Date: 20050708
Docket: T-949-02
Citation: 2005 FC 949
BETWEEN:
THE ATTORNEY GENERAL OF CANADA
Applicant
- and -
LA CAISSE POPULAIRE DESJARDINS DE
LYSTER / INVERNESS / VAL-ALAIN
Respondent
REASONS FOR ORDER
PINARD J.:
Introduction
[1] By this motion, the respondent is appealing the judgment of Prothonotary Morneau, dated January 25, 2005, ordering it, pursuant to subsections 227(4.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the ITA), and 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, as amended (the EIA), to pay the applicant the sum of $5,462.39, with the interest provided for by subsections 36(2) and 37(2) of the Federal Courts Act, R.S.C. 1985, c. F-7, as amended (the FCA), at the rate provided for by the ITA, and capitalized daily from October 19, 2000 until paid in full, with costs.
The Facts
[2] The parties have agreed on the following relevant facts:
1. On June 30, 1999, the respondent made a loan to LRC Forestiers Inc. (the debtor) in the amount of $45,000 secured by an hypothec charging the whole of the claims and accounts receivable and the whole of the assets of the debtor, including, more particularly, a John Deere skidder (the skidder).
2. On October 17, 2000, the debtor sold the skidder to Entreprise Perfort Inc. (the purchaser) for $15,500 plus the applicable taxes.
3. On October 18, 2000, the sum of $17,828.88, representing the proceeds of the sale of the skidder including the applicable taxes, was deposited into the debtor’s bank account.
4. On October 19, 2000, this sum was withdrawn from the debtor’s bank account to be credited to the respondent with respect to the loan.
5. On October 23, 2000, the respondent made a voluntary payment on the movable hypothec it held on the skidder.
6. On September 7, 2001, the Canada Customs and Revenue Agency (the Agency) sent the respondent a letter informing it that the debtor was liable to the applicant for money owing as source deductions and that its property was subject to subsection 227(4.1) of the ITA and subsection 86(2.1) of the EIA. More specifically, the debtor still owed the Agency $8,988.55, including $5,462.39 in source deductions withheld on the compensation paid to its employees under the ITA and EIA.
7. The $5,462.39 claimed by the applicant is still unpaid to this day.
Analysis
[3] The relevant provisions contained in subsections 86(2) and (2.1) of the EIA are similar to those in subsections 227(4) and (4.1) of the ITA; it will thus suffice to reproduce only the ITA provisions:
|
227. (4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.
(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed (a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and (b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
|
|
227. (4) Toute personne qui déduit ou retient un montant en vertu de la présente loi est réputée, malgré toute autre garantie au sens du paragraphe 224(1.3) le concernant, le détenir en fiducie pour Sa Majesté, séparé de ses propres biens et des biens détenus par son créancier garanti au sens de ce paragraphe qui, en l’absence de la garantie, seraient ceux de la personne, et en vue de le verser à Sa Majesté selon les modalités et dans le délai prévus par la présente loi.
(4.1) Malgré les autres dispositions de la présente loi, la Loi sur la faillite et l’insolvabilité (sauf ses articles 81.1 et 81.2), tout autre texte législatif fédéral ou provincial ou toute règle de droit, en cas de non‑versement à Sa Majesté, selon les modalités et dans le délai prévus par la présente loi, d’un montant qu’une personne est réputée par le paragraphe (4) détenir en fiducie pour Sa Majesté, les biens de la personne, et les biens détenus par son créancier garanti au sens du paragraphe 224(1.3) qui, en l’absence d’une garantie au sens du même paragraphe, seraient ceux de la personne, d’une valeur égale à ce montant sont réputés : a) être détenus en fiducie pour Sa Majesté, à compter du moment où le montant est déduit ou retenu, séparés des propres biens de la personne, qu’ils soient ou non assujettis à une telle garantie; b) ne pas faire partie du patrimoine ou des biens de la personne à compter du moment où le montant est déduit ou retenu, que ces biens aient été ou non tenus séparés de ses propres biens ou de son patrimoine et qu’ils soient ou non assujettis à une telle garantie. Ces biens sont des biens dans lesquels Sa Majesté a un droit de bénéficiaire malgré toute autre garantie sur ces biens ou sur le produit en découlant, et le produit découlant de ces biens est payé au receveur général par priorité sur une telle garantie.
|
|
|
|
|
[4] The following provisions of the FCA are also relevant:
|
36. (2) A person who is entitled to an order for the payment of money in respect of a cause of action arising outside a province or in respect of causes of action arising in more than one province is entitled to claim and have included in the order an award of interest on the payment at any rate that the Federal Court of Appeal or the Federal Court considers reasonable in the circumstances, calculated (a) where the order is made on a liquidated claim, from the date or dates the cause of action or causes of action arose to the date of the order; or (b) where the order is made on an unliquidated claim, from the date the person entitled gave notice in writing of the claim to the person liable therefor to the date of the order.
37. (2) A judgment of the Federal Court of Appeal or the Federal Court in respect of a cause of action arising outside a province or in respect of causes of action arising in more than one province bears interest at the rate that court considers reasonable in the circumstances, calculated from the time of the giving of the judgment. |
|
36. (2) Dans toute instance devant la Cour d’appel fédérale ou la Cour fédérale et dont le fait générateur n’est pas survenu dans une province ou dont les faits générateurs sont survenus dans plusieurs provinces, les intérêts avant jugement sont calculés au taux que la Cour d’appel fédérale ou la Cour fédérale, selon le cas, estime raisonnable dans les circonstances et : a) s’il s’agit d’une créance d’une somme déterminée, depuis la ou les dates du ou des faits générateurs jusqu’à la date de l’ordonnance de paiement; b) si la somme n’est pas déterminée, depuis la date à laquelle le créancier a avisé par écrit le débiteur de sa demande jusqu’à la date de l’ordonnance de paiement.
37. (2) Dans le cas où le fait générateur n’est pas survenu dans une province ou dans celui où les faits générateurs sont survenus dans plusieurs provinces, le jugement porte intérêt, à compter de son prononcé, au taux que la Cour d’appel fédérale ou la Cour fédérale, selon le cas, estime raisonnable dans les circonstances.
|
|
|
|
|
[5] The respondent essentially submits that the prothonotary erred in law in determining that the proceeds from the sale of the skidder constituted, in its possession, “proceeds thereof” within the meaning of subsection 227(4.1) of the ITA. The respondent argues that the prothonotary thus erred in requiring it to remit this money to the applicant.
[6] More particularly, the respondent submits that, as a secured creditor of the tax debtor, it never officially realized its security interest. It simply received from the debtor an amount corresponding to the proceeds from the sale of the skidder and deposited it into the debtor’s account, where it merged with the other amounts therein. The respondent asks that it be considered a bona fide third party, citing as well the need for certainty in the law and stability of business transactions.
[7] I am unable to accept the respondent’s arguments, in view of the amended language of subsection 227(4.1) of the ITA and the way in which it was applied by the Supreme Court of Canada in First Vancouver Finance v. M.N.R., [2002] S.C.R. 720 (First Vancouver) and later by the Federal Court of Appeal in Canada (M.N.R.) v. National Bank et al., 2004 FCA 92, [2004] F.C.J. No. 372 (QL) (National Bank) (leave to appeal to the Supreme Court of Canada denied, October 14, 2004, SCC 30311).
[8] In the first place, in First Vancouver the Supreme Court, at pages 729 to 733, relates the deemed trust mechanism made available to the Minister by the ITA to the importance of the collection of source deductions; at the same time the Court, to justify the absolute priority of this deemed trust, notes the opportunity financial institutions have of familiarizing themselves with the business and finances of a tax debtor, and considers as well the significant changes now reflected in subsection 227(4.1) of the Act, in response to the judgment in Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R. 411:
The collection of source deductions has been recognized as “at the heart” of income tax collection in Canada: see Pembina on the Red Development Corp. v. Triman Industries Ltd. (1991), 85 D.L.R. (4th) 29 (Man. C.A.), at p. 51, per Lyon J.A. (dissenting), quoted with approval by Gonthier J. (dissenting on another issue) in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, at para. 36. Because of the importance of collecting source deductions, the legislation in question gives the Minister the vehicle of the deemed trust to recover employee tax deductions which employers fail to remit to the Minister.
It has also been noted that, in contrast to a tax debtor’s bank which is familiar with the tax debtor’s business and finances, the Minister does not have the same level of knowledge of the tax debtor or its creditors, and cannot structure its affairs with the tax debtor accordingly. Thus, as an “involuntary creditor”, the Minister must rely on its ability to collect source deductions under the ITA: Pembina on the Red Development, supra, at pp. 33‑34, per Scott C.J.M., approved by Cory J. in Alberta (Treasury Branches), supra, at paras. 16‑18. For the above reasons, under the terms of the ITA, the Minister has been given special priority over other creditors to collect unremitted taxes.
. . .
In response to Sparrow Electric, the deemed trust provisions were amended in 1998 (retroactively to 1994) to their current form. Most notably, the words “notwithstanding any security interest . . . in the amount so deducted or withheld” were added to s. 227(4). As well, s. 227(4.1) (formerly s. 227(5)) expanded the scope of the deemed trust to include “property held by any secured creditor . . . that but for a security interest . . . would be property of the person”. Section 227(4.1) was also amended to remove reference to the triggering events of liquidation, bankruptcy, etc., instead deeming property of the tax debtor and of secured creditors to be held in trust “at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act”. Finally, s. 227(4.1) now explicitly deems the trust to operate “from the time the amount was deducted or withheld”.
It is apparent from these changes that the intent of Parliament when drafting ss. 227(4) and 227(4.1) was to grant priority to the deemed trust in respect of property that is also subject to a security interest regardless of when the security interest arose in relation to the time the source deductions were made or when the deemed trust takes effect. This is clear from the use of the words “notwithstanding any security interest” in both ss. 227(4) and 227(4.1). In other words, Parliament has reacted to the interpretation of the deemed trust provisions in Sparrow Electric, and has amended the provisions to grant priority to the deemed trust in situations where the Minister and secured creditors of a tax debtor both claim an interest in the tax debtor’s property.
[Emphasis added]
[9] In this case, it is true that the respondent did not officially realize its security interest against the debtor. However, there is nothing in the language of subsection 227(4.1) of the ITA that would subordinate the Crown’s beneficial right to a similar official execution of a security interest against a tax debtor. The effect of the sale by a tax debtor of a property to which the deemed trust attaches is clearly explained by the Supreme Court in First Vancouver, at pages 723 and 738:
Section 153(1) of the ITA requires employers to deduct and withhold amounts from their employees’ wages (“source deductions”) and remit these amounts to the Receiver General by a specified due date. By virtue of s. 227(4), when source deductions are made, they are deemed to be held separate and apart from the property of the employer in trust for Her Majesty. If the source deductions are not remitted to the Receiver General by the due date, the deemed trust in s. 227(4.1) of the ITA becomes operative and attaches to property of the employer to the extent of the amount of the unremitted source deductions. As well, the trust is deemed to have existed from the moment the source deductions were made.
. . .
... In this way, when an asset is sold by the tax debtor, the deemed trust ceases to operate over that asset; however, the property received by the tax debtor in exchange becomes subject to the deemed trust. As such, the trust is neither depleted nor enhanced; it simply floats over the property belonging to the tax debtor at any given time, for as long as the default in remittances continues.
[Emphasis added]
[10] In light of this interpretation, it is clear in this case that the monetary amount realized on the sale of the skidder by the tax debtor was the “proceeds” of a property subject to the deemed trust and that consequently, since this trust had ceased to attach to the skidder, the monetary consideration received by the tax debtor was now itself held in trust.
[11] It was precisely these “proceeds” in which the applicant had a beneficiary interest, that immediately, the very next day, were remitted in full by the tax debtor to the respondent by way of a deposit into its bank account for the purpose of reducing its debt to the respondent, thereby depleting the deemed trust by a corresponding amount. In these circumstances, because the respondent has received the monetary proceeds from the sale of the skidder, a property of the deemed trust, this cannot prevent the applicant from exercising against it its beneficial interest under subsection 227(1.4) of the ITA. This personal liability to the respondent is confirmed, it seems to me, by the following extract from the National Bank judgment, at paragraph 40:
It seems obvious to me that a secured creditor who does not comply with his statutory obligation to “pay” the Receiver General the proceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable for the unpaid amount. The amount is “payable” out of the proceeds flowing from the property and, as we have seen, section 222 of the ITA provides that “All . . . amounts payable under this Act are debts due to Her Majesty and recoverable as such . . . ”.
[12] In National Bank, the Federal Court of Appeal also acknowledged, by way of exception, that the effect of the sale by the tax debtor to a third party, in the normal course of business, of property that is part of the deemed trust, effectively removes it from the trust. In the case at bar, it is clear that this is not a sale made by the tax debtor in the normal course of business.
[13] Finally, concerning the date of computation of the pre-judgment interest, it must be taken into account that the capital amount awarded to the applicant is an amount payable under the ITA and therefore a debt due to Her Majesty and recoverable as such pursuant to section 22 of the ITA. I am therefore satisfied, as was the prothonotary, on the basis of Markevich v. Canada, [2003] 1 S.C.R. 94, National Bank and paragraph 36(2)(a) of the FCA, that October 19, 2000 may be deemed to be the starting date in this case.
[14] For these reasons, the respondent’s motion is dismissed, with costs.
Judge
OTTAWA, ONTARIO
July 8, 2005
Certified true translation
François Brunet, LLB, BCL
FEDERAL COURT
SOLICITORS OF RECORD
DOCKET: T-949-02
STYLE: ATTORNEY GENERAL OF CANADA v. LA CAISSE POPULAIRE DESJARDINS DE LYSTER / INVERNESS / VAL-ALAIN
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: June 6, 2005
REASONS FOR ORDER: Pinard J.
DATE OF REASONS: July 8, 2005
APPEARANCES:
Patrick Vézina
Nadine Dupuis FOR THE APPLICANT
Reynald Auger FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C.
Deputy Attorney General
of Canada FOR THE APPLICANT
Langlois Kronström Desjardins
Québec, Quebec FOR THE RESPONDENT