COURT OF APPEAL FOR BRITISH COLUMBIA

Transcription

1 Citation: Royal Bank of Canada v. Tuxedo Date: Transport Ltd BCCA 430 Docket: CA Registry: Vancouver COURT OF APPEAL FOR BRITISH COLUMBIA BETWEEN: THE ROYAL BANK OF CANADA PETITIONER AND: AND: AND: TUXEDO TRANSPORT LTD. HER MAJESTY THE QUEEN REPRESENTED BY THE MINISTER OF NATIONAL REVENUE, CUSTOMS, EXCISE AND TAXATION CHRISTINA WALES CHARLES RESPONDENT (RESPONDENT) RESPONDENT (APPELLANT) RESPONDENT (RESPONDENT) Before: The Honourable Mr. Justice Cumming The Honourable Mr. Justice Donald The Honourable Madam Justice Proudfoot Heather Hill Judith Doulis Counsel for the Appellant Counsel for the Respondent Christina Wales Charles

2 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 2 Place and Date of Hearing: Place and Date of Judgment: Vancouver, British Columbia 13 June 2000 Vancouver, British Columbia 10 July 2000 Written Reasons by: The Honourable Mr. Justice Donald Concurred in by: The Honourable Mr. Justice Cumming The Honourable Madam Justice Proudfoot

3 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 3 Reasons for Judgment of the Honourable Mr. Justice Donald: [1] This appeal concerns the interpretation of s-ss. 227(4), (4.1) and (4.2) of the Income Tax Act ( I.T.A. ) which deem unremitted payroll deductions to be a trust in favour of Her Majesty. [2] The issue arose on a contest between the Crown and Christina Wales Charles over funds obtained by Tuxedo Transport Ltd. after it was placed in interim receivership. [3] The Crown claims that the money was impressed with a deemed trust because the company failed to remit payroll deductions on account of income tax. The I.T.A. gives the trust priority over security interests. [4] Ms. Charles claims the money as the assignee of a General Security Agreement. Her security ranks ahead of that held by the Royal Bank and since her claim exceeds the money available, approximately $40,000, the Bank took no part in the proceedings below or in this Court. [5] On 24 March 1999 a Supreme Court judge in chambers decided that for various reasons Ms. Charles was entitled to the money. This decision is reported at (1999), 64 B.C.L.R. (3d) 158 (S.C.) and can be found at [1999] B.C.J. No. 670 (Q.L.) (B.C.S.C.).

4 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 4 [6] I have concluded that the appeal taken by the Crown can be resolved in its favour solely on the issue of the deemed trust, making it unnecessary to deal with the other bases for the decision under appeal. In brief, the chambers judge found that the relevant legislation did not express with sufficient clarity that a trust deemed to cover unpaid deductions includes after acquired assets. The funds in question were obtained after the deductions were made and the trust came into existence. With respect, I have reached a contrary opinion. In my view, the language in the I.T.A. clearly states that the trust includes all assets whenever acquired. [7] The relevant enactments are set out as follows: Trust for moneys deducted 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. Extension of trust (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

5 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 5 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. Meaning of security interest (4.2) For the purposes of subsections (4) and (4.1), a security interest does not include a prescribed security interest. [8] The chronology of events were conveniently summarized by counsel for the Crown in the following manner: - On 14 August 1996, a GSA was registered against the assets of Tuxedo Transport Ltd. ( Tuxedo ). The GSA was first granted to Neuko Holdings Ltd., but it was later assigned to the Respondent, Ms. Charles.

6 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 6 - In August through November, 1996, Tuxedo failed to make remittances to the Crown for source deductions which gives rise a deemed trust in favour of the Crown under the I.T.A.. - On 2 October 1996, the Royal Bank of Canada ( Royal Bank ) registered a GSA against the property of Tuxedo. - On 14 March 1997, the Royal Bank had D. Manning & Associates Inc. ( Manning ) appointed as interim receiver. - Manning, as interim receiver, realized $57,69l.90, comprising $10, in book debts and bills receivable received and $47, in cash. After payment of the interim receiver s fees and expenses, $41, remains. - On 27 March 1997, the interim receiver order lapsed with no resulting bankruptcy or receivership. The Royal Bank has had no other involvement in this dispute. - On 8 April 1997, Revenue Canada assessed Tuxedo for $132, for unremitted source deductions for the period August through November, 1996 served on Manning a Requirement to Pay issued under subsection 224(1.2) of the I.T.A. - On 15 April 1997, Ms. Charles filed a notice of motion seeking to be added as parties to these proceedings, and seeking payment of the funds realized by the Interim Receiver. - On 24 April 1997, Manning was ordered to pay to Tuxedo s solicitors the net proceeds of $41, On 13 January 1999, the Crown filed a notice of motion seeking to be added as parties to these proceedings, and seeking payment of the funds realized by the Interim Receiver.

7 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 7 - On 18 January 1999, the applications of the Crown and Ms. Charles were heard by the learned chambers judge. - On 24 March 1999, the learned chambers judge ordered that Ms. Charles be awarded priority. [9] The chambers judge concluded that only property existing at the time the trust was created (August November 1996) is subject to the trust and that property of the taxpayer that came into existence afterwards is not subject to the trust. His course of reasoning went along these lines: 1. In contrast to the language of the General Security Agreements held by Ms. Charles and the Royal Bank, property as defined by s.248 of the ITA does not refer to future debts and monies owing. The failure to expressly indicate that after acquired property would be included in the trust created by ss. 227(4) and 227(4.1) evidences a clear intention that it would not be included. Alternatively, the drafting of the section is unclear; in the absence of an expression of clear intention, an intention to include such property cannot be assumed. 2. The phrase a chose in action in the definition of property does not assist the Crown. No chose in action arises until there is a right available and there can be no present right available to property not as yet created. It was open for Parliament, if so intended, to

8 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 8 include after acquired choses in action in the definition of property. 3. The clear intention of the new s. 227(4) is like its predecessor to seek out assets which will be subject to the trust in favour of Her Majesty. The material difference is that under the new section the assets will be subject to the trust regardless of previous charges. This does not affect the proposition that the property must be in existence at the time of the attachment of the beneficial interest: Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R Under ss. 227(4) and 227(4.1), property of the debtor or property held by a secured creditor is to be held in trust from the time the amount was deducted or withheld. It is impossible for the debtor or creditor to hold that which does not exist from the time the amount was deducted or withheld. Thus, it is only assets in existence that the trust can seek out. 5. Re University of Calgary and Receiver General of Canada (1977), 75 D.L.R. (3d) 638 (Alta.S.C.) does not support the proposition that future income is property. It is distinguishable in that it dealt not with future income, but rather, with income earned but not yet payable. [10] In my judgment, the answer to the question regarding after acquired assets can be found in the words of s-s. 227(4.1):

9 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 9... where at any time an amount... is not paid... property of the person... is deemed from the time the amount was deducted or withheld... (a) to be held... in trust for Her Majesty... and is property beneficially owned by Her Majesty... [11] Subsection 227(4) makes the trust operative at the time of the deductions. Subsection 227(4.1) acts to ensure that if deductions are still unpaid when assets come into the hands of the taxpayer, those assets will be deemed to be part of the trust. Beginning with the date the deductions are made the trust continues forward in time and attaches to any property of the debtor as it comes into existence. [12] In the present case when the interim receiver realized the company s book debts and accounts receivable the amount deemed to be held in trust had not been paid. This is the state of affairs contemplated by the words where at any time an amount... is not paid, and accordingly the funds became part of the trust. [13] I recognize that clear language is required to displace third party rights. As Iacobucci J. said for the majority in Sparrow, supra, at 483: This is not to say, however, that Parliament could not legislate otherwise. Parliament has shown that

10 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 10 it knows how to assert priority over rival security interests. See Alberta (Treasury Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1 S.C.R. 963, at p All that is needed to overtake a fixed and specific charge is clear language to that effect. [14] The Court in Sparrow construed the 1985 version of the deemed trust provisions not the 1994 version as the chambers judge erroneously implied. In 1994 s. 227(4) was overhauled and strengthened as a result: S.C. 1994, c. 21, s. 104(1). Further amendments were made in 1998, retroactive to 1994, by re-writing s. 227(4) and adding (4.1): S.C. 1998, c. 19, s. 226(1). The latter amendments put into effect two important changes: (1) amounts were deemed to be held in trust notwithstanding any security interest, with the Receiver General to be paid in priority to all secured creditors; and (2) the words whether or not the person is in receivership, bankruptcy or liquidation or has made an assignment were removed leaving the deemed trust operative at any time on the non-remittance of source deductions. This made it unnecessary to consider what assets were encumbered on the happening of a triggering event, such as receivership, etc. [15] I am satisfied that the language of the I.T.A. meets the required degree of clarity to give priority of the fund to the Crown. With respect, I think that the chambers judge s

11 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 11 interpretation effectively adds words of limitation to property confirming that term to that which existed when the trust became operative. Such an approach would lead to unacceptable results. Take the example of a company that makes a payroll deduction one day and receives a large payment the next. The company could carry on business using the unremitted deductions for its operating expenses and the deemed trust could not attach to the monies received shortly after the payday. That, in my opinion, is not in accord with the intent of the provisions nor does it follow from the plain meaning of the language. [16] There was extensive discussion in the reasons for judgment below on the status and role of the interim receiver on such questions as whether he held the money for the taxpayer or for someone else, whether he was a secured creditor, and whether he was liable to make a payment. Once it is determined that the trust preceded the interim receivership, as it plainly did, then these questions fall away. I say that because the receivership could not affect the trust; it therefore does not matter that the money was in his hands rather than the taxpayer or a secured creditor.

12 Royal Bank of Canada v. Tuxedo Transport Ltd. Page 12 [17] For these reasons I would allow the appeal and order that the fund previously held by the interim receiver be paid to Revenue Canada. I AGREE: "The Honourable Mr. Justice Donald" "The Honourable Mr. Justice Cumming" I AGREE: "The Honourable Madam Justice Proudfoot"