The Toronto-Dominion Bank v. The Queen, 94 DTC 1261, [1994] 1 CTC 2615 (TCC)

Sarchuk, J.T.C.C.:—This is an appeal by the Toronto-Dominion Bank (the bank) from an assessment by the Minister of National Revenue (the Minister) made on the basis that pursuant to subsection 153(1.3) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") the bank is liable for the amount of unpaid source deductions, interest and penalties payable by Mark Creek Investments Ltd.

The bank is a chartered bank of Canada and has a branch office located in Cranbrook British Columbia. Mark Creek Investments Ltd. ("Mark Creek") was a customer. The bank held a debenture which was secured against real property and chattels owned by Mark Creek and operated as Inn of the Rockies (the "inn"). The bank also received a postponement of creditors' claims relating to the shareholders' loans and unlimited guarantees from the directors. Mark Creek made default in the repayment of the indebtedness and on October 1, 1984 the bank commenced foreclosure proceedings in the Supreme Court of British Columbia to realized on its debenture security. On December 14, 1984 the Supreme Court approved the sale of the inn. Shortly thereafter the purchaser assumed possession and took over operations. The sale of the said property and chattels closed on March 20, 1985 and the proceeds were paid to the bank.

On January 25, 1985 Mark Creek was assessed by the Minister for unremitted source deductions, interest and penalties for the period October through December 1984. This was followed by assessments by the Minister dated August 25, 1986 pursuant to section 227.1 of the Act against the directors of Mark Creek for failure to remit the source deductions of the corporation. These assessments were subsequently vacated. Then on October 10, 1990 the assessment against the bank presently before the Court was made.

The issue is whether the bank was a trustee within the meaning of the provisions of subsections 153(1.3) and 153(1.4) [1] of the Act and is therefore liable for the unpaid source deductions, interest and penalties payable by Mark Creek. The calculation of the actual amounts assessed is not in issue.

Evidence

Mr. Kenneth R. Jones ("Jones"), the Cranbrook branch manager, and David F. Tysoe ("Tysoe"), a solicitor who acted on behalf of the bank in 1984, testified for the appellant. Bruce A. Hryciuk ("Hryciuk") and Dennis W. Deaville ("Deaville"), both shareholders and directors of Mark Creek, testified for the respondent. Although there are understandable differences in the witness’ recollection of events, there is no significant disagreement concerning the facts I now set out.

The Inn opened in or about May 1982. Business, from the outset, did not live up to projections and within a short period of time Mark Creek began to fall behind in its payments to the bank. By December 14, 1983 the Mark Creek account was classified by the bank as “an unsatisfactory, non-productive loan" although Jones still considered it had some potential. Internal memoranda indicate that in January 1984 two options were being considered by the bank, receivership within 90 days or deferral of any action for one year or longer. It appears that receivership was not gaining much favour. On March 8, 1984 the loan had been reclassified to bad and doubtful” and the bank was becoming increasingly concerned regarding the ability of the guarantors to pay for a shortfall. Both the bank and, to a lesser degree Mark Creek, began to consider sale as another option. The bank’s "real estate team" recommended a realtor and Jones arranged "for ongoing contact" by "our customers with" him. On April 14, 1984 the property was offered for sale at a price of $1.1 million. Jones' instructions were to bring pressure to bear on Mark Creek to force it into a realistic sale price and to effect the sale with dispatch.

Several other factors were coming into play at this time. The projected shortfall on principal ranged from a minimum of $378,000 to $678,000 or more. Detailed files on each guarantor including credit bureau reports were being compiled by the bank. As early as April 1984 the bank was becoming extremely concerned and was preparing to respond to a "walk away” situation in which Mark Creek would simply close down the business. In that month Jones issued a pre-demand letter which he described as an expression of concern and a strong hint to Mark Creek to resolve its problems.

Concurrently the guarantors began to make inquiries as to whether the bank would consider replacing their unlimited guarantees with limited amounts supported in whole or in part by security. The recommendation by Jones to his divisional supervisor was that this warranted consideration. In May an offer to purchase was on hand but was not likely to be accepted unless the guarantors had some indication as to the bank’s position on the guarantees. By early June the guarantors’ level of concern was reaching the breaking point. Jones noted in his reports that "it is becoming apparent that only the bank stands to gain from continued operation" and made specific recommendations regarding a workout of the personal guarantees. These were rejected by the divisional office.

Matters proceeded slowly. Business remained poor and cash flow problems persisted. Mark Creek never had an operating line of credit, rather it worked through a current account which it overdrew with increasing frequency in 1984. While no formal overdraft protection was in place on occasion the manager or a

under subsection (1) to be deducted or withheld and to be remitted on account of the payment.

(1.4) In subsection (1.3), “trustee” includes a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator, sequestrator or any other person performing a function similar to that performed by any such person.

director of the inn would inquire as to whether a specific trade cheque would be honoured. Alternatively a cheque would be presented for payment and would appear on Jones' desk, together with information indicating whether it would create or increase an overdraft. Jones would make the decision as to whether the cheque would be honoured based on the level of the overdraft and other factors such as his knowledge of the normal flow of deposits from Mark Creek; whether Mark Creek's Mastercharge account at the bank of Montreal could be tapped to cover the overdraft; whether it was an essential cheque; whether it could be deferred or payment to a supplier rearranged. To be honoured a cheque had to relate to the day-to-day operation of the company. Jones described this arrangement as an informal facility the bank had provided to Mark Creek almost from the day the Inn opened for business.

In early summer of 1984 the bank required Mark Creek to produce internal financial statements on a monthly basis. On July 4, 1984 Jones was instructed by his superior to urge the shareholders of Mark Creek to accept an offer in the amount of $750,000 and to negotiate an increase in the guarantors’ offer of settlement of $152,000 by an additional $200,000.

On September 7,1984 the bank served a formal demand for payment on Mark Creek. Demand was also made of the guarantors. An offer to purchase dated September 9, 1984 for the inn was presented to Mark Creek. It contained a condition precedent, to wit: receipt of confirmation from the bank that it would limit its claim for any shortfall resulting from the sale to an amount of $350,000. Mark Creek was prepared to accept the offer only if the bank agreed to limit the liability of the guarantors to $150,000. This was unacceptable to the bank. On October 1, 1984 when no payment was made the bank filed a petition in the Supreme Court for orders enforcing the security instruments held by it, including an order for the sale of the inn. Tysoe advised Jones to have the prospective purchaser prepare, for submission to the Court, a new agreement which did not contain a limitation on the guarantees. On October 9, 1984 the purchaser made an offer in that form and Tysoe was instructed to seek Court approval of the sale. A motion for such an order was to have been heard on October 26, 1984 but was adjourned at the request of the purchaser's solicitor and by the guarantors. The matter was further adjourned on several occasions because the purchaser had failed to finalize his financing and his offer was conditional upon that fact. It was also in the bank’s best interests to accommodate him and to hold off on pursuing its remedies in the interim.

Throughout this period discussions continued between Hryciuk [2] and the bank regarding the guarantors’ exposure. By November 20, 1984 an agreement was taking shape. Jones was again concerned that Mark Creek would close the inn and in a memorandum to his divisional supervisors recommended that gratuitous credit of up to $20,000 be given to Mark Creek to facilitate day-to-day operations and final payroll separation costs. This meant that the bank would not ask Mark Creek to repay this amount if expended, and no further guarantees or security would be required. Jones advised his superiors that there was a substantial risk that the hotel operation would fall apart and that this credit was necessary to ensure that the business would not cease to exist. His recommendation was rejected. Jones nonetheless continued to approve Mark Creek overdrafts as before and the Inn's doors remained open.

The bank's application was now scheduled to be heard on December 14, 1984. That morning Tysoe met Mr. Grant Burnyeat ("Burnyeat"), counsel representing Mark Creek and the guarantors [3] . Tysoe advised Burnyeat that the bank had instructed him to agree to a settlement on the guarantees in the amounts proposed. [4] Burnyeat stated this was acceptable to his clients. The motion was heard and the Supreme Court approved the sale. Further, as agreed, the banks request for a judgment against the guarantors was adjourned indefinitely.

At or about the same time the Federal Business Development Bank declined to give the purchaser the required financing. The bank felt obliged to do so to complete the sale but wanted written confirmation of the settlement with the guarantors. The terms of the agreement were embodied in a letter dated December 19, 1984 from Tysoe to Burnyeat. No response was received. No response was received. On the morning of December 21, 1984 Burnyeat met Tysoe at which time Burnyeat confirmed that Tysoe's letter correctly set out the understanding between the parties for the compromise of the guarantees. The bank then proceeded to arrange financing for the purchaser. Possession of the Inn was taken on or about December 21, 1984 and closing was scheduled for January 18, 1985.

On December 27, 1984 Hislop wrote to Jones setting out his understanding of the arrangement between the bank and the guarantors and confirming that, subject to several conditions, it was acceptable to the guarantors. One such condition was that the bank “will see that the preferred creditors, e.g., W.C.B., income tax, and wages are paid, and will save harmless the directors from preferred creditor claims”. This letter was referred to Tysoe who, on January 9, 1985, advised Hislop that the agreement for the compromise of the guarantees was that contained in his December 19 letter to Burnyeat. More specifically he advised Hislop that there was no condition to the effect that the bank would pay any creditors of Mark Creek other than those which had priority over the bank’s security and assert their priority.

Hryciuk wrote to Jones on January 21 and to Tysoe on February 25, 1985. On March 4 Hislop wrote to Tysoe. They continued to contend that, as Hryciuk put it, the guarantors [5] :

. . . entire understanding of the settlement agreement was based upon the undertakings of Mr. Jones and the Toronto-Dominion Bank that the liabilities for these items would be funded without question upon presentation of appropriate documentation by the bank with no recourse against the directors, guarantors or shareholders of Mark Creek Investments Ltd. Our discussions with Mr. Jones identified these liability accounts specifically and did not refer to priority claims, preferred creditors or any other legal definition. The discussions clearly indicated that the liabilities of concern were those as stated above regardless of what terminolgy [sic] is used to define them.

Mr. Tysoe responded on March 11, 1985, stating:

Whatever discussions may have taken place between Mr. Hryciuk and Mr. Jones, the terms of the settlement agreement were the ones which we discussed with Mr. Burnyeat immediately prior to the Court hearing on December 14, 1984, as confirmed in our letter dated December 19, 1984 to Davis and Company. The settlement agreement did not include any term relating to the payment by the bank of indebtedness owing by Mark Creek Investments Ltd. for which the directors may be liable.

He went on to say that payroll deductions did not have priority over the bank and thus would not fall into the category of priority claims which would be honoured by the bank.

On March 27, 1985 Hislop, on behalf of the guarantors, wrote to Tysoe, enclosing a cheque in the amount of $172,000 together with a general release and a consent dismissal of the action against the guarantors for execution by the bank. No mention was made of the "understanding", nor was any further action, legal or otherwise, taken by the guarantors.

Appellant's position

Counsel for the appellant argued that in order for the assessment to stand the Court must be satisfied that the bank was (a) a trustee; (b) who administered, controlled or managed the property of Mark Creek; and (c) who authorized or otherwise caused payment of salary or wages to be made on behalf of Mark Creek.

He submitted that the bank was not a trustee because there was no vesting of property. From subsection 153(1.4) of the Act the legislative intention was clear in that the word "trustee" is designated to describe a person in whom a legal authority has vested over property and, further, that the trustee is managing that property for the exclusive interest of a beneficiary. [6] Counsel contends there was no such relationship in this case. The relationship between the bank and Mark Creek was one of debtor/creditor. The evidence is that the bank’s purpose throughout 1984 was directed towards a maximum recovery of its loans to Mark Creek. The involvement of Jones and the enforcement of its remedies under the security instruments through the Court were taken in furtherance of that purpose and not for the benefit of any other person.

Counsel argued that there was no evidence of any legal impediment to Mark Creek closing the hotel and “walking away from the venture". What, if any, perception Mark Creek had as to the bank's interests or alleged requirements to maintain and continue the operation of the Inn was not sufficient to convert the position of the bank from that of lender to trustee in whom Mark Creek's property vested.

Furthermore, the bank was not in control of Mark Creek's property. Counsel noted that the Minister assumed that the principals of Mark Creek or the manager of the inn were in charge of its day-to-day operations during the time when remittances should have been made. In regard to the payroll process, the bank provided a service for Mark Creek out of which arises no obligation to make the remittances required by statute. The bank was an agent in that regard, and it did not act without direction and authorization from Mark Creek. [7] The bank never authorized or caused, within the meaning of subsection 153(1.3), a payment to be made to the employees. Only Mark Creek authorized the payments.

Counsel submitted that in fact Mark Creek, as the person required to deduct and remit the source deductions, paid its employees without making the required remittances. It was subsequent to that failure that the guarantors settled with the bank by way of an agreement which did not include any term or condition which would require the bank to pay the source deductions to Revenue Canada after the company ceased operating the hotel. The fact that directors may have believed the liability would not subsequently be imposed on them if the hotel was later sold does not excuse Mark Creek as the employer from making remittances as they fell due.

Counsel contended that what is apparent from the respondent's pleadings and the assessment is that the Minister tied the agreement alleged by the directors of Mark Creek that the bank would hold them harmless at the time of sale to the obligation of Mark Creek to deduct and remit the source deductions as required. That, he says, is wrong as the Minister cannot assess on the "agreement" between the guarantors and the bank. As counsel noted:

. . . if there was any right of action the guarantors or directors may have had against the bank, the breach of the alleged agreement to pay deductions arising out of the alleged misunderstanding between Mr. Jones and Mr. Hryciuk, that does not render the bank liable to the Crown for unpaid source deductions under section 1.3 of the Act.

Respondent's position

Counsel for the respondent submitted that the whole of section 153 of the Act must be looked at in order to determine the interpretation to be placed on subsections 153(1.3) and (1.4). Subsection 153(1) requires "every person paying . . . salary or wages or other remuneration" to deduct and remit the prescribed amounts to the Receiver General on account of the payee's tax. Subsections 153(1.3) and (1.4) were added by 1980-81, c. 48, subsection 86(3) and were intended to broaden the net of persons that would now be subject to the provisions of subsection 153(1). Subsection 153(1.3) provides that a trustee may be deemed to be the person making any payment referred to in subsection 153(1) and is thereby liable for the tax to be withheld from such payment.

Counsel further argued that by the language of subsection 153(1.4) the legislators also increased the scope of the enactment by expanding the definition of "trustee" to include not just liquidators, receivers, etc., but also "any other person performing a function similar to that performed by such person". Counsel submitted that section 153 now includes not only those in a strict employer/employee relationship but also those who stand in a fiduciary relationship to another person. In support he referred to the following definition of "trustee" in Black’s Law Dictionary:

In a strict sense, a "trustee" is one who holds the legal title to property for the benefit of another, while, in a broad sense, the term is sometimes applied to anyone standing in a fiduciary or confidential relation to another, such as agent, attorney, bailee, etc. State ex rel. Lee v. Sartorius, 344 Mo. 912, 130 S.W. 2d 547, 549, 550.

[Emphasis added.]

and to the interpretation of the term "fiduciary obligation" propounded by Wilson, J. in Frame v. Smith, [1987] 2 S.C.R. 99, 42 D.L.R. (4th) 81 at pages 134-36 (D.L.R. 97):

In the past the question whether a particular relationship is subject to a fiduciary obligation has been approached by referring to categories of relationships in which a fiduciary obligation has already been held to be present. Some recognized examples of these categories are relationships between directors and corporations, solicitors and clients, trustees and beneficiaries, agents and principals, life tenants and remaindermen, and partners. As well, it has frequently been noted that the categories of fiduciary relationship are never closed: see, for example, Guerin v. The Queen, [1984] 2 S.C.R. 335, 13 D.L.R. (4th) 321 at page 384 (D.L.R. 340-41), per Dickson, J. (as he then was); International Corona Resources Ltd. v. Lac Minerals Ltd. (1986), 25 D.L.R. (4th) 504, 53 O.R. (2d) 737 (H.C.); Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 22 D.L.R. (4th) 410, 52 O.R. (2d) 473; English v. Dedham Vale Properties Ltd., [1978] 1 AIl E.R. 382 at page 398; Tufton v. Sperni, [1952] T.L.R. 516 at page 522; R. Goff and G. Jones, The Law of Restitution, 2nd ed. (1978), at pages 490-91. An extension of fiduciary obligations to new “categories” of relationship presupposes the existence of an underlying principle which governs the imposition of the fiduciary obligation.

Yet there are common features discernible in the contexts in which fiduciary duties have been found to exist and these common features do provide a rough and ready guide to whether or not the imposition of a fiduciary obligation on a new relationship would be appropriate and consistent.

Relationships in which a fiduciary obligation have been imposed seem to possess three general characteristics:

1. The fiduciary has scope for the exercise of some discretion or power.

2. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests.

3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

Counsel contended that these criteria were subsequently adopted by the majority of the Supreme Court in Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, 61 D.L.R. (4th) 14.

With reference to the present appeal, it was argued that Mark Creek was peculiarly vulnerable to and at the mercy of the bank. It was pressing Mark Creek to continue operating; it was pressing Mark Creek to sell the inn at a value which would result in a major obligation on the guarantors. Furthermore, the bank was in a position to and did exercise its power or discretion so as to affect Mark Creek's interests. Jones, the bank manager, decided whether Mark Creek's cheques would be honoured and, more significantly, towards the latter part of 1984 periodically extended credit beyond that endorsed by the owners of the inn in order to ensure it remained in business. Thus he was unilaterally increasing Mark Creek's liability. Furthermore, the evidence of Hryciuk and Deaville made it clear that in September 1984 the directors were on the verge of closing the inn to limit their losses. The bank was privy to these discussions and, as Deaville stated, refused to allow the directors to do so at the end of summer, insisting that the inn remain open so that it could be sold as an ongoing operation. As a result of their exposure under the guarantees the directors felt compelled to comply. Faced with such intransigence the directors effected an agreement with the bank that payroll costs, which were the largest component of the inn's expenses, would be processed and met on a regular basis until the Inn was sold and, they say, it was understood that any further indebtedness which arose from these payments would not be repaid to the bank but would simply form part of the final settlement.

The Court was urged to accept Hryciuk's assertion that his discussions with Jones dealt with source deduction liability as well as provincial sales tax and Workmen's Compensation. Specifically with respect to the payroll source deductions Hryciuk said it was agreed that the existing payroll arrangement would continue with one major change being, that Mark Creek would no longer make separate remittances to the Receiver General, this function now being taken over by the bank.

It was submitted that as a result of the ever increasing control of the affairs of Mark Creek by the bank it owed a fiduciary duty to Mark Creek. This fiduciary relationship existed because certain major business decisions were being made by the bank. As contrasted to the involvement of the interim receiver referred to in Plaskett & Associates, supra, the bank was making decisions independent of Mark Creek, principally those which required it to continue with the operation of the inn despite the directors' desire to close it down. This, counsel argued, was sufficient to bring the bank within the purview of subsection 153(1.3).

Analysis

What is to be determined in this appeal is the interpretation to be given the language of subsection 153(1.4) of the Act.

In order for a liability to arise under subsection 153(1.3) a person must be a "trustee" within the extended meaning given by subsection 153(1.4). Thus the evidence must establish that the bank was performing functions similar to that of a receiver, etc. It was not vigorously contended by counsel for the respondent that the evidence supported a finding that the bank was a trustee as that term is usually defined. Given the evidence, that is understandable. The bank was not vested wit the property and assets of Mark Creek; it was not empowered to exclude Mark Creek from running the business; it did not administer property on behalf of Mark Creek, nor was it entitled to carry on any of the usual functions of the persons enumerated in subsection 153(1.4). However, counsel for the respondent, relying on the comments of Wilson, J. in Frame, supra, asks the Court to hold that the evidence supports a conclusion that the relationship between the bank and Mark Creek had the characteristics required to impose a fiduciary obligation on the bank and that is sufficient to bring the bank within the ambit of the provisions of subsection 153(1.3) of the Act.

Two issues arise. First, was subsection 153(1.4) intended by the legislators to expand the meaning of "trustee" to this extent. Second, if so, does the evidence support a conclusionthat the specific circumstances of the relationship between Mark Creek and the bank give rise to a fiduciary obligation on the part of the bank sufficient to bring it within the scope of subsection 153(1.3).

As to the first issue counsel for the respondent baldly stated that the legislative intent was clear but otherwise failed to support that proposition. Counsel for the appellant did not directly deal with the issue, resting his case on the lack of evidence that the bank assumed control over the affairs of Mark Creek.

The two subsections in issue were added to the Income Tax Act by 1980-81, c. 48, subsection 86(3), effective on Royal Assent, February 26, 1981. Prior to the enactment of these subsections commentators had noted that there had developed growing uncertainty concerning the responsibility of an agent, receiver or trustee in bankruptcy for making tax deductions under subsection 153(1 ). [8] Several inconsistent cases did little to clear up the situation. [9]

The decision most often used to illustrate the problem was Coopers & Lybrand Ltd. v. The Queen, [1979] C.T.C. 352, 79 D.T.C. 5273 (F.C.T.D.) [rev'd [1980] C.T.C. 367, 80 D.T.C. 6281 (F.C.A.)]. In that case Coopers & Lybrand had been appointed receiver and manager for Venus Electric, an agent of the Mercantile Bank of Canada pursuant to a debenture. The bank supplied net payroll to Coopers & Lybrand which distributed it. Hence none of the amounts that should have been deducted were remitted to the Minister of National Revenue, the department raised an assessment against Coopers & Lybrand for the unremitted amount together with interest and penalties. Gibson, J., in a strongly worded decision, held that Coopers & Lybrand was not obligated to remit under section 153. He made it clear that Coopers & Lybrand could not be considered to be a "person" for the purposes of that section. [10]

It appears generally accepted that these cases, and in particular Coopers & Lybrand, supra, led to enactment of the provisions of subsections 153(1.3) and (1.4). In a notice of ways and means motion to amend the Income Tax Act tabled by the Finance Minister on December 11, 1979 the following proposal is found:

70. That

(a) after December 11, 1979, receivers-managers and similar persons who have substantial control of the affairs of another person be required to deduct withholding tax in respect of payments caused to be made on behalf of the other person. . . .

An election intervened. On April 21, 1980 the new Finance Minister tabled a ways and means motion containing essentiallythe same proposals for amendment to section 153.

While any attempt to discern the legislative intent behind a particular provision is often speculative, in this case it seems reasonably clear that Parliament desired to make "receiver-managers" liable for the withholding and remitting of tax under section 153 and that, by enacting subsection 153(1.4) intended to make the definition of "trustee" as broad as possible to ensure that any person with substantial control of the affairs of another person be required to deduct withholding tax.

I have concluded that the respondent's position with respect to the legislative intent behind subsections 153(1.3) and (1.4) has some merit. However Frame, supra provides but limited assistance since that decision is extremely narrow in scope and does not represent the view of the Supreme Court of Canada as a whole. Reference should be made instead to Lac Minerals, supra, where the subject of fiduciary relationships was fully canvassed. I particularly note the following comments of La Forest, J., first at pages 643-44 (D.L.R. 26) where he stated:

There are few legal concepts more frequently invoked but less conceptually certain than that of the fiduciary relationship. In specific circumstances and in specific relationships, courts have no difficulty in imposing fiduciary obligations, but at a more fundamental level, the principle on which that obligation is based is unclear. Indeed, the term "fiduciary" has been described as "one of the most ill-defined, if not altogether misleading terms in our law. . . .

La Forest, J. acknowledged the comments of Wilson, J. in Frame, supra, and, noting that the issue in that case was whether the relationship of a custodial parent to a non-custodial parent could be considered a category to which fiduciary obligations could attach (an issue the majority of the Supreme Court did not consider necessary to address), accepted Wilson, J.’s approach as helpful. However he went on to say at pages 646-49 (D.L.R. 28-30):

Much of the confusion surrounding the term "fiduciary" stems, in my view, from its undifferentiated use in at least three distinct ways. The first is as used by Wilson, J. in Frame, supra. There the issue was whether a certain class of relationship, custodial and non-custodial parents, was a category, analogous to directors and corporations, solicitors and clients, trustees and beneficiaries, and agents and principals, the existence of which relationship would give rise to fiduciary obligations. The focus is on the identification of relationships in which, because of their inherent purpose or their presumed factual or legal incidents, the courts will impose a fiduciary obligation on one party to act or refrain from acting in a certain way. The obligation imposed may vary in its specific substance depending on the relationship, though compendiously it can be described as the fiduciary duty of loyalty and will most often include the avoidance of a conflict of duty and interest and a duty not to profit at the expense of the beneficiary. The presumption that a fiduciary obligation will be owed in the context of such a relationship is not irrebuttable, but a strong presumption will exist that such an obligation is present. Further, not every legal claim arising out of a relationship with fiduciary incidents will give rise to a claim for breach of fiduciary duty . . . .

. . . It is only in relation to breaches of the specific obligations imposed because the relationship is one characterized as fiduciary that a claim for breach of fiduciary duty can be founded. In determining whether the categories of relationships which should be presumed to give rise to fiduciary obligations should be extended, the rough and ready guide adopted by Wilson, J. is a useful tool for that evaluation . . . .

This brings me to the second usage of fiduciary . . . a fiduciary obligation can arise as a matter of fact out of the specific circumstances of a relationship. As such it can arise between parties in a relationship in which fiduciary obligations would not normally be expected. I agree with this comment of Professor Finn in "The Fiduciary Principle", supra, at page 64:

What must be shown, in the writer’s view, is that the actual circumstances of a relationship are such that one party is entitled to expect that the other will act in his interests in and for the purposes of the relationship. Ascendancy, influence, vulnerability, trust, confidence or dependence doubtless will be of importance in making this out. But they will be important only to the extent that they evidence a relationship suggesting that entitlement. The critical matter in the end is the role that the alleged fiduciary has, or should be taken to have, in the relationship. It must so implicate that party in the other's affairs or so align him with the protection or advancement of that other's interests that foundation exists for the “fiduciary expectation". Such a role may generate an actual expectation that that other's interests are being served. This is commonly so with lawyers and investment advisers. But equally the expectation may be a judicially prescribed one because the law itself ordains it to be that other's entitlement. And this may be so either because that party should, given the actual circumstances of the relationship, be accorded that entitlement irrespective of whether he has adverted to the matter, or because the purpose of the relationship itself is perceived to be such that to allow disloyalty in it would be to jeopardise its perceived social utility.

It is in this sense, then, that the existence of a fiduciary obligation can be said to be a question of fact to be determined by examining the specific facts and circumstances surrounding each relationship; see Waters, Law of Trusts in Canada (2nd ed. 1984), at page 405. If the facts give rise to a fiduciary obligation, a breach of the duties thereby imposed will give rise to a claim for equitable relief.

The third sense in which the term "fiduciary" is used is markedly different from the two usages discussed above. It requires examination here because, as I will endeavour to explain, it gives a misleading colouration to the fiduciary concept. This third usage of “fiduciary” stems, it seems, from a perception of remedial inflexibility in equity. Courts have resorted to fiduciary language because of the view that certain remedies, deemed appropriate in the circumstances, would not be available unless a fiduciary relationship was present. In this sense, the label fiduciary imposes no obligations, but rather is merely instrumental or facilitative in achieving what appears to be the appropriate result. The clearest example of this is the judgment of Goulding, J. in Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd., [1981] Ch. 105.

As to this category La Forest, J. said at page 652 (D.L.R. 32):

In my view, this third use of the term fiduciary, used as a conclusion to justify a result, reads equity backwards. It is a misuse of the term. It will only be eliminated, however, if the courts give explicit recognition to the existence of a range of remedies, including the constructive trust, available on a principled basis even though outside the context of a fiduciary relationship.

With these principles in mind I turn to the matter before me. Clearly the relationship between the bank and Mark Creek does not fit into the first category described by La Forest, J. (and as applied by Wilson, J. in Frame, supra). The relationship created in an arm's length transaction between a lender and borrower does not, in my view, constitute a class of relationship, the mere existence of which might give rise to fiduciary obligations. Equally the third sense in which the term fiduciary was referred to by La Forest, J. has no relevance or application in the present appeal.

That leaves the second usage of fiduciary referred to by La Forest, J. In considering whether it is applicable, the fact that the bank and Mark Creek were involved in a commercial transaction must not be overlooked. In this context I am mindful of the comments of La Forest, J. in Lac Minerals, supra, at page 653 (D.L.R. 33):

The Court of Appeal agreed with the submission made by Lac that the law of fiduciary relations does not ordinarily apply to parties involved in commercial negotiations. Such negotiations are normally conducted at arm's length. They held, however, that in certain circumstances fiduciary obligations can arise, and it is a question of fact in each case whether the relationship of the parties, one to the other, is such as to create a fiduciary relationship.

and at page 667 (D.L.R. 43):

Commercial relationships will more rarely involve fiduciary obligations. That is not because they are immune from them, but because in most cases, they would not be appropriately imposed. I agree with this comment of Mason, J. in Hospital Products Ltd. v. United States Surgical Corp. (1984), 55 A.L.R. 417, at pages 456-57:

There has been an understandable reluctance to subject commercial transactions to the equitable doctrine of constructive trust and constructive notice. But it is altogether too simplistic, if not superficial, to suggest that commercial transactions stand outside the fiduciary regime as though in some way commercial transactions do not lend themselves to the creation of a relationship in which one person comes under an obligation to act in the interests of another. The fact that in the great majority of commercial transactions the parties stand at arm’s length does not enable us to make a generalization that is universally true in relation to every commercial transaction. In truth, every such transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristics of a fiduciary relationship.

I am satisfied that if the circumstances of the relationship between the bank and Mark Creek were such that Mark Creek was entitled to expect that the bank would act in its interests in and for the purposes of the relationship, then a fiduciary obligation upon the bank could arise and that would be sufficient to bring it within the ambit of subsections 153(1.3) and (1.4), provided that it could be said the bank was “controlling or otherwise dealing with the property, business" of Mark Creek and "authorized or caused a payment" referred to in subsection 153(1).

Conclusion

I am not able to conclude that the bank owed any fiduciary obligation to Mark Creek. While the bank exercised some discretion or authority, particularly with regard to the overdraft, that situation did not come about as a result of any unilateral action by the bank during the period of time in issue. In fact it had existed virtually from the time the Inn opened for business and had been accepted by Mark Creek as an essential alternative to a formal line of credit. Furthermore, it would be difficult to conclude that the bank unilaterally exercised its power to affect Mark Creek's interest. Compensation to the employees remained in the hands of Mark Creek at all times. It had arranged to use the bank's computer payroll department (C.P.D.) in 1982. This payroll service was purely clerical, and involved nothing more than utilizing information provided by Mark Creek to process a pay run which included the preparation of cheques or direct deposits for Mark Creek employees together with accounting records which accompany a normal payroll. The processed cheques and records were returned to Mark Creek which then paid its employees. The letter of authorization from Mark Creek instructed C.P.D. to debit Mark Creek's general account with the amounts of the net payroll and appropriate charges but specifically directed that government statutory deductions were not to be made by C.P.D. The evidence is that the manager of the Inn was responsible and had historically remitted those deductions to Revenue Canada. Furthermore, although an overdraft position had occurred on a number of occasions, each cheque tor source deductions remitted to Revenue Canada by Mark Creek was honoured by the bank. That never changed. It is also relevant that as of November 2, 1984 Mark Creek's account was in a credit position, demonstrating that funds were being generated by the operation and were available to make the remittances.

Furthermore, I cannot find that there was a specific agreement by the bank to deduct and remit the source deductions on behalf of the Inn during the period of October to December 1984. Hryciuk was adamant that the "arrangement" between the guarantors and the bank included the actual remittance of the source deductions by the bank. Jones maintained he has no recollection of specific claims being discussed and is equally adamant that he never advised Mark Creek that the bank would pay source deductions during that period. Considering all of the evidence I concluded that source deductions were not specifically identified and raised between Jones and the guarantors until after Mark Creek had gone out of possession of the Inn on December 17,1984. [11]

In my view Mark Creek was not “peculiarly vulnerable to or at the mercy of" the bank. There is no evidence that Mark Creek was legally or financially restricted in its ability to deal with Revenue Canada and this fact was conceded by Hryciuk. Both Hryciuk and Deaville stated that the operation of the Inn continued primarily because of pressure from the bank. The evidence, however, suggests that an equally strong motive was the uarantors’ desire to negotiate the lowest possible settlement with the bank for themselves. Financially speaking Mark Creek was dead in the water. It could have closed down the operations of the Inn and thus limited the amount of its ultimate indebtedness, but did not because the guarantors who had a vested interest in the outcome, in their role as directors permitted Mark Creek to continue operations to protect their personal interests. Difficult as it may have been the directors' responsibility was to Mark Creek, and the relationship of the guarantors with the bank must not be confused with that of Mark Creek and the bank.

The issue as expressed by La Forest, J. in Lac Minerals, supra, at page 646 (D.L.R. 28) “should be whether, having regard to all the facts and circumstances, one party stands in relation to another such that it could reasonably be expected that the other would act or refrain from acting in a way contrary to the interests of that other". On the facts of this case I am satisfied that the circumstances of the relationship between the bank and Mark Creek were not, if I may borrow the- words of Professor Finn, such as to implicate the bank in Mark Creek's affairs or so align the bank with the protection or advancement of Mark Creek's interests that a foundation exists for the fiduciary expectation. The bank did not have such substantial control over the affairs of Mark Creek as to bring it within the purview of subsections 153(1.3) and (1.4) of the Act.

The appeal is allowed, with costs to be taxed, and the assessment is vacated.

Appeal allowed.