Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182

Supreme Court of Canada

Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182

Date: 1980-03-18

Dauphin Plains Credit Union Limited (Plaintiff) Appellant;

and

Xyloid Industries Ltd. (Defendant);

and

Her Majesty The Queen (Applicant) Respondent.

1979: November 7; 1980: March 18.

Present: Martland, Ritchie, Pigeon, Beetz, Estey, McIntyre and Chouinard JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA

Receivership—Revenue—Deductions from wages prescribed by three federal statutes—Deductions effected by debtor company on wages paid—Funds not remitted nor kept separate—Appointment of receiver—Wages earned prior to appointment paid by receiver pursuant to Payment of Wages Act of Manitoba—Wages paid less deductions—No remittance by receiver of amount deducted—Priority of claims as between Crown and secured creditor—The Payment of Wages Act, 1975 (Man.), c. 21, ss. 1(h), 7(1)—Income Tax Act, 1970-71-72 (Can.), c. 63, s. 153(1)(a), (3), 227(4), (5)—Canada Pension Plan, R.S.C. 1970, c. C-5, s. 24(3), (4)—Unemployment Insurance Act, 1970-71-72 (Can.), c. 48, s. 71(2), (3).

As security for debts in excess of $1,000,000, the appellant credit union (Dauphin) obtained from the defendant company (Xyloid) debentures whereby a first fixed and specific charge was created on all its real and immovable property with a floating charge on all of its other assets. On March 31, 1977, the appellant obtained the appointment of a receiver of “all the undertaking, property and assets” of the defendant. In due course, the receiver realized the assets of the company and distributed the net proceeds of such realization, less the sum of $7,416.57, which upon the discharge of the receiver was directed to be held until the validity and priority of the claims of the respondent Crown under certain federal statutes was determined by the Court.

Prior to the appointment of the receiver, Xyloid had paid wages to its employees and effected the deductions prescribed by the Income Tax Act of Canada, the Canada Pension Plan Act and the Unemployment Insurance Act. However, Xyloid did not remit the amounts

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so deducted to the respondent nor did it keep such deductions or withholdings separate and apart from its “own moneys or from the assets of…” Xyloid. After his appointment the receiver paid to the employees of Xyloid wages earned prior to his appointment, as required by The Payment of Wages Act of Manitoba. This payment was made less the prescribed deductions but the receiver made no remittance to the respondent in respect of the aforementioned federal statutes.

The only issue arising was what priority, if any, did the respondent enjoy by virtue of the said statutes over the claims of Dauphin as the secured creditor of Xyloid with reference to the moneys held by the receiver in the amount of $7,416.57.

The trial judge held that the Crown had failed to establish priority for any portion of the amount claimed and ordered that the receiver pay out to Dauphin the entire sum of $7,416.57. The Manitoba Court of Appeal, reversing the judgment of the trial judge, directed that Dauphin do pay to the Crown the sum of $6,278.81. With leave of this Court, Dauphin appealed from the judgment of the Court of Appeal.

Held (Estey and Chouinard JJ. dissenting in part): The appeal should be allowed only to the extent of deducting from the amount allowed by the judgment of the Court of Appeal the sum claimed for income tax deductions made prior to the date of the receiving order, that is, $2,550.78, with the appropriate adjustment for interest and penalties.

Per Martland, Ritchie, Pigeon, Beetz and McIntyre JJ.: The appeal failed in respect of the deductions made by the receiver out of wages paid under The Payment of Wages Act. Dauphin was, in effect, contending that The Payment of Wages Act authorized the receiver to make the income tax deduction for the benefit of the debenture holder. This was a complete subversion of the purpose of such a deduction. Section 153 of the Income Tax Act is the only law under which anyone can make a deduction for income tax, but this section goes on to provide in subs. (4) that the amount so deducted shall be held “in trust for Her Majesty”. No law of Manitoba can possibly change that. Also, by virtue of s. 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. But, the position taken by Dauphin means that it would get the benefit of the deductions so that the employees would have to pay income tax to the Department of National Revenue on what they have not received and for which they would get no credit.

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The trial judge failed to consider the consequences of allowing a receiver to make deductions for income tax when paying wages and then failing to treat those deductions as withholdings on account of income tax. This is not only a contradictory position but, if upheld, would amount to an unfair diversion which the Legislature of Manitoba cannot possibly have intended to authorize by the definition of wages in The Payment of Wages Act.

In view of the purpose of The Payment of Wages Act the deductions contemplated in the definition of “wages” are only those which may be made for the benefit of the employer. The statute should not be construed in a manner which would deprive a third party, the tax collector, of his proper rights. The Legislature is not presumed to have intended an inconsistency and it would be inconsistent to authorize deductions to be made for income tax only to be appropriated to the benefit of the employer’s creditor.

With respect to the deductions made by the receiver for the Canada Pension Plan, and Unemployment Insurance, employee portion, the amounts withheld represented a debt due by the recipients of the wages under the provisions of s. 8 of the Canada Pension Plan and s. 62 of the Unemployment Insurance Act, 1971. The receiver had ample funds for paying the full amount of wages due and therefore the deductions made were true deductions, not mere book-keeping entries, they were money withheld for the purpose of satisfying the employees’ indebtedness for contributions and premiums in respect of those earnings. This money withheld for such purpose became held in trust in favour of the tax collector who is therefore entitled to claim it from the receiver. Dauphin cannot justify the judgment at trial directing the receiver to give it those moneys and it was therefore properly ordered by the judgment of the Court of Appeal to turn them over to the Department of National Revenue so that they may be credited against the employees’ indebtedness.

The Court of Appeal was correct in holding that there was no legal basis for the claims for the Canada Pension Plan and Unemployment Insurance deductions, employer portion. This conclusion was not challenged on the appeal to this Court and no question was raised as to the correctness of the adjustments which were made for those sums with interest and penalties and resulted in the amount fixed by the judgment.

Following the reasoning in Re Deslauriers Construction Products Ltd., 1970 402 (ON CA), [1970] 3 O.R. 599, the claim for income tax deductions on wages paid by the employer

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itself before the receiving order could not be supported. Deslauriers dealt with the Canada Pension Plan, the relevant provisions of which were subss. 24(3) and (4). After providing in subs. 24(3) as in subs. 227(4) of the Income Tax Act, that the employer who has deducted an amount “shall be deemed to hold the amount so deducted in trust for Her Majesty”, subs. 24(4) goes on to provide that “In the event of any liquidation” an equal amount “shall be deemed to be separate from… the estate in liquidation …whether or not that amount has in fact been kept separate”. The claim for the Pension Plan deductions was upheld in Deslauriers by reason only of those words which are not in the Income Tax Act.

There remained the further question whether the quoted provisions of the Canada Pension Plan and the similar provisions of the Unemployment Insurance Act are applicable to a receiver appointed by the Court pursuant to fixed and floating charges covering all assets of an employer company. The claim for Pension Plan and Unemployment Insurance deductions cannot affect the proceeds of realization of property subject to a fixed and specific charge. From the moment such charge was created, the assets subject thereto were no longer the property of the debtor except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing. However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.

The final question was whether the realization by the receiver is a “liquidation, assignment or bankruptcy” within the meaning of the provisions under consideration. There was no reason not to give the word “liquidation” its wide meaning in usual language. The majority in the Court of Appeal properly held that the amount deducted by the employer from employees’ wages for Pension Plan and Unemployment Insurance contributions was to be deemed to have been held in trust for Her Majesty at the date of the receiving order and consequently was to be deemed to have been realized by the receiver out of the assets subject to the floating charge.

Board of Industrial Relations v. Avco, 1979 230 (SCC), [1979] 2 S.C.R. 699; Wiltshire v. Barrett, [1966] 1 Q.B. 312; Royal Trust Co. v. Montex Apparel Industries Ltd.,

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1972 437 (ON SC), [1972] 2 O.R. 673, aff’d 1972 705 (ON CA), [1972] 3 O.R. 132; Davey v. Gibson (1930), 65 O.L.R. 379, referred to.

Per Estey and Chouinard JJ., dissenting in part: The Payment of Wages Act of Manitoba created a charge secured by a statutory lien against the assets of Xyloid, in an amount equal to the wages owing as defined in the Act, which means those wages owing less an amount equal to lawful deductions that may be made by an employer.

The lien against the assets of Xyloid as subsequently received by the receiver on its appointment was in existence at the time of that appointment, and attached to and continued to exist as a lien and charge on those assets into the post-appointment period. The receiver, in making the payments it did to the former employees of Xyloid, was not distributing wages to those employees but was rather simply paying off the statutory lien and charge. In doing so, it clearly did not act as the agent of Xyloid but simply as an officer of the court in the discharge of its responsibilities under the order of appointment. Dauphin therefore was entitled against the respondent to retain the sum of $3,474.83 claimed by the respondent with reference to the post-appointment period.

Xyloid contrary to the direction contained in each of the Canada Pension Plan Act, the Unemployment Insurance Act and the Income Tax Act failed to keep “separate and apart from his own moneys…” any amount so deducted or withheld upon the payment of wages to its then employees. Each of the three sections, after giving such a direction, provides in different ways that the moneys deducted or withheld are held “in trust for Her Majesty”. The terms of the Canada Pension Plan Act and the Unemployment Insurance Act provide further that “in the event of any liquidation, assignment or bankruptcy of an employer [an amount equal to these moneys] shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate”.

Clearly, there was no assigment or bankruptcy of Xyloid. The meaning to be properly applied to the word ‘liquidation’ in each of the three statutes is liquidation of the employer entity. In legal matters, such a term connotes the winding up of the entity by realizing upon its assets, paying off its liabilities, and distributing the surplus, if any, rateably amongst shareholders according to their precedence. There was no such proceeding with reference to Xyloid and hence the provisions of subs. (4) of s. 24 of the Canada Pension Plan Act, subs. (3) of s.

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71 of the Unemployment Insurance Act and s. 227(4) and (5) of the Income Tax Act have no application.

The Income Tax Act provision (s. 227(5)) does not include the extended provision with reference to a deeming of separation in the event of liquidation and hence the respondent, even if the event of liquidation had occurred, would have no assistance from the statute in determining a segregation of accounts.

The payments by Xyloid, therefore, in the pre-appointment period post-date the accrual of the wage entitlement. Xyloid failed to maintain the deductions separate and apart from its own moneys and assets, and Xyloid was not in liquidation, was not in bankruptcy, and had made no assignment, and therefore the express waiver of the requirement of separation legislated in two of the three statutes does not avail the respondent. Therefore, as in the case of the post-appointment period, the appellant is entitled to those moneys withheld by the receiver with reference to deductions made in this period as well.

Royal Trust Co. v. Montex Apparel Industries Ltd., supra; Bank of Nova Scotia v. Middleton Motors Ltd. (1978), 1978 3751 (NS SC), 78 D.T.C. 6307; Re KRA Restaurants Ltd. v. Toronto Dominion Bank (1977), 1977 1789 (NS SC), 74 D.L.R. (3d) 272, referred to.

APPEAL from a judgment of the Court of Appeal for Manitoba[^1], reversing a judgment of Wright J., and allowing certain claims of the Crown in respect of source deductions under the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act. Appeal allowed in part, Estey and Chouinard JJ. dissenting in part.

John Lamont and R.T. Willis, for the plaintiff appellant.

T.B. Smith, Q.C., and Craig Henderson, for the applicant, respondent.

The judgment of Martland, Ritchie, Pigeon, Beetz and McIntyre JJ. was delivered by

PIGEON J.—This is an appeal by leave of this Court from the judgment of the Court of Appeal for Manitoba[^1] reversing the judgment of Wright J.[^2] and directing that Dauphin Plains Credit

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Union Limited (the “Credit Union”), the appellant in this Court, do pay to Her Majesty The Queen, the respondent in this Court, the sum of $6,278.81.

As security for debts in excess of a million dollars, the Credit Union had obtained from Xyloid Industries Ltd. (the “Company”) debentures whereby a first fixed and specific charge was created on all its real and immovable property with a floating charge on all its other assets. The debtor being in default, the Credit Union instituted an action on March 30, 1977 and, on the following day, March 31, 1977, obtained a receiving order whereby the Clarkson Company Limited was appointed receiver. The receiver having realized the assets of the company was authorized to pay the net proceeds of realization to the secured creditor, the Credit Union, subject to a claim of the Department of National Revenue in the amount of $7,416.57. An application for an order directing the payment of this sum was made on behalf of the Crown based on assessments made up as follows:

1. Pre March 31, 1977

Income tax source deductions

$2,550.78

Canada Pension Plan, employee portion

275.43

Canada Pension Plan, employer portion

275.43

Unemployment Insurance deduction employee portion

244.77

Unemployment Insurance deduction employer portion

342.68

Interest and penalties

647.25

TOTAL ASSESSMENT

$4,336.34

2. Post March 31, 1977

Income tax source deductions

2,068.05

Canada Pension Plan, employee portion

220.05

Canada Pension Plan, employer portion

220.05

Unemployment Insurance deduction employee portion

196.16

Unemployment Insurance deduction employer portion

274.63

Interest and penalties

495.89

$3,474.83

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The amounts under the heading “Pre March 31, 1977” were claimed in respect of wages paid by the company before the receiving order and as to this the trial judge made the following finding (at p. 660):

… Because of the specific allegation of Mr. Johnson (para. 4 of his affidavit) that an audit shows the deductions claimed were in fact made, and because, in argument, counsel for the defendant made no submission otherwise, I accept as factual that the required statutory amounts were deducted by the defendant before or when the wage payments were made by it before the date of receivership.

The allegation referred to by the trial judge is para. 2 of the affidavit reading as quoted (at p. 659):

2. That I am advised and believe that the Minister of National Revenue caused an assessment to be raised against Xyloid Industries Ltd. This assessment was raised pursuant to an audit that was performed on the books of Xyloid Industries Ltd. in Receivership and represents unpaid source deductions apparent on the books of Xyloid Industries Ltd. for the months of February, March, and April, 1977.

The assessment under the heading “Post March 31, 1977” was made against the receiver but it did not relate as Monnin J.A. said (at p. 517) to “wages earned in April 1977, after the receivership”. It was admitted at the hearing in this Court that deductions on wages earned in the service of the receiver had been duly remitted. The assessment related to wages which were earned prior to March 31, 1977, but were paid by the receiver pursuant to The Payment of Wages Act of Manitoba. Counsel for the Credit Union admitted that when paying those wages to the employees the receiver had withheld the amounts claimed as income tax source deductions, Canada Pension Plan, employee portion and Unemployment Insurance deduction, employee portion. In other words, the receiver paid the employees the amount of wages due, net of those deductions and he was assessed under date January 25, 1978, “for failure to remit as required” in this respect. I find it

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convenient to deal with this part of the claim first.

The Payment of Wages Act, 1975 (Man.), c. 21, provides:

1. In this Act,

(h) “wage” or “wages” includes salaries, commissions, or any compensation for labour or services measured by time, piece, or otherwise, and any pay which is due and payable to an employee including moneys payable under The Vacations With Pay Act or moneys payable in cases of termination of employment under The Employment Standards Act; but does not include any deductions from wages that may be lawfully made by an employer.

7(1) Notwithstanding any other Act, the amount of wages due and payable by an employer to an employee not exceeding $2,000.00 constitutes a lien and charge on the property and assets of the employer in favour of the employee, and is payable in priority to any other claim or right, including those of the Crown in right of Manitoba, and without limiting the generality of the foregoing that priority extends over every assignment, including an assignment of book debts, whether absolute or otherwise, every mortgage on real or personal property, and every debenture.

The relevant provisions of the Income Tax Act (enacted 1970-71-72, c. 63) are:

153. (1) Every person paying

(a) salary or wages or other remuneration to an officer or employee,

at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on account of the payee’s tax for the year under this Part.

(3) When an amount has been deducted or withheld under subsection (1), it shall, for all the purposes of this Act, be deemed to have been received at that time by

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the person to whom the remuneration, benefit, payment, fees, commissions or other amounts were paid.

It is important to consider the nature of the deduction for income tax. It is not a deduction for the benefit of the employer, it is a withholding for the benefit of the employee because it is to be remitted to the Receiver General of Canada on account of the employee’s tax indebtedness. By virtue of other provisions of the Income Tax Act if, as happens in a large number of cases, the withholdings exceed the employee’s tax liabilities, a refund will be made to the employee by the Department of National Revenue. Therefore, the amount withheld remains a part of the wages, and subs. 153(3) provides that it is “deemed to have been received” by him at the time the payment was made less the deduction. Furthermore, subs. 227(4) of the Income Tax Act provides:

(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.

In the present case, the Credit Union is, in effect, contending that The Payment of Wages Act authorized the receiver to make the income tax deduction for the benefit of the debenture holder. In my view, this is a complete subversion of the purpose of such a deduction. At the hearing, I said to the appellant’s counsel: “You contend that the deductions made from the wages enure to the benefit of the creditor?” His answer was: “That is the practical, but not the legal result”. I just cannot see how what is true in fact, may be false in law. In my view, counsel’s assertion reveals the inherent contradiction in the Credit Union’s position. Section 153 of the Income Tax Act is the only law under which anyone can make a deduction for income tax, but this section goes on to provide in subs. (4), that the amount so deducted shall be held “in trust for Her Majesty”. No law of Manitoba can possibly change that. How can the Credit Union claim that the amount deducted was held for its benefit?

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It must also be considered that, by virtue of s. 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. But, the position taken by the Credit Union means that it would get the benefit of the deductions so that the employees would have to pay income tax to the Department of National Revenue on what they have not received and for which they would get no credit.

With respect, it appears to me that the trial judge has failed to consider the consequences of allowing a receiver to make deductions for income tax when paying wages and then failing to treat those deductions as withholdings on account of income tax. This is not only a contradictory position but, if upheld, would amount to an unfair diversion which the Legislature of Manitoba cannot possibly have intended to authorize by the definition of wages in The Payment of Wages Act.

In view of the purpose of The Payment of Wages Act it appears to me that the deductions contemplated in the definition of “wages” are only those which may be made for the benefit of the employer. This appears not only from the considerations above stated, but also from the very wording of the provision: “deductions from wages that may be lawfully made by an employer”. The withholdings directed by the Income Tax Act etc. are not deductions that may be made by an employer, they are deductions that shall be made. In my view, the Legislature of Manitoba when speaking of deductions that may be made by an employer had in mind deductions of the same nature as those which are contemplated in s. 25 of The Employment Standards Act, R.S.M. 1970, c. E110:

25. A board upon the written authorization of the minister may, with respect to the area for which it is appointed, make recommendations in writing respecting

(a) standards of minimum wages to be paid to employees

(i) of different ages; or

(ii) who are inexperienced, handicapped, or special employees;

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(b) the maximum proportion of employees classified under sub-clause (ii) of clause (a) to other employees in the same employment; and

(c) the maximum amount, if any, that may be deducted from the prescribed minimum wage in cases where the employer furnishes to the employee board, lodging, uniforms, laundry, or other service.

I have underlined the words “that may be deducted” which appear in this statute in pari materia of the same province; they are indicative of what was contemplated. In The Payment of Wages Act as in The Employment Standards Act the legislature was exclusively concerned with matters within its jurisdiction. In respect of deductions, minimum wage orders are concerned only with those which are under the control of the provincial legislature, they make no reference to the deductions required by federal statutes although employers obviously have to make them. In my view, the provision with respect to deductions in The Payment of Wages Act is to be similarly viewed. It is concerned only with matters under the control of the Legislature. It is a well-established rule that provincial enactments are presumed to be intended to avoid interference with federal legislation.

The recent judgment of this Court in Board of Industrial Relations v. Avco[^3] affords an example of a restricted meaning ascribed to a provision of the British Columbia Payment of Wages Act to avoid untoward consequences. The provision under consideration created “a lien and charge… payable in priority over any other claim or right…”. Giving the unanimous opinion, Martland J. said (at p. 706):

…The property to which a s. 5A lien attaches is not defined nor identified. In the absence of a specific statutory provision to that effect, in my view it should not be construed in a manner which could deprive third parties of their pre-existing property rights.

In my view, the Manitoba statute should not be construed in a manner which would deprive a third party, the tax collector, of his proper rights. The Legislature is not presumed to have intended an inconsistency and I would find it inconsistent to

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authorize deductions to be made for income tax only to be appropriated to the benefit of the employer’s creditor.

In R. v. Biron[^4] the majority in this Court approved and applied the decision in Wiltshire v. Barrett[^5] where a provision reading: “A police constable may arrest without warrant a person committing an offence under this section” was held to mean “apparently committing an offence”. In that case Lord Denning, dealing with the argument that if the man arrested was not prosecuted then the arrest was unlawful, said (at p. 325):

…The section does not mention cases of a third kind, namely, those cases where on inquiry at the police station it appears that there is no sufficient ground on which to proceed further against the man. Clearly, in those cases, the man should be released forthwith. There was no need in the statute to mention that contingency. It is too obvious for words. (Emphasis added.)

The trial judge held that the receiver in this case was not a person within the meaning of subs. 153(1) of the Income Tax Act. For this conclusion he relied on the decision of the Ontario Court of Appeal in Royal Trust Co. v. Montex Apparel Industries Ltd.[^6] But, in that case the question was whether the receiver came within the provisions of subs. 50(9) of the Excise Tax Act reading:

When the Minister has knowledge that any person has received from a licensee any assignment of any book debt…

Here the question is whether the receiver comes within the words “Every person paying salary or wages…” and I fail to see any reason for holding that the receiver did not come within the terms of this provision. There is no need to consider the definition of “person” in the Act. In any case this definition is not a restrictive but an extensive definition due to the word “includes”. Assuming the receiver was not authorized to make the deduc-

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tions, the Credit Union is not entitled to that part of the employees’ wages, it should go to them. By having it remitted to the tax authorities the employees will be given credit therefor.

I will finally note that no argument was addressed to the Court urging that, by virtue of subs. 152(8) and 227(10), the assessment on the receiver could not be disputed otherwise than by appeal under the provisions of the Income Tax Act. Under the circumstances, I do not find it necessary to consider the point before coming to the conclusion that the appeal fails in respect of the deductions made by the receiver out of wages paid under The Payment of Wages Act.

With respect to the deductions made by the receiver for the Canada Pension Plan, employee portion, and the Unemployment Insurance, employee portion, the trial judge said (at pp. 664‑665):

Both acts speak in terms of the obligation to deduct as lying with the employer of the persons receiving the payments, and the receiver-manager, not being such an employer, therefore had no obligation to make the deductions claimed.

In my view, the question is not whether the claim would succeed if the receiver had not made those decuctions. The fact is, as appears from the Johnson affidavit already quoted, that the deductions were duly made and entered in the books. In making payments to the employees pursuant to The Payment of Wages Act the receiver actually withheld the proper amount for Pension Plan contributions and Unemployment Insurance premiums. These amounts represented a debt due by the recipients of the wages under the provisions of s. 8 of the Canada Pension Plan and s. 62 of the Unemployment Insurance Act, 1971. The receiver had ample funds for paying the full amount of wages due and therefore the deductions made were true deductions, not mere book-keeping entries, they were money withheld for the purpose of satisfying the employees’ indebtedness for contributions and premiums in respect of those earnings. This money withheld for such purpose became held in trust in favour of the tax collector who is therefore entitled to claim it from the receiver.

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The Credit Union cannot justify the judgment at trial directing the receiver to give it those moneys and it was therefore properly ordered by the judgment of the Court of Appeal to turn them over to the Department of National Revenue so that they may be credited against the employees’ indebtedness.

I find it clear that the Court of Appeal was correct in holding that there was no legal basis for the claims for the Canada Pension Plan, employer portion, and the Unemployment Insurance deduction, employer portion. This conclusion was not challenged on the appeal to this Court and no question has been raised as to the correctness of the adjustments which were made for those sums with interest and penalties and resulted in the amount fixed by the judgment.

The assessment entitled “Pre March 31, 1977” involves entirely different considerations. The claim is for deductions which were made by the employer when paying wages prior to the making of the receiving order. The sums withheld were merely deducted from the wages paid, they were not set apart. In fact, the company was short of funds and did not have funds available to be set aside as required by law. It was not disputed that the funds corresponding to the deductions could not be traced. These withholdings merely represented deductions from the wages paid, not money set aside at the time. The material statutory provisions of the Income Tax Act are subss. 227(4) and (5):

(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.

(5) All amounts deducted or withheld by a person under this Act shall be kept separate and apart from his own moneys and in the event of any liquidation, assignment or bankruptcy the said amounts shall remain apart and form no part of the estate in liquidation, assignment or bankruptcy.

The trial judge said on this point (at p. 662):

Insofar as the claim for income tax deductions from wages paid before the receivership is concerned, under

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the above provisions the employer must first deduct or withhold the requisite moneys, which then must be kept separate. If they are not kept separate they must be traceable as trust moneys in order to be recovered by the Crown: Re Hallets Estate; Knatchbull v. Hallett (1880), 13 Ch. D. 696 (C.A.); Re Craftsmen Painting Contractors Ltd., 1967 272 (ON SC), [1968] 1 O.R. at 522, 11 C.B.R. (N.S.) 91, 67 D.L.R. (2d) 37, leave to appeal refused 11 C.B.R. (N.S.) 91n, and cases cited there. In the present circumstances the Crown has not established that the moneys purported to be deducted actually existed, or, if they did, that the moneys were kept in such a way as to be traceable. Thus the Crown’s claim here cannot succeed.

The majority opinion in the Court of Appeal was based on the overruling of the Craftsmen’s case by the Ontario Court of Appeal in Re Deslauriers Construction Products Ltd.[^7] That case, like Craftsmen’s, dealt with the Canada Pension Plan, 1964-65 (Can.), c. 51 (now R.S.C. 1970, c. C-5). The relevant provisions are subss. 24(3) and (4) as follows:

(3) Where an employer has deducted an amount from the remuneration of an employee as or on account of any contribution required to be made by the employee but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.

(4) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (3) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate.

It will be noted that after providing in subs. 24(3) as in subs. 227(4) of the Income Tax Act, that the employer who has deducted an amount “shall be deemed to hold the amount so deducted in trust for Her Majesty”, subs. 24(4) goes on to provide that “In the event of any liquidation” an equal amount “shall be deemed to be separate from… the estate in liquidation… whether or

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not that amount has in fact been kept separate”. It is clear from the following passage of the judgment delivered by Gale C.J.O. (at pp. 601-602) that the claim for the Pension Plan deductions was upheld in Deslauriers by reason only of those words which are not in the Income Tax Act:

On the facts of the instant case again, only notional deductions appearing on the payroll records had been made as the company could meet only its net payroll and its operational expenses.

On behalf of the Attorney-General it was submitted that, while the Minister would have no claim such as is asserted in this case under s-s. (3) if s. 24 ended there, none the less, in the light of s-s. (4), the Minister did have the right to receive out of the realization of the assets a sum representing the amount which was deducted from the employees’ salaries, totalling $1,068.82. We agree with that interpretation of s-s. (4). It seems to us that s-s. (4), and particularly the concluding six words thereof, were inserted in the Act specifically for the purpose of taking the moneys equivalent to the deductions out of the estate of the bankrupt by the creation of a trust and making those moneys the property of the Minister.

We agree with Mr. Olsson on behalf of the Attorney-General that the word “deemed” in the fourth line of s-s. (4) must be used in the sense of a conclusive rather than a rebuttable presumption since the contrary case, where the amount has not in fact been kept separate and apart, is specifically dealt with in the concluding part of that very subsection.

I find the reasoning in Deslauriers wholly persuasive and would note that in 1956, (c. 39, s. 27) Parliament repealed subs. (6) of s. 123 of the Income Tax Act, R.S.C. 1952, c. 148, whereby a first charge was created on the property of an employer for income tax deductions. I must therefore hold that the claim for the income tax deductions on wages paid by the employer itself before the receiving order cannot be supported.

There remains for consideration the further question whether the quoted provisions of the Canada Pension Plan and the similar provisions of

[Page 1199]

the Unemployment Insurance Act are applicable to a receiver appointed by the Court pursuant to fixed and floating charges covering all assets of an employer company. Subsections 71(2) and (3) of the Unemployment Insurance Act, 1971 (enacted 1970-71-72, c. 8) read:

(2) Where an employer has deducted an amount from the remuneration of an insured person as or on account of any employee’s premium required to be made by the insured person but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own monies and shall be deemed to hold the amount so deducted in trust for Her Majesty.

(3) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (2) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own monies or from the assets of the estate.

It should first be observed that, for reasons similar to those on which the decision in the Avco case, supra, was based, the claim for Pension Plan and Unemployment Insurance deductions cannot affect the proceeds of realization of property subject to a fixed and specific charge. From the moment such charge was created, the assets subject thereto, were no longer the property of the debtor except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing. However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.

The remaining question is whether the realization by the receiver is a “liquidation, assignment or bankruptcy” within the meaning of the provisions under consideration. This question was considered by Osler J. in Royal Trust Co. v. Montex Apparel Industries Ltd.[^8] His conclusion denying the claim for Unemployment Insurance deductions was

[Page 1200]

affirmed on appeal[^9]. However, it is important to note that the provision in force at the material time (R.S.C. 1970, c. U-2, subs. 40(2)) did not include the words “whether or not the amount thereof has in fact been kept separate and apart from the employer’s own assets or from the assets of the bankrupt estate”. At that time those words which are now in subs. 71(3) of the Unemployment Insurance Act, 1971, were found only in subs. 24(4) of the Pension Plan and, as we have seen, it is only by reason of those additional words that the claim was allowed in Deslauriers. Consequently, in their absence the claim failed on the basis of the reasoning made by Gale C.J.O. which I have already quoted and on which Osler J. relied. This was clearly sufficient to dispose of the point but he went on to say obiter (at p. 681):

Although no authority on this branch of the case was cited to me, it is trite law that taxing statutes are to be strictly construed and, in my view, a receivership by order of the Court is not a liquidation, assignment or bankruptcy and hence, neither s. 40 of the Unemployment Insurance Act nor s. 24 of the Canada Pension Plan have application, regardless of the above reasons. On the facts of the present case, it appears that the receiver has in reality been engaged in liquidating the defendant’s enterprise. However, as was pointed out by counsel for the trustee, liquidation is not the inevitable result of a receivership and indeed, there have been many successful receiverships which have resulted in the enterprise being handed back to its owner as a going concern. It cannot be known with any degree of certainty at the moment of the appointment of a receiver whether in fact liquidation is inevitable and the effect of the various statutes must be assessed as at that moment. The task of the receiver might well be made an impossible one if the application of these statutes were made to await the outcome of his endeavours rather than being ascertainable upon his appointment.

With respect, I am unable to agree. We are not concerned with a situation where the receivership does not end up in a liquidation, just as when considering a distribution in bankruptcy one is not concerned with the situation where the receiving order is discharged. We are here dealing with a receivership which was completed by the sale and distribution of all the assets of the employer com-

[Page 1201]

pany. In the statutes of Canada as they stood when the two provisions we have to construe were enacted, “liquidation” was not the word used to describe the voluntary or forced distribution of the assets of a company, the word used was “winding-up”, see the Winding-up Act, R.S.C. 1970, c. W-10. However, the word “liquidation” was sometimes used to describe this process of dissolution of a company, for instance, in s. 6 subpar. (b) providing for the application of the Act to Canadian Companies:

(b) that are in liquidation or in process of being wound up, and, on petition by any of their shareholders or creditors, assignees or liquidators ask to be brought under this Act.

The word is also found in s. 166 with reference to a British or foreign company that “is in liquidation in the country in which its head office is situated”. In the Canada Cooperative Associations Act, 1970-71-72 (Can.), c. 6, the word “liquidation” is found in s. 74 making the directors liable for employees’ wages when, among other cases, the association has

(ii) gone into liquidation or been ordered to be wound up under the Winding-Up Act, or has made an assignment under the Bankruptcy Act or a receiving order under the Bankruptcy Act has been made against it…

It seems to me that it would not make sense to hold that, because the assets of a company were realized by a receiver appointed at the request of a creditor rather than by a liquidator or a trustee in bankruptcy appointed by a court, the claim for wages should fail. It appears to me that there is no reason not to give the word “liquidation” its wide meaning in usual language. I would follow the reasoning made by Middleton J.A. in Davey v. Gibson[^10], at p. 381:

The argument before us turned rather upon a discussion of the question whether the Act should be strictly or liberally construed. It is not, in my view, necessary to enter upon any such discussion.…

[Page 1202]

The term “gone into liquidation” is not anywhere defined; the language is more or less colloquial, for there is not, at the present time, any legal proceeding known as liquidation. At one time there was, but it has long since been obsolete. The technical term used in the Companies Act is “wind-up,” although the officer appointed to conduct the winding-up is designated a liquidator.

If one searches dictionaries, it is not hard to find a definition of liquidation wide enough to include bankruptcy. In the Century Dictionary this is given: “Liquidation: the act or operation of winding up the affairs of a firm or company by getting in the assets, settling with its debtors and creditors, and apportioning the amount of each partner’s or shareholder’s profit or loss, etc.” In the Oxford Dictionary is the following: “Liquidate: Law and commerce: To ascertain and set out clearly the liabilities of (a company or firm) and to arrange the apportioning of the assets; to wind up.” In Corpus Juris, that mine of information, is this definition: “Liquidation, a word of French origin, is not a technical term, and, therefore, can have no fixed legal meaning; but it has a fairly defined legal meaning, and it is said to be a term of jurisprudence, of finance, and of commerce. It is defined as the act of settling, adjusting debts, or ascertaining their amounts or balance due; settlement or adjustment of an unsettled account…. Applied to a partnership or company, the act or operation of winding up the affairs of a firm or company by getting in the assets, settling with its debtors and creditors, and appropriating the amount of profit or loss.”…

In my opinion the majority in the Court of Appeal of Manitoba properly held that the amount deducted by the employer from employee’s wages for Pension Plan and Unemployment Insurance contributions was to be deemed to have been held in trust for Her Majesty at the date of the receiving order and consequently was deemed to have been realized by the receiver out of the assets subject to the floating charge. The exact amount of such assets was not established, but one of the exhibits shows that more than $100,000 were realized from inventory. It is therefore clear that the receiver had ample funds to cover those two small claims.

For those reasons I would allow the appeal only to the extent of deducting from the amount allowed by the judgment of the Court of Appeal

[Page 1203]

the sum claimed for income tax deductions made prior to the date of the receiving order, that is, $2,550.78, with the appropriate adjustment for interest and penalties as directed by the Court of Appeal (per Monnin J.A. at p. 523). The appellant succeeds on a major point and, in the circumstances of the case where no costs have been allowed below, I think it is entitled to costs in this Court.

The reasons of Estey and Chouinard JJ. were delivered by

ESTEY J. (dissenting in part)—The issue arising in these proceedings is whether or not a receiver appointed by the court to enforce security granted by the defendant/debtor to the plaintiff/appellant is obligated to pay to the respondent, in priority to the claims of the appellant as a secured creditor, certain moneys with reference to deductions made (or which, in the view of the respondent, should have been made) from wages paid or payable by the defendant under three federal statutes.

For simplicity, the plaintiff/appellant will be referred to as Dauphin, the debtor/defendant and the employer in question as Xyloid, and Her Majesty The Queen in the Right of Canada as the respondent. On March 31, 1977, Dauphin obtained the appointment by the Court of Queen’s Bench of the Province of Manitoba of a receiver and manager (the Clarkson Company Ltd.) of “all the undertaking, property and assets of Xyloid. In due course, the receiver/manager (hereinafter referred to as the “receiver”) realized the assets secured by a debenture, a floating charge and a chattel mortgage and distributed the net proceeds of such realizations, less the sum of $7,416.57, which upon the discharge of the receiver by Deniset J. was directed to be held until the validity and priority of the claims of the respondent under certain federal statutes was determined by the court. We are not here concerned with the events leading up to the discharge of the receiver and indeed the record does not reveal whether the aforementioned sum of $7,416.57 was the product of realization of the fixed charge in the debenture, the assets secured by the chattel mortgage, or the floating charge embodied in the debenture. Nothing appears to turn upon the origin of these funds.

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It is important, however, to appreciate that prior to the appointment of the receiver (which I shall refer to for convenience as the pre-appointment period), Xyloid paid certain wages to its employees and effected the deductions prescribed by the Income Tax Act of Canada, the Canada Pension Plan Act and the Unemployment Insurance Act. With reference to these payments, the learned trial judge found that Xyloid made the statutory deductions. He stated:

I accept as factual that the required statutory amounts were deducted by the defendant before or when the wage payments were made by it before the date of the receivership.

However, Xyloid did not remit the funds so withheld to the respondent nor did it keep such deductions or withholdings separate and apart from its “own moneys or from the assets of….” Xyloid. After the appointment of the receiver (and this period I shall for convenience refer to as the post-appointment period), the receiver paid to the employees of Xyloid wages accruing in the pre-appointment period, allegedly pursuant to The Payment of Wages Act of Manitoba. When doing so, the receiver made no remittance to the respondent (and by this, I mean to include all agencies and departments of the respondent) in respect of the three federal statutes.

It is sufficient to observe in passing that in the post-appointment period the receiver carried on some operations of Xyloid and engaged in that connection some former employees of Xyloid to whom wages were paid by the receiver and remittances were forwarded to the respondent pursuant to the three above-mentioned federal statutes. No issue arises with respect to this phase of the receiver’s activities.

The only issue therefore arising is what priority, if any, did the respondent enjoy by virtue of these federal statutes over the claims of Dauphin as the secured creditor of Xyloid with reference to the moneys held by the receiver in the amount of $7,416.57.

1. Payments made by the receiver in the post-appointment period

It is convenient to commence with the position taken by the appellant with reference to the pay-

[Page 1205]

ment by the receiver in the post-appointment period to the former employees of Xyloid of certain moneys accruing to them as wages in the pre-appointment period. The appellant states that these payments were made by the receiver pursuant to The Payment of Wages Act of Manitoba, the relevant terms of which are as follows:

7(1) Notwithstanding any other Act, the amount of wages due and payable by an employer to an employee not exceeding $2,000.00 constitutes a lien and charge on the property and assets of the employer in favour of the employee, and is payable in priority to any other claim or right, including those of the Crown In Right of Manitoba, and without limiting the generality of the foregoing that priority extends over every assignment, including an assignment of book debts, whether absolute or otherwise, every mortgage on real or personal property, debenture and security, whether registered or not, made, given, accepted or issued before or after the coming into force of this Act.

3(4) Every employer shall be deemed to hold the wages accruing due to an employee in trust for the employee whether or not the amount thereof has been kept separate and apart by the employer and the employee has a lien and charge in the amount of wages on the assets of the employer that in the ordinary course of business would be entered in the accounts of the business of the employer whether so entered or not.

1(h) “wage” or “wages” includes salaries, commissions, or any compensation for labour or services measured by time, piece, or otherwise, and any pay which is due and payable to an employee including moneys payable under The Vacations With Pay Act or moneys payable in cases of termination of employment under The Employment Standards Act; but does not include any deductions from wages that may be lawfully made by an employer.

24 Where there is a conflict between the provisions of this Act and those of any other Act of the Legislature, the provisions of this Act prevail.

The appellant submits that the Manitoba statute constitutes a statutory lien against the assets of Xyloid in favour of the latter’s employees, and is payable in priority to “any other claim or right… whether registered or not, made, given… or issued before or after the coming into force of this Act”. Furthermore, the statute provides that the employer shall “be deemed to hold the wages

[Page 1206]

accruing…” in trust for the employee “whether or not the amount thereof has been kept separate and apart by” Xyloid. By reason of the definition of “wage” in s. 1(h), the receiver, in the submission of the appellant, properly paid off this lien in the statutory amount, being the wages accruing but not including any deductions therefrom “that may be lawfully made by an employer”. In the result, according to this line of argument, the receiver applied the net realizations from the assets secured by the aforementioned debenture, chattel mortgage and floating charge to the extent necessary to pay off the statutory lien arising under the Manitoba statute.

In determining the consequences in law of the payment by the receiver in response to the Manitoba Act in the post-appointment period, one must determine whether the payments were in fact and in law the payment of wages, or whether the effect of the Act is that the payment in question was a payment of debt. I have concluded that the Manitoba statute has created a charge secured by a statutory lien against the assets of Xyloid, in an amount equal to the wages owing as defined in the Act, which means those wages owing less an amount equal to lawful deductions that may be made by an employer. The portion of the pool of assets of the employer’s estate so charged (and which here is included in the security being enforced by the court through a receivership) is limited to a defined portion of the accrued wages which remained unpaid at the time of the appointment of the receiver and the receipt by him of the assets of the employer.

In the interpretation and the application of the Manitoba statute to these circumstances, it is important to note that the lien and charge on the assets of Xyloid in favour of the employees arose when the wages became “due and payable” and hence the charge in respect of such accrued wages came into being on their accrual. This was prior to the appointment of the receiver and prior to any deductions made by Xyloid under the federal statutes.

But even if this be so, the application of the federal statutes still must be determined by an interpretation thereof to ascertain their intended

[Page 1207]

reach. The three federal statutes provide as follows:

The Income Tax Act (hereafter referred to as ITA) s. 227 Withholding Taxes

(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.

(5) All amounts deducted or withheld by a person under this Act shall be kept separate and apart from his own moneys and in the event of any liquidation, assignment or bankruptcy [of an employer] the said amounts shall remain apart and form no part of the estate in liquidation, assignment or bankruptcy.

The Canada Pension Plan Act (hereafter referred to as CPPA)

s. 24(3) Where an employer has deducted an amount from the remuneration of an employee as or on account of any contribution required to be made by the employee but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.

s. 24(4) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by sub-section (3) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate.

The Unemployment Insurance Act (hereafter referred to as UIA)

s. 71(2) Where an employer has deducted an amount from the remuneration of an insured person as or on account of any employee’s premium required to be made by the insured person but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own monies and shall be deemed to hold the amount so deducted in trust for Her Majesty.

s. 71(3) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by sub-section (2) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own monies or from the assets of the estate. (Emphasis added.)

[Page 1208]

The ITA, for example, requires that “every person paying salary or wages or other remuneration to an employee shall deduct …”. Assuming for the moment that the definition of ‘person’ includes a receiver[^11], is that person liable to make deductions from payments which in law at the moment of payment were not wages but amounts paid to satisfy a statutory lien? I do not think the statute can be so read, for the reasons stated above.

As regards the other federal statutes, apart altogether from the other reasons I have discussed, I reach the same conclusion as regards the taxation statute for the additional reason that both the UIA and the CPPA by their express terminology contemplate a payment by an employer, and the receiver here is neither employer nor the agent of the employer.

In my view, then, the result is that the lien against the assets of Xyloid as subsequently received by the receiver on its appointment was in existence at the time of that appointment, and attached to and continued to exist as a lien and charge on those assets into the post-appointment period. The receiver, in making the payments it did to the former employees of Xyloid, was not distributing wages to those employees but was rather simply paying off the statutory lien and charge. In doing so, it clearly did not act as the

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agent of Xyloid but simply as an officer of the court in the discharge of its responsibilities under the order of appointment. See Falconbridge on Mortgages, 4th ed. (1977), pp. 759-60, quoted with approval by the Manitoba Court of Appeal in International Woodworkers of America, Local 1-324 v. Wescana Inn Ltd. and Clarkson Company Limited[^12], at p. 204. See also R.W.S. Johnston, “Receivers”, L.S.U.C. Special Lectures (1961) 101, at p. 105. This comment in the Wescana judgment, supra, at p. 204, seems at odds on this point with the judgment of the Court of Appeal in this case: see (1979), 1979 2769 (MB CA), 29 CBR 276 at p. 283.

Therefore, I conclude that Dauphin succeeds and is entitled as against the respondent to retain the sum of $3,474.83 claimed by the respondent with reference to the post-appointment period.

2. The pre-appointment period

I turn now to the pre-appointment period in respect of which additional conditions arise. From the record in these proceedings it is clear that Xyloid, contrary to the direction contained in each of the CPPA, the UIA and the ITA failed to keep “separate and apart from his own moneys…” any amount so deducted or withheld upon the payment of wages to its then employees. Each of the three sections, after giving such a direction, provides in different ways that the moneys deducted or withheld are “in trust for Her Majesty”. The terms of the CPPA and the UIA are identical and provide that these moneys shall be deemed to be held in trust; and furthermore “in the event of any liquidation, assignment or bankruptcy of an employer… shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employers own moneys or from the assets of the estate”. Whether this provision, which is found in s. 24(4) of the CPPA and s. 71(3) of the UIA, is applicable turns upon the interpretation of the expression “liquidation, assignment or bankruptcy of an employer”. Clearly, there has been no assignment or bankruptcy of Xyloid and the question

[Page 1210]

therefore is, has there been a liquidation of Xyloid. The term has been variously defined in legal and other dictionaries and the following are illustrative.

Stroud’s Judicial Dictionary, 4th ed., vol. 3, at p. 1555:

Liquidation. Voluntary liquidation of a company, though merely for the purpose of reconstruction, is none the less a “liquidation” within a clause of forfeiture in a lease to the company (Horsey v. Steiger [1898] 2 Q.B. 259). But a voluntary liquidation is equivalent to “bankruptcy”, as that latter word was used in Conveyancing and Law of Property Act 1881 (c. 41), s. 14(6,i), and Conveyancing and Law of Property Act 1892 (c. 13), s. 2(2);…

Shorter Oxford English Dictionary, 1959, p. 1150:

Liquidation…

1. Law. The action or process of ascertaining and apportioning the amounts of a debt, etc.

2. The clearing off or settling (of a debt) 1786.

3. The action or process of winding up a company; the state or condition of being wound up; esp. in phr. to go into 1. 1869.

Black’s Law Dictionary

Liquidation. The act or process of settling or making clear, fixed, and determinate that which before was uncertain or unascertained. Payment, satisfaction, or collection; realization on assets and discharge of liabilities. To clear away (to lessen) a debt. Craddock-Terry Co. v. Powell, 180 Va. 242, 22 S.E.2d 30, 34. To pay or settle. In re Klink’s Estate, 310 Ill.App. 609, 35 N.E.2d 684, 687. To take over for collection. Belden v. Modern Finance Co., Ohio App., 61 N.E.2d 801, 804, 44 O.L.A. 163. Winding up or settling with creditors and debtors. Wilson v. Superior Court in and for Santa Clara County, 2 Cal.2d 632, 43 P.2d 286, 288. Winding up of corporation so that assets are distributed to those entitled to receive them. Process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

The term as employed in our law generally, whether or not it be qualified by the presence of the words ‘assignment’ or ‘bankruptcy’, relates either to the realization of assets to pay debts or to the total disposition of the undertaking of an entity

[Page 1211]

including not only the realization of assets to pay debts but for the distribution of any net surplus to the owners of the entity prior to its termination. Where the term is used as in the pension and unemployment statutes with reference to the liquidation “of an employer”, it is clear, in my view, that the term carries its broad and general meaning, that is the process of disposing of an undertaking and terminating the existence of the entity. As that has not happened here, the provisions of subs. (4) of the CPPA and (3) of the UIA are not applicable. Osler J., sitting at trial in Royal Trust Co. v. Montex Apparel Industries Ltd.[^13], reaches the same conclusion by still another avenue when he states:

On the facts of the present case, it appears that the receiver has in reality been engaged in liquidating the defendant’s enterprise. However, as was pointed out by counsel for the trustee, liquidation is not the inevitable result of a receivership and indeed, there have been many successful receiverships which have resulted in the enterprise being handed back to its owner as a going concern. It cannot be known with any degree of certainty at the moment of the appointment of a receiver whether in fact liquidation is inevitable and the effect of the various statutes must be assessed as at that moment. The task of the receiver might well be made an impossible one if the application of these statues were made to await the outcome of his endeavours rather than being ascertainable upon his appointment.

It may be argued that the term ‘liquidation’ would apply to the lesser project, that is to say realization of assets for the purpose of paying a debt, where the debt in question was secured by an all-embracing charge reaching, as is apparently the case here, 100 per cent of the assets. The argument would be that since the process of realization reduces the undertaking to zero, the entity has, in one sense at least, been put in liquidation. As a legal proposition, however, it is not sound because even in that circumstance, the charter still remains in existence, and upon the discharge of the receiver, the entity remains under the control of its owners and although its assets may be nil and although some of its liabilities may still survive in law, it cannot be said that the entity has either been liquidated or placed in liquidation.

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The appropriate definition of the word as employed in the relevant sections is that relating to the liquidation of an entity inasmuch as the term is used in the CPPA and UIA with reference to “the liquidation… of an employer”. In s. 227(5) of the Income Tax Act the term is used in company with “assignment” or “bankruptcy” but without express reference to an entity, such as an employer. The subsection goes on to refer, however, to “the estate in liquidation” which plainly refers to the ‘liquidation’ of the entity and not simply to the liquidation of a part of its assets in the process of payment of a particular secured debt. Furthermore, the three words ‘liquidation, assignment or bankruptcy’ together all pertain to an entity which has either gone into liquidation, made an assignment, or been placed in bankruptcy. This is particularly the case where, as here, the subsection requires that the amounts so withheld be kept separate and apart from the moneys of a person effecting the withholding, and hence the ‘liquidation, assignment or bankruptcy’ relates to that person as an entity and not only to the assets of that entity. Hence the meaning to be properly applied to the word ‘liquidation’ in each of these three statutes is liquidation of the employer entity. In legal matters, such a term connotes the winding up of the entity by realizing upon its assets, paying off its liabilities, and distributing the surplus, if any, rateably amongst shareholders according to their precedence. There is here, of course, no such proceeding with reference to Xyloid and hence the provisions of subs. (4) of s. 24 of the CPPA, subs. (3) of s. 71 of the UIA and s. 227(4) and (5) of the Income Tax Act have no application.

In each of those two subsections there is the further term to the trust-establishing provision that deductions shall be deemed to be separate and apart from the estate in liquidation whether or not in fact the deduction has been kept separate from the employer’s own money. This term might well reach the circumstance here where Xyloid made no such segregation of funds, but these provisions are not here applicable.

[Page 1213]

The Income Tax Act provision (s. 227(5)) does not include the extended provision with reference to a deeming of separation in the event of liquidation and hence the respondent, even if the event of liquidation had occurred, would have no assistance from the statute in determining a segregation of accounts.

This may be of considerable significance in the law of trusts in that trust property must ordinarily be identifiable, and the specific res of a trust set aside before it can be said that the trust has come into being. (Vide Waters, The Law of Trusts in Canada, 1974, p. 64 et seq., Mussoorie Bank v. Raynor[^14], Perry v. Perry[^15].) We of course are not here concerned with the general law of trusts but rather with the operation of the cited statutes.

The payments by Xyloid, therefore, in the pre-appointment period post-date the accrual of the wage entitlement. Xyloid failed to maintain the deductions separate and apart from its own moneys and assets, and Xyloid was not in liquidation, was not in bankruptcy, and had made no assignment, and therefore the express waiver of the requirement of separation legislated in two of the three statutes does not avail the respondent. Therefore, I conclude that, as in the case of the post-appointment period, the appellant is entitled to those moneys withheld by the receiver with reference to deductions made in this period as well. (To the same effect, Bank of Nova Scotia v. Middleton Motors Limited[^16].)

While the issues with which we are here concerned have not come directly to this Court before, I find the reasoning followed by other Courts supportive of the conclusion I have reached. For example, the Supreme Court of Ontario in Royal Trust Company v. Montex Apparel Industries Limited, (at trial[^17]) and (Court of Appeal[^18]) concluded, with reference to the UIA, that a corporation under the administration of a receiver and

[Page 1214]

manager appointed under a bond mortgage is not in liquidation, assignment or bankruptcy and accordingly, what is now s. 71(3) did not apply. Similar issues arose in the Courts in Nova Scotia in Re KRA Restaurants Ltd. v. Toronto Dominion Bank et al.[^19] The Court was there concerned with the identical problem as here with reference to the CPPA and the UIA. Hart J. concluded that these provisions do not create in the Crown in the Right of Canada any priority as regards moneys withheld in a period analogous to the pre-appointment period hereunder, over secured creditors. In the end, the Court interpreted these provisions as creating a trust which impresses only those funds realized from assets which remain after the trustee in bankruptcy has satisfied the secured creditors.

The position of the respondent under the ITA is more difficult to establish in competition with the claims of the appellant because the ITA does not include the deeming provision found in the other two statutes, but simply leaves the matter to be decided on two simple provisions in s. 227, the first being a deeming provision that amounts deducted are held in trust for Her Majesty and the second being a directive that moneys so deducted shall be kept separate from the moneys of the person making the deduction and the further direction that in the event of any liquidation, the amounts shall remain separate and apart from the estate in liquidation. The provision of the ITA, at least in one respect, however, is more helpful to the respondent than the provisions of the other two statutes because the reference to liquidation does not specify that it be the liquidation “of an employer”, nor does it direct that moneys withheld shall remain apart from the estate in liquidation on the liquidation of an employer, etc.; rather the provision simply states “and in the event of any liquidation… the said amount shall remain apart…”. It may be argued that “any liquidation” is broader than “liquidation of an employer” in the sense that the former, unlike the latter, would include the liquidation of the assets of a debtor without amounting to a formal liquidation of the

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undertaking of the debtor or the existence in law of the debtor. I do not so interpret subs. (5). The word “liquidation” is again used in association with assignment or bankruptcy and refers to an estate in liquidation. In the context of the subparagraph, liquidation, in my view, relates to the winding up of the legal entity and the consequential retirement of indebtedness and distribution of the net residue to the ultimate owners thereof as, for example, the shareholders.

It was urged by the appellant that the ITA should fall into the category of statutes which receive a strict or penal interpretation by the courts. Such a canon of statutory interpretation has, in recent years, lost a great deal of its force, perhaps due in part to the position of taxing statutes in the scheme of government regulation of the economic affairs of the community or indeed to the practice of including in the ITA what might generally be described as rights to deductions, to special rates of taxation, to postpone liability, and other affirmative rights in the taxpaying sector of society. The application of the old rules of strict and beneficial construction no longer fit such statutes in toto, and sometimes not at all. Vide W.A. Sheaffer Pen Company of Canada Limited v. Minister of National Revenue[^20]; Lumbers v. Minister of National Revenue[^21]. In any case, in the context of these proceedings, it is difficult to classify subss. (4) and (5) of s. 227, being as they are mechanical provisions with reference to the disposition of funds withheld from taxpayers pursuant to the statute, and being taxing provisions calling for strict interpretation in the historic sense of that term in the field of statutory interpretation.

It is readily apparent that the direct result of the interpretation of these three statutes in the manner I have done produces an anomaly. The taxpayer and the insured, who are here one and the same person, under the three statutory patterns loses the benefit of part of the wages which he has earned from the third party employer. Under the pension plan, he does not receive credit which, but for the default of his employer, he would have received in the pension plan established by the CPPA. Simi-

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larly, his account under the UIA will not reflect any contribution as a result of moneys which were diverted from his earnings in the manner detailed above before those earnings reached the employee. Under the ITA, his tax position is clouded, to say the least, by the collapse of the employer. A deduction in the result having been effected at source one way or another does not find itself as a credit to the tax account of the employee. It may be that his taxable income will, under the taxing statute, be limited to the proceeds paid over by the receiver on the retirement of the wage lien and to the cash amount paid over by the employer in the pre‑appointment period to the employee. In either or both of these events, the tax impact will be less than the impact of taxation would be were the gross wages channelled through the tax screen. Nevertheless, the employee will receive a lesser proportionate credit, at least in theory, than would have been the case had the employer not fallen into default on its secured debt. I use the word “theoretical” because the actual dollar impact will vary according to the amount of outside earnings, if any, in the taxation year in question of the employee, which is of course unknown in these proceedings.

I adverted at the outset to the difficulty arising in the disposition of this appeal because of the fact that the record does not disclose whether the distribution by the receiver of moneys to the employees in the two periods originated in whole or in part from realizations by the receiver under the specific charge included in the debenture or under the chattel mortgage registered against the personal property of Xyloid or under the floating charge contained in the debenture. The Court was informed by counsel in the course of the hearing that the case has proceeded at all levels on the basis that the moneys employed by the receiver in making the two payments to the employees came from realizations on the assets of Xyloid on the enforcement of the floating charge. This floating charge, of course, crystallized and came into effect in law as against the assets of Xyloid upon the appointment of the receiver-manager by the Court on March 31, 1977. Up to that date, there had been no allocation or separation by Xyloid of the deductions effected by it under these statutes. The

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cash on hand of Xyloid at that date was $137. There had been at that date no proceedings in the nature of liquidation proceedings, no bankruptcy proceedings, and no assignment by Xyloid. In the result, therefore, it matters not whether the funds came from the enforcement of one security or the other. There was no deemed separation of deductions or withholdings from the assets or estate of the estate of Xyloid; and under the ITA there could be no statutory deeming of such separation in any case; and finally, the receiver was not a person within the meaning of subs. (4) of s. 227 who deducted anything “under this Act” inasmuch as the receiver, as I have said, simply made a payment in retirement of a provincial statutory lien. Xyloid is the person contemplated in subs. (4), and for reasons already set forth, deductions by Xyloid were not constituted a trust of property separate and apart from the estate of Xyloid when the assets of Xyloid passed upon the enforcement of security into the hands of the receiver.

Courts elsewhere and before this have bemoaned the results thrust upon them by the interaction of federal and provincial laws with reference to debtor-creditor priorities. The resolution of anomalies in this complex field is a legislative process. The duty of the Court is to interpret the legislation as it finds it. The result must follow, and if it is a result with which the community interests do not coincide, it is a matter for the Legislature. For these reasons, I would allow the appeal, set aside the Order of the Manitoba Court of Appeal, and restore the Order entered at trial, with costs throughout to the appellant, Dauphin Plains Credit Union Limited.

Appeal allowed in part, with costs in this Court, ESTEY and CHOUINARD JJ. dissenting in part.

Solicitors for the plaintiff, appellant: Aikins, MacAulay & Thorvaldson, Winnipeg.

Solicitor for the applicant, respondent: Roger Tassé, Ottawa.

[^1]: 1979 2769 (MB CA), [1979] 2 W.W.R. 514.

[^2]: 1978 1980 (MB QB), [1978] 3 W.W.R. 658.

[^3]: 1979 230 (SCC), [1979] 2 S.C.R. 699.

[^4]: 1975 13 (SCC), [1976] 2 S.C.R. 56.

[^5]: [1966] 1 Q.B. 312.

[^6]: 1972 705 (ON CA), [1972] 3 O.R. 132.

[^7]: 1970 402 (ON CA), [1970] 3 O.R. 599.

[^8]: 1972 437 (ON SC), [1972] 2 O.R. 673.

[^9]: 1972 705 (ON CA), [1972] 3 O.R. 132.

[^10]: (1930), 65 O.L.R. 379.

[^11]: It has been found in other courts (vide Aylesworth J.A. in Royal Trust v. Montex, 1972 705 (ON CA), [1972] 3 O.R. 132) that ‘person’ as defined in s. 2(1)(c) of the Excise Tax Act does not include a receiver. The definition in the present Income Tax Act, which is about the same as that in the Excise Tax Act, reads as follows:

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

No explanation is found in the judgment for this conclusion, but the trial judge in these proceedings applied the case and reached the same conclusion. I do not find it necessary to determine whether ‘person’ includes a receiver, but if such a conclusion were necessary, I would be inclined to believe that applying the definition in s. 248 to the operative words of s. 153(1), the term ‘person’ does include a receiver in the circumstances here present.

[^12]: (1977), 1977 2247 (MB CA), 27 C.B.R. (N.S.) 201.

[^13]: 1972 437 (ON SC), [1972] 2 O.R. 673.

[^14]: (1882), 7 App. Cas. 321.

[^15]: 1918 372 (MB CA), [1918] 2 W.W.R. 485 (Man. C.A.).

[^16]: (1978), 1978 3751 (NS SC), 78 D.T.C. 6307.

[^17]: 1972 437 (ON SC), [1972] 2 O.R. 673.

[^18]: 1972 705 (ON CA), [1972] 3 O.R. 132.

[^19]: (1977), 1977 1789 (NS SC), 74 D.L.R. (3d) 272.

[^20]: (1953), 1953 758 (CA EXC), 53 D.T.C. 1223.

[^21]: 1943 298 (CA EXC), [1943] Ex. C.R. 202, [1944] S.C.R. 167.