Bank of Montreal v. Attorney General of Canada representing Her Majesty the Queen in Right of Canada as represented by the Minister of National Revenue and Canada Customs and Revenue Agency

[Indexed as: Bank of Montreal v. Canada (Attorney General)]

66 O.R. (3d) 161

[2003] O.J. No. 2821

Docket No. C39468

Court of Appeal for Ontario,

Weiler, Laskin and Goudge JJ.A.

July 11, 2003

Taxation -- Goods and Services Tax -- Canada Customs and Revenue Agency sending Requirement to Pay under s. 317(3) of Excise Tax Act to tax debtor in respect of collected and unremitted GST -- Requirement to pay also issued to account debtors of tax debtor -- Receiving order subsequently being made against tax debtor under Bankruptcy and Insolvency Act -- Bankruptcy not affecting right of CCRA to receive payment under Requirements to Pay issued prior to date of bankruptcy -- Funds received after service of Requirement to Pay becoming property of Her Majesty -- Tax debtor having no residual right in funds so trustee in bankruptcy not acquiring any rights -- Excise Tax Act, R.S.C. 1985, c. E.15, s. 317(3) -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

The Canada Customs and Revenue Agency ("CCRA") served a tax debtor with a Requirement to Pay relating to GST owed under the Excise Tax Act. Requirements to Pay were also issued to account debtors of the tax debtor in respect of the GST debt. The tax debtor was subsequently adjudged bankrupt and a receiving order was made against it under the Bankruptcy and Insolvency Act. On an application by a secured creditor of the tax debtor, the issue was whether the bankruptcy of the tax debtor affected the right of the CCRA to receive payment under the Requirements to Pay issued prior to the date of the bankruptcy. The application judge held that it did not. The secured creditor appealed.

Held, the appeal should be dismissed.

On receipt of the Requirement to Pay, the funds became the property of Her Majesty to the tax debtor's assessed liability. The tax debtor had no residual right in the funds, so the trustee in bankruptcy could not acquire any rights. In essence, s. 317(3) of the Excise Tax Act provides a form of garnishment enabling the federal government to intercept moneys owed to tax debtors. Once a notice to pay is served, the funds acquired thereafter never become the property of the tax debtor. The tax debtor is a conduit for the transmission of tax collected by it for the CCRA. The account debtors of the tax debtor are the instrument by which the debtor transits the tax he was required to collect to the CCRA.

APPEAL by a secured creditor from a judgment holding that the Canada Customs and Revenue Agency had priority in respect of certain funds.

Forget v. Quebec (Deputy Minister of Revenue), [2003] J.Q. no 1026 (QL), J.E. 2003-646 (C.S.), not folld Other cases referred to Alberta (Treasury Branches) v. M.N.R., 1996 244 (SCC), [1996] 1 S.C.R. 963, 27 B.L.R. (2d) 147, 133 D.L.R. (4th) 609, 96 D.T.C. 6245, 196 N.R. 105, [1996] 5 W.W.R. 153 (sub nom. Pigott Project Management Ltd. v. Land-Rock Resources Ltd.); Giguère (Re), 2001 12284 (QC CA), [2001] J.Q. no 4825 (QL), [2001] R.D.F.Q. 39, [2001] R.J.Q. 2584, J.E. 2001-1953 (C.A.), affg (1998), 1998 9535 (QC CS), 2 C.B.R. (4th) 292, 98 D.T.C. 6329, [1998] Q.J. No. 570 (QL), [1998] R.D.F.Q. 77, J.E. 98-799 (S.C.) [page162] Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 70(1) Excise Tax Act, R.S.C. 1985, c. E-15, s. 317(3) Income Tax Act, S.C. 1970-71-72, c. 63, s. 224(1.2) Personal Property Security Act, R.R.O. 1990, c. P.10

Tony Van Klink, for appellant. Peter A. Vita, Q.C. and Kevin Dias, for respondent.

The judgment of the court was delivered by

WEILER J.A.: --

Nature of Appeal

[1] The Excise Tax Act, R.S.C. 1985, c. E-15 ("ETA"), provides for the collection of funds due to the federal government respecting the Goods and Services Tax and for the transmission of these monies by those who collect them. When funds that have been collected have not been remitted, the Canada Customs and Revenue Agency (the "CCRA") sends a Notice to Pay to account debtors of the tax debtor (the company that was to remit the GST collected). The issue in this appeal is whether a Notice to Pay, received by creditors of the tax debtor prior to the tax debtor's assignment in bankruptcy but remitted after the assignment, gives the CCRA priority over the tax debtor's secured creditors. It is common ground that ordinarily a garnishee that is received prior to an assignment in bankruptcy but that has not been executed does not take priority over the rights of secured creditors. The issue on this appeal is whether s. 317 of the ETA, which creates a statutory garnishee, yields the same result. Section 317(3) states:

317(3) Despite any other provision of this Part, any other enactment of Canada other than the Bankruptcy and Insolvency Act, any enactment of a province or any law, if the Minister has knowledge or suspects that a particular person is, or will become within one year, liable to make payment

(a) to a tax debtor, or

(b) to a secured creditor who has 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, by notice in writing, require the particular person to pay without delay, if the moneys are payable immediately, 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 [page163] on account of the tax debtor's liability under this Part, and on receipt of that notice by the particular person, the amount of those moneys that is so required to be paid to the Receiver General shall, despite any security interest in those moneys, become the property of Her Majesty in right of Canada 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.

Facts

[2] BMO was the banker of Vita Pharm, a vitamin manufacturer which executed a general security Agreement which, in turn, was filed under the Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA") against the debtor's accounts receivable. Vita Pharm owed the Bank approximately $2 million with respect to outstanding loans.

[3] On February 22, 2001, the CCRA served Vita Pharm with a Requirement to Pay, in the sum of $133,099.36 relating to GST owed under the ETA. The following day, February 23, 2001, the Bank of Montreal, (the "Bank") issued a petition for a Receiving Order against Vita Pharm. On March 8, 2001, Vita Pharm was adjudged bankrupt and a Receiving Order was made against it under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA").

[4] On February 27, 2001, the CCRA issued a further Requirement to Pay for the same amount plus accumulated interest for a total of $133,319.82 to 18 account debtors of Vita Pharm in respect of the GST debt.

[5] On March 8, 2001, a Trustee was appointed.

[6] Subsequent to March 8, 2001, the CCRA received funds in excess of the amount owing and forwarded the excess to the trustee. Currently, there is still more than $1 million owed to BMO and there are no assets available for security.

[7] The issue below was whether the bankruptcy of Vita Pharm affected the right of CCRA to receive payment under the Requirements to Pay issued prior to the date of bankruptcy.

[8] The application judge held that the Crown issued its Requirement to Pay before the bankruptcy, and thus, pursuant to the clear wording of s. 317(3) of the ETA, the money became the property of the Crown to the extent of the GST liability. He dismissed the Bank's application.

[9] The Bank submits that the application judge erred and that the Receiving Order made against Vita Pharm takes precedence over and stays the rights of the CCRA to receive payments under the Requirements to Pay.

Analysis

[10] I would disagree with the Bank's submission. As the application judge held, on receipt of the Requirement to Pay, the funds [page164] become the property of Her Majesty to the extent of Vita Pharm's liability as assessed by the Minister. Vita Pharm has no residual right in the funds and so the Trustee cannot acquire any rights. Vita Pharm's bankruptcy cannot give the Bank any right to the funds because they never became the property of the Trustee.

[11] This interpretation is supported by the decision of the Supreme Court of Canada in Alberta (Treasury Branches) v. M.N.R., 1996 244 (SCC), [1996] 1 S.C.R. 963, 133 D.L.R. (4th) 609, at p. 971 S.C.R. In that case, the court observed that s. 224(1.2) of the Income Tax Act, S.C. 1970-71-72, c. 63, provides for a statutory garnishment remedy identical to the one provided for in s. 317 of the ETA where a company or individual has failed to remit GST that was collected as required by the provisions of the ETA. At pp. 988-89 S.C.R., Cory J. for the majority stated:

In Friesen, supra, it was held that the words of the Income Tax Act should be given their plain and ordinary meaning in accordance with the structure and purpose of the Act. It is clear that in enacting the sections of the ITA and ETA under consideration Parliament was attempting to ensure the priority of the claim of the MNR over that of other creditors. The primary task of collecting and remitting taxes and contributions under both Acts rests with those who are employers and those who sell goods and services. These amounts so collected could be said to belong not to the collecting debtor entities but to the government. In a sense the funds collected but not remitted might be considered to be held in a form of trust since the entities that have collected these funds are not in any circumstances entitled to retain them. Rather, they must remit the funds. In those circumstances the priority granted to the MNR to recover such funds cannot possibly be said to be expropriation without compensation.

In an effort to ensure the recovery of these amounts collected for the MNR, Parliament has endeavoured to ensure the priority of the claims of the MNR to these funds over other creditors. The majority of the courts that have considered this issue since the 1990 amendment have concluded that Parliament has succeeded in achieving this aim.

(Citations omitted)

[12] Those words are equally applicable to this case. In essence s. 317(3) provides a form of garnishment enabling the federal government to intercept moneys owed to tax debtors. Once a notice to pay is served, the funds acquired thereafter never become the property of the tax debtor.

[13] The money in the hands of the account debtors of the tax debtor are not just any funds due to any tax debtor. The tax debtor is a conduit for the transmission of tax collected by it for the CCRA. The account debtors of the tax debtor are the instrument by which the debtor transmits the tax he was required to collect to the CCRA: See by analogy Quebec (Deputy Minister of Revenue) v. Giguère (Trustee of) (1998), 1998 9535 (QC CS), 2 C.B.R. (4th) 292, 98 D.T.C. 6329 (Que. S.C.) at p. 298, affd 2001 12284 (QC CA), [2001] J.Q. no 4825 (QL), [2001] R.D.F.Q. 39 (C.A.). [page165]

[14] The appellant submits that under s. 70(1) of the BIA, a receiving order takes precedence over a garnishment that has not been completely executed by payment being made because s. 317(3) of the ETA is made subject to the BIA. Otherwise, the appellant submits, the court would not be giving effect to the words"other than the BIA". The words "other than the BIA" have meaning apart from the interpretation suggested by the appellant. They mean that any GST payments that become due after a receiving order in Bankruptcy has been made no longer can be collected in priority to other creditors.

[15] In my opinion, the contrary interpretation in Forget v. Quebec (Deputy Minister of Revenue), [2003] J.Q. no 1026 (QL), J.E. 2003-646 (C.S.) is not correct and is inconsistent with the authorities I have mentioned above. The decision overlooks the distinction made in Giguère, supra, between an ordinary debt and one owed to the government, such as income tax from source deductions of tax from employees where the tax debtor is only a conduit of funds for the government.

[16] I would dismiss the appeal. No costs being requested there are no costs of the appeal.

Appeal dismissed.