[1993] 2 F.C. 206
T-532-89
T-533-89
Her Majesty the Queen (Plaintiff)
v.
National Bank of Canada (Defendant)
Indexed as: Canada v. National Bank of Canada (T.D.)
Trial Division, Rothstein J.—Toronto, September 24, November 12, 1992; Ottawa, February 19, 1993.
Bankruptcy — Bank taking assignment of book debts as security for loans to licensed manufacturers for Excise Tax Act purposes — When debtors defaulting Bank collecting book debts — Minister claiming federal sales tax pursuant to Excise Tax Act, s. 52(10) — In cases of bankruptcy, regard must be had to distribution scheme in Bankruptcy Act, s. 107 — S. 107 interpreted broadly — Under s. 107(1)(j) Parliament intending to treat claims of Crown, federal or provincial, equally — Legislation purporting to create priority must yield to s. 107 distribution scheme unless containing clear override — As no such provision in Excise Tax Act, s. 107 prevails — Book debts “property of bankrupt”, not of Bank, and Bankruptcy Act applies.
Customs and Excise — Excise Tax Act — Minister claiming, pursuant to s. 52(10), federal sales tax on transactions giving rise to assignment of book debts by bankrupt manufacturers to secured creditor (Bank) — Nothing in Excise Tax Act clearly overriding Bankruptcy Act — Distribution scheme in Bankruptcy Act, s. 107 prevails — Bank not “manufacturer or producer” which would be directly liable for sales tax under s. 27(1)(a).
These were actions for the federal sales tax associated with the book debts collected by the Bank pursuant to security which included general assignment of book debts. The Bank took general assignments of book debts as security for loans to licensed manufacturers for the purposes of the Excise Tax Act. The debtors defaulted. In the first case, bankruptcy proceedings were commenced before the Minister served the Bank with a demand for federal sales tax pursuant to Excise Tax Act, subsection 52(10), which provides that when the Minister learns that any person has received from a licensee any assignment of any book debts he may, by registered letter, demand payment to the Receiver General out of any moneys so received after the receipt of such notice, the amount of any tax imposed by the Act upon the transaction giving rise to the debt assigned. In the second case the Minister’s demand was given before a petition for receiving order was made. The Bank collected the book debts. The Bankruptcy Act, section 107 sets out the scheme for the distribution of a bankrupt’s property. In particular, paragraph 107(1)(j) provides that claims of the Crown, whether federal or provincial, shall be treated pari passu notwithstanding any statutory preference to the contrary.
The issues were whether the Excise Tax Act, subsection 52(10) overrode the scheme of distribution under Bankruptcy Act, section 107; whether the Minister’s claim under subsection 52(10) was against the book debts assigned to the Bank, not against the property of the bankrupt, in which case the Bankruptcy Act would not apply; whether the Bank was a “manufacturer or producer” within the definition of that term, and as such would be indebted directly to the Minister for sales tax under Excise Tax Act, paragraph 27(1)(a).
Held, in the first case, the action should be dismissed; in the second case, the action should be dismissed to the extent that the receivables were collected on or after the date of the petition for receiving order.
The following four conclusions emerged from the Supreme Court of Canada cases considered: (1) in the case of bankruptcy, regard must be had to section 107 of the Bankruptcy Act; (2) section 107 is to be interpreted broadly; (3) under paragraph 107(1)(j), Parliament intended to treat claims of the Crown, whether provincial or federal, on an equal footing; and (4) provincial and federal legislation purporting to create priority or security for a government claim or to establish a trust in favour of a government must yield to the scheme of distribution in section 107 of the Bankruptcy Act unless, in the case of conflicting legislation, such legislation contains a clear override. Nothing in the Excise Tax Act indicates that in respect of federal sales tax the scheme of distribution of the Bankruptcy Act should be ignored or overridden.
For the purposes of subsection 107(1) of the Bankruptcy Act, the book debts were the property of the bankrupt, and not of the Bank. “Property of the bankrupt” in the Bankruptcy Act covers property which is the subject of security in favour of a secured creditor, regardless of the form in which the security is taken. Whether or not legal title to the property remains with the bankrupt or has been transferred to the security holder is not important as long as an equity of redemption remains with the bankrupt or his trustee. The debtors herein would have had the rights of redemption of the security they gave to the Bank under Personal Property Security Act, section 62. The right of redemption of the book debts comes within the definition of “property” in the Bankruptcy Act. Paragraph 107(1)(j) of the Bankruptcy Act, and not subsection 52(10) of the Excise Tax Act, governs the Minister’s entitlement in the case of a bankruptcy.
The Bank was not liable directly as a “manufacturer or producer”. Definitions by their nature must be worded broadly, but they must be construed having regard to the context and circumstances in which words are used. The Excise Tax Act was not intended to create duplicate or triplicate obligees for the same transaction or render security holders guarantors to the Minister of a debtor’s obligation to pay sales tax. A bank does not become a manufacturer or producer until it exercises its security. If an assignee were directly liable as a manufacturer or producer pursuant to paragraph 27(1)(a) in all cases, such wide interpretation would render subsection 52(10) redundant. A bank would be required to pay sales tax in the capacity of a manufacturer or producer by way of a direct obligation under paragraph 27(1)(a) when it delivered goods to a purchaser or when property in such goods passed to the purchaser i.e. when it took over the business of its customer. This is not the case when the bank is collecting amounts owed to it pursuant to its security.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Bankruptcy Act, R.S.C. 1970, c. B-3, s. 107.
Corporation Securities Registration Act, R.S.O. 1980, c. 94.
Excise Tax Act, R.S.C. 1970, c. E-13, ss. 2(1)(a), 27(1)(a)(i) (as am. by S.C. 1986, c. 9, s. 16), 52(10), (11).
Income Tax Act, S.C. 1970-71-72, c. 63, s. 227(5) (as am. by S.C. 1988, c. 55, s. 171).
Personal Property Security Act, R.S.O. 1980, c. 375, ss. 56(2), 62.
Retail Sales Tax Act, R.S.Q. 1964, c. 71, s. 30.
Social Service Tax Act, R.S.B.C. 1979, c. 388.
The Workers’ Compensation Act, S.A. 1973, c. 87 (now S.A. 1981, c. W-16), s. 78(4).
Workmen’s Compensation Act, R.S.Q. 1977, c. A-3.
CASES JUDICIALLY CONSIDERED
APPLIED:
Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061; (1988), 14 Q.A.C. 140; 68 C.B.R. (N.S.) 209; 84 N.R. 308; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; (1989), 59 D.L.R. (4th) 726; [1989] 5 W.W.R. 577; 38 B.C.L.R. (2d) 145; 75 C.B.R. (N.S.) 1; 97 N.R. 61; 2 T.C.T. 4263; [1989] 1 T.S.T. 2164; C.I.B.C. v. R. (1984), 52 C.B.R. (N.S.) 145; 8 C.E.R. 4; [1984] CTC 442; 84 DTC 6426 (F.C.T.D.); affd (1986), 60 C.B.R. (N.S.) 45; 11 C.E.R. 387; Can. S.T.R. 80-098; [1986] 2 C.T.C. 267; 86 DTC 6390 (F.C.A.); Re Broydon Printers Ltd. (1974), 4 O.R. (2d) 48; 47 D.L.R. (3d) 43; 19 C.B.R. (N.S.) 226 (S.C.).
DISTINGUISHED:
XMCO Canada Ltd. (Re) (1991), 3 O.R. (3d) 148 (Gen. Div.); R. in Right of Can. v. Continental Bank of Can. (1985), 56 C.B.R. (N.S.) 97; 9 C.E.R. 205; [1985] 2 CTC 134; Can. S.T.R. 80-069; 85 CTC 5332 (F.C.T.D.); A.G. Canada v. Bank of British Columbia, [1987] 1 C.T.C. 153 (B.C.S.C.).
CONSIDERED:
Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; (1979), 105 D.L.R. (3d) 270; 33 C.B.R. (N.S.) 301; 30 N.R. 24; Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board et al., [1985] 1 S.C.R. 785; (1985), 63 A.R. 321; 19 D.L.R. (4th) 577; 38 Alta. L.R. (2d) 169; [1985] 4 W.W.R. 481; 55 C.B.R. (N.S.) 241; 60 N.R. 81; Re Black Forest Restaurant Ltd. (1981), 47 N.S.R. (2d) 454; 121 D.L.R. (3d) 435; 90 A.P.R. 454; 37 C.B.R. (N.S.) 176 (S.C.).
REFERRED TO:
North-West Line Elevators Association et al. v. Canadian Pacific Railway and Canadian National Railway et al., [1959] S.C.R. 239; (1959), 17 D.L.R. (2d) 241; 77 C.R.T.C. 241; R. v. Prowest Fabrications Ltd. and Balzer’s Mechanical (1978) Ltd. (1983), 31 Sask. R. 150; 50 C.B.R. (N.S.) 102 (Q.B.).
AUTHORS CITED
Canada. House of Commons Debates, Vol. IV, 1st Sess., 18th Parl., 1 Edw. VIII, 1936.
ACTIONS for federal sales tax associated with the book debts of bankrupt manufacturers collected by the Bank pursuant to security, which included general assignment of book debts. Actions dismissed.
COUNSEL:
Peter A. Vita, Q.C. for plaintiff.
William I. Innes and Clifford Rand for defendant.
SOLICITORS:
Deputy Attorney General of Canada for plaintiff.
Stikeman, Elliott, Toronto, for defendant.
The following are the reasons for judgment rendered in English by
Rothstein J.: This matter involves two cases argued together, both between Her Majesty the Queen (The Minister of National Revenue—Customs and Excise and referred to herein as the Minister) and the National Bank of Canada (referred to herein as the Bank). The issue in both cases is whether or not the Minister, under subsection 52(10) of the Excise Tax Act, R.S.C. 1970, c. E-13, is entitled to federal sales tax associated with book debts collected by the Bank pursuant to security which included general assignments of book debts.
The evidence in both cases was by way of agreed statements of facts and agreed upon exhibits. The following summary of the facts is taken from paragraphs 2 and 3 of the defendant’s notes of argument and the submissions of counsel.
In action No. T-532-89, the Bank loaned funds to IHEC Ltd. (“IHEC”), a licensed manufacturer for the purposes of the Excise Tax Act. The Bank took back security for this loan which included a general assignment of book debts. That security interest was registered under the Corporation Securities Registration Act, R.S.O. 1980, c. 94 and the Personal Property Security Act, R.S.O. 1980, c. 375. IHEC defaulted upon its indebtedness to the Bank and the Bank appointed a receiver and manager of IHEC’s property on or about November 12, 1985. On or about November 15, 1985, an interim receiver of IHEC was appointed by order of the Supreme Court of Ontario pursuant to the provisions of the Bankruptcy Act, R.S.C. 1970, c. B-3. On or about November 28, 1985, the Minister served the Bank with a demand in respect of federal sales tax pursuant to subsection 52(10) of the Excise Tax Act. On or about January 28, 1986 a receiving order was made against IHEC under the provisions of the Bankruptcy Act. The Bank collected the book debts of IHEC. In this action, the Minister claims the amount of $79,998.60 as the federal sales tax applicable to the transactions giving rise to the book debts collected by the Bank after the date of the Minister’s notice under subsection 52(10) of the Excise Tax Act.
In action No. T-533-89, the Bank loaned funds to Thrush Incorporated (“Thrush”), a licensed manufacturer for the purposes of the Excise Tax Act. The Bank took back security for this loan which included a general assignment of book debts. That security was registered under the Personal Property Security Act of Ontario. Thrush defaulted upon the indebtedness to the Bank and the Bank appointed a receiver and manager of Thrush’s property on or about October 18, 1985. On or about November 1, 1985, the Minister served the Bank with a demand in respect of federal sales tax pursuant to subsection 52(10) of the Excise Tax Act. On November 22, 1985, pursuant to an application by the Bank to the Supreme Court of Ontario, a receiver and manager of Thrush was appointed by that Court. On or about November 25, 1985 a receiving order was made against Thrush under the provisions of the Bankruptcy Act. The Bank collected the book debts of Thrush. In this action, the Minister claims the amount of $54,877.33 as the federal sales tax applicable to the transactions giving rise to the book debts collected by the Bank after the date of the Minister’s notice under subsection 52(10) of the Excise Tax Act.
The primary relevant statutory references in this case, in effect at the relevant time, are paragraph 2(1)(a), subparagraph 27(1)(a)(i) [as am. by S.C. 1986, c. 9, s. 16], and subsections 52(10) and (11) of the Excise Tax Act, R.S.C. 1970, c. E-13, as amended, and section 107 of the Bankruptcy Act, R.S.C. 1970, c. B-3.
THE EXCISE TAX ACT
2. (1) In this Act
…
“manufacturer or producer” includes
(a) the assignee, trustee in bankruptcy, liquidator, executor, or curator of any manufacturer or producer and, generally, any person who continues the business of a manufacturer or producer or disposes of his assets in any fiduciary capacity, including a bank exercising any powers conferred upon it by the Bank Act and a trustee for bondholders,
…
27. (1) There shall be imposed, levied and collected a consumption or sales tax at the rate specified in subsection (1.1) on the sale price of all goods
(a) produced or manufactured in Canada
(i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier,
…
52. …
(10) When the Minister has knowledge that any person has received from a licensee any assignment of any book debt or of any negotiable instrument of title to any such debt, he may, by registered letter, demand that such person pay over to the Receiver General out of any moneys received by him on account of such debt after the receipt of such notice, a sum equivalent to the amount of any tax imposed by this Act upon the transaction giving rise to the debt assigned.
(11) The person receiving any such demand shall pay the Receiver General according to the tenor thereof, and in default of payment is liable to the penalties provided in this Act for failure or neglect to pay the taxes imposed by Parts III to V.
THE BANKRUPTCY ACT
107. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:
(a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses incurred by the legal personal representative of the deceased bankrupt;
(b) the costs of administration, in the following order,
(i) the expenses and fees of the trustee,
(ii) legal costs;
(c) the levy payable under section 118;
(d) wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during three months next preceding the bankruptcy to the extent of five hundred dollars in each case; together with in the case of a travelling salesman, disbursements properly incurred by him in and about the bankrupt’s business, to the extent of an additional three hundred dollars in each case, during the same period; and for the purposes of this paragraph commissions payable when goods are shipped, delivered or paid for, if shipped, delivered or paid for within the three-month period, shall be deemed to have been earned therein;
(e) municipal taxes assessed or levied against the bankrupt within two years next preceding his bankruptcy and that do not constitute a preferential lien or charge against the real property of the bankrupt, but not exceeding the value of the interest of the bankrupt in the property in respect of which the taxes were imposed as declared by the trustee;
(f) the landlord for arrears of rent for a period of three months next preceding the bankruptcy and accelerated rent for a period not exceeding three months following the bankruptcy if entitled thereto under the lease, but the total amount so payable shall not exceed the realization from the property on the premises under lease, and any payment made on account of accelerated rent shall be credited against the amount payable by the trustee for occupation rent;
(g) the fees and costs referred to in subsection 50(2) but only to the extent of the realization from the property exigible thereunder;
(h) all indebtedness of the bankrupt under any Workmen’s Compensation Act, under any Unemployment Insurance Act, under any provision of the Income Tax Act or the Income War Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld, pari passu;
(i) claims resulting from injuries to employees of the bankrupt to which the provisions of any Workmen’s Compensation Act do not apply, but only to the extent of moneys received from persons or companies guaranteeing the bankrupt against damages resulting from such injuries;
(j) claims of the Crown not previously mentioned in this section, in right of Canada or of any province, pari passu notwithstanding any statutory preference to the contrary.
(2) Subject to the retention of such sums as may be necessary for the costs of administration or otherwise, payment in accordance with subsection (1) shall be made as soon as funds are available for the purpose.
(3) A creditor whose rights are restricted by this section is entitled to rank as an unsecured creditor for any balance of claim due him.
POSITION OF THE PARTIES
Counsel for the Minister made two arguments. The primary argument based on subsections 52(10) and (11), while the alternative argument based on paragraph 2(1)(a) and subsection 27(1) of the Excise Tax Act.
The gist of the primary argument made by counsel for the Minister was that the express words of subsection 52(10) of the Excise Tax Act provide that when an assignment of book debts is taken by a creditor as security, the sales tax associated with the collections made by the creditor pursuant to the assignment must be paid to the Minister by the creditor. The fact that a bankruptcy takes place is irrelevant since the creditor is secured and the claim of the Minister attaches to collection under the security.
The alternative argument made by counsel for the Minister was that the Bank fell within the definition of “manufacturer or producer” under paragraph 2(1)(a) of the Excise Tax Act and as such was subject to subsection 27(1) of that Act which imposed upon producers and manufacturers, the requirement to pay a tax on the sale price of all goods.
Counsel for the Bank submitted that subsection 52(10) of the Excise Tax Act should be construed to entitle the Minister to sales tax only on sales made after the Minister issues a notice pursuant to that subsection i.e., on sales made by the Bank once it takes over the operation of its customer.
It was submitted that pursuant to its security, the Bank was the legal owner of the receivables and had an absolute right to them. To allow the Minister to enforce a claim for amounts collected by the Bank on sales which were made by the Bank’s customer, would amount to confiscation of the Bank’s property without compensation. For the Excise Tax Act to have such an effect, the intention would have to be stated clearly and beyond reasonable doubt. It was submitted that no such clear intention could be deduced from the Excise Tax Act.
It was also asserted by the Bank’s counsel that the sales tax obligation falls upon the manufacturer or producer and not on the customer of the manufacturer or producer. The manufacturer or producer is not acting as a trustee or agent for the Minister in the collection of sales tax from others. The sales tax is not a discrete or identified portion of a receivable. The sales tax obligation is a simple debt of the manufacturer or producer to the Minister. As such, there is no legal basis for the Bank to be obligated to pay sales tax on amounts it recovers under a general assignment of book debts.
Alternatively, the Bank’s counsel argued that because a bankruptcy occurred in each of the two cases here, the scheme of distribution of property under section 107 of the Bankruptcy Act governed, and that rights in other legislation such as subsection 52(10) of the Excise Tax Act were displaced by the Bankruptcy Act. The effect in this case would be to leave the book debts entirely to the Bank with the ranking of the Minister’s claim for sales tax established under paragraph 107(1)(j) of the Bankruptcy Act.
ANALYSIS
In my view, resolution of the relationship between the Excise Tax Act and the Bankruptcy Act is determinative of the issue in this case.
The contest between subsection 52(10) of the Excise Tax Act and section 107 of the Bankruptcy Act has been dealt with in two cases to which I was referred at trial. In R. in Right of Can. v. Continental Bank of Can. (1985), 56 C.B.R. (N.S.) 97 (F.C.T.D.), the Bank’s customer made an assignment in bankruptcy. The Bank had an assignment of book debts. The Minister served a demand on the Bank pursuant to subsection 52(10) of the Excise Tax Act. The Bank subsequently received proceeds of sales of its customer pursuant to its assignment of book debts. Cullen J. found, at page 101:
In this case, it is clear that at the date of the assignment in bankruptcy, namely 24th November, 1982, the book debts were the property of the defendant, and not the property of the bankrupt, and so the assignment in bankruptcy did not affect the book debts in question.
He concluded that the provisions of the Bankruptcy Act did not defeat the claim of the Minister under the Excise Tax Act. The Bank, in receipt of funds pursuant to security which entitled it to the book debts of the bankrupt, had to pay over to the Minister the sales tax associated with those book debts pursuant to subsection 52(10).
In A.G. Canada v. Bank of British Columbia, [1987] 1 C.T.C. 153, Davies J. of the Supreme Court of British Columbia dealt with the same contest between the Bankruptcy Act and the Excise Tax Act. He stated, at pages 154-156:
This matter is a question of interpretation of the two Acts, the Bankruptcy Act and the Excise Tax Act, and further, how they are to be applied in this particular situation.
I find that the Bankruptcy Act should apply to these funds paid to the Bank by the Trustee, as Parliament must have intended that Act to govern the affairs of Oxford once it was in bankruptcy.
…
After determining the rights of secured creditors, one then considers the priorities listed in subsections (a) to (j) [of section 107 of the Bankruptcy Act]. By paragraph 7 of the agreed statement of facts, the parties agree that the Bank received payment from the Trustee as a secured creditor. The amount paid was pursuant to an assignment and included accounts receivable of Oxford in respect of which excise tax had become payable.
In my judgment, the prerequisites of subsection 52(10) of the Excise Tax Act have been met and Her Majesty is entitled to the tax claimed.
Thus, Davies J. found that in a contest between subsection 52(10) of the Excise Tax Act and subsection 107(1) of the Bankruptcy Act, the provisions of the Excise Tax Act prevailed and the Minister was entitled to sales tax on monies collected by the Bank pursuant to an assignment of book debts.
In both decisions it appears that the Minister’s claims under subsection 52(10) of the Excise Tax Act were treated as claims against a secured creditor related to proceeds received by the secured creditor under its security.
Notwithstanding these two decisions, counsel for the Bank drew to my attention a line of authorities which he submitted would have me reach the opposite conclusion.
Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35, dealt with claims of the Crown under the Quebec Retail Sales Tax Act, R.S.Q. 1964, c. 71. Section 30 of this Quebec statute states that claims of the Crown under that Act constitute “a privileged debt ranking immediately after law costs.” In that case it was found that provincial legislation purporting to grant security to the Government of Quebec relating to the proceeds of the sale of immovable property was contrary to the scheme of distribution in the Bankruptcy Act and could not be effective. Pigeon J. found that because a bankruptcy had taken place, the decision in the case turned upon the interpretation of paragraph 107(1)(j) of the Bankruptcy Act. With reference to paragraph 107(1)(j) Pigeon J. stated at pages 44-45:
It is abundantly clear that this was intended to put on an equal footing all claims by Her Majesty in right of Canada or of a province except in cases where it was provided otherwise … Paragraph (j) ends with the following words: “notwithstanding any statutory preference to the contrary”. The purpose of this part of the provision is obvious. Parliament intended to put all debts to a government on an equal footing.…
As the provision in question is federal law intended to override provincial law throughout Canada, this is not a case for interpretation on the basis of technical meaning. However, even on a literal construction, I see no insurmountable difficulty. There is of course a contradiction between the reservation at the outset of the rights of secured creditors which include privileges and “notwithstanding any statutory preference …” However, it is certainly clear that the reservation is a general rule and the “notwithstanding” an exception which takes precedence wherever applicable. Furthermore, subs. 3 shows that s. 107 does derogate from the rights of some secured creditors by providing that a secured creditor whose “rights are restricted” ranks as an “unsecured creditor”.
These words of Pigeon J., which are not restricted to debts owing to provincial governments but which also apply to claims of the federal government, indicate that in the event of a bankruptcy, subsection 107(1) must be considered to determine relative priorities. As he construed paragraph 107(1)(j), it would take precedence even over federal legislation which created a security interest covering a claim of the federal government.
In Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board et al., [1985] 1 S.C.R. 785, the contest was between a claim of the Alberta Workers’ Compensation Board under subsection 78(4) of Alberta’s The Workers’ Compensation Act, S.A. 1973, c. 87 (now S.A. 1981, c. W-16), and subsection 107(1) of the Bankruptcy Act, supra. Paragraph 78(4)(a) of the Alberta Act provided that the amount due to the Workers’ Compensation Board was “a charge upon the property or proceeds of property of the employer”. Paragraph 107(1)(h) of the Bankruptcy Act established a ranking for indebtedness under any Workers’ Compensation Act creating an obligation to pay to Her Majesty amounts that had been deducted or withheld. Wilson J., in her reasons for the majority, notes a concession made by counsel for the Workers’ Compensation Board of interest in the case at bar. At page 803 she states:
Counsel for the appellant submits that Re Bourgault [Rainville] is a judgment of this Court directly in its favour. Counsel for the Board distinguishes Re Bourgault on the basis it was dealing with a claim under para. (j) of s. 107(1) as opposed to para. (h) and para. (j) ends with the phrase “notwithstanding any statutory preference to the contrary”. This, he submits, makes it clear that the provincial legislation yields to the scheme of distribution under s. 107(1) as far as claims under para. (j) are concerned. No such overriding language appears in para. (h).
In the case at bar, we are dealing with paragraph 107(1)(j) and the “overriding language” appearing in that paragraph.
In Deloitte Haskins and Sells, supra, Wilson J. found that section 107 applied to determine priorities in a bankruptcy and in such a case subsection 78(4) of Alberta’s The Workers’ Compensation Act had no application.
In her reasons in Deloitte, at pages 803-804, Wilson J. cites with approval an excerpt of the decision of Cowan C.J.T.D. in Re Black Forest Restaurant Ltd. (1981), 47 N.S.R. (2d) 454 (S.C.), at pages 469-471 which I have found useful:
The claim of the Worker’s Compensation Board is specifically referred to in s. 107(1)(h) and is not removed from the scope of that paragraph by the opening words of s. 107(1) preserving the rights of secured creditors. It is entitled to the priority provided for by s. 107(1)(h) and is not entitled to the statutory security or priority which s. 125 of the Worker’s Compensation Act purports to create, and which would be valid and effective in the absence of bankruptcy of the employer.
…
The result, in my opinion, is that, so long as there is no bankruptcy, full effect must be given to statutory provisions such as those contained in the Labour Standards Code of this province and in the Worker’s Compensation Act of this province, which create liens and charges on property ranking ahead of pre-existing interests such as those created by mortgages or assignments of book debts, affecting the property said to be subject to the statutory liens and charges. However, when bankruptcy occurs, the provisions of s. 107 of the Bankruptcy Act take effect and the scheme of distribution of the property of the bankrupt coming into the hands of the trustee must be followed. The statutory liens and charges, to the extent to which they are affected by the provisions of s. 107, cease to be of any force and effect. The rights of secured creditors, whose security arises apart from such statutes, are preserved and may be enforced against the property charged by way of security. The creditors for whose benefit the statutory liens and charges were created are no longer entitled to enforce those statutory liens and charges, except to the extent permitted by s. 107, and their claims are dealt with in the priority set out in s. 107.
These excerpts indicate that statutory priorities or statutorily created security in favour of a provincial government purporting to rank its claims ahead of other interests, while valid and effective in the absence of bankruptcy, must yield to the scheme of distribution in section 107 of the Bankruptcy Act in the case of bankruptcy. Of course, Deloitte and Black Forest, supra, were dealing with provincial statutes creating priority and security for provincial government claims and the focus of the observations of Wilson J. appear to be directed to the constitutional question in that case.
However, in the context of conflicting federal legislation, in the case of bankruptcy, section 107 must still be given meaning. The focus here is on statutory interpretation. Parliament can override the scheme of distribution in section 107, which a provincial legislature cannot do. The question is whether, in a given case, such as the case at bar, it did so.
In considering statutory interpretation it should be noted that an expansive or pervasive interpretation has been given to section 107 of the Bankruptcy Act in Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061. At pages 1071-1072, Lamer J. (as he then was) stated:
In any event, I feel that the decisions in Re Bourgault and Deloitte are conclusive as to the fate of the appeal. These cases stand for the following proposition: in a bankruptcy matter, it is the Bankruptcy Act which must be applied. If a bankruptcy occurs, the order of priority is determined by the ranking in s. 107 of the Act, and any debt mentioned in that provision must therefore be given the specified priority.
…
As soon as the bankruptcy occurs the Bankruptcy Act will be applied: the mere fact that a creditor is mentioned in s. 107 of the Act suffices for such creditor to be ranked as a preferred creditor and in the position indicated in that provision.
Again in this case, the contest was between security created by a Quebec statute and section 107 of the Bankruptcy Act. However, the words of Lamer J. appear to be encompassing of all legislation — provincial and federal. They indicate that once bankruptcy occurs, ranking is determined by section 107. Of course, Parliament would have the jurisdiction to override section 107 of the Bankruptcy Act. But where it does not do so, section 107 would appear to govern the ranking and priority of creditors’ claims including claims of the federal government.
In British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, the issue was whether a statutory trust established under the British Columbia Social Service Tax Act, R.S.B.C. 1979, c. 388, was outside the scheme of distribution of section 107 of the Bankruptcy Act. McLachlin J. summarized the issue at page 30:
The issue may be characterized as follows. Section 47(a) of the Bankruptcy Act exempts trust property in the hands of the bankrupt from distribution to creditors, giving trust claimants absolute priority. Section 107(1) establishes priorities between creditors on distribution; s. 107(1)(j) ranks Crown claims last. Section 18 of the Social Service Tax Act creates a statutory trust which lacks the essential characteristics of a trust, namely, that the property impressed with the trust be identifiable or traceable. The question is whether the statutory trust created by the provincial legislation is a trust within s. 47(a) of the Bankruptcy Act or a mere Crown claim under s. 107(1)(j).
At page 34 she concluded:
In summary, I am of the view that s. 47(a) should be confined to trusts arising under general principles of law, while s. 107(1)(j) should be confined to claims such as tax claims not established by general law but secured “by Her Majesty’s personal preference” through legislation. This conclusion, in my opinion, is supported by the wording of the sections in question, by the jurisprudence of this Court, and by the policy considerations to which I have alluded.
Henfrey Samson Belair again indicates the view of the Supreme Court, albeit in the area of trust, that section 107 of the Bankruptcy Act should be given a pervasive interpretation and exceptions be subject to narrow construction.
I have referred to the foregoing four Supreme Court of Canada decisions in support of the following conclusions:
(a) in the case of bankruptcy, regard must be had to section 107 of the Bankruptcy Act;
(b) section 107 is to be interpreted broadly;
(c) under paragraph 107(1)(j), Parliament intended to treat claims of the Crown, whether provincial or federal, on an equal footing; and
(d) provincial and federal legislation purporting to create priority or security for a government claim or to establish a trust in favour of a government must yield to the scheme of distribution in section 107 of the Bankruptcy Act unless, in the case of conflicting federal legislation, such legislation contains a clear override.
I have had regard to the case of XMCO Canada Ltd. (Re) (1991), 3 O.R. (3d) 148 (Gen. Div.), in which amounts deducted from employees’ wages were held to be a special form of statutory trust exempt from the distribution scheme in subsection 107(1) [now s. 136(1)] of the Bankruptcy Act [now R.S.C., 1985, c. B-3]. In that case the relevant provisions of the Income Tax Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1988, c. 55, s. 171], subsection 227(5), commenced with the words: “Notwithstanding any provision of the Bankruptcy Act”. Killeen J. states at page 154:
Rather, the opening “notwithstanding” clause of s. 227(5)— “Notwithstanding any provision of the Bankruptcy Act”—is sweepingly clear in that it calls for an override over any and every provision of that Act. Thus, there can be nothing in the Bankruptcy Act which constitutes an impediment to the reach and application of s. 227(5).
In the case at bar, subsection 52(10) of the Excise Tax Act does not contain a “notwithstanding” provision. On the contrary, it is paragraph 107(1)(j) of the Bankruptcy Act that contains such a “notwithstanding” provision. I see no words in the Excise Tax Act that indicate that in respect of federal sales tax, the scheme of distribution of the Bankruptcy Act should be ignored, let alone overridden.
Counsel for the Minister urged that subsection 52(10) of the Excise Tax Act takes the issue outside the Bankruptcy Act with the contest being only between the Minister and the Bank. This is based on the notion that the claim by the Minister under subsection 52(10) is a claim against the book debts assigned to the Bank and not a claim against the property of the bankrupt. I cannot agree with this proposition.
In Federal Business Development Bank, supra, Lamer J. expressly addressed the question of what property constituted “property of the bankrupt” for purposes of the Bankruptcy Act. There he was dealing with an immovable in Quebec that was the subject of a trust deed in favour of a creditor. Upon default by the debtor, a trustee for the creditor took possession of the immovable. The debtor next made an assignment in bankruptcy. Before the immovable could be sold, the Commission de la santé et de la sécurité du travail registered a privilege under the Quebec Workmen’s Compensation Act [R.S.Q. 1977, c. A-3] which purported to give the Commission priority over the secured creditor. In that case, the Commission argued that subsection 107(1) of the Bankruptcy Act had no application since the immovable was not property of the bankrupt. Lamer J. rejected this argument. At pages 1067-1068 he stated:
The immovable, encumbered to appellant and seized by the trustee, is part of the “property of the bankrupt” mentioned in s. 107 of the Bankruptcy Act. Under s. 2 of the Act, the word “property” includes immovables situated in Canada or elsewhere. The phrase “property of a bankrupt” is also defined in s. 47 of the Bankruptcy Act:
47. The property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any 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.
These two definitions clearly show that the immovable in the case at bar is property of the bankrupt within the meaning of the Bankruptcy Act. Even if the trustee takes possession of the immovable before the bankruptcy, the bankrupt remains owner of his property. The trustee who has seized an encumbered immovable cannot claim to have a right of ownership over that property: he has only the rights of a creditor under a pledge or hypothec.
Counsel for the Minister argued that the reasoning of Lamer J. in Federal Business Development Bank, supra, was particular to security in the province of Quebec where title remained with an owner and the security constituted an encumbrance on title. However, in support of a broad interpretation of the words “property of the bankrupt” Lamer J. also made reference with approval to Re Broydon Printers Ltd. (1974), 4 O.R. (2d) 48 (S.C.). At pages 1068-1069 of Federal Business Development Bank, supra, he states:
In another case, Re Broydon Printers Ltd. (1975), 19 C.B.R. (N.S.) 226 (Ont. S.C.), the trustee in bankruptcy informed the secured creditor of his intention to inspect the property held by the latter. Section 57 of the Bankruptcy Act authorizes the trustee in bankruptcy to proceed with the inspection of the “property of a bankrupt” held as a pledge, pawn or other security, in order to determine whether such property represents an interest that may be realized for the creditors as a whole. The secured creditor denied the trustee in bankruptcy permission to inspect the said property. The Court defined the phrase “property of a bankrupt … held as … other security” [at pp. 50-51]:
… I do not think s. 57 is intended to be restricted to property in the nature of a pledge or pawn. Rather, I believe the section is wide enough to include property of the bankrupt which is in the possession of a secured creditor at the date of bankruptcy. If this were not so, the trustee would be unable to protect the rights of creditors in respect of such property.
In Re Broydon Printers, supra, the security in question was conditional sales contracts. Under conditional sales contracts title to the property remains with the vendor until the full purchase price is paid, although the purchaser will normally have possession of the property. However, even where the property has been repossessed, the purchaser has an equity of redemption. Houlden J. found that the equity of redemption in goods repossessed by a conditional vendor came within the definition of “property” in the Bankruptcy Act (at page 51):
“Property” is defined in s. 2 of the Bankruptcy Act to include
… money, goods, things in action, land, and every description of property, whether real or personal, movable or immovable, 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.
It seems to me that Federal Business Development Bank, supra, stands for the proposition that the term “property of the bankrupt” in the Bankruptcy Act covers property which is the subject of security in favour of a secured creditor, irrespective of the form in which the security is taken. Whether or not legal title to the property remains with the bankrupt or has been transferred to the security holder is not of importance as long as an equity of redemption remains with the bankrupt or his trustee. With respect to security registered pursuant to the Personal Property Security Act, R.S.O. 1980, c. 375, which was applicable in the case of the assignments of book debts in the case at bar, subsection 56(2) stated:
56.…
(2) Where the debtor is in default under a security agreement, the secured party has, in addition to any other rights and remedies, the rights and remedies provided in the security agreement except as limited by subsection (5), the rights and remedies provided in this Part and, when in possession, the rights, remedies and duties provided in section 19.
Section 62 provided:
62. At any time before the secured party has disposed of the collateral by sale or exchange or contracted for such disposition under section 59 or before the secured party shall be deemed to have irrevocably elected to retain the collateral in satisfaction of the obligation under subsection 61(2), the debtor, or any person other than the debtor who is the owner of the collateral, or any secured party other than the secured party in possession, may, unless he has otherwise agreed in writing after default, redeem the collateral by tendering fulfilment of all obligations secured by the collateral together with a sum equal to the reasonable expenses of retaking, holding, repairing, processing, preparing the collateral for disposition and in arranging for its disposition, and, to the extent provided for in the security agreement, the reasonable solicitor’s costs and legal expenses.
As in Re Broydon Printers, supra, it appears in the case at bar that IHEC and Thrush would have had the rights of redemption of the security they gave to the Bank. This right, in the cases of IHEC and Thrush, would have arisen under section 62 of the Personal Property Security Act. Based on the reasoning of Houlden J. in Re Broydon Printers, supra, as approved by Lamer J. in Federal Business Development Bank, supra, the right of redemption of the book debts, in my view, comes within the definition of “property” in the Bankruptcy Act. As such, the reasoning of Lamer J. in Federal Business Development Bank would apply and the book debts would constitute “property of the bankrupt” for purposes of subsection 107(1) of the Bankruptcy Act.
In my opinion, this interpretation leads to a logical result and permits subsection 107(1) to achieve its object and purpose”a prescribed scheme of distribution in the event of bankruptcy. This object and purpose may be somewhat obscured when it is not apparent that the trustee in bankruptcy has any interest in, or in the proceeds realized from, security, as appears to be the situation in the case at bar. However, where there is a surplus, I believe the situation is clearer.
In the absence of the Minister’s claim, the Bank would recover up to the amount owed to it from its security. Any surplus (and assuming no other secured creditor entitled after the Bank) would be turned over to the trustee in bankruptcy for distribution among creditors in accordance with the Bankruptcy Act and in accordance with section 60 of the Personal Property Security Act which states:
60. Where a security agreement secures an indebtedness and the secured party has dealt with the collateral under section 57 or has disposed of it in accordance with section 59 or otherwise, he shall account for any surplus to any person, other than the debtor, whom the secured party knows to be the owner of the collateral, and, in the absence of such knowledge, he shall account to the debtor for any surplus.
Where the Minister has a claim, if he would be entitled to rely upon subsection 52(10) of the Excise Tax Act in the case of a bankruptcy, it would, in the case of a surplus, clearly be at the expense of other creditors. It is this type of “queue jumping” that the scheme of distribution prescribed by subsection 107(1) of the Bankruptcy Act was enacted to preclude. Of course, subsection 107(1) must be applied whether or not there is a surplus.
In the result, I am of the opinion that paragraph 107(1)(j) of the Bankruptcy Act and not subsection 52(10) of the Excise Tax Act governs the Minister’s entitlement in the case of a bankruptcy. While I realize that my conclusion on this issue is different than those in Continental Bank and Bank of British Columbia, supra, those decisions were rendered before the Supreme Court’s decisions in Federal Business Development Bank and Henfrey Samson Belair, supra.
The alternative argument of counsel for the Minister—that the Bank was indebted for sales tax to the Minister directly under paragraph 27(1)(a) of the Excise Tax Act as it was a “manufacturer or producer” within the definition of that term in paragraph 2(1)(a) of the Excise Tax Act—is not persuasive. In my view, definitions by their nature, must be worded broadly. Their application must always be construed having regard to the context and circumstances in which words are used. See, for example, North-West Line Elevators Association et al. v. Canadian Pacific Railway and Canadian National Railway et al., [1959] S.C.R. 239, at pages 244-245.
Taken out of context, as soon as a bank takes an assignment of book debts, it is included in the definition of “manufacturer or producer” and would be liable to pay sales tax pursuant to paragraph 27(1)(a) of the Excise Tax Act. However, it is obvious that the Excise Tax Act was not intended to create duplicate or triplicate obligees for the same transaction or render security holders guarantors to the Minister of a debtor’s obligation to pay sales tax. Thus, in C.I.B.C. v. R. (1984), 52 C.B.R (N.S.) 145 (F.C.T.D.), affirmed at (1986), 60 C.B.R. (N.S.) 45 (F.C.A.), it was determined that a bank does not become a manufacturer or producer until it exercises its security.
Under subsection 52(10) of the Excise Tax Act, the Minister may look to an assignee of book debts for payment of the equivalent of the sales tax on the book debts collected by the assignee. The definition of “manufacturer or producer” in paragraph 2(1)(a) and the obligation to pay sales tax under paragraph 27(1)(a) must be construed in a manner consistent with subsection 52(10). Otherwise, the assignee would be assuming an obligation to the Minister for sales tax over and above what would be applicable to amounts it actually collected. Indeed, if an assignee were directly liable as a manufacturer or producer pursuant to paragraph 27(1)(a) in all cases, such wide interpretation would render subsection 52(10) redundant.
The sales tax that a bank would be required to pay to the Minister in the capacity of a manufacturer or producer by way of a direct obligation under paragraph 27(1)(a) may be sales tax arising when the bank itself delivered goods to a purchaser or when property in such goods passed to the purchaser. This would envision the bank having taken over the business of its customer. This is not the case when the bank simply is collecting amounts owed to it pursuant to its security.
I observe that in the absence of a bankruptcy, I see no reason why subsection 52(10) of the Excise Tax Act should not have the effect argued for by counsel for the Minister. Counsel for the Bank argued that this would amount to confiscation of the Bank’s property. However, subsection 52(10) has been found to be sufficiently clear to be effective to achieve its purpose in Continental Bank and Bank of British Columbia, supra, and in R. v. Prowest Fabrications Ltd. and Balzer’s Mechanical (1978) Ltd. (1983), 31 Sask. R. 150 (Q.B.).
In the notes of argument supplied by counsel for the Bank, an excerpt from the House of Commons Debates of June 2, 1936, at page 3344 was provided. This appears to have been the time at which subsection 52(10) was first enacted. The Honourable J. T. Ilsley stated:
Mr. ILSLEY: This is an administrative change. This section is designed to make it incumbent upon persons who receive assignments of book debts or trade papers, which include sales tax, to pay the amount of such tax to the public revenues. In the past there has been no authority in the act to collect the tax in such cases, and if the taxpayer were in a precarious financial position or about to go into liquidation the amounts represented by the tax were collected by the person holding the collateral for his own account, and became a non-collectable account as far as the public revenues were concerned.
Mr. FACTOR: Does that include banks as well?
Mr. ILSLEY: Yes.
I am of the opinion that the words of subsection 52(10) are clear and unambiguous and are effective in carrying out their stated purpose, except in the case of bankruptcy.
In the case of IHEC, it appears that the bankruptcy proceedings were commenced prior to the Minister’s notice under subsection 52(10). With respect to this action, the Minister’s claim is dismissed with costs.
In the case of Thrush, the Minister’s notice was given on November 1, 1985, a petition for receiving order was made on November 13, 1985, and the receiving order was made on November 25, 1985. It was not made absolutely clear during the trial whether the bankruptcy in the case of Thrush would affect all receivables collected by the Bank or whether the Minister was entitled to sales tax on receivables collected between November 1 and November 12, 1985. To the extent that the receivables in question were collected on or after November 13, 1985, the Minister’s claim is dismissed with costs. For those receivables collected by the Bank between November 1 and November 12, 1985, counsel may make further submissions should either of them deem it necessary. A conference call will be arranged by the Court upon the application of counsel for either of the parties.
Counsel for the defendant, having been substantially successful, is ordered to prepare the order for judgment, carrying out the effect of these reasons, submit it for approval as to form and content to counsel for the defendant, and provide it to the Court within twenty-one (21) days of the date of these reasons.