COURT FILE NO.: 6632/13
DATE: 2014-03-26
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: The Toronto-Dominion Bank, Applicant
AND:
Khurt Michael Comrie and Collett Comrie, Respondents
BEFORE: Coats J.
COUNSEL Counsel for Asha Sukhdeo: Mr. Neil L. Boyko
FOR MOTION: Counsel for the Attorney General of Ontario on behalf of Her Majesty the Queen in Right of Ontario as represented by the Minister of Finance: Mr. Steven Groeneveld
HEARD: January 22, 2014
ENDORSEMENT
Part I – Preliminary Matter
[1] Neither the applicant nor the respondents participated in this motion. The applicant, the Toronto-Dominion Bank, paid the surplus proceeds into court by order dated January 2, 2014, and therefore had no further interest in the proceeding. The endorsement of January 2, 2014, does not indicate that the respondents, Collett Comrie and Khurt Michael Comrie (the “Comries”) attended on the motion to pay the surplus proceeds into court and they have no entitlement to the surplus proceeds in any event. The other execution creditors of the respondents were served with Asha Sukhdeo’s motion initially returnable January 2, 2014, and the endorsement of that date does not indicate that any of them attended. Therefore, only counsel, Mr. Neil L. Boyko and Mr. Steven Groeneveld, attended before me when the motions were argued.
Part II – The Issue
[2] Ms. Sukhdeo brought a motion by notice of motion, dated December 17, 2013, seeking an order to have paid out to Ms. Sukhdeo the monies paid into court by the Toronto-Dominion Bank on the 2nd day of January, 2014, namely $10,064.53 plus any accrued interest. The Attorney General of Ontario on behalf of Her Majesty the Queen in Right of Ontario as represented by the Minister of Finance (the “Ministry”) also brought a motion by notice of motion, dated December 20, 2013, seeking an order for payment out of court to the Minister of Finance of surplus proceeds from the power of sale proceedings on the property municipally known as Suite 19, 117 Omni Drive in Scarborough, Ontario (the “Property”), in the amount of $7,736.57, plus accrued interest, for retail sales tax arrears of the respondents. Both motions were argued before me on January 22, 2014 and I reserved my decision.
[3] The only issue for me to decide is whether the claim of the Ministry is in priority to all other security interests in the Property including the interest of the second mortgagee, Ms. Sukhdeo.
Part III – Overview and Background Facts
[4] The applicant mortgagee, the Toronto-Dominion Bank, sold the Property under a power of sale on June 7, 2013. The Comries were the owners and mortgagors of the Property. There was a surplus from that power of sale that Toronto-Dominion Bank has paid into court by a court order dated January 2, 2014.
[5] The Ministry’s position is that the claim of the Ministry to the surplus funds is in priority to all other security interests in the Property pursuant to the deemed trust provisions in section 22 of the Retail Sales Tax Act, R.S.O. 1990, c. R.31 (“RSTA”). The Comries had tax arrears under the RSTA for tax collected from customers but not remitted to the Ministry which totaled $7,736.57 as of December 19, 2013. The Ministry seeks payment of that amount from the surplus proceeds paid into court in priority to Ms. Sukhdeo.
[6] The Comries were registered as vendors under the RSTA operating a business called the “Island Fork.” They were sole proprietors. It was not an incorporated business. In operating that business, the Comries collected retail sales tax from customers. For the three month period from April 2010 to June 2010, the Comries filed returns with the Ministry of Finance as required under the RSTA. These returns showed that retail sales tax was collected by the Comries. The tax collected was not remitted to the Ministry with the returns. On September 1, 2010, the Ministry issued three notices of assessment against the vendors – the Comries – one each for the months of April, May and June 2010.
[7] On April 1, 2011, the Ministry filed a warrant of seizure and sale against the Comries, pursuant to subsection 37(1) of the RSTA, in the amount of $6,591.99. In an attempt to have the warrant released and have their home refinanced, the Comries made two separate payments in May 2011: one payment of $6,591.99 by personal cheque hand delivered on May 27, 2011 and one payment of $70 made by direct deposit at a TD Bank branch on May 31, 2011. Pursuant to the two payments made, the warrant and Personal Property Security Act, R.S.O. 1990, c. P.10 (PPSA) lien that were registered against the Comries/vendors on April 1, 2011, were released on May 31, 2011. However, on June 7, 2011, the cheque payment of $6,591.99 was declared non-sufficient funds (“NSF”). Therefore, only the payment of $70 was received.
[8] On June 8, 2011, the Ministry filed a new warrant of seizure and sale against the vendors, pursuant to subsection 37(1) of the RSTA, in the amount of $6,657.43.
[9] On July 4, 2011, the Ministry registered a lien against the Property, pursuant to the authority in section 23 of the RSTA.
[10] As of the December 19, 2013, the outstanding amount of tax arrears under the RSTA, with interest and penalty was $7,736.57.
[11] Collett Comrie purchased the Property on August 6, 2010. The Property was transferred from Collett Comrie to herself and Khurt Michael Comrie on June 1, 2011. The applicant commenced power of sale proceedings against the Comries on the Property on February 19, 2013, and subsequently sold the Property on June 7, 2013. There is a surplus of $10,064.53 from that sale which the applicant has paid into court (minus $750 in costs of the application).
[12] The second mortgagee, Ms. Sukhdeo, has also brought a motion for payment of the surplus proceeds. The mortgage granted in favour of Ms. Sukdeo was registered on August 6, 2010. It was in the sum of $34,400. This mortgage became a second mortgage by reason of a registered postponement in favour of the Toronto-Dominion Bank, the postponement being registered on June 1, 2011.
[13] The second mortgage was amended by increasing the principal to $43,990.45 which amendment was registered on June 1, 2011.
[14] There was $54,254.69 owing on the mortgage as of December 2013. The mortgage was fully advanced at the time of the registration.
[15] There is no evidence that Ms. Sukhdeo was aware of the Ministry’s registration of a lien on July 4, 2011 prior to its registration.
[16] It is Ms. Sukhdeo’s position that under the terms of section 71 of the Registry Act, R.S.O. 1990, c. R.20, priority of registration prevails unless before the prior registration there has been actual notice of the prior instrument by the person claiming under the prior registration. Further, Ms. Sukhdeo argues that a similar priority scheme is found in sections 78(5) and 93 of the Land Titles Act, R.S.O. 1990, c. L.5 where priority is according to the time of registration and a chargee’s interest is to be free from any unregistered interest in the land. Lastly, Ms. Sukhdeo argues that the monies advanced by her as a mortgagee cannot be described as money collected by a vendor under section 22(2) of the RSTA so as to be impressed with the trust provisions.
Part IV – Law and Analysis
[17] After hearing submissions and considering the material filed, I find that the interest of the Ministry in the Property has priority over all other security interests pursuant to the “deemed trust” provision in the RSTA.
[18] In First Vancouver Finance v. Canada (Minister of National Revenue – M.N.R), 2002 SCC 49, [2002] 2 S.C.R. 720 (S.C.C.), the Court considered the deemed trust provisions in the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.). The dispute was over certain property that came into the hands of the tax debtor after the deemed trust arose. The Court found that the deemed trust was similar to a floating charge over all of the tax debtor’s assets in favour of Her Majesty. At para. 4 the Court held that, “As long as the tax debtor continues to be in default, the trust continues to float over the tax debtor’s property. Thus, at any given point in time, whatever property then belonging to the tax debtor is subject to the deemed trust.” The property acquired by the tax debtor after the deemed trust arises becomes subject to the trust until the property is sold and then the proceeds are captured by the trust. Although applying different legislation than the RSTA, the Court recognized the importance of the deemed trust to recover source deductions which were made and not remitted to the Minister and the special priority given to the Minister over other creditors to collect unremitted taxes.
[19] The statutory deemed trust mechanism is found in both federal and provincial legislation. The RSTA has a statutory deemed trust provision under section 22. This deemed trust provision arises by operation of law and no steps or registrations need to be taken for this claim to take effect.
[20] Section 12 of the RSTA requires that vendors, who sell goods and services subject to the Act, collect retail sales tax at the time of sale and remit that tax to the Minister, as required under the regulations.
[21] Sections 5.(1) and (1.0.1) of Regulation 1013, under the RSTA provide as follows:
- (1) On or before the 23rd day of each month, every vendor shall make a return to the Minister, on a form provided by the Minister, of all transactions described in subsection (1.0.1) that took place during the calendar month immediately preceding and shall remit to the Minister with the return the tax collectable or payable by the vendor during that month with respect to the transactions. 0. Reg. 429/95, s.1.
(1.0.1) Subsection (1) applies to the following transactions:
Sales made by the vendor in Ontario.
The collection by the vendor of prices of admission to places of amusement in Ontario, including the collection of prices of admission sold on a subscription or season ticket basis.
Promotional distributions made by the vendor of admissions to places of amusement in Ontario.
The payment of premiums to the vendor.
Purchases made upon which the vendor paid no tax to the vendor in the purchase at the time of purchase based on purchase exemption certificates or otherwise and upon which tax is payable under the Act.
The payment of premiums in respect of a benefits plan administered by the planholder and upon which the planholder paid no tax to any other person at the time of the payment of the premium and upon which tax is payable under section 2.1 of the Act. 0. Reg. 429/95, s. 1.
[22] In accordance with this regulation, the payment for April 2010 was due May 23; for May 2010 due on June 23, 2010; and for June 2010 due on July 23, 2010, all before the second mortgage.
[23] Subsection 22(1) of the RSTA provides that tax amounts collected are deemed, despite any security interest in the funds, to be held in trust for the Crown. The subsection reads as follows:
Any amount collected or collectable as or on account of tax under this Act by a vendor shall be deemed, despite any security interest in the amount so collected or collectable, to be held in trust for Her Majesty in right of Ontario and separate and apart from the vendor’s property and from property held by any secured creditor that but for the security interest would be the vendor’s property and shall be paid over by the vendor in the manner and at the time provided under this Act and the regulations.
[24] Subsection 22(2) of the RSTA reinforces the deemed trust by extending it to the property of the vendor. The subsection provides as follows:
Despite any provision of this or any other Act, where at any time an amount deemed by subsection (1) to be held in trust is not paid as required under the Act, property of the vendor and property held by any secured creditor of the vendor that but for a security interest would be property of the vendor, equal in value to the amount so deemed to be held in trust shall be deemed,
(a) to be held, from the time the amount was collected or collectable by the vendor, separate and apart from the property of the vendor in the trust for Her Majesty in right of Ontario whether or not the property is subject to a security interest; and
(b) to form no part of the estate or property of the vendor from the time the amount was so collected or collectable whether or not the property has in fact been kept separate and apart from the estate or property of the vendor and whether or not the property is subject to such security interest.
[25] Subsection 22(3) of the RSTA sets out the priority of the deemed trust over other security interests. The subsection provides as follows:
The property described in subsection (2) shall be deemed to be beneficially owned by Her Majesty in right of Ontario despite any security interest in such property or in the proceeds of such property, and the proceeds of such property shall be paid to the Minister in priority to all such security interests.
[26] The term “security interest” is defined in the RSTA at subsection 22(9) as follows:
In this section and in subsection 36 (2.1),
“secured creditor” means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest, and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor and any other person performing a similar function; (“creancier garanti”)
“security interest” means any interest in property that secures payment or performance of an obligation, and includes an interest created by or arising out of a debenture, mortgage, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatsoever or whenever arising, created or deemed to arise or otherwise provided for, but does not include a security interest prescribed by the Minister as one to which this section does not apply. (“surete”)
[27] No security interests have been prescribed under subsection 22(9) under the RSTA.
[28] The Ministry also registered liens on the Property. Pursuant to subsection 23(11.1) of the RSTA, the registration of the lien under the Act, does not affect the operation of the deemed trust in section 22 of the Act and the lien secures any liability of a taxpayer in addition to any deemed trust under section 22.
[29] The deemed trust provisions in the RSTA mirror the deemed trust provision in section 227(4) of the Income Tax Act, and the goods and services tax provisions found in section 222(1) of the Excise Tax Act, R.S.C. 1985, C. E-15. As set out above, in First Vancouver Finance, the Supreme Court of Canada described the deemed trust as a floating charge over all of the tax debtor’s assets including after acquired property and the proceeds of sale of property. This would include the proceeds of sale in the circumstances of this case.
[30] Ms. Sukhdeo’s argument that the proceeds of the second mortgage were not amounts collected or collectable is without merit. Section 22(2) of the RSTA extends the deemed trust to any property of the vendor and property held by any secured creditor of the vendor and applying the reasoning in the First Vancouver Finance this extends to property acquired after the deemed trust arises. In addition, Ms. Sukhdeo’s argument that the provisions of the Registry Act and Land Titles Act give priority to registration is also without merit as section 22(2) of the RSTA begins with “Despite any provision of this or any other Act”. The provincial legislators have determined that the RSTA extended trust prevails. The case provided on behalf of Ms. Sukhdeo, Lambton Lumber Ltd. v. Claran Homes Ltd. et al. (1979), 1979 CanLII 1967 (ON CA), 23 O.R. (2d) 673 (Ont. C.A) does not apply in this situation. It does not concern the interplay of the Registry Act with tax remittance/collection legislation.
[31] Further, the Ontario Superior Court of Justice and the Ontario Court of Appeal have ruled that the aforementioned deemed trust provisions in tax legislation apply to give priority to the Canada Revenue Agency over mortgagees. In MCAP Service Corp. v. Hunter, [2005] O.J. No. 5574 (Ont. S.C.), the plaintiff mortgagee brought a summary judgment motion against the mortgagor in a mortgage action. The issue was whether the non-remittance of goods and services tax under the Excise Tax Act and source deductions under the Income Tax Act by the mortgagor was a default of the mortgage. In summarily finding that the failure to remit was a default under the terms of the mortgage, the court had to first find that the deemed trust provisions in the tax legislation gave priority over the mortgagee, who held a registered mortgage. After reviewing the relevant aforementioned sections of the Excise Tax Act and the Income Tax Act, the court ruled the deemed trust provisions gave priority to the Canada Revenue Agency over the mortgagee. At para. 10, Justice Gordon found as follows:
Accordingly, by virtue of this legislation, Canada Revenue Agency does have a priority claim against the real property of the defendant to the extent of the amount owing to it on 5 December 2002. The plaintiff, therefore, did not obtain a first charge upon registration of the mortgage.
[32] The court in MCAP Service Corp. further references the deemed trust priority over the mortgagee in paragraphs 19, 22 and 23. The priority claim was limited to the amount of tax arrears at the date the mortgage was granted (December 5, 2002). The court’s limitation in the amount of the deemed trust priority was pursuant to section 2201 of the Income Tax Regulations and the parallel section 2011-55 of the Security Interest (GST/HST) Regulations. There are no similarly prescribed security interests under the RSTA that would limit the amounts to arrears owing at the date of the granting of the mortgage. Further, in the matter before this court, the retail sales tax arrears arose prior to the registration of the mortgage in favour of Ms. Sukhdeo, as it did in MCAP Service Corp.
[33] The granting of the motion for summary judgment by the Superior Court of Justice in MCAP Service Corp. was appealed to the Court of Appeal. Although the Court of Appeal at MCAP Service Corp. v. Hunter, [2007] O.J. No. 429 (Ont. C.A.) reversed the decision of the Superior Court in granting summary judgment and ruled that non-remittance of tax being grounds for default was a genuine issue for trial, the Court of Appeal clearly found that the deemed trust provisions gave priority over the interest of the mortgagee at para. 3 as follows:
Applicable federal legislation deem the monies the appellant had failed to remit to the CRA to be held in trust pending payment to Her Majesty, and give the Crown a beneficial right in all of his property, to the extent of the unremitted amount, with priority over any security interest. There are exceptions for prescribed security interests that are not in issue in this case.
[34] For the above reasons, I conclude that the deemed trust provisions in the RSTA, give priority to tax owing under that Act over all other security interests involved in this matter, including Ms. Sukhdeo’s interest as a mortgagee.
Part V - Relief Granted
[35] The Ministry shall have the payment of $7,736.57, plus applicable interest, to the Minister of Finance out of the surplus proceeds paid into court. The balance shall be paid out of court to Ms. Sukhdeo. Counsel may make written submissions as to costs if they cannot resolve same. Written submissions to be filed within 45 days.
Coats J.
Date: March 26, 2014