Marzetti v. Marzetti, [1994] 2 S.C.R. 765

Marzetti v. Marzetti, [1994] 2 S.C.R. 765

Peat Marwick Thorne Inc., Trustee of the

Estate of Arden Anthony Marzetti, a Bankrupt Appellant

v.

The Director of Maintenance Enforcement,

the Attorney General of Canada and

the Attorney General for Alberta Respondents

and

The Superintendent of Bankruptcy Intervener

and between

Jacqueline Jeannine Marzetti Petitioner

v.

Arden Anthony Marzetti Respondent

Indexed as: Marzetti v. Marzetti

File No.: 23273.

1994: February 3; 1994: July 14.

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

on appeal from the court of appeal for alberta

Bankruptcy ‑‑ Priority ‑‑ Post‑bankruptcy income tax refund ‑‑ Husband ordered to pay monthly amount for child and spousal support to Director of Maintenance Enforcement ‑‑ Husband later filing voluntary assignment in bankruptcy and assigning post‑bankruptcy income tax refund to trustee ‑‑ Director filing notice of continuing attachment against federal Crown ‑‑ Whether income tax refund properly payable to trustee or to Director ‑‑ Bankruptcy Act, R.S.C., 1985, c. B‑3, ss. 67, 68.

After his payments of child and spousal support fell into arrears, M was ordered to pay a monthly sum to the Director of Maintenance Enforcement. He later filed a voluntary assignment in bankruptcy and executed an agreement letter authorizing that any refund resulting from a post‑bankruptcy income tax return be mailed to the appellant trustee as an asset for distribution to the creditors. The Director filed a notice of continuing attachment against the federal Crown. After M was discharged from bankruptcy, a garnishee summons was issued putting the notice of continuing attachment into effect. The trustee filed a post‑bankruptcy income tax return, and a refund became payable. In response to a motion by the trustee, the Master declared that the refund constituted property of the bankrupt which vested in the trustee. Under s. 67(c) of the Bankruptcy Act, the property of a bankrupt divisible among his creditors comprises all property of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge. Under s. 68(1), however, "the trustee, if directed by the inspectors or the creditors, shall apply to the court for an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the court may determine, having regard to the family responsibilities and personal situation of the bankrupt". Section 68(2) provides that the order must be directed to the bankrupt and his employer. The Master was prepared to accept that s. 68 removes wages from the scope of s. 67(c), but was not prepared to accept that income tax deductions from an employee's wages retain the character of wages. The Court of Queen's Bench reversed the Master's decision and ordered that the refund be returned to the Director. The Court of Appeal affirmed that judgment.

Held: The appeal should be dismissed.

A bankrupt's interest in a post‑bankruptcy income tax refund can be considered "property" for the purposes of s. 67(c) of the Bankruptcy Act. Even if a taxpayer who makes overpayments has no right to compel a refund prior to filing a return, that taxpayer has at least a future and contingent interest in the ultimate tax refund which would come within the definition of "property" in s. 2 of the Act. The property need not also meet the requirements of s. 67(d) before the trustee can claim it, since s. 67(c) and (d) should be treated as alternatives. The bankrupt's interest in his refund did not, however, vest automatically in his trustee. Section 68 is a complete code in respect of a bankrupt's salary, wages or other remuneration, and such forms of property thus cannot be "property of a bankrupt divisible among his creditors" for purposes of s. 67. The trustee can access them only following a court application as contemplated by s. 68(1), and no such application was made in this case. A plain language interpretation of s. 68(1) favours the view that it is a substantive provision: the opening words "[n]otwithstanding section 67" are intended to make it clear that wages will not come within s. 67(c) but will be dealt with by s. 68. The mischief which s. 68 was intended to remedy reinforces this view. Since the section was intended to remedy province‑to‑province disparities in the application of the Bankruptcy Act, it necessarily follows that it is a substantive rather than a procedural modification to the pre‑existing scheme.

The post‑bankruptcy income tax refund in this case retained the character of wages to the extent that it represented a return of employer withholdings. The bankrupt earned a certain amount as wages after his voluntary assignment in bankruptcy, and the fundamental character of these wages is not affected by the fact that a portion was, by virtue of statute, automatically directed toward his tax liability. The only problems with the characterization of an income tax refund as deferred wages for the purposes of s. 68 of the Bankruptcy Act are structural ones. The trustee's inability to act independently is a flaw inherent in s. 68(1), which has now been corrected by a statutory amendment. The fact that s. 68(2) orders can be directed only toward "the bankrupt and his employer" is a more serious problem, but this deficiency cannot affect the conclusion that an income tax refund retains its character as wages. While it would be preferable, from a trustee's point of view, to obtain an order directly against the Crown in respect of an income tax refund, an order against the bankrupt person alone does provide the trustee with the necessary legal entitlement to the refund. Moreover, the fact that the court is to have "regard to the family responsibilities and personal situation of the bankrupt" demonstrates an overriding concern for the support of families. The discretion given to courts by s. 68 is amplified by the discretion which is necessarily left in the trustee, creditors and inspectors. Since these kinds of discretion are better able to respond to the costs of raising families, a purposive interpretation should be given to the word "wages" in s. 68, notwithstanding difficulties associated with s. 68(2).

The agreement letter was incapable of creating an effective assignment owing to s. 67 of the Financial Administration Act, which states that "[e]xcept as provided in this Act or any other Act of Parliament . . . a Crown debt is not assignable". "Crown debt" is defined to include not only existing debts, but also future debts "due or becoming due". The Financial Administration Act fails to permit such assignment, and no express authorization appears in any other federal statute. By taking steps to garnish the income tax refund, the Director thus necessarily obtained priority in this case.

Cases Cited

Disapproved: Re Northward Airlines Ltd. (1981), 1981 CanLII 1187 (AB KB), 37 C.B.R. (N.S.) 137; Re Beaton (1979), 1979 CanLII 2089 (ON CA), 30 C.B.R. (N.S.) 225; Re Hoffer (1980), 34 C.B.R. (N.S.) 222; Re Kellaway (1977), 24 C.B.R. (N.S.) 14; distinguished: Re Bertrand, [1980] 2 N.Z.L.R. 72; referred to: Tailby v. Official Receiver (1888), 13 App. Cas. 523; Industrial Acceptance Corp. v. Lalonde, 1952 CanLII 2 (SCC), [1952] 2 S.C.R. 109; Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R. 300; Re Goulet (1977), 24 C.B.R. (N.S.) 222; Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 1980 CanLII 186 (SCC), [1980] 1 S.C.R. 1182; Munich Reinsurance Co. (Canada Branch) v. M.N.R., 91 D.T.C. 1137; Hughes v. The Queen, 91 D.T.C. 5290; Re Giroux (1983), 1983 CanLII 1731 (ON SC), 45 C.B.R. (N.S.) 245; Re McCullough (1984), 52 C.B.R. (N.S.) 313; Re Ali (1987), 62 C.B.R. (N.S.) 64; Vachon v. Canada Employment and Immigration Commission, 1985 CanLII 12 (SCC), [1985] 2 S.C.R. 417; Re Szatmari (1972), 1972 CanLII 416 (ON SC), 18 C.B.R. (N.S.) 309; Re Walker (1982), 43 C.B.R. (N.S.) 319; Moge v. Moge, 1992 CanLII 25 (SCC), [1992] 3 S.C.R. 813.

Statutes and Regulations Cited

Act to amend the Bankruptcy Act, S.C. 1966-67, c. 32, s. 10.

Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C. 1992, c. 27, ss. 1, 2, 34(1).

Bankruptcy Act, R.S.C., 1985, c. B‑3, ss. 2, 67, 68, 70, 71, 158.

Bankruptcy Act, S.C. 1919, c. 36, s. 25.

Divorce Act, R.S.C., 1985, c. 3 (2nd Supp.).

Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp.), ss. 23, 24, 28.

Family Support Orders and Agreements Garnishment Regulations, SOR/88‑181, s. 3(a).

Financial Administration Act, R.S.C., 1985, c. F‑11, ss. 66, 67, 68(1), 69, 70.

Income Tax Act, R.S.C. 1952, c. 148, ss. 153(3), 164(1).

Maintenance Enforcement Act, S.A. 1985, c. M‑0.5, s. 4.

Tax Rebate Discounting Act, R.S.C., 1985, c. T-3, s. 2(2).

Authors Cited

Canadian Encyclopedic Digest (Ontario 3rd ed.), vol. 12, Title 58. Toronto: Carswell.

Canadian Encyclopedic Digest (Western 3rd ed.), vol. 13, Title 59. Calgary: Carswell.

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

Houlden, L. W., and C. H. Morawetz. Bankruptcy and Insolvency Law of Canada, vol. 1, 3rd ed. Toronto: Carswell, 1992 (looseleaf).

House of Commons Debates, vol. VI, 1st Sess., 27th Parl., June 16, 1966, at p. 6488.

APPEAL from a judgment of the Alberta Court of Appeal (1992), 1992 ABCA 226, 14 C.B.R. (3d) 127, 131 A.R. 154, 25 W.A.C. 154, 4 Alta. L.R. (3d) 97, 42 R.F.L. (3d) 76, 94 D.L.R. (4th) 394, affirming a judgment of the Court of Queen's Bench (1991), 1991 CanLII 5890 (AB KB), 8 C.B.R. (3d) 238, 123 A.R. 1, 82 Alta. L.R. (2d) 67, 35 R.F.L. (3d) 225, reversing a decision of Master Funduk (1990), 1990 CanLII 5956 (AB KB), 2 C.B.R. (3d) 109, 112 A.R. 70, awarding the bankrupt's income tax refund to the trustee of his estate. Appeal dismissed.

Michael J. McCabe, for the appellant.

Jeanette Fedorak, for the respondent the Director of Maintenance Enforcement.

Ingrid C. Hutton, Q.C., and Robert Moen, for the respondent the Attorney General of Canada.

No one appeared for the respondent the Attorney General for Alberta.

Rick T. G. Reeson, for the intervener.

The judgment of the Court was delivered by

Iacobucci J. -- This appeal involves a priority contest, the subject matter of which is a bankrupt's post-bankruptcy income tax refund. The contestants are a trustee in bankruptcy and the Director of Maintenance Enforcement. The appeal has been brought as a test case, with the parties proceeding on an agreed statement of facts.

I. Facts

In 1986, Arden Anthony Marzetti was ordered to pay monthly child and spousal support pursuant to the Divorce Act, R.S.C., 1985, c. 3 (2nd Supp.). He fell into arrears, and a default hearing was held in December 1988. As a consequence, Marzetti was ordered to pay $250 per month to the Director of Maintenance Enforcement (the "Director"), who is appointed pursuant to s. 4 of the Maintenance Enforcement Act, S.A. 1985, c. M-0.5.

On June 7, 1989, Marzetti filed a voluntary assignment into bankruptcy. On that date, he also executed an "Agreement Letter" as requested by his Trustee in Bankruptcy, Peat Marwick Thorne Inc. The Agreement Letter reads:

I hereby authorize Peat Marwick Limited, as Trustee of my Estate, to complete and file with Revenue Canada - Taxation my post-bankruptcy income tax return for the year 1989. I further authorize that any refund resulting from the post-bankruptcy income tax return be mailed to Peat Marwick Limited as an asset pursuant to Section 47 of the Bankruptcy Act for distribution to my creditors.

On February 15, 1990, the Director filed a Notice of Continuing Attachment against the federal Crown under the Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp.). The Notice instructed the Crown to pay to the Director specified monies, namely, sums otherwise payable to Marzetti under any Act of Parliament.

On March 7, 1990, Marzetti was granted an absolute discharge from bankruptcy.

On April 13, 1990, the Department of Justice issued a garnishee summons, thus putting into effect the Notice of Continuing Attachment previously filed.

On April 30, 1990, the Trustee filed a post-bankruptcy income tax return for Marzetti. That return summarized Marzetti's tax liability for the period between June 7, 1989 and December 31, 1989. A post-bankruptcy income tax refund totalling $2,066.90 became payable.

Before the refund was paid, the Trustee applied for a declaration that the refund was properly payable to the Trustee rather than the Director. Although the Crown in right of Canada was served with notice of the Trustee's motion, the tax refund was nonetheless paid to the Director in August 1990. Counsel for the Attorney General of Canada acknowledged that this payment was made in error, and that the Minister of National Revenue did not intentionally make payment prior to resolution of the priority dispute.

In response to the Trustee's motion, an Alberta Master declared that the refund constitutes property of Marzetti which vested in the Trustee: (1990), 1990 CanLII 5956 (AB KB), 2 C.B.R. (3d) 109, 112 A.R. 70. The Director was ordered to pay the amount of the refund to the Trustee. The Court of Queen's Bench of Alberta allowed the Director's appeal, and ordered that the refund be returned to the Director: (1991), 1991 CanLII 5890 (AB KB), 8 C.B.R. (3d) 238, 123 A.R. 1, 82 Alta. L.R. (2d) 67, 35 R.F.L. (3d) 225. The Court of Appeal for Alberta dismissed the Trustee's appeal: (1992), 1992 ABCA 226, 14 C.B.R. (3d) 127, 131 A.R. 154, 25 W.A.C. 154, 4 Alta. L.R. (3d) 97, 42 R.F.L. (3d) 76, 94 D.L.R. (4th) 394. This Court granted leave to appeal from that decision: [1993] 1 S.C.R. vii.

The Attorney General for Alberta, a named respondent who participated in the proceedings below, was not represented in the appeal before this Court.

II. Relevant Statutory Provisions

A.Bankruptcy Act, R.S.C., 1985, c. B-3

2. In this Act,

"property" includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property;

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

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

(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,

but it shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

68. (1) Notwithstanding section 67, where a bankrupt is in receipt of, or is entitled to receive, any salary, wages or other remuneration from any person employing, or using the services of, the bankrupt, in this section referred to as the "employer", the trustee, if directed by the inspectors or the creditors, shall apply to the court for an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the court may determine, having regard to the family responsibilities and personal situation of the bankrupt.

(2) An order under subsection (1) shall be directed to the bankrupt and his employer and shall be expressed to continue for such time as the court may fix or until payment of a sum specified in the order and, unless otherwise stated in the order, it ceases to have effect on the discharge of the bankrupt.

(4) An order under subsection (1) shall be served on the bankrupt and is binding on him, and when the order is served on his employer, it is binding on the employer named therein and any subsequent employer of the bankrupt if a copy of the order is served on the subsequent employer, but nothing in this section shall be construed as requiring the trustee to serve such an order on any employer of a bankrupt if it appears to the trustee inexpedient to do so.

70. (1) Every receiving order and every assignment made in pursuance of this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, judgments operating as hypothecs, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or his agent, and except the rights of a secured creditor.

71. ...

(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.

158. A bankrupt shall

(l) execute such powers of attorney, conveyances, deeds and instruments as may be required;

(o) generally do all such acts and things in relation to his property and the distribution of the proceeds among his creditors as may be reasonably required by the trustee, or may be prescribed by the General Rules, or may be directed by the court by any special order made with reference to any particular case or made on the occasion of any special application by the trustee, or any creditor or person interested . . .

B.Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp.)

23. In this Part,

"garnishable moneys" means moneys authorized to be paid by Her Majesty by or under such Acts of Parliament or provisions thereof or programs thereunder as are designated by the regulations;

24. Notwithstanding any other Act of Parliament preventing the garnishment of Her Majesty, Her Majesty may, for the enforcement of support orders and support provisions, be garnisheed in accordance with this Part in respect of all garnishable moneys.

25. Subject to this Part and the regulations, service of the following documents on the Minister, namely,

(a) a garnishee summons,

(b) a copy of the support order or agreement containing the support provision to which the garnishee summons relates, and

(c) an application in the form prescribed by the regulations,

binds Her Majesty for one year in respect of all garnishable moneys payable to the judgment debtor named in the garnishee summons.

C.Family Support Orders and Agreements Garnishment Regulations, SOR/88-181

3. The following Acts, provisions thereof and programs thereunder are designated for the purposes of the definition "garnishable moneys" in section 23 of the Act:

(a) sections 164 and 216 of the Income Tax Act as they relate to the personal return of income of the taxpayer for a particular taxation year; . . .

D. Financial Administration Act, R.S.C., 1985, c. F-11

66. In this Part,

"Crown debt" means any existing or future debt due or becoming due by the Crown, and any other chose in action in respect of which there is a right of recovery enforceable by action against the Crown;

67. Except as provided in this Act or any other Act of Parliament,

(a) a Crown debt is not assignable; and

(b) no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person any rights or remedies in respect of that debt.

E. Tax Rebate Discounting Act, R.S.C., 1985, c. T-3

2. ...

(2) For the purposes of this Act, a person acquires a right to a refund of tax where that person, as between himself and another person, acquires a right to a refund of tax or to an amount equal to the amount of a refund of tax, notwithstanding that, by virtue of section 67 of the Financial Administration Act or any provision of any other Act of Parliament or of the legislature of a province, the refund of tax is not assignable.

III. Judgments

A.Alberta Court of Queen's Bench (1990), 1990 CanLII 5956 (AB KB), 2 C.B.R. (3d) 109 (Master Funduk in Chambers)

Master Funduk asked whether an income tax refund can be considered property of a bankrupt which vests in a trustee by virtue of the Bankruptcy Act, R.S.C., 1985, c. B-3. He answered that a refund is prima facie "property", as that term is used in s. 67 of the Bankruptcy Act. However, he realized that some courts have treated refunds as deferred wages, and that such courts, by invoking s. 68 of the Bankruptcy Act, have held that refunds do not automatically vest in trustees under s. 67.

Master Funduk was prepared to accept that s. 68 of the Bankruptcy Act removes wages from the scope of s. 67(c). But after a comprehensive review of case law, he was not prepared to accept that income tax deductions from an employee's wages retain the character of wages. He stated, plainly: "I do not think that an income tax refund can logically be considered to be `deferred wages'" (p. 119).

Further, Master Funduk noted that, if the refund retained its character as wages, then the plain language of s. 68 would seem to preclude trustees from obtaining orders in respect of the refund. Pursuant to s. 68, while a trustee can secure an order to obtain wages, the s. 68 order can be directed only toward "the bankrupt and his employer". Master Funduk stated that s. 68 does not permit the attachment of a debt owed by a third party to a bankrupt.

Accordingly, Master Funduk held that the income tax refund is not within the scope of s. 68 of the Bankruptcy Act. He held that it is property of the bankrupt within s. 67(c) which vested automatically in the Trustee. In light of these holdings, Master Funduk did not consider arguments relating to the Agreement Letter.

B.Alberta Court of Queen's Bench (1991), 1991 CanLII 5890 (AB KB), 8 C.B.R. (3d) 238 (Wachowich J.)

Wachowich J. (as he then was) agreed with Master Funduk that the tax refund is prima facie property within s. 67(c) of the Bankruptcy Act. He also agreed that the refund is neither wages nor deferred wages within s. 68. However, Wachowich J. indicated that "[w]hile the tax refund falls within s. 67(c), it seems clear from the language of the Bankruptcy Act that s. 67(d) must also apply before the property can be dealt with by the trustee" (pp. 246-47). Wachowich J. stated (at p. 247):

This means that the trustee's right to deal with this property is limited to those rights the bankrupt would have had had he not been bankrupt . . . . if Marzetti had not been bankrupt, he would have had no power to collect the portion of the tax refund garnisheed by the Director because of the Family Orders and Agreements Enforcement Assistance Act. Similarly then, the trustee has no right to that portion of the tax refund garnisheed and paid to the Director.

Thus, the tax refund does not automatically vest in the trustee under ss. 67(c) and (d).

Wachowich J. next considered the Agreement Letter. He found that, under ss. 66 and 67 of the Financial Administration Act, R.S.C., 1985, c. F-11, "there is a statutory prohibition against the assignment of Crown debts except as specifically authorized by federal legislation" (p. 247). Wachowich J. accepted that, by virtue of Re Northward Airlines Ltd. (1981), 1981 CanLII 1187 (AB KB), 37 C.B.R. (N.S.) 137 (Alta. Q.B.), an assignment might nonetheless be effective as between an assignor and an assignee. However, Wachowich J. referred to Tailby v. Official Receiver (1888), 13 App. Cas. 523 (H.L.), and stated (at p. 249):

... while the assignment might bind the conscience of the assignor, it cannot bind the property until such time as the contract becomes capable of being performed. . . . the contract between the assignor and the assignee cannot be performed until the assignor has received his tax refund. Because of the nature of the garnishment proceedings available to the Director, the assignor (the bankrupt) never does receive the tax refund. Thus, the assignee's rights to the property never materialize.

Thus, Wachowich J. distinguished Re Northward Airlines on the ground that it did not involve a prior right to garnishee a Crown debt.

On the question of assignment, then, Wachowich J. concluded that the Trustee is "attempting to get through the back door something it could not get through the front" (p. 249). He stated that the Trustee could take action against the Director only if Marzetti could similarly take action, which he could not. He found that, once the refund passed to the Director, it ceased to be Marzetti's property under s. 67(c), in that Marzetti had "no power over or in respect of that property" (p. 249). Additionally, Wachowich J. stated that even if the assignment were otherwise enforceable, it would remain unenforceable on the facts because of the Trustee's failure to comply with ss. 69 and 70 of the Financial Administration Act.

The assignment being ineffective, and s. 67(c) of the Bankruptcy Act being inoperative, Wachowich J. allowed the appeal. He declared that the income tax refund was properly attached by the Director. Accordingly, he ordered the Trustee to remit the refund plus interest to the Director.

C.Alberta Court of Appeal (1992), 1992 ABCA 226, 14 C.B.R. (3d) 127 (Major J.A. for the Court)

Major J.A. (as he then was) first discussed the role of s. 68 of the Bankruptcy Act. In his opinion, s. 68 legislatively overruled Industrial Acceptance Corp. v. Lalonde, 1952 CanLII 2 (SCC), [1952] 2 S.C.R. 109. Thus, Major J.A. interpreted s. 68 to mean that "only upon application to the court having regard to the enumerated considerations can a trustee access the wages or salary earned by a bankrupt" (p. 131).

Major J.A. next accepted as correct both Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R. 300 (Austr. H.C.) and Re Goulet (1977), 24 C.B.R. (N.S.) 222 (Ont. S.C.). This acceptance supported his conclusion, namely, that "tax deductions taken at source by an employer and remitted to Revenue Canada do not lose their character as wages" (p. 135). Major J.A. explained that "[t]he reality of the situation is that the income tax refund, insofar as it relates to employer withholdings, represents wages that otherwise would have been paid to the bankrupt" (p. 134). He buttressed his conclusion with dicta from Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 1980 CanLII 186 (SCC), [1980] 1 S.C.R. 1182. But he also qualified his conclusion by stating (at p. 135):

I do not conclude that all tax refunds are wages. It depends on the nature of the refund. In this case the refund was the result of taxes deducted directly from wages. Tax refunds may arise in other ways and can be determined when that case arises.

Then, as a final point on the wages issue, Major J.A. considered whether the language of s. 68 precludes a wages characterization for income tax refunds. He described the position of Master Funduk, namely, that since s. 68 does not contemplate an order against the Crown, a refund cannot constitute s. 68 "wages". For Major J.A., however, the alleged problem with s. 68 is irrelevant, inasmuch as it "cannot change the characterization of employer withholdings returned in the form of a tax refund as `wages'" (p. 135). He stated that any s. 68 problem associated with the making of orders is a problem for Parliament.

In the alternative, Major J.A. agreed with Wachowich J.'s other conclusions relating to the operation of s. 67 of the Bankruptcy Act, the effectiveness of the Agreement Letter, and the requirements of the Financial Administration Act. Major J.A. dismissed the appeal, and held that the Director was properly entitled to the refund because of the Notice of Continuing Attachment.

IV. Issues

The central issue in this appeal, as I have already noted, is whether the Trustee or the Director has priority in respect of Marzetti's post-bankruptcy income tax refund. In discussing this issue, I find it convenient to adopt the following structure:

A. What is the position under the Bankruptcy Act?

1.In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?

2.In specific terms, must a court conclude that both ss. 67(c) and 67(d) of the Bankruptcy Act have been satisfied in order to conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67?

3.Is s. 68 a complete code in respect of a bankrupt's wages?

4.Should a post-bankruptcy income tax refund be considered "wages" for the purposes of s. 68?

B. Did the Agreement Letter create an enforceable assignment?

In answering these questions, I will make frequent reference to the Bankruptcy Act. I do so with full knowledge that the relevant statute is now entitled the Bankruptcy and Insolvency Act: see S.C. 1992, c. 27, ss. 1 and 2. However, since the statute was known as the Bankruptcy Act at the pertinent times, and since none of the 1992 amendments materially affects my opinion, I will generally find it unnecessary to have regard to the amended version.

V. Analysis

A.What is the Position Under the Bankruptcy Act?

Perhaps more for logic than for law, I consider it helpful, as an initial matter, to consider s. 67 of the Bankruptcy Act in isolation. That section is of critical importance to the Act's operation, inasmuch as it establishes certain rules regarding what will, and what will not, comprise "property of a bankrupt divisible among his creditors". These rules, in turn, rest upon a definition of "property" found in s. 2 of the Bankruptcy Act.

Both s. 67 and the "property" definition can trace their legislative roots back to the original Bankruptcy Act, S.C. 1919, c. 36. The "property" definition in that early statute is nearly identical to the existing definition found in s. 2. Likewise, s. 25 of the early statute performed much the same function as the current s. 67. In contrast, s. 68 is historically rooted in a relatively recent amendment: S.C. 1966-67, c. 32, s. 10. Although I will later conclude that s. 68 is operative in this case, both the long history and the fundamental importance of s. 67 lead me first to consider that section of the Bankruptcy Act in isolation.

1.In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?

Section 67(c) of the Bankruptcy Act provides that "[t]he property of a bankrupt divisible among his creditors . . . shall comprise . . . all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge". At the "date of his bankruptcy" in this case, Marzetti had no interest in the tax refund, since that refund relates to income he earned following his voluntary assignment into bankruptcy. Accordingly, the relevant issue is whether Marzetti "acquired" any property, or whether any property "devolve[d] on him", prior to his discharge.

In discussing this issue, it must first be observed that Marzetti's income tax return was not filed until after his discharge from bankruptcy. This means that, if Marzetti acquired property in respect of the refund, or had such property devolve upon him, the acquisition or devolution cannot depend upon the filing of the income tax return itself. Can it be said that, prior to his discharge, Marzetti had property in respect of his eventual income tax refund, even though a return was not filed until after his discharge?

According to the Director, it cannot, and for this proposition the Director cited Munich Reinsurance Co. (Canada Branch) v. M.N.R., 91 D.T.C. 1137 (T.C.C.). In that case, Rip T.C.J. stated that "the right to a refund does not arise at the time an overpayment of any tax instalment is made but it arises on the day a return is filed" (p. 1143). In making this statement, however, Rip T.C.J. was speaking in terms of the taxpayer having "an enforceable right against the Minister" (p. 1143, emphasis added). In particular, he was considering whether the taxpayer who overpays an instalment acquires a right to receive interest income.

Viewed in context, therefore, the conclusion in Munich does not rest upon Rip T.C.J.'s independent assessment of the proprietary character of overpayments. Rather, it derives inferentially from the existence of a statutory refund procedure in s. 164(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended. In the words of Rip T.C.J., "[a]s section 164 makes clear, a refund is not due and payable until a return is filed" (p. 1143). Accordingly, assuming that Munich is correctly decided, it is of little assistance to the Director. There is a marked distinction between the existence, and the statutory enforceability, of a proprietary right.

Is there, then, a proprietary character to tax overpayments? Not surprisingly, the Bankruptcy Act defines the word "property" in very broad terms. In particular, I note that the definition includes "every description of property, whether . . . legal or equitable", and it specifically mentions "every description of . . . interest . . . present or future, vested or contingent, in, arising out of or incident to property": s. 2. Even if a taxpayer who makes overpayments has no right to compel a refund prior to filing a return, surely that taxpayer has at least a future and contingent interest in the ultimate tax refund.

During oral argument, counsel for the Director was asked whether it might be valid to compare a tax overpayment to a demand promissory note, the suggestion being that each is a form of property, but that neither is enforceable prior to the satisfaction of certain preconditions. In the case of the promissory note, the precondition is the demand. In the case of the tax overpayment, the recognized preconditions relate to the filing of the return: see, e.g., Munich, supra, and Hughes v. The Queen, 91 D.T.C. 5290 (F.C.T.D.). In my view, the comparison is a good one. The argument of the Director artificially restricts the Bankruptcy Act definition of "property", and it fails to distinguish between accrued legal debts and other, inchoate, forms of property.

On this preliminary issue, therefore, I conclude that the Bankruptcy Act's reference to "property" is broad enough to embrace the facts of this case. More specifically, using the language of s. 67(c), I conclude that Marzetti acquired at least a future and contingent interest in his income tax refund at the time excess overpayments were withheld on his behalf.

2.In specific terms, must a court conclude that both ss. 67(c) and 67(d) of the Bankruptcy Act have been satisfied in order to conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67?

According to Wachowich J., ss. 67(c) and 67(d) of the Bankruptcy Act must both be satisfied before a court can conclude that there exists "property of a bankrupt divisible among his creditors". Those two paragraphs provide:

The property of a bankrupt divisible among his creditors . . . shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

In other words, like Master Funduk, Wachowich J. concluded that the income tax refund could be considered "property" for the purposes of s. 67(c), such that it was capable of vesting automatically in the Trustee. However, for Wachowich J., s. 67(d) precluded automatic vesting on the facts. He reasoned that, by virtue of s. 67(d), the Trustee could exercise only those powers in respect of the refund which might have been exercised by Marzetti but for the bankruptcy. And, he stated, if the bankruptcy had not occurred, Marzetti could have exercised no power over the refund because of the garnishee instituted by the Director. So while Marzetti had "property" in respect of the refund, there was no "property of a bankrupt divisible among his creditors". The Court of Appeal approved this reasoning, but without analysis.

With respect, Wachowich J. misinterpreted ss. 67(c) and 67(d). In effect, Wachowich J. characterized s. 67(c) as an inclusionary provision, and s. 67(d) as an exclusionary provision. Section 67(c) giveth, and s. 67(d) taketh away. But this interpretation ignores the structure of s. 67 as a whole, since ss. 67(a) and (b) are preceded by the phrase "[t]he property of a bankrupt . . . shall not comprise" (emphasis added), whereas ss. 67(c) and (d) are preceded by the phrase "[t]he property of a bankrupt...shall comprise" (emphasis added). If s. 67(d) were intended to limit the scope of s. 67(c), why would it not have been placed with (a) and (b)?

This criticism of Wachowich J.'s interpretation is echoed by L. W. Houlden and C. H. Morawetz in Bankruptcy and Insolvency Law of Canada (3rd ed. rev. 1992), vol. 1, at p. 3-6, where the authors comment upon Wachowich J.'s trial decision:

. . . Wachowich J. of the Alberta Court of Queen's Bench was of the opinion that if property falls within [s. 67(c)], it must also meet the requirements of [s. 67(d)] before the trustee can claim it. With respect, this seems wrong. Section [67(c)] and (d) have always been treated as alternatives.

In other words, because of the statutory structure, it is inappropriate to read paragraphs (c) and (d) restrictively when those paragraphs are intended broadly and inclusively to define the "property of a bankrupt divisible among his creditors". Surely the better view is to give, at least at this stage of the analysis, a wider effect to these paragraphs so as not to reduce artificially the estate available to creditors. In grammatical terms, the word "and" which appears at the end of the English version of s. 67(c) must, by reason of its context, be read disjunctively. As stated by E. A. Driedger, "[t]he inclusive or and the several and produce the same result, and it remains for the context to indicate in what sense these two little words are used": Construction of Statutes (2nd ed. 1983), at p. 18.

Moreover, I am fortified in this conclusion by the French text of s. 67. Although the parties failed to highlight the point, the word "et" does not appear as a conjunction between ss. 67(c) and 67(d). Although the absence of a conjunction in the French version does not make Wachowich J.'s interpretation impossible, it does make the interpretation even less defensible.

For these reasons, a bankrupt's interest in a post-bankruptcy income tax refund can be considered "property" for the purposes of s. 67(c) of the Bankruptcy Act. Moreover, it can be considered "property of a bankrupt divisible among his creditors" for the purposes of s. 67 as a whole, since s. 67(d) in no way qualifies the operation of s. 67(c). This, then, is my initial conclusion.

In the absence of other considerations, the logical consequence of my initial conclusion would be that Marzetti's interest in his refund vested automatically in his Trustee: see s. 71(2). In this way, the Trustee would have obtained priority over the Director's garnishment: see s. 70(1). However, as I will now proceed to explain, my initial conclusion cannot govern in this case. It is overruled by s. 68.

To assess the importance of s. 68 in this case, I must do two things. First, I must determine whether s. 68 always controls the disposition of a bankrupt's wages. Is s. 68 a substantive provision, that is, one which always removes wages from the scope of s. 67, or does it simply create a procedural device for trustees? Second, if I determine that s. 68 is a complete code in respect of a bankrupt's wages, I must then proceed to consider whether Marzetti's post-bankruptcy income tax refund retained its wages character.

3.Is s. 68 a complete code in respect of a bankrupt's wages?

Prior to the enactment of what is now s. 68, it was clear that the salary, wages, or other remuneration of a bankrupt could sometimes constitute after-acquired "property", and so be considered "property of a bankrupt divisible among his creditors" for the purposes of what is now s. 67. The pre-amendment position was clarified by Industrial Acceptance Corp., supra.

In Industrial Acceptance Corp., this Court was asked to explain whether wages or salary could be excluded from the definition of divisible property by s. 23(ii) (later s. 67(b)) of the Bankruptcy Act. According to the respondent bankrupt in Industrial Acceptance Corp., the terms of s. 23(ii) could not operate to exclude wages or salary, inasmuch as wages or salary can "only be reached by a garnishee or attachment procedure" (p. 118). This procedural reality was said to be important because s. 23(ii) excluded from the definition of divisible property only property exempted from "execution or seizure" under provincial law. Estey J. rejected the distinction between garnishment or attachment procedures on the one hand, and procedures by way of execution or seizure on the other hand, in the following terms (at p. 117):

It would appear that Parliament, in adopting the language of s. 23(ii) (particularly when compared with the language of s. 38(2) in the English act) intended that only such portion of the salary as was subject to seizure by legal process under the law of the respective provinces should vest in the trustee. Moreover, the omission of any such provision as that contained in s. 51(2) of the English act, under which, on the application of the trustee, an order might be made against a bankrupt in receipt of a salary to pay the whole or part thereof to the trustee, appears to support the foregoing view.

In modern terms, Industrial Acceptance Corp. established that the language of s. 67(b), which removes from "property of a bankrupt divisible among his creditors . . . any property that as against the bankrupt is exempt from execution or seizure under the laws of the province", can operate to exclude wages or salary as contemplated by provincial exemptions.

In effect, therefore, the pre-amendment position was this: after taking into account provincial wage and salary exemptions, any remaining wages or salary of a bankrupt was "property of a bankrupt divisible among his creditors". These excess wages vested automatically in the trustee. And it is clear from Industrial Acceptance Corp. that this conclusion was partly driven by the absence of a provision like s. 68, namely, one which permits, "on the application of the trustee, an order . . . against a bankrupt in receipt of a salary to pay the whole or part thereof to the trustee" (p. 117). But what is not clear in Industrial Acceptance Corp., and what must be resolved in this appeal, is how the presence of s. 68 alters this pre-existing structure.

Two possibilities present themselves. First, it can be argued that s. 68 is a complete code in respect of a bankrupt's salary, wages, or other remuneration. Under this view, such forms of property cannot be "property of a bankrupt divisible among his creditors" for s. 67. They do not automatically vest in the trustee. The trustee can access them only following a court application as contemplated by s. 68(1). Proponents of this first view characterize the s. 68 amendment as a substantive amendment to the pre-existing structure, in so far as s. 68 leaves no room for the operation of s. 67 in respect of a bankrupt's salary, wages, or other remuneration. The substantive view has judicial support: Re Giroux (1983), 1983 CanLII 1731 (ON SC), 45 C.B.R. (N.S.) 245 (Ont. S.C.); Re McCullough (1984), 52 C.B.R. (N.S.) 313 (Ont. S.C.); Re Ali (1987), 62 C.B.R. (N.S.) 64 (Ont. S.C.).

The second view, not surprisingly, is that s. 68 is simply a procedural provision. Proponents of this view contend that the pre-amendment position persists, and that wages, salary, and other remuneration can still vest automatically in the trustee as non-exempt property under s. 67(b). To explain s. 68's existence, a procedural purpose is advanced to demonstrate that s. 68 applications can be beneficial from the trustee's perspective. Two variations of the procedural argument can be identified.

The first variation characterizes s. 68 as creating an additional remedy for trustees. It is said that s. 68 permits a trustee to access not only the non-exempt portion of a bankrupt's wages (which vests automatically), but also the otherwise exempt portion, subject to the court's discretion as defined by s. 68. This view is expressed in Re Beaton (1979), 1979 CanLII 2089 (ON CA), 30 C.B.R. (N.S.) 225 (Ont. C.A.), where Arnup J.A. stated (at pp. 227-28):

Section 48 [now s. 68], in my view, adopted and enlarged upon the procedure in the English Act. It gave the trustee an expeditious and convenient means of getting into his hands not only the [non-exempt portion] which by s. 47 [now s. 67] was already the divisible property of the bankrupt . . . but possibly more, if the court saw fit to order a larger portion to be paid to the trustee....

The second variation of the procedural argument, which is not inconsistent with the first, emphasizes the convenience of s. 68 over its potential to increase a trustee's access to wages. This view is expressed by Kroft J. in Re Hoffer (1980), 34 C.B.R. (N.S.) 222 (Man. Q.B.), at p. 234:

...under s. 47 [now s. 67] alone the trustee could not attach the [non-exempt portion] until it fell due. How wages were attached as they became due was a source of considerable confusion, and the approaches across Canada were inconsistent.

Section 48 [now s. 68] appears to have been passed to give trustees a fair and convenient procedure by which they can ask a court to determine the portion of wages which will be available to creditors and to direct the manner of payment.

In addition to Re Beaton and Re Hoffer, the procedural view was advanced in Re Kellaway (1977), 24 C.B.R. (N.S.) 14 (B.C.S.C.), though without explanation.

To proceed, I restate the question: is s. 68 a substantive or procedural provision in respect of a bankrupt's salary, wages, or other remuneration? In my opinion, the case law debate summarized above should be resolved in favour of the substantive view for three reasons. First, that view better accords with the language of s. 68. Second, it permits s. 68 to remedy more effectively the mischief which led to the original amendment. And, third, it has some support in authority from this Court. I will now elaborate upon each of these reasons in turn.

The language of s. 68 twice favours the substantive view. These points of support were described by Thorson J.A. dissenting in Re Beaton, supra. I can do no better than quote his cogent discussion of each. First, Thorson J.A. considered the implications of the phrase "an order directing the payment to the trustee", as that phrase is used in s. 68 (then s. 48(1)) of the Bankruptcy Act. He stated (at p. 237):

It is not without significance that the only order which s. 48(1) authorizes the court to make is "an order directing the payment to the trustee" of a part of the bankrupt's earnings. The inference which I draw from this phrasing of language is that it contemplates a payment being made to the trustee to which the trustee would not be entitled in the absence of the order. There is no hint or suggestion anywhere in the subsection that the payment which is to be made is to take the place of, or is to be in addition to, some part of those earnings to which the trustee is in any event already entitled; rather there is the reverse implication that, but for the order, the trustee would have no right to be paid whatever part of those earnings he is seeking to have paid to him. [Emphasis in original.]

Second, Thorson J.A. examined the significance of the words "such part of the salary, wages or other remuneration" as they appear in s. 68(1). In the following passage, Thorson J.A. explains how those words favour the substantive view (at pp. 237-38):

Furthermore, I cannot conclude that no significance is to be attached to the language of the legislative condition of s. 48(1), beginning with the words "where a bankrupt is in receipt of, or is entitled to receive, any salary, wages or other remuneration from any person employing, or using the services of, the bankrupt", when that language is then followed by language authorizing the making of an order directing payment to the trustee of "such part of the salary, wages or other remuneration" (the italics are mine) as the court may determine. If the contention of counsel for the trustee were to be accepted, the only meaning that could be given to the words "such part of the salary, wages or other remuneration" would be "such part of the portion of the salary, wages or other remuneration that has not already vested in the trustee", i.e., the portion that remains after deducting the 30 per cent portion of the bankrupt's wages to which the trustee has already become entitled.

This is equally the result, in my opinion, of the argument of counsel for the Superintendent of Bankruptcy that s. 48 was not intended to, and does not, take away any rights that the trustee might otherwise have to the bankrupt's wages "at least until he has proceeded under s. 48". If he is correct, the only possible starting point of earnings from which a court could proceed to make an order under s. 48 would be from the remaining [otherwise exempt] portion of the bankrupt's earnings. [Emphasis in original.]

I agree with both points made by Thorson J.A. in Re Beaton, supra. In my opinion, a plain language interpretation of s. 68(1) favours the view that it is a substantive provision. When s. 68(1) indicates that it applies "[n]otwithstanding section 67", it means that it operates as a complete code in respect of the listed forms of property. Or, as stated by Houlden and Morawetz, supra, at p. 3-126: "The opening words `notwithstanding section [67]' are intended to make it clear that wages, etc. will not come within [s. 67(c)] but will be dealt with by s. 68".

My interpretation of s. 68 is reinforced by my understanding of the mischief which that provision was intended to remedy. As described above, prior to the enactment of s. 68's predecessor, while wages could vest in trustees automatically, provincial law could operate to exempt wages from the definition of "property of a bankrupt divisible among his creditors": Industrial Acceptance Corp., supra. The necessary, and problematic, consequence of this statutory structure was that the treatment of a bankrupt's wages for Bankruptcy Act purposes varied from province to province: Houlden and Morawetz, supra, at p. 3-127.

Parliament no doubt considered it unreasonable for the treatment of bankrupt persons to depend upon the happenstance of provincial residence. Of course, even if one accepts that s. 68 is a complete code in respect of salary, wages, and other remuneration, the potential for uneven treatment across Canada remains in respect of other provincially exempted property. But it is hardly surprising that Parliament selected an important form of property -- salary, wages, and other remuneration -- and gave that property special treatment. In Re Beaton, supra, Thorson J.A. made the following statement with which I agree (at p. 235):

It is thus legitimate to speculate that one of Parliament's objectives in enacting s. 48 [now s. 68] was to avoid this potential for unevenness (and its consequent potential unfairness both to bankrupts and to creditors alike) by providing an entirely separate regime for dealing with salary, wages or other remuneration received or entitled to be received by a bankrupt from his employer, which would apply uniformly throughout Canada regardless of differences in provincial laws.

The view I take is, moreover, reflected in Hansard extracts. Then Minister of Justice, the Hon. Louis-Joseph-Lucien Cardin, proposed to amend the Bankruptcy Act in the following speech (House of Commons Debates, June 16, 1966, at p. 6488):

Other amendments clearly set out a procedure whereby bankrupts may be required to contribute some part of their post-bankruptcy income to the trustee for the benefit of the creditors. The present act would seem to indicate that a contribution may be required but this has been left to the discretion of trustees and the courts with the result that debtors are treated in a most inconsistent manner across the country. [Emphasis added.]

Accepting as I do that s. 68 is intended to remedy province-to-province disparities in the application of the Bankruptcy Act, the conclusion necessarily follows that s. 68 is a substantive rather than a procedural modification to the pre-existing scheme. If s. 68 were only intended to give trustees access to funds in excess of the non-exempt portion defined by s. 67(b), then uniformity of provincial application could only be achieved if courts in all provinces made s. 68 orders calculated to reflect the lowest common denominator of provincial exemption. In my view, however, not only is this outcome anomalous, but it is also probably prevented by the language of s. 68(1) itself, which language compels courts to have "regard to the family responsibilities and personal situation of the bankrupt" prior to making s. 68 orders. It is thus reasonable to suppose that uniformity of provincial application was intended to be achieved through the operation of s. 68 as a complete code, whereby courts make orders in respect of a bankrupt's salary, wages, or other remuneration after considering only one standard: the one specified in s. 68 itself.

As a final point of support for the substantive view, I draw attention to the decision of this Court in Vachon v. Canada Employment and Immigration Commission, 1985 CanLII 12 (SCC), [1985] 2 S.C.R. 417. In Vachon, Beetz J. discussed the rehabilitative purpose of the Bankruptcy Act. He did so in terms which suggest this Court's acceptance of the substantive view (at p. 430):

The rehabilitation of the bankrupt is not the result only of his discharge. It begins when he is put into bankruptcy with measures designed to give him the minimum needed for subsistence. These measures are contained in s. 47 [now s. 67] of the Bankruptcy Act concerning, inter alia, the exemption from execution of certain property, and in s. 48 [now s. 68], regarding the wages of the bankrupt, which applies notwithstanding s. 47 and which empowers the Court to make

an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the court may determine having regard to the family responsibilities and personal situation of the bankrupt.

The part of the wages paid to creditors does not necessarily correspond to the part which may be attached. It may be more or less "having regard to the family responsibilities and personal situation of the bankrupt". Houlden and Morawetz, op. cit., vol. 1, write at pp. F-66 and F-69:

Since the enactment of s. 48, wages have been removed from the operation of s. 47 so that no part thereof vests in the trustee to be divided among creditors unless he makes an application under s. 48 and then only to the extent allowed by the court: Re Giroux (1983), 1983 CanLII 1731 (ON SC), 45 C.B.R. (N.S.) 245, 41 O.R. (2d) 351, 146 D.L.R. (3d) 103 (S.C.).

Applications under s. 48 of the Bankruptcy Act come down not to a question of law, but of fact; that is, whether the bankrupt after being given credit for his reasonable living expenses has excess funds which might be used to pay creditors. [Emphasis added.]

As I read the above quotation, Beetz J. approves of the highlighted passage from Houlden and Morawetz, which passage, in turn, rests upon Re Giroux, supra. Interestingly, while Houlden and Morawetz reach a more qualified conclusion in the current version of their work, they continue to favour the substantive view. The authors state (supra, at p. 3-126): "The position in Re Giroux and Re McCullough seems more consonant with the amendment that was made to the Act by the addition of s. 68".

To summarize briefly, it is my opinion that the language of s. 68, the inferred purpose of that provision, and the decision of this Court in Vachon, supra, all support the conclusion that s. 68 is a substantive provision, one which is intended to operate as a complete code in respect of a bankrupt's salary, wages, or other remuneration. These forms of property cannot fall within s. 67(c) of the Bankruptcy Act as a bankrupt's after-acquired "property", and they cannot be considered "property of a bankrupt divisible among his creditors" for the purposes of s. 67. They do not vest in the trustee through the simple operation of law.

Finally, for the sake of completeness, I note that this conclusion is not contradicted by Commonwealth authorities cited to this Court. The intervener the Superintendent of Bankruptcy cited Re Bertrand, [1980] 2 N.Z.L.R. 72 (C.A.). In that case, McMullin J. considered a provision which the Superintendent argued is similar to s. 68(1) of the Bankruptcy Act, and characterized it as "primarily a machinery provision" (at p. 77). But it is apparent from reading Re Bertrand that there is, in fact, no similarity between the two provisions at all. In the New Zealand case, the relevant provision operated "[w]ithout prejudice to any other rights conferred by" the Act in which it was found, and McMullin J. recognized that the provision was, therefore, not "intended to interfere with the pattern of vesting" (p. 77) otherwise apparent in the statute: cf. Federal Commissioner of Taxation, supra.

And it is also germane to observe that my reading of s. 68 in no way emasculates the importance of s. 67(b). There are many provincial exemptions from "execution or seizure" which have nothing to do with salary, wages, or other remuneration. See, for example, Houlden and Morawetz, supra, at pp. 3-39 et seq., where the authors review provincial exemptions in respect of such things as pension plans (at p. 3-45), real estate and homesteads (at p. 3-45), and tools and chattels used in the bankrupt's business, profession or calling (at p. 3-47). See also Canadian Encyclopedic Digest (Western 3rd ed.) vol. 13, Title 59, at pp. 59-83 et seq., and Canadian Encyclopedic Digest (Ontario 3rd ed.) vol. 12, Title 58, at pp. 93 et seq.

So I proceed upon the footing that anything called "wages" will not vest automatically in a trustee. But this case, of course, involves not wages per se, but rather Marzetti's post-bankruptcy income tax refund. This means that s. 68's role as a complete code will only matter if Marzetti's refund retained, for present purposes, its character as wages.

4.Should a post-bankruptcy income tax refund be considered "wages" for the purposes of s. 68?

Major J.A. held that Marzetti's refund retained the character of wages to the extent that it represented a return of employer-withholding deductions. The available authority supports his position, with which I agree.

The principal Canadian case is Re Goulet, supra, which raised the precise issue being considered, viz., whether a bankrupt or a trustee was entitled to a tax refund arising from post-bankruptcy wages. Henry J. held (at p. 223):

When the minister returns the fund it then comes into the hands of the taxpayer, in this case the bankrupt, in the form of deferred wages. The fund in question is identified throughout as a deduction from wages earned and never loses its character as wages until it is finally applied by the minister to defray some portion of the tax liability.

Like Master Funduk, I fail to appreciate how Re Szatmari (1972), 1972 CanLII 416 (ON SC), 18 C.B.R. (N.S.) 309 (Ont. S.C.), relied upon by Henry J. in Re Goulet, supports the passage quoted above. But Re Goulet was followed in Re Walker (1982), 43 C.B.R. (N.S.) 319 (Ont. S.C.), and I accept that both cases offer some direct support for the proposition that a tax refund can be characterized as deferred wages for Bankruptcy Act purposes.

There is also Commonwealth authority on point. In Federal Commissioner of Taxation, supra, legislation similar to the Bankruptcy Act in all material respects was considered by the Australian High Court. The court held that a tax refund should be considered "a refund of part of the earnings of the bankrupt and money which he is entitled to retain in the absence of an order of the court under s. 101 of the Act [the equivalent of s. 68]" (at p. 316 per Williams J.).

In an attempt to suggest that there is also contrary Commonwealth authority, the Trustee again cited Re Bertrand, supra, to this Court. The attempt must fail. In Re Bertrand, the New Zealand bankruptcy legislation considered by the Court of Appeal had no provision comparable to the Canadian s. 68 or the Australian s. 101. For this reason, the potential characterization of a tax refund as wages or earnings was irrelevant, since, under the common law, wages and earnings, like other forms of property, vest automatically in trustees. The court in Re Bertrand explicitly distinguished Federal Commissioner of Taxation, supra, on this basis (at pp. 77-78).

Finally, the Director cited Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., supra, and argued that obiter remarks by Pigeon J. in that case support a wages characterization. At issue in Dauphin was not a tax refund per se, but rather the nature of an employer's deduction, or withholding, in respect of an employee's taxes. Pigeon J. stated (at p. 1191):

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. [Emphasis added.]

I am willing to accept that the emphasized line in the above passage supports the Director's position. Certainly, the support is qualified, inasmuch as Pigeon J.'s opinion must be tied to s. 153(3) of the Income Tax Act, which states that withholdings are "deemed to have been received" by employees at the time of withholding, but which establishes this result only "for all the purposes of this Act" (emphasis added). But there is an element of support in Dauphin nonetheless, since Pigeon J. concludes that "the amount withheld remains a part of the wages" before he discusses s. 153(3).

Adopting a stance in opposition to these authorities, Master Funduk thought it was not "logical" to view tax refunds as deferred wages. He stated that "the statutory deduction requirement is just an enforcement process to ensure that the employee makes payments on account of his tax liability" (p. 120). I agree with Master Funduk that withholding provisions are designed to ensure that employees pay taxes, but, with respect, I fail to see how this advances his position. If an excess of wages is withheld, that excess does not fulfil the enforcement purpose. Accordingly, its character is not informed by that purpose.

In my opinion, the transformation of Marzetti's wages over time does not alter their fundamental character. Marzetti earned a certain amount as wages after his voluntary assignment into bankruptcy. The fact that some portion of his wages was, by virtue of statute, automatically directed toward his tax liability does not affect the question. The intervention of statute speaks to how Marzetti spent his wages, not to how much he earned in the first place. In common parlance, taxpayers do not draw false distinctions between the wages they earn and the refunds they receive. As stated by Fullagar J. in Federal Commissioner of Taxation, supra, "[h]is right to payment arises because, and only because, he worked for a remuneration which is found, on a contingency which was contemplated throughout, not to have been paid to him in full" (p. 322).

Therefore, Major J.A. was, I suggest, entirely justified in concluding that a tax refund is analytically similar to deferred wages in this case. He noted that "[i]f there is any money that can be easily traced in a modern society, it is the amount of taxes paid and the amount of taxes owed" (p. 133). It is difficult to dispute this statement, and I reject the Superintendent of Bankruptcy's suggestion that a wages characterization is precluded by the commingling of withheld sums in the Consolidated Revenue Fund. Equally, I agree with Major J.A. that there is no necessary inconsistency between holding that a tax refund is a debt owed by the Crown, and holding that a tax refund represents deferred wages originally owed by an employer. Again, as stated by Fullagar J. in Federal Commissioner of Taxation, supra, "to say that payment of the sum . . . will be a repayment of income tax overpaid is not inconsistent with saying that that sum represents personal earnings of the bankrupt for the purposes of the Bankruptcy Act" (p. 321).

Furthermore, like Major J.A., I note that there is no doubt in this case that the post-bankruptcy income tax refund derived from Marzetti's wages. Of course, tax refunds can be generated by other sources of income. In the words of Major J.A., therefore, the wages characterization "depends on the nature of the refund" (p. 135).

The only problems with the characterization of an income tax refund as deferred wages for the purposes of s. 68 of the Bankruptcy Act are structural ones which relate to the trustee's ability to make applications, and the court's ability to make orders. The former problem causes me little concern. It is said that s. 68(1) of the Bankruptcy Act permits a trustee to make an application only "if directed by the inspectors or the creditors", and that the trustee's inability to act independently is a reason to reject the wages characterization. But this aspect of s. 68(1) is an inherent flaw, and it equally affects the trustee's ability to access a bankrupt's salary, wages, and other remuneration per se. The flaw does not become more serious simply because the definition of "wages" is expanded. Moreover, the flaw has now been corrected such that s. 68(1) permits applications "on the trustee's own initiative": see S.C. 1992, c. 27, s. 34(1).

A bigger problem exists with respect to the making of s. 68(2) orders. Such orders can be directed only toward "the bankrupt and his employer", and not, for example, against third-party revenue authorities. Although s. 68(2) has also been amended by S.C. 1992, c. 27, s. 34(1), the amendment does not seem to resolve this problem.

Like Major J.A. at the Court of Appeal, I am content to state that any deficiency in s. 68(2) cannot affect the conclusion that an income tax refund retains its character as wages. Major J.A. stated (at p. 135):

...the master opined that even if the refund could be characterized as "wages," s. 68 does not contemplate an order against the Crown. Therefore, he concluded, the refund could not possibly be wages under the Bankruptcy Act. With respect, that is irrelevant. The trustee has not nor is not seeking an order under s. 68. The difficulties, if any, in the wording of s. 68 cannot change the characterization of employer withholdings returned in the form of a tax refund as "wages." That may be a problem for Parliament but not in this appeal.

Although it would be preferable, from a trustee's point of view, to obtain an order directly against the Crown in respect of an income tax refund, the deficiency in s. 68(2) does not entirely remove refunds from a trustee's grasp. Orders can still be obtained as against bankrupt persons and employers under s. 68(2). Of course, in the circumstances of an income tax refund, service of a s. 68(2) order upon the employer would be meaningless. In this respect, I note that s. 68(4) of the Bankruptcy Act permits trustees to withhold service of the s. 68(2) order where the trustee regards same as "inexpedient". Thus, the trustee can effectively obtain a s. 68(2) order as against the bankrupt person alone, and although such an order is not ideal, it does provide the trustee with the necessary legal entitlement to the refund.

My opinion is, furthermore, fortified by public policy considerations. Although the absence of language in s. 68(2) permitting an order to be made against the Crown weighs in favour of the Trustee in this case, when family needs are at issue, I prefer to err on the side of caution. In s. 68 of the Bankruptcy Act, Parliament has indicated that, before wages become divisible among creditors, it is appropriate to have "regard to the family responsibilities and personal situation of the bankrupt". This demonstrates, to my mind, an overriding concern for the support of families.

Furthermore, the discretion given to courts by s. 68 is amplified by the discretion which is necessarily left in the trustee, creditors, and inspectors. As stated by Houlden and Morawetz: "It is unlikely that the trustee would make, or that the inspectors or creditors would authorize, [a s. 68] application, unless the earnings of the bankrupt were in excess of what was needed for the adequate maintenance of the bankrupt and of his family" (supra, at p. 3-127). Since these kinds of discretion are better able to respond to the costs of raising families, I favour a purposive interpretation of the word "wages" in s. 68, notwithstanding difficulties associated with s. 68(2).

Moreover, there are related public policy goals to consider. As recently recognized by L'Heureux-Dubé J. in Moge v. Moge, 1992 CanLII 25 (SCC), [1992] 3 S.C.R. 813, "there is no doubt that divorce and its economic effects" (p. 854) are playing a role in the "feminization of poverty" (p. 853). A statutory interpretation which might help defeat this role is to be preferred over one which does not.

To summarize briefly, s. 68 governs in this case as a complete code. Marzetti's post-bankruptcy income tax refund retained its character as wages for the purposes of s. 68. The Trustee could access that refund only through a s. 68 application. None was made.

Accordingly, the contest in this case narrows, and priority will be accorded in respect of one of two happenings: first, the execution of the Agreement Letter; second, the Director's garnishment. Since the Agreement Letter came first in time, if it is effective, it will prevail over the garnishment because the latter could have taken effect only once statutory requirements were satisfied: Family Orders and Agreements Enforcement Assistance Act, s. 28. And so I turn to the final issue, and ask whether the Agreement Letter created an enforceable assignment.

B. Did the Agreement Letter Create a Valid Assignment?

The parties debated the effectiveness of the Agreement Letter under several heads, most of which I will not examine. They disagreed as to whether the Director's garnishee, in substance, created an equitable assignment, such that the priority contest might truly involve two equitable assignees. And, leaving aside other statutory considerations, they fundamentally disagreed as to whether the Agreement Letter could have created an effective assignment. This latter disagreement involved component disputes. Does the Letter demonstrate an intention to assign, or does it merely direct a Crown payment? Is the characterization of the assigned interest as future property significant? And, is it necessary to find consideration to support the Agreement Letter?

In my opinion, these points of contention do not require resolution in this appeal, inasmuch as the Agreement Letter is rendered ineffective by s. 67 of the Financial Administration Act. Section 67 provides, in part, that "[e]xcept as provided in this Act or any other Act of Parliament . . . a Crown debt is not assignable". The expression "Crown debt" is defined in s. 66 to include not only existing debts, but also future debts "due or becoming due". Marzetti did not obtain an accrued legal debt in respect of his post-bankruptcy income tax refund until his income tax return was filed, as I have already mentioned. But his interest in that return can legitimately be described as an interest in a future Crown debt becoming due.

This Crown-debt characterization means that the Financial Administration Act operates to prohibit assignment of an income tax refund, due or becoming due from the Crown, unless assignment is permitted by that Act or another "Act of Parliament". There is no question that the Financial Administration Act fails to permit such assignment, and no express authorization appears in any other federal statute.

In this context, I pause to note s. 2(2) of the Tax Rebate Discounting Act, R.S.C., 1985, c. T-3. That section permits a person to "acquire. . . a right to a refund of tax . . . notwithstanding that, by virtue of section 67 of the Financial Administration Act . . . the refund of tax is not assignable". This provision effectively illustrates a simple point: when Parliament means to make income tax refunds assignable, it can do so easily and with clarity.

The only effort made in this appeal to find statutory authorization for the Agreement Letter involved s. 158 of the Bankruptcy Act, but that effort must go unrewarded. Under s. 158(l), bankrupt persons are obliged to execute specified documents "as may be required", but this obligation says nothing about the independent validity of such documents in the face of a statutory proscription. Likewise, under s. 158(o), a bankrupt may be obliged to do "all such acts and things in relation to his property . . . . as may be reasonably required by the trustee", but it cannot be said that a trustee can "reasonably require" that which Parliament expressly prohibits.

In ss. 67 and 68 of the Bankruptcy Act, Parliament has established a regime which determines whether there exists "property of a bankrupt divisible among his creditors". In my opinion, it would be very odd if trustees could attain that which appears to be unattainable on the face of those provisions, namely, an entitlement to an income tax refund without the need for a court application. In other words, I do not believe that a trustee and a bankrupt can use contract law to circumvent statutory law in this area.

In the absence of clear statutory authority to permit the assignment envisioned by the Agreement Letter, s. 67(a) of the Financial Administration Act takes hold and renders that Crown debt not assignable. Moreover, the grip of s. 67(a) is not loosened by Re Northward, supra, which was cited by the Trustee.

In Re Northward, an airline company purported to assign its book debts to a bank. The company later declared bankruptcy at a time when the federal Crown was the company's debtor. The bank claimed the value of the Crown debt as assignee, but the trustee relied upon the Financial Administration Act. MacDonald J. in Re Northward responded to these facts by holding that the rules of equity continued to apply as between the assignor and the assignee, notwithstanding the Financial Administration Act. MacDonald J. reasoned that the company as assignor would hold monies received from the Crown in trust for the bank, and that trust monies, under the equivalent of s. 67(a) of the Bankruptcy Act, would not constitute property of the bankrupt which could vest in the trustee.

With respect, I think that Re Northward is wrongly decided. MacDonald J. stated that the Financial Administration Act "does not abrogate the rights of parties except to the extent of exercising rights or remedies in respect of the Crown debt" (p. 140). In other words, MacDonald J. held that an assignment will be invalid only to the extent that an assignee attempts to exercise "rights or remedies" directly against the Crown debtor. But this holding ignores the broad language chosen by Parliament in s. 67(b).

MacDonald J. in Re Northward interpreted s. 67(b) as if Parliament enacted a prohibition against attempts to assign to "any person any rights or remedies against the Crown as debtor in respect of [the Crown] debt". But, of course, s. 67(b) renders ineffective attempts to assign to "any person any rights or remedies in respect of [the Crown] debt" (emphasis added). I do not think it is possible to go behind this broad language as Re Northward suggests. Moreover, since s. 67(a) prohibits the assignment of a Crown debt, that prohibition alone would presumably give the Crown the same protection as would s. 67(b) under the Re Northward interpretation. In my view, s. 67(b) amplifies the broad prohibition apparent in s. 67(a), so that a purported assignment of a Crown debt is rendered absolutely ineffective, as between debtor and creditor, and as between assignor and assignee.

For these reasons, I conclude that the Agreement Letter executed by Marzetti was statutorily incapable of creating an effective assignment. Priority in respect of the post-bankruptcy income tax refund remains unaffected by that instrument, and falls to be determined according to the principles I have already described.

VI. Conclusion and Disposition

Under s. 24 of the Family Orders and Agreements Enforcement Assistance Act, the Crown may be garnisheed in respect of "garnishable moneys". By virtue of s. 23 of that Act, read in conjunction with s. 3(a) of the Family Support Orders and Agreements Garnishment Regulations, SOR/88-181, an income tax refund constitutes "garnishable moneys". Accordingly, the Director was properly able to file the Notice of Continuing Attachment as against the Crown to recover Marzetti's income tax refund, and thus to instigate the process which led to the garnishee summons.

In conclusion, by taking steps to garnish the income tax refund, the Director necessarily obtained priority in this case. That is because the refund did not automatically vest in the Trustee. It could have been accessed by the Trustee only through an application under s. 68 of the Bankruptcy Act. However, since no application was made prior to the garnishment -- indeed, since no application was ever made -- the Director's claim to priority is effectively unchallenged.

I would dismiss the appeal. By agreement among the parties, there will be no order as to costs.

Appeal dismissed.

Solicitors for the appellant: Cruickshank Karvellas, Edmonton.

Solicitor for the respondent the Director of Maintenance Enforcement: Jeannette W. Fedorak, Edmonton.

Solicitors for the respondent the Attorney General of Canada: Ingrid C. Hutton and Robert Moen, Edmonton.

Solicitors for the intervener: Barr, Wensel, Nesbitt & Reeson, Edmonton.