British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24

Her Majesty The Queen in right of of the Province of British Columbia Appellant

v.

Henfrey Samson Belair Ltd. Respondent

and

The Attorney General of Canada, the Attorney General for Ontario, the Attorney General of Quebec, the Attorney General of Nova Scotia, the Attorney General for New Brunswick, the Attorney General of Manitoba, the Attorney General for Alberta and the Attorney General of Newfoundland Interveners

indexed as: british columbia v. henfrey samson belair ltd.

File No.: 20515.

1989: April 21; 1989: July 13.

Present: Lamer, Wilson, La Forest, L'Heureux‑Dubé, Gonthier, Cory and McLachlin JJ.

on appeal from the court of appeal for british columbia

Bankruptcy ‑‑ Priority ‑‑ Statutorily created trust for tax collected ‑‑ Tax collected commingled with bankrupt's assets ‑‑ All assets applied to reduce bank's indebtedness ‑‑ Whether or not province should be given priority over other creditors because of statutorily created trust ‑‑ Bankruptcy Act, R.S.C. 1970, c. B‑3, ss. 47(a), 107(1)(j) ‑‑ Social Service Tax Act, R.S.B.C. 1979, c. 388, s. 18.

Tops Pontiac Buick Ltd. collected provincial sales tax in the course of its business operations, as required by the Social Service Tax Act, and mingled the tax collected with its other assets. A creditor placed Tops in receivership and Tops then made an assignment in bankruptcy. The receiver sold the assets and applied the full proceeds to reduce the bank's indebtedness.

The province contended that the Social Service Tax Act created a statutory trust over the assets of Tops equal to the amount of the sales tax collected but not remitted, and that it had priority over the bank and all other creditors for this amount. The chambers judge held that the Social Service Tax Act did not create a trust and that the province had no priority under the Bankruptcy Act. The Court of Appeal held that the legislation created a statutory trust but the Bankruptcy Act did not confer priority on such a trust. At issue here is whether the statutory trust created by s. 18 of the British Columbia Social Service Tax Act gives the province priority over other creditors under the Bankruptcy Act.

Held (Cory J. dissenting): The appeal should be dismissed.

Per Lamer, Wilson, La Forest, L'Heureux‑Dubé, Gonthier and McLachlin JJ.: The statutory trust created by the provincial legislation is not a trust within s. 47(a) of the Bankruptcy Act but merely a Crown claim under s. 107(1)(j). Section 47(a), which concerns "property held by the bankrupt in trust for any other person", permits removal of property which can be specifically identified as not belonging to the bankrupt under general principles of trust law from the distribution scheme established by the Bankruptcy Act. Section 107(1)(j), on the other hand, does not deal with rights conferred by general law, but with the statutorily created claims of federal and provincial tax collectors. If sections 47(a) and 107(1)(j) are read in this way, no conflict arises between them. This construction of ss. 47(a) and 107(1)(j) of the Bankruptcy Act conforms with the principle that provinces cannot create priorities under the Bankruptcy Act by their own legislation.

Section 18 of Social Service Tax Act deems a statutory trust at the moment the tax is collected. The trust property is identifiable at that time and the requirements for a trust under the principles of trust law are met. The money when collected would therefore be exempt from distribution to creditors by reason of s. 47(a). The trust at common law ceases to exist, however, when the tax money collected is mingled with other money so that it cannot be traced and is no longer identifiable. The province has a claim secured only by a charge or lien created by s. 18(2) of the Social Service Tax Act, and s. 107(1)(j) of the Bankruptcy Act would accordingly apply. Here, no specific property impressed with a trust could be identified and s. 47(a) of the Bankruptcy Act did not extend to the province's claim.

Per Cory J. (dissenting): The moneys collected as sales tax by a vendor belong to the province and the vendor is in every sense of the word a trustee for them. The province did not need to rely on the vendor's keeping separate bank accounts to protect its trust property but rather could and did implement a registration system that allowed it to specify precisely the amount owing through a system of bookkeeping. If the tax were not paid to the province then a vendor must have stolen the funds, converted them to its own use or most charitably lost the funds for which it would be responsible and for which it would be accountable to the province.

The Bankruptcy Act prevents the provinces from creating priorities but it does not prevent them from creating a deemed trust or lien. It protects funds which, at the moment they were paid, were truly trust funds and the validity of the trust need not be determined exclusively on the basis of common law. Since section 18 of the Social Service Tax Act and ss. 47(a) and 107 of the Bankruptcy Act do not conflict, the doctrine of federal paramountcy cannot apply and s. 18 should prevail. The property at issue which was subject to s. 18 of the Social Service Tax Act never at any time became the property of the bankrupt and was therefore not subject to distribution as the property of the bankrupt pursuant to s. 107 of the Bankruptcy Act.

The trust, created by s. 18, contained the three essential characteristics required of a trust by equity: certainty of intention, subject matter and of objects. The statute established certainty of intention and of object and through the use of a clear formula established the trust property. A statutorily constituted trust has an advantage over a privately constituted trust in that it is recognized without the beneficiary's having to undertake the often inordinately expensive action of tracing commingled funds. This advantage should not deprive the statutory trust property of its trust character or take it outside the policies determined by this Court.

Cases Cited

By McLachlin J.

Applied: Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785; referred to: Re Phoenix Paper Products Ltd. (1983), 1983 CanLII 1786 (ON CA), 48 C.B.R. (N.S.) 113.

By Cory J. (dissenting)

Royal Trust Co. v. Tucker, 1982 CanLII 162 (SCC), [1982] 1 S.C.R. 250; John M. M. Troup Ltd. v. Royal Bank of Canada, 1962 CanLII 9 (SCC), [1962] S.C.R. 487; Re Deslauriers Construction Products Ltd. (1970), 1970 CanLII 402 (ON CA), 3 O.R. 599; Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 1980 CanLII 186 (SCC), [1980] 1 S.C.R. 1182; Multiple Access Ltd. v. McCutcheon, 1982 CanLII 55 (SCC), [1982] 2 S.C.R. 161; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785; Re Diplock's Estate, [1948] Ch. 465, [1948] 2 All E.R. 318, aff'd sub nom. Min. of Health v. Simpson, [1951] A.C. 251, [1950] 2 All E.R. 1137 (H.L.); Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 105 (SCC), [1988] 1 S.C.R. 1061.

Statutes and Regulations Cited

Bankruptcy Act, R.S.C. 1970, c. B‑3, ss. 47(a), 107(1)(j).

Builders' Lien Act, R.S.A. 1980, c. B‑12, s. 16.1.

Business Corporations Act, S.A. 1981, c. B‑15, s. 191(1).

Canada Pension Plan, R.S.C. 1985, c. C‑8, s. 23(4).

Construction Lien Act, S.O. 1983, c. 6, s. 7.

Employment Standards Act, R.S.A. 1980, c. E‑10.1, s. 113.

Health Insurance Act, R.S.O. 1980, c. 197, s. 18.

Health Insurance Premiums Regulation, Alta. Reg. 217/81.

Insurance Act, R.S.A. 1980, c. I‑5, s. 123(1).

Insurance Act, R.S.O. 1980, c. 218, s. 359.

Mechanics' Lien Act, R.S.O. 1950, c. 227.

Pension Benefits Act, S.O. 1987, c. 35, s. 58.

Real Estate Agents' Licensing Act, R.S.A. 1980, c. R‑5, s. 14.

Revenue Act, R.S.B.C. 1979, c. 367.

Social Service Tax Act, R.S.B.C. 1979, c. 388, ss. 5, 6, 8, 9, 10, 18(1), (2), 27.

Social Services Tax Act Regulations, B.C. Reg. 84/58, Division 5.

Authors Cited

Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.

Hardy, Anne E. Crown Priority in Insolvency. Toronto: Carswells, 1986.

Waters, D. W. M. Law of Trusts in Canada, 2nd ed. Toronto: Carswells, 1984.

APPEAL from a judgment of the British Columbia Court of Appeal (1987), 1987 CanLII 2791 (BC CA), 13 B.C.L.R. (2d) 346; 40 D.L.R. (4th) 728; [1987] 4 W.W.R. 673; 65 C.B.R. (N.S.) 24; 5 A.C.W.S. (3d) 47, dismissing an appeal from a judgment of Meredith J. in chambers (1986), 1986 CanLII 944 (BC SC), 5 B.C.L.R. (2d) 212, 61 B.C.R. (N.S.) 59. Appeal dismissed, Cory J. dissenting.

William A. Pearce and J. G. Pottinger, for the appellant.

Wendy G. Baker, Q.C., and Gillian E. Parson, for the respondent.

James M. Mabbutt, Q.C., for the intervener the Attorney General of Canada.

Janet E. Minor and Timothy Macklem, for the intervener the Attorney General for Ontario.

Yves de Montigny and Madeleine Aubé, for the intervener the Attorney General of Quebec.

Reinhold M. Endres, for the intervener the Attorney General of Nova Scotia.

Richard Burns, for the intervener the Attorney General for New Brunswick.

W. Glenn McFetridge and Dirk D. Blevins, for the intervener the Attorney General of Manitoba.

Robert C. Maybank, for the intervener the Attorney General for Alberta.

W. G. Burke‑Robertson, Q.C., for the intervener the Attorney General of Newfoundland.

//McLachlin J.//

The judgment of Lamer, Wilson, La Forest, L'Heureux-Dubé, Gonthier and McLachlin JJ. was delivered by

MCLACHLIN J. -- The issue on this appeal is whether the statutory trust created by s. 18 of the British Columbia Social Service Tax Act, R.S.B.C. 1979, c. 388, gives the Province priority over other creditors under the Bankruptcy Act, R.S.C. 1970, c. B-3.

Tops Pontiac Buick Ltd. collected sales tax for the provincial government in the course of its business operations, as it was required to do by the Social Service Tax Act. Tops mingled the tax collected with its other assets. When the Canadian Imperial Bank of Commerce placed Tops in receivership pursuant to its debenture and Tops made an assignment in bankruptcy, the receiver sold the assets of Tops and applied the full proceeds in reduction of the indebtedness of the bank.

The Province contends that the Social Service Tax Act creates a statutory trust over the assets of Tops equal to the amount of the sales tax collected but not remitted ($58,763.23), and that it has priority over the bank and all other creditors for this amount.

The Chambers judge held that the Social Service Tax Act did not create a trust and that the Province did not have priority. On appeal the receiver conceded that the legislation created a statutory trust, but contended that the chambers judge was correct in ruling that the Province did not have priority because the Bankruptcy Act did not confer priority on such a trust. The British Columbia Court of Appeal accepted this submission. The Province now appeals to this Court.

The section of the Social Service Tax Act which the Province contends gives it priority provides:

18. (1) Where a person collects an amount of tax under this Act

(a)he shall be deemed to hold it in trust for Her Majesty in right of the Province for the payment over of that amount to Her Majesty in the manner and at the time required under this Act and regulations, and

(b)the tax collected shall be deemed to be held separate from and form no part of the person's money, assets or estate, whether or not the amount of the tax has in fact been kept separate and apart from either the person's own money or the assets of the estate of the person who collected the amount of the tax under this Act.

(2) The amount of taxes that, under this Act,

(a)is collected and held in trust in accordance with subsection (1); or

(b) is required to be collected and remitted by a vendor or lessor

forms a lien and charge on the entire assets of

(c)the estate of the trustee under paragraph (a);

(d)the person required to collect or remit the tax under paragraph (b); or

(e)the estate of the person required to collect or remit the tax under paragraph (d).

The Province argues that s. 18(1) creates a trust within s. 47(a) of the Bankruptcy Act, which provides:

47. The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person,

The respondents, on the other hand, submit that the deemed statutory trust created by s. 18 of the Social Service Tax Act is not a trust within s. 47 of the Bankruptcy Act, in that it does not possess the attributes of a true trust. They submit that the Province's claim to the tax money is in fact a debt falling under s. 107(1)(j) of the Bankruptcy Act, the priority to which falls to be determined according to the priorities established by s. 107.

107. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(j) claims of the Crown not previously mentioned in this section, in right of Canada or of any province, pari passu notwithstanding any statutory preference to the contrary.

Discussion

The issue may be characterized as follows. Section 47(a) of the Bankruptcy Act exempts trust property in the hands of the bankrupt from distribution to creditors, giving trust claimants absolute priority. Section 107(1) establishes priorities between creditors on distribution; s. 107(1)(j) ranks Crown claims last. Section 18 of the Social Service Tax Act creates a statutory trust which lacks the essential characteristics of a trust, namely, that the property impressed with the trust be identifiable or traceable. The question is whether the statutory trust created by the provincial legislation is a trust within s. 47(a) of the Bankruptcy Act or a mere Crown claim under s. 107(1)(j).

In my opinion, the answer to this question lies in the construction of the relevant provisions of the Bankruptcy Act and the Social Service Tax Act.

In approaching this task, I take as my guide the following passage from Driedger, Construction of Statutes (2nd ed. 1983), at p. 105:

The decisions . . . indicate that the provisions of an enactment relevant to a particular case are to be read in the following way:

1. The Act as a whole is to be read in its entire context so as to ascertain the intention of Parliament (the law as expressly or impliedly enacted by the words), the object of the Act (the ends sought to be achieved), and the scheme of the Act (the relation between the individual provisions of the Act).

2. The words of the individual provisions to be applied to the particular case under consideration are then to be read in their grammatical and ordinary sense in the light of the intention of Parliament embodied in the Act as a whole, the object of the Act and the scheme of the Act, and if they are clear and unambiguous and in harmony with that intention, object and scheme and with the general body of the law, that is the end.

With these principles in mind, I turn to the construction of ss. 47(a) and 107(1)(j) of the Bankruptcy Act. The question which arises under s. 47(a) of the Act concerns the meaning of the phrase "property held by the bankrupt in trust for any other person". Taking the words in their ordinary sense, they connote a situation where there is property which can be identified as being held in trust. That property is to be removed from other assets in the hands of the bankrupt before distribution under the Bankruptcy Act because, in equity, it belongs to another person. The intention of Parliament in enacting s. 47(a), then, was to permit removal of property which can be specifically identified as not belonging to the bankrupt under general principles of trust law from the distribution scheme established by the Bankruptcy Act.

Section 107(1)(j), on the other hand, has been held to deal not with rights conferred by general law, but with the statutorily created claims of federal and provincial tax collectors. The purpose of s. 107(1)(j) was discussed by this Court in Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35. Pigeon J., speaking for the majority, stated at p. 45:

There is no need to consider the scope of the expression "claims of the Crown". It is quite clear that this applies to claims of provincial governments for taxes and I think it is obvious that it does not include claims not secured by Her Majesty's personal preference, but by a privilege which may be obtained by anyone under general rules of law, such as a vendor's or a builder's privilege.

If sections 47(a) and 107(1)(j) are read in this way, no conflict arises between them. If a trust claim is established under general principles of law, then the property subject to the trust is removed from the general distribution by reason of s. 47(a). Following the reasoning of Pigeon J. in Deputy Minister of Revenue v. Rainville, such a claim would not fall under s. 107(1)(j) because it is valid under general principles of law and is not a claim secured by the Crown's personal preference.

This construction of ss. 47(a) and 107(1)(j) of the Bankruptcy Act conforms with the principle that provinces cannot create priorities under the Bankruptcy Act by their own legislation, a principle affirmed by this Court in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785. As Wilson J. stated at p. 806:

. . . the issue in Re Bourgault [Deputy Minister of Revenue v. Rainville] and Re Black Forest Restaurant Ltd. was not whether a proprietary interest has been created under the relevant provincial legislation. It was whether provincial legislation, even if it did create a proprietary interest, could defeat the scheme of distribution under s. 107(1) of the Bankruptcy Act. These cases held that it could not, that while the provincial legislation could validly secure debts on the property of the debtor in a non-bankruptcy situation, once bankruptcy occurred s. 107(1) determined the status and priority of the claims specifically dealt with in the section. It was not open to the claimant in bankruptcy to say: By virtue of the applicable provincial legislation I am a secured creditor within the meaning of the opening words of s. 107(1) of the Bankruptcy Act and therefore the priority accorded my claim under the relevant paragraph of s. 107(1) does not apply to me. In effect, this is the position adopted by the Court of Appeal and advanced before us by the respondent. It cannot be supported as a matter of statutory interpretation of s. 107(1) since, if the section were to be read in this way, it would have the effect of permitting the provinces to determine priorities on a bankruptcy, a matter within exclusive federal jurisdiction.

While Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board was concerned with provincial legislation purporting to give the Province the status of a secured creditor for purposes of the Bankruptcy Act, the same reasoning applies in the case at bar.

To interpret s. 47(a) as applying not only to trusts as defined by the general law, but to statutory trusts created by the provinces lacking the common law attributes of trusts, would be to permit the provinces to create their own priorities under the Bankruptcy Act and to invite a differential scheme of distribution on bankruptcy from province to province.

Practical policy considerations also recommend this interpretation of the Bankruptcy Act. The difficulties of extending s. 47(a) to cases where no specific property impressed with a trust can be identified are formidable and defy fairness and common sense. For example, if the claim for taxes equalled or exceeded the funds in the hands of the trustee in bankruptcy, the trustee would not recover the costs incurred to realize the funds. Indeed, the trustee might be in breach of the Act by expending funds to realize the bankrupt's assets. Other difficulties would arise in the case of more than one claimant to the trust property. The spectre is raised of a person who has a valid trust claim under the general principles of trust law to a specific piece of property, finding himself in competition with the Crown claiming a statutory trust in that and all the other property. Could the Crown's general claim pre-empt the property interest of the claimant under trust law? Or would the claimant under trust law prevail? To admit of such a possibility would be to run counter to the clear intention of Parliament in enacting the Bankruptcy Act of setting up a clear and orderly scheme for the distribution of the bankrupt's assets.

In summary, I am of the view that s. 47(a) should be confined to trusts arising under general principles of law, while s. 107(1)(j) should be confined to claims such as tax claims not established by general law but secured "by her Majesty's personal preference" through legislation. This conclusion, in my opinion, is supported by the wording of the sections in question, by the jurisprudence of this Court, and by the policy considerations to which I have alluded.

I turn next to s. 18 of the Social Service Tax Act and the nature of the legal interests created by it. At the moment of collection of the tax, there is a deemed statutory trust. At that moment the trust property is identifiable and the trust meets the requirements for a trust under the principles of trust law. The difficulty in this, as in most cases, is that the trust property soon ceases to be identifiable. The tax money is mingled with other money in the hands of the merchant and converted to other property so that it cannot be traced. At this point it is no longer a trust under general principles of law. In an attempt to meet this problem, s. 18(1)(b) states that tax collected shall be deemed to be held separate from and form no part of the collector's money, assets or estate. But, as the presence of the deeming provision tacitly acknowledges, the reality is that after conversion the statutory trust bears little resemblance to a true trust. There is no property which can be regarded as being impressed with a trust. Because of this, s. 18(2) goes on to provide that the unpaid tax forms a lien and charge on the entire assets of the collector, an interest in the nature of a secured debt.

Applying these observations on s. 18 of the Social Service Tax Act to the construction of ss. 47(a) and 107(1)(j) of the Bankruptcy Act which I have earlier adopted, the answer to the question of whether the Province's interest under s. 18 is a "trust" under s. 47(a) or a "claim of the Crown" under s. 107(1)(j) depends on the facts of the particular case. If the money collected for tax is identifiable or traceable, then the true state of affairs conforms with the ordinary meaning of "trust" and the money is exempt from distribution to creditors by reason of s. 47(a). If, on the other hand, the money has been converted to other property and cannot be traced, there is no "property held . . . in trust" under s. 47(a). The Province has a claim secured only by a charge or lien, and s. 107(1)(j) applies.

In the case at bar, no specific property impressed with a trust can be identified. It follows that s. 47(a) of the Bankruptcy Act should not be construed as extending to the Province's claim in this case.

The Province, however, argues that it is open to it to define "trust" however it pleases, property and civil rights being matters within provincial competence. The short answer to this submission is that the definition of "trust" which is operative for purposes of exemption under the Bankruptcy Act must be that of the federal Parliament, not the provincial legislatures. The provinces may define "trust" as they choose for matters within their own legislative competence, but they cannot dictate to Parliament how it should be defined for purposes of the Bankruptcy Act: Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board.

Nor does the argument that the tax money remains the property of the Crown throughout withstand scrutiny. If that were the case, there would be no need for the lien and charge in the Crown's favour created by s. 18(2) of the Social Service Tax Act. The Province has a trust interest and hence property in the tax funds so long as they can be identified or traced. But once they lose that character, any common law or equitable property interest disappears. The Province is left with a statutory deemed trust which does not give it the same property interest a common law trust would, supplemented by a lien and charge over all the bankrupt's property under s. 18(2).

The Province relies on Re Phoenix Paper Products Ltd. (1983), 1983 CanLII 1786 (ON CA), 48 C.B.R. (N.S.) 113 (Ont. C.A.), where the Ontario Court of Appeal held that accrued vacation pay mixed with other assets of a bankrupt constituted a trust under s. 47(a) of the Bankruptcy Act. As the Court of Appeal in this case pointed out, the Ontario Court of Appeal in Re Phoenix Paper Products Ltd., in considering the two divergent lines of authority presented to it, did not have the advantage of considering what was said in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, and the affirmation in that case of the line of authority which the Ontario Court of Appeal rejected.

The appellant raised a second question in the alternative, namely:

If the Province is divested of its trust property by reason of S. 18(1) being in conflict with S. 107(1)(j) of the Bankruptcy Act, does [that] property devolve to the secured creditor [the Bank] or is it distributed to unsecured creditors pursuant to S. 107 of the Bankruptcy Act?

This question was not raised in the courts below, nor on the application for leave to appeal. It concerns parties who were not present on the appeal. For these reasons, I would decline to consider it.

Conclusion

For the reasons stated, I conclude that s. 47(a) of the Bankruptcy Act does not apply in this case and the priority of the Province's claim is governed by s. 107(1)(j) of the Act. I would decline to answer the alternative question posed by the appellants.

I would dismiss the appeal, with costs.

//Cory J.//

The following are the reasons delivered by

CORY J. (dissenting) -- I have read with great interest the compelling reasons of my colleague Justice McLachlin. Unfortunately I cannot agree that s. 47(a) of the Bankruptcy Act, R.S.C. 1970, c. B-3, does not apply in this case. If section 18 of the British Columbia Social Service Tax Act, R.S.B.C. 1979, c. 388, creates a valid trust, then s. 47(a) of the Bankruptcy Act must apply. In order to determine the effect of s. 18 it may be helpful to consider the Social Service Tax Act as a whole.

Scheme of the B.C. Social Service Tax Act

Registration under this Act is a condition precedent to carrying on a retail sales business in the province of British Columbia. Subject to certain irrelevant and minor exceptions, the Act provides that no one may sell "tangible personal property" in the province at a retail sale without being registered with the "commissioner", the provincial official appointed to administer the Act. It is sufficient to note that the term "tangible personal property" is given a very broad definition. With the approval of the Minister, the Commissioner may cancel or suspend the certificate of anyone found guilty of an offence under the Act thus terminating the retail business. This is the ultimate form of control that the province exercises over those who collect the taxes assessed under the Act. In addition, the regulations passed pursuant to the Act provide for close scrutiny of the use of the registration certificates issued to vendors.

Pursuant to s. 5 of the Act, retail vendors are deemed to be agents of the Minister for the purposes of levying and collecting sales tax. Section 6 provides that these agents are deemed to be tax collectors for the purposes of the Revenue Act, R.S.B.C. 1979, c. 367, and are made subject to the provisions of ss. 22 to 28 of that Act. Sections 22 to 28 prescribe the penalties for tax collectors who fail to ender their accounts as required by the statute. Pursuant to s. 27, where a collector has received money belonging to the Crown in right of the Province and has failed to pay it to the province, the defaulting collector's property may be seized. As a quid pro quo, s. 8 of the Social Service Tax Act provides that vendors are to receive remuneration for the service they provide to the government by collecting the tax.

Under ss. 9 and 10 of the Act every vendor is required to make returns and keep tax records in the form prescribed by the regulations and must keep a record of all purchases and sales. Division 5 of the Social Services Tax Act Regulations, B.C. Reg. 84/58, makes detailed provision for these returns and records. The regulations make clear that there is to be continuous supervision of sales tax collection. Separate monthly returns must be made for each place of business and the returns must be made no later than fifteen days after the last day of each monthly period. The regulations provide in detail for the means of calculating upon each return the commission for each vendor on the collection of sales tax.

The requirements concerning the keeping of records and accounts emphasize the trust nature of the arrangement. They provide that books of account must contain distinct records of all (1) sales, (2) purchases, (3) non-taxable sales, (4) taxable sales, (5) amounts of tax collected and (6) disposal of tax including commission taken. The records further stress that "all entries concerning the tax and such books of account, records and documents shall be kept separate and distinguishable from other entries made therein." (Emphasis added.) As well the tax must be shown as a separate item on all receipts given to purchasers. Section 27 of the Act provides wide powers for the inspection of these records.

It is against this background that s. 18 of the Social Service Tax Act must be considered. That section provides:

18. (1) Where a person collects an amount of tax under this Act

(a)he shall be deemed to hold it in trust for Her Majesty in right of the Province for payment over of that amount to Her Majesty in the manner and at the time required under this Act and regulations, and

(b)the tax collected shall be deemed to be held separate from and form no part of the person's money, assets or estate, whether or not the amount of the tax has in fact been kept separate and apart from either the person's own money or the assets of the estate of the person who collected the amount of the tax under this Act.

(2) The amount of taxes that, under this Act,

(a)is collected and held in trust in accordance with subsection (1); or

(b)is required to be collected and remitted by a vendor or lessor

forms a lien and charge on the entire assets of

(c)the estate of the trustee under paragraph (a);

(d)the person required to collect or remit the tax under paragraph (b); or

(e)the estate of the person required to collect or remit the tax under paragraph (d).

It can be seen that the moneys collected by a vendor such as Tops as the tax collector of the sales tax never belongs to the vendor. The sales tax is payable by the purchaser who owes that sum to the province. The vendor never has any interest in those funds and is in every sense of the word a trustee of the funds collected for the sales tax. The vendor is simply the conduit for payment of the sales tax to the province. The province has not relied upon a requirement that separate bank accounts be kept by a vendor to protect its trust property. Rather, it has put into place a system of registration of all retail sales businesses and provided for a regulated means of record keeping and inspection. This system permits the government to specify precisely what money is due to it and to ascertain what is happening to its money on a monthly basis.

If the tax is not paid to the province then a vendor such as Tops must have stolen the funds, converted them to its own use or most charitably lost the funds for which it was responsible and for which it was accountable to the province.

From the point of view of fairness, there would seem to be no objection to the provincial government creating a lien or charge on the assets of the vendor for the amount of the sales tax (the trust funds) which the vendor was responsible for collecting and remitting to the province.

Does Section 18 Create a Valid Trust?

The question may be phrased more precisely by asking: If, as the chambers judge found, sales tax money "was misappropriated by Tops and mingled with its assets", does that put an end to the trust? It is said that the trust, although validly existing at the moment the funds were paid by the purchaser, ceases to exist or have any validity once the funds were mingled so that they could not be traced readily. To begin with, and somewhat simplistically, there is no prohibition in the Bankruptcy Act against the province creating a deemed trust or lien against the retail vendor's property for the extent of the sales tax nor is there a conflict between s. 18 of the Social Service Tax Act and s. 47(a) and s. 107 of the Bankruptcy Act. This is not a statutory ruse to evade the provisions of the Bankruptcy Act. It is simply an attempt to protect trust funds which are earmarked to be used for the public benefit and public use. Rather than insist that on each sale there be a separate payment to the province, the Act created a system which was in the best interest of retail purchasers, retail vendors, the business community and the province as a whole. The Act does no more than protect funds which at the moment they were paid were truly trust funds. Nor am I sure that the validity of a trust must be determined exclusively on the basis of common law. It has been held by this Court that the civil law of trust is not the same as that of common law. See Royal Trust Co. v. Tucker, 1982 CanLII 162 (SCC), [1982] 1 S.C.R. 250, at p. 261.

There are a number of provincial statutory provisions which create trusts. This type of legislation is common to a wide range of statutes that may benefit employees, purchasers of insurance, payers of health and insurance and many others who lack the organization or bargaining power to establish a trust for themselves. See for example, Pension Benefits Act, S.O. 1987, c. 35, s. 58; Insurance Act, R.S.O. 1980, c. 218, s. 359; Health Insurance Act, R.S.O. 1980, c. 197, s. 18; Builders' Lien Act, R.S.A. 1980, c. B-12, s. 16.1; Construction Lien Act, S.O. 1983, c. 6, s. 7; Business Corporations Act, S.A. 1981, c. B-15, s. 191(1); Employment Standards Act, R.S.A. 1980, c. E-10.1, s. 113; Insurance Act, R.S.A. 1980, c. I-5, s. 123(1); Real Estate Agents' Licensing Act, R.S.A. 1980, c. R-5, s. 14, and Health Insurance Premiums Regulation, Alta. Reg. 217/81.

This Court has held that a province may, to further and protect a principle of social policy, create a statutory trust. In John M. M. Troup Ltd. v. Royal Bank of Canada, 1962 CanLII 9 (SCC), [1962] S.C.R. 487, at p. 494, the trust provisions of The Mechanics' Lien Act, R.S.O. 1950, c. 227, (now the Construction Lien Act) were found to be validly enacted. The statutory trusts referred to above provide needed protection for their beneficiaries and forward salutary social objectives which the provinces have jurisdiction to pursue.

Subsection 23(4) of the Canada Pension Plan, R.S.C. 1985, c. C-8, creates a statutory trust using language almost identical to s. 18 of the Social Service Tax Act. In Re Deslauriers Construction Products Ltd. (1970), 1970 CanLII 402 (ON CA), 3 O.R. 599 (C.A.), Gale C.J.O., for a unanimous Court, noted that the Act deemed Pension Plan moneys to be kept separate and apart from the estate of the employer "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", and commented at p. 601:

[These words] 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.

From this he drew the following conclusion at pp. 602-3:

In the Canada Pension Plan the fund is deemed to be property which does not comprise part of the bankruptcy at all, so that the Crown under that act is not a creditor, but is deemed to hold property which is not the property of the bankrupt.

Gale C.J.O's judgment was cited with approval by Pigeon J. writing for the majority in this Court in Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 1980 CanLII 186 (SCC), [1980] 1 S.C.R. 1182, at p. 1198, who stated: "I find the reasoning in Deslauriers wholly persuasive . . . ."

The provisions of s. 18 then should prevail unless they are in conflict with the provisions of the Bankruptcy Act. Sections 47 and 107 of the Act provide:

47. The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person;

107. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(j) claims of the Crown not previously mentioned in this section, in right of Canada or of any province, pari passu notwithstanding any statutory preference to the contrary.

The doctrine of federal paramountcy of legislation can only apply if there is actual conflict in the operation of the provincial and federal statutes. The principle was set forth in Multiple Access Ltd. v. McCutcheon, 1982 CanLII 55 (SCC), [1982] 2 S.C.R. 161, at p. 191, by Dickson J., as he then was, in these words:

In principle, there would seem to be no good reasons to speak of paramountcy and preclusion except where there is actual conflict in operation as where one enactment says "yes" and the other says "no"; "the same citizens are being told to do inconsistent things"; compliance with one is defiance of the other.

In this case there is no conflict as the property which was subject to s. 18 of the Social Service Tax Act never at any time became the property of the bankrupt and is therefore not subject to distribution as the property of the bankrupt pursuant to s. 107 of the Bankruptcy Act. On a plain reading of s. 47 of the Bankruptcy Act there is no conflict created by the two statutes.

It is true that this Court has in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785, recognized and emphasized that provinces cannot, by means of their own legislation, create priorities under the Bankruptcy Act. However, s. 18 has not created a priority. It did no more than give statutory recognition to a valid trust. It then eliminated the necessity of setting up a separate bank account for sales tax moneys and substituted a system of registration and record-keeping to control these funds which never at any time belonged to the vendor trustee. That latter step did not alter the existence of the valid trust of the funds collected from the purchasers for payment to the province. I do not think that the decision in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, supra, can be taken to have altered the meaning of the words "property of the bankrupt" contained in s. 47 of the Bankruptcy Act.

This appears to be the opinion expressed by Anne E. Hardy, the author of Crown Priority in Insolvency (1986). She concedes that in the interest of consistency with Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, supra, the lien portion of the deemed trust section should probably be held to be ineffective on the bankruptcy of the trustee. Nonetheless at p. 107 she sets out her position in this way:

Thus, as a matter of interpretation, it is questionable to limit the scope of section 47(a) of the Bankruptcy Act to trusts which either exist in fact or do not benefit the Crown or a creditor whose claim is referred to in subsection 107(1) of the Act. Until the Act is amended to permit the courts to construe section 47 in this manner, they are probably not justified in taking this approach. The Coopers & Lybrand case therefore appears to be incorrectly decided. The judgments in most cases which have upheld statutory deemed trusts in bankruptcy and refused to rank the claims covered by them under subjection 107(1) of the Act are preferable.

As argued above, trusts should generally be upheld on the bankruptcy of the trustee regardless of the manner in which they arise. It is possible, however, that certain types be deemed trust provisions should be held to be ineffective and that a valid trust would therefore not come into existence. Most of the trust cases decided since Re Bourgault have distinguished that case because it did not discuss trust provisions or the relationship between the trusts covered by section 47(a) and subsection 107(1) of the Bankruptcy Act. Some of these decisions dealt with trust provisions under which an amount deemed to be held in trust had been made a lien and charge on the assets of the trustee.

That view should I think prevail.

Furthermore, it seems that the trust although imposed by statute contains all the essential characteristics required of a trust. In order for a trust to be recognized in equity, there had to be three fundamental aspects complied with, that is to say there had to be certainty of intention, certainty of subject matter and certainty of objects. It is conceded that the statute establishes certainty of intention and of object. The respondent argues that there cannot be certainty of subject matter because the trust property cannot be identified and that thus trust in the traditional sense has not come into existence. However, here the subject matter was clearly identified at the moment of the sales by the vendor (Tops). The only issue that remained was whether or not the trust property could be identified so that such a trust could succeed in a tracing action. This subject matter was addressed by Professor Waters in the Law of Trusts in Canada (2nd ed. 1984), at pp. 119-22:

When the courts say that there must be certainty of subject-matter, they mean that the property must either be described in the trust instrument, or there must be "a formula or method given for identifying it."

In determining certainty, what the courts are looking for is the certainty of concept rather than whether it is too difficult to ascertain the subject-matter.

He distinguishes this question from the tracing issue:

Initial ascertainability does not exist, so far as case law is concerned, unless specific property is earmarked as the trust property. Once this has occurred, and the trust has come into effect, the trust beneficiary can trace that property, whether it is converted into other forms, or, if money, it is mixed with other funds. [Emphasis in original.]

There can be no doubt that the statute provides a clear formula for establishing the trust property, that is to say the sales tax, and therefore certainty of subject matter does indeed exist. The three certainties of intention, object and subject matter are thus established by statute. It could not be said that funds which were collected by Tops for sales tax became the property of Tops on the ground that the certainties required of a trust by equity do not exist as the statute has validly created them.

Neither could it be said that the statutory trust funds (the sales tax collected) became the property of the bankrupt Tops by reason of the fact that Tops improperly mingled those funds with its own property. In equity, funds mingled in this way remained impressed with their trust obligations. This left the beneficiary with two possible recourses against the trustee for its wrongful conduct. The beneficiary might either seek to recover the trust property by itself through the remedy of tracing or might choose instead to seek compensation for the loss by means of an action against the trustee.

Although there is some dispute as to whether at common law funds can be "followed" once they have been mixed with the defendant's own funds, in equity those monies can be traced "either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund": Re Diplock's Estate, [1948] Ch. 465, at p. 521, [1948] 2 All E.R. 318, at p. 347 (C.A.), per Lord Green M.R.; aff'd sub nom. Min. of Health v. Simpson, [1951] A.C. 251, [1950] 2 All E.R. 1137 (H.L.) The limits to a tracing action are largely fixed by the difficulties and ultimately the prohibitive excuse of providing the necessary accounts. See D. W. M. Waters, supra, at pp. 1037 ff. There is no reason why a statutorily constituted trust cannot provide an advantage over a privately constituted trust by recognizing the existence of the trust in property held by the trustee without requiring the beneficiary to undertake the often inordinately expensive action of tracing commingled funds. This advantage should not deprive the statutory trust property of its trust character or take it outside the policies articulated in Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, supra, and Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 105 (SCC), [1988] 1 S.C.R. 1061. It would thus seem that the statutory trust complies with the requirements of a valid trust that would be recognized in equity.

If as stated in Deputy Minister of Revenue v. Rainville mechanics' liens or construction liens may be recognized, although it would be impossible to trace the funds of the sub-contractors in the commingled accounts of the general contractor, so too should the statutory trust pertaining to sales tax be recognized.

Nor will such a conclusion create practical problems. If the proposed trustee in bankruptcy is faced with the question as to whether or not the assets are subject to a trust, an application may be made to the court to determine that issue at the outset of the proceedings. Further, if there is a dispute between those claiming a trust interest it can be determined on the basis of priority predicated upon the date on which the trust arose.

Disposition

I conclude therefore that the trust described in s. 18 of the British Columbia Social Service Tax Act is not in any sense a claim against the property of the bankrupt so as to conflict with the policy underlying s. 107(1) of the Bankruptcy Act as that policy has been expounded in Deputy Minister of Revenue v. Rainville; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board and Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail) for the following reasons:

(a)The sums constituting the trust were never the property of the bankrupt, but were transferred from purchasers of vehicles to the provincial Crown, for whom Tops acted as trustee, in satisfaction of an obligation incurred by those purchasers;

(b)the trust was validly constituted in that it complied with the three certainties required of trusts by the law of equity: s. 18 of the Social Service Tax Act does not dispense with those certainties, but conforms to them, in the same way that a contractual trust instrument must;

(c)the only relevant distinction between this statutory trust and a contractual express trust lies in the deemed tracing remedy provided by the statute. The existence of this remedy

(i) does not negate the trusts;

(ii)is largely facilitative and thus does not take the trust out of the policy enunciated in Deputy Minister of Revenue v. Rainville; Deloitte Haskins & Sells Ltd. v. Workers' Compensation Board and Federal Business Development Bank v. Québec (Commission de la santé et de la sécurité de travail);

(d)The trust therefore properly falls within s. 47(a) of the Bankruptcy Act and outside the property of the bankrupt, as that term is to be understood in light of the policy underlying s. 107(1) of the Act.

I would therefore answer the constitutional question as follows:

Are the provisions of s. 18(1) of the Social Service Tax Act, R.S.B.C. 1979, c. 388, as amended, inoperative by reason of being in conflict with s. 107(1)(j) of the Bankruptcy Act, R.S.C. 1970, c. B-3?

Answer: No.

I would allow the appeal, set aside the decision of the Court of Appeal and that of the chambers judge and direct that the special case be answered "the defendant was not correct in granting the Canadian Imperial Bank of Commerce priority over the statutory trust of the plaintiff."

Appeal dismissed, CORY J. dissenting.

Solicitor for the appellant: The Ministry of the Attorney General of British Columbia, Victoria.

Solicitors for the respondent: Davis & Company, Vancouver.

Solicitor for the intervener the Attorney General of Canada: The Deputy Attorney General of Canada, Ottawa.

Solicitor for the intervener the Attorney General for Ontario: The Ministry of the Attorney General, Toronto.

Solicitor for the intervener the Attorney General of Quebec: The Attorney General of Quebec, Ste‑Foy.

Solicitor for the intervener the Attorney General of Nova Scotia: The Department of the Attorney General of Nova Scotia, Halifax.

Solicitor for the intervener the Attorney General for New Brunswick: The Attorney General for New Brunswick, Fredericton.

Solicitor for the intervener the Attorney General of Manitoba: Gordon E. Pilkey, Winnipeg.

Solicitor for the intervener the Attorney General for Alberta: The Attorney General for Alberta, Edmonton.

Solicitor for the intervener the Attorney General of Newfoundland: The Attorney General of Newfoundland. St. John's.