Date: 20030326
Docket: T-1335-01
OTTAWA, (Ontario), this 26th day of March, 2004.
Present: THE HONOURABLE JOHANNE GAUTHIER
BETWEEN:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
AS REPRESENTED BY THE
MINISTER OF NATIONAL REVENUE
Plaintiff
and
HSBC BANK OF CANADA
Defendant
REASONS FOR JUDGMENT AND JUDGMENT
[1] The plaintiff (hereinafter "the Minister) instituted this action to recover outstanding source deductions owed by Cambridge Colleges Inc. from HSBC Bank of Canada ("HSBC") on the basis that HSBC appropriated assets which were held in trust by Cambridge in favour of the Minister. More particularly, HSBC was Cambridge's banker and it redeemed on July 19, 1999, a guaranteed investment certificate ("G.I.C.") issued by another financial institution to Cambridge on May 26, 1999 for an amount of $300,000.00 pursuant to a security agreement covering this G.I.C.
[2] All the facts relevant to this action have been included in a statement of agreed facts filed by the parties instead of viva voce evidence. Rather than trying to summarize them further, I have included a copy of the said statement (without the annexes) as Appendix I to my reasons for judgment.
THE ISSUES
[3] The Minister relies on subsection 227(4.1) of the Income Tax Act, R.S.C. 1985, ch. 1 (5th Supplement) as amended (the "Act"), which creates a deemed trust in its favour. The plaintiff submits that this trust came into existence retroactively to the time the source deductions were made by Cambridge that is back in January 1999 and that it attaches assets equal in value to the amounts not remitted by Cambridge which as of June 1999 totalled $99,531.28 (see paragraphs 19 to 21 in Appendix 1).
[4] The Minister claims that on July 19, 19999, when HSBC caused the G.I.C. to be redeemed, and used the proceeds to fulfill its obligations under letters of credit issued by it in favour of another creditor of Cambridge, it did so as a "secured creditor" within the meaning of subsection 224(1.3) of theAct (paragraphs 6, 7, 13 and 16 of Appendix 1).
[5] Pursuant to subsection 227(4.1) of the Act, HSBC was thus bound to remit to the Minister the proceeds of the G.I.C. up to the amount owed by Cambridge. It failed to do so and must now be condemned to pay $80,915.32 which represents the current outstanding debt owed to the Minister (paragraph 31 of Appendix 1).
[6] HSBC relies on the recent decision of the Supreme Court of Canada in First Vancouver Finance v. Canada (Minister of National Revenue), [2002] 2 S.C.R. 720, to argue that the security provided for in favour of the Minister at subsections 227(4) and (4.1) of the Act is akin to a floating charge over all of the tax debtor's assets. Until it crystallized, Cambridge was free to dispose of its assets. According to the defendant, the floating charge only crystallized on September 2, 1999, when the Minister sent its requirement to pay (paragraph 23 of Appendix 1).
[7] HSBC had no notice that Cambridge had not remitted all its source deductions when it redeemed the G.I.C. and used the proceeds to pay other obligations of Cambridge. When the deemed trust provided for at section 227 of the Act crystallized, the G.I.C. or the proceeds thereof were no longer subject to the trust and HSBC was no longer a secured creditor in respect of such assets. Thus, HSBC owes nothing to the plaintiff.
ANALYSIS
[8] Subsections 227(4) and (4.1) read as follows:
| 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.
227(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 the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
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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.
227(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.
[mes soulignés]
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[9] It is not disputed that on July 19, 1999:
i) the G.I.C. and the $300,000 it represented were the property of Cambridge ;
ii) the G.I.C. was covered by the deemed trust in favour of the Minister as well as a security interest in favour of the defendant;
iii) HSBC was a secured creditor holding a security interest in the G.I.C. and in its proceeds.
[10] In First Vancouver Finance, supra, the Supreme Court of Canada had to decide whether the deemed trust in favour of the Minister prevented a tax debtor from selling for value some of its assets, more particularly its receivables, to a financial institution under a factoring agreement.
[11] In that case, the financial institution had paid a fair value for the receivables. It purchased those assets and was never a secured creditor within the meaning of the Act. It also knew that the tax debtor owed source deductions to the Minister and had agreed to pay a portion of the value of the receivables directly to the Minister.
[12] The Court found that the sale of assets to a third party purchaser for value in the ordinary course of business was not precluded by the existence of the deemed trust. It reached that conclusion because of the absence of a specific reference to third party purchasers in subsections 227(4) and (4.1) of the Act. It held that in such a case, there was no basis to allow the Minister's interest in the tax debtor's property to continue, once, such property had been sold to such third parties. It found that this interpretation was in harmony with the purpose of the statute given that the deemed trust would attach automatically to the proceeds or assets received by the debtor in exchange for its assets. This conclusion was also warranted by the plain language of subsection 227(4.1) which specifically refers to proceeds. It was in line with the intention of the legislator which directed its effort to recovery in priority of secured creditors. Even the Minister had not argued that it could be assumed that the legislator wanted to assert priority over ordinary consumers because this would have a general chilling effect on commercial transactions.
[13] HSBC says that the same reasoning is applicable here and that indeed, it would have a chilling effect on commercial transactions if bankers could not exercise their security in the ordinary course of business (particularly those given to secure payments under letters of credit), when they have not receive any notice of their client's failure to pay the Minister.
[14] This position does not take into consideration that the very purpose of subsections 227(4) and (4.1) is to grant the Minister priority over secured creditors such as HSBC. In Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (QL), the Supreme Court of Canada had indicated that strong language would be necessary to give the Minister such priority over secured creditors. This prompted the latest series of amendments to the Act and the current version of subsections 227(4) and 227(4.1) is the result thereof. These subsections no longer refer to specific events triggering the deemed trust. Instead, the Act deems property of the taxpayer and of secured creditor to be held in trust at any time an amount is not paid in accordance with the Act.
[15] In First Vancouver Finance, supra, the Supreme Court of Canada confirmed that the new wording not only triggered a retroactive trust at the time the deductions were made but also that it extended the trust to all property acquired after it came into existence. In doing so, the Supreme Court of Canada recognized that the broad power given to the Minister was necessary because in contrast to a tax debtor's bank which is familiar with its debtor's business and finances, the Minister does not have much knowledge and he is in fact, an involuntary creditor. The Minister must thus rely entirely on its ability to collect the source deductions which are, as mentioned in First Vancouver Finance, supra, at the very heart of the income tax collection in Canada. The legislator specifically intended to avoid the need for the Minister to trace tax debtor's assets and to prove what property was covered by the trust.
[16] On July 19, 1999 when it cause Cambridge's G.I.C. to be redeemed, HSBC was relying on its security agreement and was acting as a "secured creditor" of Cambridge.
[17] HSBC could have made inquiries on or before July 19, 1999, to determine if any money was owed for source deductions. There is no evidence that they made any attempt in this respect or that they didn't have the capacity to do so. They could have required personal guarantees to balance the risk that such debt would take priority over its security pursuant to the Act.
[18] Until the Minister carries out an audit which in this case was done at the end of June 1999, the plaintiff is not in a position to notify any secured creditor that the tax debtor failed to remit all its source deductions.
[19] The Act does not require the sending of a notice by the Minister but HSBC states that it has always been a requirement under common law to prevent bankers from exercising their security on assets held in trust (see Canada v. Phoenix Assurance Co., [1976] 2 FC 649 (QL)).
[20] The Supreme Court of Canada in First Vancouver Finance above, at paragraph 34, states that the Minister is not bound by any restraint imposed by ordinary principles of trust law and that a statutory trust, such as the one created at subsections 227(4) and (4.1), is not governed by common law requirements.
[21] In light of the above, it appears to me that the circumstances of this case are very different from those in First Vancouver Finance, supra. HSBC is not a third party purchaser for value and its argument runs contrary to the language of the Act as well as the purpose and intention of the legislator.
[22] In the circumstances, the Court concludes that the proceeds of the G.I.C. should have been paid to the Minister in priority. This was not done and the defendant must therefore repay the amount of outstanding source deductions owed by Cambridge that is, $80,915.32.
[23] The Court is satisfied that the plaintiff is entitled to prejudgment interests pursuant to subsection 36(1) of the Federal Courts Act, R.S. 1985, c. F-7. Having considered the relevant provisions of the Judgment Interest Act, R.S.A. 2000, c. J-1, of the province of Alberta and all the circumstances of this case, I find that it would be just to award prejudgment interest from September 2, 1999 at the various rates prescribed by regulation pursuant to the said Judgment Interest Act.
JUDGMENT
This Court's judgment is that:
1. The action is allowed.
2. The defendant shall pay to the plaintiff $80,915.39, plus prejudgment interest from September 2, 1999 at the various rates prescribed by regulation under the Judgment Interest Act of the province of Alberta.
3. Plaintiff shall have its costs assessed as per column III of the Tariff B of the Federal Court Rules, 1998.
"Johanne Gauthier"
Judge
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1335-01
STYLE OF CAUSE: Her Majesty the Queen in Right of Canada as
represented by the Minister of National Revenue v.
HSBC Bank of Canada
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: February 09, 2004
REASONS FOR JUDGMENT AND JUDGMENT : The Honourable Johanne Gauthier
APPEARANCES:
Mr. George Christidis For Plaintiff
Mr. Gordon R. McKenzie For Defendant
SOLICITORS OF RECORD:
Morris Rosenberg For Plaintiff
Deputy Attorney General of Canada
Bishop & McKenzie LLP For Defendant
Edmonton, Alberta