 37-40, TaxInterpretations translation):

First, the ordinary meaning of the words "rights of the secured creditor /tous les droits du créancier garanti" refers to all the economic rights of the secured creditor securing the obligation. There is nothing in the text of paragraph 2201(2)(a) of the Regulations to limit these rights to the real property rights of the secured creditor. The Caisse does not dispute that, at the time of the failure to pay the source deductions, it held a $55,000 guarantee as security for Chambois' obligation to repay the hypothec loan. …

Second, the legislator was careful to add "including guarantees or rights of set-off /y compris les garanties et droits de compensation". … The word "guarantees" must be taken in its broad sense, which includes suretyship. Had Parliament wished to restrict this example to rights in rem, it would have so specified. As for "rights of set-off /droits de compensation", the AGC is right to point out that these are personal rights. …

Third, the [Finance] Explanatory Notes to the Regulations support this interpretation. …

Gagné JCA went on to agree (at para. 44) with the essentially undisputed point that all the payments of interest (as well as principal) on the loan after the default date (July 15, 2014) reduced the PSI of the Caisse.