COURT OF APPEAL FOR ONTARIO
FELDMAN, MacPHERSON and CRONK JJ.A.
IN THE MATTER OF THE BANKRUPTCY OF AD
PRODUCTIONS LIMITED
B E T W E E N:
CAROL PROFITT and APL DESIGN & PROMOTIONS INC.
Alan J. Lenczner Q.C. and Nicholas C. Tibollo for the appellants
Appellants
- and -
WASSERMAN, ARSENAULT LIMITED, TRUSTEE OF THE ESTATE OF AD PRODUCTIONS LIMITED
Catherine Francis for the respondent
Respondent
HEARD: December 3, 2001
On appeal from the order of Justice Peter C. Jarvis dated November 29, 2000.
OVERVIEW
1The respondent is the trustee in bankruptcy of Ad Productions Limited, and in that capacity received and holds a federal sales tax refund belonging to Ad Productions. The issue in this case is whether the appellants are entitled to obtain the proceeds of the sales tax refund as assignees or transferees, or whether s. 67 of the Financial Administration Act, R.S.C. 1985, c. F-11, which prohibits assignments of “Crown debts”, applies and prevents the appellants from claiming or receiving the amount being held.
2The application judge held that the case was governed by the Supreme Court of Canada decision in Marzetti v. Marzetti, 1994 50 (SCC), [1994] 2 S.C.R. 765, that the sales tax refund is a Crown debt that could not be assigned, and that any purported assignment was invalid to pass any interest in the refund to the appellants.
3In this court, counsel for the appellants sought to distinguish Marzetti on the basis that the nature of the sales tax refund in this case was not in law that of a Crown debt as defined.
FACTS (Based on agreed statement of facts with documents attached and findings of the applications judge)
4In 1990 and again in 1992, Ad Productions applied for refunds of federal sales tax under the Excise Tax Act, R.S.C. 1985, c. E-15, as amended, paid by it over several years in respect of “imaged articles”. In July, 1992, a test case with respect to federal sales tax on “imaged articles” was decided in favour of the taxpayers at the first level of adjudication. That decision was ultimately upheld by the Federal Court of Appeal in 1997. The amount of Ad Production’s claim was in excess of $200,000. When the amount was ultimately paid with interest, the amount was $365,937.30.
5On January 15, 1992, Ad Productions borrowed $45,000 from Carol Profitt, secured by a promissory note and a General Security Agreement (“GSA”). The GSA contained assignments by Ad Productions of all of its assets as security, including in paragraph 1(c) which provided:
- For value received, the Debtor hereby:
assigns, transfers and sets over to the Creditor, and grants to the Creditor a security interest in, all its present and future intangibles, including, without limiting the generality of the foregoing, all its book debts and other accounts receivable, chattel paper, contract rights and other choses in action of every kind or nature now due or hereafter to become due, including insurance rights arising from or out of the assets referred to in sub-clauses (a) and (b) above; …
6On March 26, 1993 Profitt made demand on Ad Productions for the $45,000 and appointed a receiver under the GSA, Marshall Sone. On the same date, Ad Productions made an assignment in bankruptcy and Marshall Sone was appointed trustee in bankruptcy of the estate.
7In May, 1993, Sone executed a bill of sale transferring Ad Production’s inventory and equipment “and contingent assets including FST claim” to the appellant, APL Design. The trial judge noted that, on its face, the bill of sale is in the name of Sone as receiver and not as trustee in bankruptcy. The consideration for the transfer was $15,000.
8In 1998, Wasserman, Arsenault Limited was appointed guardian of the estate of Ad Productions and in 2000, trustee in bankruptcy. Wasserman received the refund cheques from the Government of Canada and has held the proceeds pending the outcome of this proceeding.
ANALYSIS
9There are two assignments involved: the first is contained in the GSA which was given by Ad Productions to the first appellant, Carol Profitt, as security for a promissory note. The second is the transfer of the sales tax refund in the bill of sale from Marshall Sone to the second appellant, APL Design.
10Section 67 of the Financial Administration Act provides:
s. 67 Except as provided in this Act or any other Act of Parliament,
(a) a Crown debt is not assignable; and
(b) no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person any rights or remedies in respect of that debt.
11“Crown debt” is defined in s. 66 of the Act as follows:
s. 66 “Crown debt” means any existing or future debt due or becoming due by the Crown, and any other chose in action in respect of which there is a right of recovery enforceable by action against the Crown;
12This section was considered by the Supreme Court of Canada in Marzetti, a case involving the assignment of an income tax refund. In that case, Iacobucci J. found that an income tax refund is a Crown debt, and that its assignment is prohibited by s. 67 of the Act and not permitted by any other section or any other act, such as the Tax Rebate Discounting Act, R.S.C. 1985, c. T-3, where s. 2(2) permits a person to “acquire…a right to a refund of tax…notwithstanding that, by virtue of s. 67 of the Financial Administration Act … the refund of tax is not assignable.” He noted that where Parliament wished to make a particular tax refund assignable, it did so specifically.
13Iacobucci J. also overruled the interpretation of the section which had been articulated by the Nova Scotia Supreme Court in Re Northward Airlines Ltd (1981), 1981 1187 (AB KB), 37 C.B.R. (N.S.) 137 . That case had held that the effect of s. 67 was only to prevent remedies being taken by assignees against the Crown, and that once the assigned funds were in the hands of the assignor/Crown debtor, then the funds would be held in trust for the assignee. Iacobucci J. stated that this interpretation ignored the words of the section which provide an absolute prohibition against assignment of a Crown debt, making such an assignment “absolutely ineffective as between debtor and creditor and as between assignor and assignee.” (p.805)
14Although s. 220(6) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) added by S.C. 1997, c. 25 s. 66(1), now allows a corporation to assign any amount payable to it under the Income Tax Act, notwithstanding the Financial Administration Act, for assignments made after March 5, 19961, there has been no such amendment in respect of assignments of amounts payable under the Excise Tax Act.
15Within this legal landscape, counsel for the appellants made two principal arguments:
(i) The nature of the sales tax refund in this case takes it out of the definition of Crown debt in s. 66 of the Financial Administration Act. As a result, the prohibition in s. 67 is not applicable and the Marzetti case has no application.
(ii) The transfer of the refund by Marshall Sone was made in his capacity as trustee in bankruptcy, and s. 30 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, provides an exemption to s. 67 of the Financial Administration Act for transfers of assets by trustees in bankruptcy.
Submission (1)
16Counsel’s submission is that the nature of the tax overpayment by Ad Productions was money paid under a mistake of law, to which the government, as it turned out, had no right. As a result, conversion of the monies occurred and the government is unjustly enriched by the receipt and retention of the funds. The government holds them for the taxpayer and is obliged to return them to the taxpayer. Counsel likened the government’s obligation to a trust. He submitted that the relationship between the taxpayer and the government in those circumstances is not that of debtor/creditor, nor is the government’s obligation to return the monies a chose in action.
17Counsel sought to distinguish the nature of the income tax refund in Marzetti, which was held to be a Crown debt, from the excise tax overpayment in this case, on the basis that in that case the taxpayer was obliged initially to pay the tax but, as a result of certain deductions available to him, he ended up overpaying, so that the amount of the overpayment was a refund owed to him by the government and therefore was in the nature of a debt owed to him by the Crown. The appellant relied on the case of Canada Safeway v. Canada (1997), 1997 5675 (FCA), 154 D.L.R. (4th) 449 where the Federal Court of Appeal held that a reimbursement of taxes paid in error is not a refund which must be included in income in the year of the refund.
18Although there is a distinction for some purposes between monies paid by mistake and therefore subject to return to the rightful owner, and monies found to have been overpaid after a proper accounting has been taken and owed back for that reason, that distinction does not have the effect contended by the appellant, that is, that monies that must be returned because they were paid by mistake are not a chose in action.
19Choses in action or things in action are defined in the Walker, Oxford Companion to Law (1980) as follows:
Personal rights of property claimable or enforceable by legal action, as distinct from choses in possession, things capable of physical possession. This class of rights includes a great variety of rights of an intangible character. They are divided into legal and equitable choses in action, according as they may be recovered or enforced by action at law or, formerly, only by suit in equity. The former includes such as debts, claims under insurance policies, and shares in companies, the latter includes equitable rights in property such as interests under trusts, arising from those kinds of rights as to which the Court of Chancery formerly had exclusive jurisdiction. Choses in action arise from contracts, will and trusts, by virtue of statutes and from other sources. They are in general assignable by the person entitled to another by legal or equitable assignment, intimated to the debtor or fundholder, or in accordance with statute or, in the case of negotiable instruments, by delivery of the document of title, and pass on death or bankruptcy. Certain kinds of choses in action, such as certain salaries and pensions, are not assignable. The rights may be discharged in various ways, notably by payment.
20Any overpayment by a taxpayer results in money owed by the government to the taxpayer. As the taxpayer has a right to a refund of the money, if that right is not discharged by payment, the taxpayer may enforce the right by an action against the government. The right to reimbursement is therefore a chose in action within the definition of “Crown debt” in s. 66 of the Act.
21The appellant also points to the decision of the House of Lords in Woolwich Building Society v. Inland Revenue Commissioners (No. 2), [1992] 3 All E.R. 737 where the court held that any overpayment by a taxpayer based on an ultra vires demand is prima facie recoverable by the taxpayer as of right and therefore with interest unless some special circumstances or principle of policy required otherwise. Counsel submits that this obligation of the government to repay monies paid based on an ultra vires demand is not a debt, but an entitlement of the taxpayer.
22However, regardless of the characterization for the purpose of determining if such monies constitute income for the purposes of inclusion in taxable income (Canada Safeway) or for the purpose of determining whether and from what date the government is obliged to pay interest on the monies to the taxpayer (Woolwich Building Society), the issue for the s. 66 definition is whether the right to the monies is a chose in action. As ultimately the only way to recover the money, if it is not paid voluntarily, is by court action, the tax overpayment by Ad Productions is a Crown debt within the meaning of the section.
Submission (2)
23The assignment by Marshall Sone is stated on its face to be made in his capacity as receiver of Ad Productions. However, it is argued that Sone was also trustee in bankruptcy on that date and, therefore, was acting in that capacity in assigning the tax refund claim. The appellant submits that s. 30(1)(a) of the Bankruptcy and Insolvency Act permits a trustee to sell the assets of the bankrupt and is therefore federal statutory authority to assign the tax refund.
24Section 30(1)(a) of the Bankruptcy and Insolvency Act provides:
30.(1) The trustee may, with the permission of the inspectors, do all or any of the following things:
(a) sell or otherwise dispose of for such price or other consideration as the inspectors may approve all or any part of the property of the bankrupt, including the goodwill of the business, if any, and the book debts due or growing due to the bankrupt, by tender, public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;
25The Bankruptcy and Insolvency Act therefore gives statutory authority to a trustee in bankruptcy to transfer the property of a bankrupt, but does not reference the Financial Administration Act. The question is whether the s. 30(1)(a) authority constitutes a provision in “any other Act of Parliament” for the assignment of a Crown debt in accordance with s. 67 of the Financial Administration Act.
26In my view this question is answered in the negative by the reasons of Iacobucci J. in Marzetti. He refers to the need for “express authorization” (p.803) and “clear statutory authority” (p.804) in a federal act by words such as “notwithstanding that by virtue of s. 67 of the Financial Administration Act…the refund of tax is not assignable.”2 (p.803) In that case, for example, he rejected s. 158(o) of the Bankruptcy and Insolvency Act as being effective to permit an assignment of an income tax refund by a bankrupt, stating: “…under s. 158(o), a bankrupt may be obliged to do ‘all such acts and things in relation to his property…as may be reasonably required by the trustee’, but it cannot be said that a trustee can ‘reasonably require’ that which Parliament expressly prohibits.” (p.803)
27I am satisfied that the general power given to a trustee in bankruptcy in s. 30(1)(a) to sell the assets of a bankrupt does not constitute the specific power to assign a Crown debt without specific reference to such a power or to an intention to override s. 67 of the Financial Administration Act.
CONCLUSION
28I conclude that the application judge was correct in holding that the purported assignments were invalid to transfer the federal tax refund and that the trustee is therefore entitled to the rebate funds on behalf of the estate. I would therefore dismiss the appeal. In argument counsel for the appellant advised that this court need not deal with the costs of the appeal. If there is any issue with respect to costs, counsel may advise the registrar within one week of release of these reasons.
Signed: “K.N. Feldman J.A.”
“I agree J.C. MacPherson J.A.”
“I agree E. A. Cronk J.A.”
RELEASED: “KNF” MARCH 28, 2002
Footnotes
- By s. 220(7), such assignments are not binding on the Crown.
- The phrase used in the new s. 220(6) of the Income Tax Act is: “Notwithstanding section 67 of the Financial Administration Act and any other provision of a law of Canada or a province, a corporation may assign any amount payable to it under this Act.” (Emphasis added)
