Royal Bank v. Tuxedo Transport Ltd., [1999] 3 CTC 393

Burnyeat J.:

Both applicants apply for the same order that, pursuant to s. 47(2) of the Bankruptcy and Insolvency Act and the inherent jurisdiction of the court, certain funds held in trust be paid out of trust. Ms. Charles seeks the funds as a secured creditor of Tuxedo Transport Ltd. The Minister of National Revenue, Customs, Excise and Taxation seeks the funds as a result of the statutory trust created by s. 227 (4.1) of the Income Tax Act. It appears that this is the first time that the court has been required to review the effect of s. 227 (4.1) of the Income Tax Act which came into effect on June 18, 1998.

The Applicant, Christina Wales Charles

The applicant, Ms. Charles, loaned Tuxedo $250,000. The repayment of the loan was secured by a General Security Agreement dated August 14, 1996. The General Security Agreement created a “Security Interest” as follows:

In all debts, accounts, claims, moneys, and chooses in action which now are, or which may at any time hereafter be, due or owing to or owned by the Debtor [Tuxedo]...

This security was registered on August 15, 1996 in the Personal Property Registry. On April 8, 1997, Ms. Charles demanded the payment from Tuxedo of the sum of $252,242.83 and also provided a Notice of Intention to Enforce Security pursuant to s.244 of the Bankruptcy and Insolvency Act to Tuxedo.

The Role of the Royal Bank of Canada

Security was subsequently granted by Tuxedo to the Royal Bank of Canada by way of a General Security Agreement dated November 18, 1996. The General Security Agreement provided the following “Security Interest”:

...all of the Debtor’s [Tuxedo’s] right, title and interest, both present and future, in and to all of its presently owned or held and after acquired or held personal property, of whatsoever nature or kind and wheresoever situate, and in all and to all Proceeds and renewals thereof and therefrom, accretions thereto and substitutions therefore, including without limitation, all of the following now owned or hereafter owned or acquired by or on behalf of the Debtor...

Included within what was then particularized were:

...all accounts, debts, debts, dues, claims, chooses in action and demands of every nature and kind howsoever arising or secured including letters of credit and advices of credit, which are now due, owing or accruing or growing due to or owned by or which may hereafter become due, owing or accruing or growing due to or owned by the Debtor [Tuxedo]...

That security was registered in the Personal Property Registry on October 2, 1996. On March 12, 1997, the Bank made demand for payment of its outstanding loans and also served Notice of Intention to Enforce Security pursuant to s. 244 of the Bankruptcy and Insolvency Act. The balance due and owing to the Bank at that time was approximately $420,000.

Appointment of an Interim Receiver

At the request of the Bank and by order made March 14, 1997 in these proceedings, D. Manning & Associates Inc. was appointed the interim receiver of the property, business and undertaking of Tuxedo with the appointment to continue until the earlier of 5:00 p.m. on March 24, 1997, further order of the court, or the appointment of Manning as the receiver and/or receiver-manager pursuant to the security of the Bank. The appointment of Manning as interim receiver was made pursuant to s. 47(1) and s. 47 (2) (a) of the Bankruptcy and Insolvency Act. Because there was neither a further appointment nor a further order, the appointment of Manning as interim receiver continued only until March 24, 1997 at 5:00 p.m.

The order appointing the interim receiver provided Manning with these powers and with this priority for fees:

D. Manning & Associates Inc. shall take possession of all of the property, business and undertaking of Tuxedo Transport Ltd. charged by the Petitioner’s [Royal Bank of Canada] security and shall exercise control over such property and over the business of Tuxedo Transport Ltd., and shall, in particular, take steps to collect in all accounts receivable and other debts owing to Tuxedo Transport Ltd. and take control of all bank accounts. D. Manning & Associates Inc. shall have the authority to compromise accounts receivable and debts in order to facilitate the collection of accounts receivable. The fees and disbursements of the interim receiver shall be secured by a charge on the assets of Tuxedo Transport Ltd. which charge shall rank ahead of all other secured creditors.

During the period of appointment, Manning received funds in excess of those which were claimed by the Bank pursuant to its security. The excess funds after payment of the fees and disbursements of the interim receiver amounted to $41,367.88. By a consent order dated April 24, 1997, that sum was placed into an interest bearing trust account with the law firm representing Tuxedo and it is in that account that the funds plus accumulated interest remain today. The fees and disbursements of Manning were paid and, under the consent order, neither Tuxedo nor the creditors of Tuxedo retained any claim against Manning for the activities of Manning during the short appointment as interim receiver.

The Applicant, Her Majesty The Queen

Revenue Canada assessed Tuxedo in March, 1997 for unremitted source deductions for the period beginning August, 1996 and ending November, 1996. The assessment was made after a payroll audit. A Notice of Assessment dated April 8, 1997 in the amount of $132,933.83 was issued. On April 8, 1997, which was the same day that Ms. Charles made demand and provided Tuxedo with a Notice of Intention to Enforce Security pursuant to s.244 of the Bankruptcy and Insolvency Act, Revenue Canada issued an Enhanced Requirement to Pay Notice to Manning pursuant to s. 224 (1.2) and s. 227 of the Income Tax Act. Revenue Canada did not serve similar Requirements to Pay on the Bank or on Ms. Charles. However, other Requirements to Pay were subsequently issued and, as a result of those Require- ments, approximately $9,000 has been paid to the Receiver General on account of the Notice of Assessment dated April 8, 1997.

Statutory Provisions

Section 153(1) of the Income Tax Act requires an employer to withhold and remit tax. The amount deducted is deemed to have been received at the date of deduction by the employee and the amount deducted is to be held in trust for Revenue Canada. The legislation which was in effect until June 18, 1998 was:

227(4) Every person who deducts or withholds an amount under this Act shall

be deemed to hold the amount so deducted or withheld in trust, separate and apart from the person’s own moneys, for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act, and Her Majesty has a lien and charge on the property and assets of the person whether or not the person has kept the amount separate and apart or is in receivership, bankruptcy or liquidation or has made an assignment.

The following substitution for s.227 (4) was given Royal Assent on June 18, 1998:

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.

At the same time, the following provision was enacted:

227(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and

Insolvency Act, any other enactment of Canada, any enactment of a province or any 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 or in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

Definitions of “person” and “property” are set out under s.248 (1 ) of the Act:

“person”, or any word or expression descriptive of a person, includes any corporation, ... and the heirs, executors, administrators or other legal representatives of such a person, according to the law of that part of Canada which the context extends;

“property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money

(c) a timber resource property, and

(d) work in progress of a business that is a profession.

The definitions of “secured creditor” and “security interest” are set out under s. 224 (1.3) of the Act:

“secured creditor” means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator, or any other person performing a similar function;

“security interest” means any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for;

The provisions dealing with garnishment proceedings are set out in s. 224(1) and s. 224(1.2) of the Act:

224. (1) Where the Minister has knowledge or suspects that a person is, or will be within one year, liable to make a payment to another person who is liable to make a payment under this Act (in this subsection and subsections (1.1) and (3) referred to as the “tax debtor”), the Minister may in writing require the person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor’s liability under this Act.

224. (1.2) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any enactment of a province or any law, but subject to subsections 69(1) and 69.1(1) of the Bankruptcy and Insolvency Act and section 11.4 of the Companies’ Creditors Arrangement Act, where the Minister has knowledge or suspects that a particular person is, or will become within one year, liable to make a payment

(a) to another person (in this subsection referred to as the “tax debtor”) who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or

(b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor,

the Minister may in writing require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor’s liability under subsection 227(10.1) or the similar provision, and on receipt of that requirement by the particular person, the amount of those moneys that is so required to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty to the extent of that liability as assessed by the Minister and shall be paid to the Receiver General in priority to any such security interest.

The new s.227(4) and s. 227(4.1) of the Act were deemed to have come into force on June 15, 1994. In anticipation of Royal Assent, the Department of Finance issued a press release on April 7, 1997 which provided in part:

Finance Minister Paul Martin today announced proposed amendments to the Income Tax Act, the Canada Pension Plan, the Employment Insurance Act and the Excise Tax Act to clarify that the Crown’s claims for unremitted source deductions and unpaid GST take priority over all other claims.

The proposed amendments respond to the recent decision of the Supreme Court of Canada in Her Majesty the Queen v. The Royal Bank of Canada, which held that the current rules in the Income Tax Act creating a deemed trust do not give priority to the Crown over certain assignments of inventory and that clearer language is required to assign absolute priority to the Crown. The amendments will apply from June 1994.

Background Leading up to the Decision in Royal Bank v. Sparrow Electric Corp. (1997), 143 D.L.R. (4th) 385 (S.C.C.)

Earlier decisions have consistently held that the court should not interpret legislation so as to deprive third parties of pre-existing property rights unless Parliament makes its intention clear and unambiguous in the wording of the statute. The decisions dealing with s. 227(4) of the Act culminated in the Supreme Court of Canada decision in Sparrow Electric Corp. which was released on February 27, 1997 and which is referred to in the Department of Finance press release noted above.

Speaking on behalf of the majority, Iacobucci J. concluded that the lien and charge created by the former s. 227 (4) did not give priority to the Crown over pre-existing creditor charges:

the inventory was not an unencumbered asset at the moment the taxes came due. It was subject to the respondent’s security interest and therefore was legally the respondent’s and not attachable by the deemed trust. As Gonthier J. himself Says:

[subsection 227(4)] does not permit Her Majesty to attach Her beneficial interest to property which, at the time of liquidation, assignment, receivership or bankruptcy, in law belongs to a party other than the tax debtor.

The deeming is thus not a mechanism for undoing an existing security interest, but rather a device for going back in time and seeking out an asset that was not, at the moment the income taxes came due, subject to any competing security interest. In short, the deemed trust provision cannot be effective unless it is first determined that there is some unencumbered asset out of which the trust may be deemed. The deeming follows the answering of the chattel security question: it does not determine the answer. (at p. 428)

However, lacobucci J. then refers to the powers available to Parliament and suggests that it would be available to Parliament to enact legislation such as s. 224(1.2) of the Income Tax Act:

This is not to say, however, that Parliament could not legislate otherwise. Parliament has shown that it knows how to assert priority over rival security interests. See Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at p. 975. All that is needed to overtake a fixed and specific charge is clear language to that effect. (at p. 431)

Finally, I wish to emphasize that it is open to Parliament to step in and assign absolute priority to the deemed trust. A clear illustration of how this might be done is afforded by s. 224(1.2) of the ITA, which vests certain moneys in the Crown “notwithstanding any security interest in those moneys” and provides that they “shall be paid to the Receiver General in priority to any such security interest”. All that is needed to effect the desired result is clear language of that kind. (at p. 432)

The first question which arises in the case at bar is whether Parliament has indicated an intention in clear and unambiguous language that book debts not as yet in existence will be subject to the deemed trust created by ss. 227 (4) and 227 (4.1).

Are Future Book Debts Subject to Sections 227 (4) and 227 (4.1)

This question is of critical importance in determining the issues between Ms. Charles and Her Majesty. The unremitted deductions accrued between August, 1996 and November, 1996. However, the receivables collected by Manning were aged as follows as at February 15, 1997:

From that, it is clear that less than 13% of the receivables could have been in existence during the period August, 1996 through November, 1996. There is also nothing before the court which would indicate whether the receivables not collected by Manning relate to the August, 1996 through November, 1996 period or whether the receivables which were collected by Manning and remitted to the Bank related to that period or to receivables created after November, 1996.

On a clear reading of the words used, it is possible to conclude that Parliament only intended that property existing at the time the trust in favour of Her Majesty was created would be subject to the trust and that property of the taxpayer which came into existence afterwards would not be subject to the trust.

The word “property” as used in ss. 227 (4) and 227(4.1) is defined under s. 248 (1) of the Income Tax Act. That definition does not include similar references to future debts and monies owing as can be found in documents such as the General Security Agreements of Ms. Charles and the Royal Bank of Canada. The failure to include words in the definition of “property” to make it clear that after acquired property would be included in the trust created by ss. 227(4) and 227(4.1) evidences a clear intention of Parliament that such after acquired property will not be subject to such a trust. Alternatively, the drafting leaves it unclear as to whether it was intended that such after acquired property would be included so that, in the absence of a clear intention expressed in the drafting, it cannot be assumed that Parliament intended to have such property included within the trust.

The inclusion of the phrase “a chose in action” in the definition of “property” in s.248 (1) of the Act is of no assistance to Her Majesty in Her submissions. While a chose in action can be either a personal right recoverable by action or a right to personal things not in the possession of the owner but subject to a right of action for possession, it is clearly the case that no chose in action arises until there is a right available. There can be no present right of action relating to property not as yet created or book debts which will only be created in the future. If Parliament had wished to expand the definition of “chose in action”, it could have done so by indicating that “after acquired” choses in action were also included in the definition of “property”. The absence of words similar to those used in the General Security Agreement granted in favour of Ms. Charles indicates that Parliament did not intend for after acquired choses in action to be included within the definition of “property” contained under s.248( 1 ) of the Act.

The clear intention of the previous s. 227(4) was that it was “...a device for going back in time and seeking out an asset that was not, at the moment the income taxes came due, subject to any competing security interest.” and to “seek out and attach Her Majesty’s beneficial interest to property of the debtor which at that time is in existence.” (Per Iacobucci J. at pp. 428-9 and per Gonthier J. at p. 402 in Sparrow Electric Corp., supra.) Similarly, the intent of the new s.224 (4) is also to “seek out” assets which will be subject to the trust in favour of Her Majesty. The only change that Parliament has made is that the assets sought out will be subject to the trust whether or not those assets had been previously charged by the taxpayer to a creditor. However, there is no change to the proposition stated by Iacobucci J. that the property must be “in existence” at the time of the attachment of Her Majesty’s beneficial interest.

As well, the words used in drafting ss. 227 (4) and 227 (4.1) support the proposition that it is the only assets in existence which the trust can “seek out.” The wording of ss. 227 (4.1) (a) and 227 (4.1) (b) makes it clear that property of the debtor and property held by any secured creditor is to be held in trust “from the time the amount was deducted or withheld.” It would not be possible for the debtor or a secured creditor to hold that which does not exist “from the time the amount was deducted or withheld”. The clear intent of those provisions is that it is only property in existence which is subject to the trust in favour of Her Majesty. Stated the other way, it is not clear that it was intended that property which was not in existence at the time the amount was deducted or withheld would also be subject to the trust if and when such property was created.

Her Majesty relies on the decision of Kirby, J. in Morrison v. University of Calgary (1977), 75 D.L.R. (3d) 638 (Alta. T.D.) to support the proposition that future income is “property”. A review of that decision does not allow that conclusion to be drawn. Dr. Lamarre was a Professor in the Faculty of Medicine at the University of Calgary. A third party demand pursuant to the former s. 224(1) of the Income Tax Act was served on the University but, before the salary to Dr. Lamarre was payable, Dr. Lamarre executed an assignment in bankruptcy. The issue which arose in that case was whether or not the funds formed part of the estate of the bankrupt or whether the Receiver General was a secured creditor within the definition of s. 2 of the Bankruptcy Act so that the funds paid to it were funds received by a secured creditor. Justice Kirby held that the Receiver General was a secured creditor and that future income was “property”. At p.639, Kirby, J. stated:

An included definition of the word “property” in the Shorter Oxford Dictionary is “the right to possession, use or disposal of anything”. I consider that future income comes within this definition.

The decision of Kirby, J. was subsequently overturned by the Alberta Court of Appeal in Morrison v. University of Calgary (1978), 85 D.L.R. (3d) 392 (Alta. C.A.) on the basis that the Minister was not a secured creditor within the meaning of s.2 of the Bankruptcy Act. Rather, the Minister was like any other garnishing creditor whose rights were affected by s. 15(1) of the Bankruptcy Act which provided that any assignment took precedence over “... all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgments ... executions or other process against the property of the bankrupt....”

However, it is also clear that the decision of Kirby, J. did not deal with “future income”. Rather, Kirby, J. dealt with income earned but not as yet payable. If, having worked through the pay period, Dr. Lamarre had not been paid, it is clear that Dr. Lamarre would have had a cause of action accruing from the first day that he worked. Accordingly, the “property” interest that Dr. Lamarre had at the time was a chose in action, not for future income, but for moneys owing as a result of employment services provided to the University.

In the absence of a change to the definition of “property” under the Income Tax Act so as to bring that definition into accord with the definitions commonly contained under General Security Agreements such as were granted to Ms. Charles and the Bank, it is not possible to conclude that either it was the intention of Parliament to have after acquired property subject to the trust in favour of Her Majesty or that Parliament has expressed a clear intention that after acquired property would be subject to the trust. In the absence of that clarity, I can only conclude that the trust claimed by Her Majesty in the case at bar related only to property already in existence prior to or which was created during the period August, 1996 through November, 1996.

It is also clear that Manning is not a “secured creditor” within the meaning of s. 227(4.1) of the Act so that property held by Manning equal in value to the amount deemed to be held in trust is held in trust for Her Majesty. At the time the trust was created. Manning was not interim receiver. Accordingly, it cannot be said that there was any property “held by any secured creditor” [Manning] at the time the trust was created.

Even if I am incorrect in finding that the trust was only applicable to property in existence prior to November, 1996, it is clear that that which was held by Manning was not “property held by any secured creditor (as defined in subsection 224(1.3)) ...”. While the definition of “secured creditor” contained under s. 224(1.3) of the Act includes a person “who acts for or on behalf of” a secured creditor, an interim receiver is not such a person. An interim receiver is not specifically defined within the definition of “secured creditor” under s. 224(1.3) of the Act. This failure can be contrasted with s. 227(5.1) of the Act which specifically includes an interim receiver as a “specified person” for the purposes of s.227(5) of the Act. The failure to specifically include an interim receiver indicates that Parliament was satisfied that an interim receiver was not included within the definition of those who were acting for or on behalf of a secured creditor.

It is clear that Manning derives his powers from the court subject to the limitations set out under s.47 of the Bankruptcy and Insolvency Act so that Manning is not a “person ... who acts for or on behalf of... [a person who has a security interest]” as that phrase is used in s.224 (1.3). In dealing with the definition of “person” as set out under s.2( 1 )(c) of the Excise Tax Act and in dealing with whether an interim receiver and manager was liable to pay excise tax, Aylesworth J.A. in Royal Trust Co. v. Montex Apparel Industries Ltd. (1972), 17 C.B.R. (N.S.) 45 (Ont. C.A.) concluded on behalf of the court:

... Moreover the receiver derives his powers and authority wholly from the order of this Court appointing him. He is not subject to the control or direction of the appellant or of anyone, for that matter, except the Court which appointed him... If he can be said to be the legal representative of anyone, it would appear to us that that person would be the debtor, Montex, and not the appellant-trustee. (at p.49)

As well, it cannot be said that, under the definition of a “secured creditor” as set out under s.224 (1.3) of the Act, an interim receiver is a person “performing a similar function” to a trustee under a trust deed, a receiver or receiver-manager appointed by a secured creditor or by court order or a sequestrator. The duty of the interim receiver is to preserve the debtor’s assets: Stuart & Sutterby, Re (1929) 11 C.B.R. 1 (Ont. Reg. in Bktcy.). The function of the interim receiver is to act as a watchdog or monitor of the debtor’s estate until the petition is heard: Big Eddy Shops Ltd., Re (1977), 24 C.B.R. (N.S.) 90 (Ont. S.C.); Austroguip Manufacturing, Ltd. Re (1988), 68 C.B.R. (N.S.) 161 (Ont. S.C.). The property of the debtor does not vest in the interim receiver: Price Waterhouse Ltd. v. Marathon Realty Co. (1979), 32 C.B.R. (N.S.) 71 (Man. Q.B.). Those functions and the role of an interim receiver are not consistent with the interim receiver “performing a similar function” to those who were in a position to manage and to liquidate the assets of a taxpayer.

The definition of “trustee” under s.153 (1.4) of the Act which defines “trustee” for the purposes of s. 153(1.3) of the Act is almost identical to the definition of “secured creditor” set out under s.224( 1.3) of the Act. In considering the question of the liability of an interim receiver for the failure of a company to remit employee deductions after an assessment of a taxpayer under s. 153(1) of the Act, Sobier T.C.J. in Plaskett & Associates Ltd. v. Minister of National Revenue, [1991] 1 C.T.C. 2162 (T.C.C.), considered the question of whether an interim receiver was a “trustee” for the purposes of that section of that Act. Sobier, T.C.J. held that the interim receiver was not a “trustee” as defined under s. 153(1.4) of the Income Tax Act. Sobier, T.C.J. concluded:

In all of the above cases, the Courts have clearly stated that the property of the debtor does not vest in an interim receiver; that he is a “watchman”, “caretaker", “policeman" or “sheriff". His function is to preserve the assets and not to interfere with the rights of the debtor. Although it is recognized that it is essential that he control receipts, he should not interfere with the debtor carrying on business in the usual course.

Unlike those enumerated persons or persons performing a similar function, an interim receiver, and in this case the Appellant, was not entitled to carry on any of such functions. He was directed and ordered by the Court to be a “watchman"; to see that the assets of the Corporation and were not dissipated pending the hearing of the petition for a receiving order. He was specifically instructed not to interfere with the carrying on of the Corporation’s business.

Even though it could be argued that the interim receiver performed some of the functions set forth in subsection 153(1.3) such as controlling the property and income of the Corporation, it did not do so in the capacity of a trustee as defined in subsection 153(1.4) and accordingly, the charging provisions of subsection 153(1.3) are not applicable in these circumstances.

The reasoning set out is applicable to the question of whether an interim receiver is a “person ... who acts for or on behalf of” a “secured creditor.”

The powers contained under the March 14, 1997 order appointing Manning and the powers available to an interim receiver as set out under s.47 of the Bankruptcy and Insolvency Act clearly set out a caretaker or a monitoring role which is inconsistent with the management and liquidation role contemplated by the definition of “secured creditor” contained under s.224(1.3) of the Act and incorporated into s.227(4.1 ) of the Act. Accordingly, it is not possible to conclude that Manning was a “secured creditor” as it is clear that he was not a “person performing a similar function” to those persons who were specifically listed in the definition of “secured creditor” set out under s.224(1.3) of the Act.

Even if it could be said that Manning was a “secured creditor” as that term is used under s.227(4.1 ) of the Act, it is clear that Parliament has changed the former s.227(4) dramatically. While the old section creates a “lien and charge on the property and assets of the person”, the new section creates only a trust in favour of Her Majesty on property of the taxpayer or on property that the taxpayer has charged with a security interest to a secured creditor. Accordingly, it can no longer be said that Her Majesty has a lien and charge against property as a result of s.227(4) of the Act. Rather, the intent of the new s.227(4) and 227(4.1) is that amounts deducted or withheld are deemed to be held as property in trust for Her Majesty and an equal amount of other property of the taxpayer and of taxpayer property charged to a secured creditor is deemed to be held in trust for Her Majesty. By deleting the reference to “lien and charge” in s.227(4), it is clear that Parliament was abandoning its claim for a lien and charge against the property of the taxpayer and was substituting a trust claim to property.

The use of the words “in priority to all such security interests” as are contained at the end of s.227(4.1 ) do not maintain the “lien and charge” formerly contained under s.227(4) of the Act. That phrase refers to the fact that proceeds from the sale of property held in trust for Her Majesty cannot be charged by any security interest and shall be paid to the Receiver General “notwithstanding any security interest in such property or in the proceeds thereof.” The imposition of the trust means that certain property is no longer owned by either the taxpayer or a secured creditor and is no longer charged by any security interest granted by the taxpayer to the secured creditor. What is granted to Her Majesty is the beneficial ownership of the property itself and not a “lien and charge” against the property which must compete with other liens and charges for priority.

The onus is on Her Majesty to satisfy the Court as to the property which will be subject to the trust claimed. Her Majesty has not met the onus of showing that the funds presently held relate to book debts generated during the period August, 1996 through November, 1996 or relate to book debts from goods sold or services rendered during the period August, 1996 through November, 1996. Therefore, Her Majesty has failed to meet the onus of proving that, pursuant to s.227(4) and s.227(4.1), the funds presently held relate either to amounts deducted and deemed to have been held separate and apart or other property of Tuxedo or Ms. Charles equal in value to the amounts so deemed to be held in trust. The failure to meet the onus which is on Her Majesty is fatal to the claim advanced by Her Majesty that certain property is held in trust.

As there is no clear intention of Parliament to include after acquired property within the provisions of ss.227(4) and 227(4.1) of the Act, as it is clear, in any event, that Manning was not a “secured creditor”, a person “who acts for or on behalf of” a “secured creditor”, or a person “performing a similar function” and as Her Majesty has not met the onus of showing that the monies presently held are property held in trust for Her Majesty, I am satisfied that the sum of $41,367.88 held is not subject to the trust created in favour of Her Majesty by either s.227(4) or by s.227(4.1 ) of the Act.

Did the Funds Held by Manning become Property of Revenue Canada upon Service on Manning of the Enhanced Requirement to Pay Notice?

Her Majesty then argues in the alternative that the funds held by Manning became the property of Her Majesty upon service on Manning on April 8, 1997 of the notice issued pursuant to s.224( 1 ) of the Income Tax Act.

When dealing with these sections, it is also clear that the provisions must be clear and unambiguous in order that funds in the hands of a third party will be attached by such Notices: Canada Trustco Mortgage Corp. v. Port O’Call Hotel Inc. (1996), 133 D.L.R. (4th) 609 (S.C.C.); Royal Bank v. À., [1984] C.T.C. 573 (Fed. T.D.) (affirmed) [1986] 2 C.T.C. 211 (Fed. C.A.); Lloyds Bank Canada v. International Warranty Co. (1989), 60 D.L.R. (4th) 272 (Alta. C.A.); Concorde International Travel Inc. v. T.]. Travel Services (British Columbia) Inc. (1990), 72 D.L.R. (4th) 405 (B.C. C.A.); and the comments of Iacobucci J. in Sparrow Electric Corp., supra, as quoted above.

As the Notice was served on Manning and not on the Royal Bank of Canada or Ms. Charles, the issue which arises is whether Manning is a “person” who is “liable to make a payment” either to Tuxedo or to “a secured creditor who has a right to receive the payment” that would ordinarily be payable to Tuxedo. It is also necessary to ascertain if Ms. Charles is a “secured creditor who has a right to receive” payment from Manning.

The nature of what is granted to the federal government pursuant to ss.224(l) and 224(1.2) must be kept in mind. Cory J. in Canada Trustco Mortgage Corp. v. Port O’Call Hotel Inc., supra, described the essence of the section as follows: “... s.224(1.2) provides a form of garnishment enabling the federal government to intercept monies owed to tax debtors.” (at p. 612)

At p.618 in the same decision, Cory J. commented that the following statements made by Lyon J.A. in Pembina on the Red Development Corp. v. Triman Industries Ltd. (1991), 85 D.L.R. (4th) 29 (Man. C.A.) apply “even more forcefully” after the 1990 amendments made by Parliament to s.224(1.2):

In my opinion it was intended by Parliament that anyone who, in the ordinary course of business, made credit arrangements with a tax debtor involving assignments of accounts receivable, did so subject to the overriding right of the Crown to satisfy the primary obligations of the tax debtor to collect and remit taxes withheld from its employees. The words of the statute can mean nothing less. The section is cast in the broadest of possible terms precisely because it was meant to interfere with and interrupt payments under such assignments and divert them to meet this statutory obligation. (at p.52 in the Lyon J.A. judgment in Pembina on the Red Development Corp. decision)

While it was the clear intent of Parliament to attach funds and have those funds become the property of Her Majesty under s.224(1.2), it was also the clear intent of Parliament that a creditor debtor relationship must exist as between the “person...liable to make a payment” and either the taxpayer or the secured creditor of the taxpayer. There is no separate definition of “person” as that word is used in s.224(1.2) of the Act. Accordingly, while Manning is clearly a “person” for the purposes of s.248( 1 ) of the Act, there is no expansive definition of “person” such as are found under the definitions of “secured creditor” in s.224(1.3), “specified person” under s.227(5.1) or “trustee” under s. 153(1.4) of the Act. If no expanded definition of the term “person” is available for the “person” referred to in ss.224( 1 ) and 224(1.2) is available, then it is not clear that it was intended by Parliament that the term “person” as used in those sections would include an interim receiver.

In the absence of such an expanded definition, it is necessary to find that Manning was not only a “person” but also a person “liable to make a payment.” The use of the word “liable” in the context of the section indicates that there must be a finding that Manning is bound or obliged by law or by equity to make a payment. “Liable” cannot mean that he is merely “likely” to make payment. When the notice pursuant to s.224( 1 ) arrived, Manning was not a person “liable” to make payment to anyone. As the appointment of Manning came to an end on March 24, 1997 at 5:00 p.m., the obligation of Manning after that date was to turn over any property of Tuxedo to Tuxedo. That does not make Manning “liable to make a payment.” Rather, it makes Manning liable to return property to Tuxedo either because Manning was a trustee or because Manning was a fiduciary. Alternatively, Manning was required to hold the property until a court order was made directing the Interim Receiver as to the disposition of property held. Because no such order was made, Manning was not a person liable to make payment either to Tuxedo or to Ms. Charles within one year of the receipt of the notice.

Manning was not “liable to make a payment” until the court ordered him to do so. In the interim, Manning was an officer of the court who was separate and distinct from Tuxedo, who was acting in accordance with the powers provided to the interim receiver by the court and was exercising those powers in accordance with the directions of the court. In these regards, see British Columbia Central Credit Union v. Metro Co-operative Services (1982), 43 C.B.R. (N.S.) 97 (B.C. C.A.); Johnston v. Courtney (1919), [1920] 2 W.W.R. 459 (B.C. C.A.); and Parsons v. Sovereign Bank of Canada, [1913] A.C. 160 (Ontario P.C.). Until ordered by the court to make payment, the position of Manning was like a party holding funds in interpleader proceedings or as a stakeholder or as a fiduciary.

In Royal Credit Union Ltd. v. Bank of Nova Scotia, [1992] 2 C.T.C. 343 (N.B.Q.B.), Creaghan J. dealt with the question of the respective priorities between the claim of the Bank of Nova Scotia under its June 17, 1991 general assignment of book debts and a requirement to pay issued pursuant to s.224(1.2) of the Act. The funds at issue were held by Collins Barrow Inc. appointed as the agent for the Bank of Nova Scotia on June 18, 1991 to collect the book accounts. By a consent order dated September 19, 1991, the funds had been paid to a law firm in trust to be held in an interest bearing trust account until further order of the court. It was conceded that, if Collins Barrow was obligated to make payment to the bank as a secured creditor of the tax debtor when it received the requirement to pay, the claim of the Minister to those funds had priority over the claim of the bank: Royal Bank v. Saskatchewan Power Corp. (1990), 73 D.L.R. (4th) 257 (Sask. C.A.). Creaghan J. noted that:

Here the Minister made the Requirement to Pay upon a law firm delegated by the Court to hold the funds in trust pending a declaration by the Court as to the disposition of the funds after interpleader relief had been granted.

At p.4 of the judgment, Creaghan J. concluded:

For the reasons stated, 1 am unable to find that the law firm upon whom the Requirement to Pay was made and that held the interpled funds in trust pending directions from the Court as to disposition falls within the definition of a person liable to make a payment pursuant to section 224(1.2) of the Income Tax Act and that therefore the claim of the Bank has priority over the claim of the Minister with respect to the interpled funds.

Like the law firm that held funds in trust subject to further order of the court, so Manning held funds until further order of the court.

In Giguere, Re (1998), 2 C.B.R. (4th) 292 (Que. S.C.), Halperin J. dealt with the effect of a s.224(l .2) notice served on a bank who was the trustee of the debtor’s R.R.S.P. account in a situation where the debtor subsequently made an assignment in bankruptcy. Halperin J. cited with approval the comment of Cory J. as to the nature of the garnishment available to the federal government under s.224( 1.2) as set out in the quote above and then cited the following decisions establishing the proposition that the recipient of a notice under s.224(1) and s.224(1.2) does not have to pay unless a debtor/creditor relationship can be established: Bélair, cie d'assurances c. R. (1994), 37 C.B.R. (3d) 102 (T.C.C.) and Caisse populaire St-Bernard de Beauce c. Que (Sous-ministre du Revenu), [1997] R.D.F.Q. 129 (Que. C.A.). He also cites the decisions in Guttman v. Toronto Dominion Bank (1984), 51 C.B.R. (N.S.) 221 (Man. Q.B.) and McMahon v. Canada Permanent Trust Co. (1979), 32 C.B.R. (N.S.) 258 (B.C. C.A.), for the proposition that a trustee under a R.R.S.P. and the owner of the plan do not stand in a creditor/debtor relationship but rather stand in a fiduciary relationship. Similarly, the position of Manning can be described as a fiduciary relationship with Tuxedo and/or its creditors and not one which is a debtor/creditor relationship.

Although I have found that the property in the hands of Manning was not subject to a trust in favour of Her Majesty, it is clear that s.224(l .2) does not apply to property which is subject to the trust created by either s.227(4) or s.227(4.1) of the Act. There would clearly be no necessity for monies which were already the “property of Her Majesty” to again become “the property of Her Majesty” once the notice contemplated by s.224( I ) was received. As well, if property is already held in trust for Her Majesty pursuant to those sections, then the “person” is not “liable to make a payment” to the taxpayer or to a secured creditor of the taxpayer. The person holding the property is only liable to account to Her Majesty as any trustee would account to a beneficiary pursuant to a trust. The person holding the property is clearly not “liable to make a payment” to the taxpayer or to a secured creditor having security registered against the property of a taxpayer. Accordingly, even if it can be said that Manning held property in trust for Her Majesty, it could not also be said that Manning could be affected by a s.224(l) notice or by s.224(1.2). If the intent of s.224(1.2) was to require either the taxpayer or the secured creditor of the taxpayer to deliver up to Her Majesty any property and/or funds which were held in trust for Her Majesty pursuant to ss.227(4) and 227(4.1) then Parliament should have made that intention clear when drafting s.224(1.2). The lack of clarity and the lack of inclusion allows the conclusion to be drawn that Parliament did not intend for persons holding property in trust for Her Majesty to deliver up the property if they received a notice pursuant to s.224(l) of the Act.

Regarding any obligation that Manning had to Ms. Charles, it is clear that Ms. Charles was not “a secured creditor who has a right to receive the payment” as those words are used under s.224(1.2)(b). In this regard, Major J. in Canada Trustco Mortgage Corp. v. Port O’Call Hotel Inc., supra, states in his judgment on behalf of the minority in the decision:

If Parliament had intended that s.224( 1.2) should cover all persons who hold a security interest, it could have defined secured creditor as any person who holds a security interest without the deliberately limiting words “in the property of another person”. Alternatively, it could have expressly provided “property that but for a security interest in favour of the secured creditor would be the property of another person”, thus echoing the phrasing found in the rest of the section. (at p.641)

Ms. Charles would not be a secured creditor “who has a right to receive the payment” until the court granted her that “right”. By ordering Manning to pay the funds held to Ms. Charles, there is nothing owing to Ms. Charles and there is no right to receive payment until court order. If parliament had intended otherwise, then the suggested wording set out by Major J. as noted above would have been substituted for the wording contained under s.224( 1.2) (b) of the Act. The “right” of Ms. Charles to receive a payment was not established at the time the notice was received by Manning or within one year of the notice being received. It is similarly the case that Manning was not “liable to make a payment” to Tuxedo either.

Because I cannot find that Manning was a “person” as that term is used in ss.224(l) and 224(1.2) of the Act, that Manning was a person who is “liable to make a payment” either to Tuxedo or to Ms. Charles, that Manning was in a debtor/creditor relationship with either Tuxedo or with Ms. Charles, that Ms. Charles was “a secured creditor who has a right to receive the payment”, or that ss.224( 1 ) and 224(1.2) of the Act applies to parties holding the property in trust for Her Majesty by virtue of ss.227(4) and 227(4.1) of the Act, I am satisfied that the provisions of ss.224( 1 ) and 224( 1.2) did not apply to attach the funds being held by Manning when the notice was received by Manning on April 8, 1997. Accordingly, the alternate submission of Her Majesty must also fail.

Conclusion

The sum of $41,367.88 plus all accrued interest held by the solicitors for Tuxedo is payable forthwith to the law firm representing Ms. Charles. At the same time, Ms. Charles will have her costs against Her Majesty the Queen represented by the Minister of National Revenue, Customs, Excise and Taxation on a party and Party (Scale 3) basis.

Order accordingly.