Judgments

[1997] 3 F.C. 3

A-444-93

A-445-93

Her Majesty the Queen (Appellant)

v.

National Bank of Canada (Respondent)

Indexed as: Canada v. National Bank of Canada (C.A.)

Court of Appeal, Hugessen, Décary JJ.A. and Chevalier D.J.—Montréal, January 15; Ottawa, March 10, 1997.

Bankruptcy — Bank collecting bankrupt licensed manufacturers’ accounts receivable assigned to it as security for loan — Minister may not require Bank pay excise tax with respect to accounts receivable — Priority of Bankruptcy Act, s. 107(1) over Excise Tax Act, s. 52(10) — Even if assignment of debt giving Bank secured creditor status, property in which security held component of assets of bankruptcy — Even though Bank secured creditor, debt owing to it gave it no absolute property right in moneys deriving from ultimate collection of account receivable — When collected accounts receivable, Bank did not become “manufacturer” or “producer” — Tax simple debt owing by vendor manufacturer and, for recovery purposes, in case of bankruptcy, has rank accorded to it in Act, s. 107(1) — Minister must make claim to trustee, and be given priority as preferred creditor, based on ranking.

Customs and Excise — Excise Tax Act — Bank collecting bankrupt licensed manufacturers’ accounts receivable assigned to it as security for loan — Minister may not require Bank pay excise tax with respect to accounts receivable — Priority of Bankruptcy Act, s. 107(1) over Excise Tax Act, s. 52(10) — Minister must make claim to trustee, be given priority as preferred creditor, based on ranking.

Financial institutions — Banks — Bank collecting bankrupt licensed manufacturers’ accounts receivable assigned to it as security for loan — Bank not liable for excise tax under Excise Tax Act, s. 52(10) with respect to accounts receivable — Priority of Bankruptcy Act, s. 107(1) over Excise Tax Act, s. 52(10) — Even if assignment of debt giving Bank secured creditor status, property in which security held component of assets of bankruptcy — Even though Bank secured creditor, debt owing to it gave it no absolute property right in moneys deriving from ultimate collection of accounts receivable — When collected accounts receivable, Bank did not become “manufacturer” or “producer” — Tax simple debt owing by vendor manufacturer and, for recovery purposes, in case of bankruptcy, has rank accorded to it in Act, s. 107(1).

The appellant Bank granted two manufacturers a number of loans with a general assignment of accounts receivable as security. When the manufacturers, licensed for the purposes of the Excise Tax Act, defaulted on the payment of their debt, the Bank initiated collection of the accounts then owing. The manufacturers subsequently went bankrupt. Relying on subsection 52(10) of the Excise Tax Act, the Minister of National Revenue demanded payment of an amount equivalent to the federal sales tax from the Bank. The issue was the impact of the bankruptcy upon the Minister’s claim.

Held (Décary J.A. dissenting), the appeals should be dismissed.

Per Chevalier D.J.: There was no contradiction between subsection 52(10) of the Excise Tax Act (authorizing the Minister to claim the federal sales tax from a person who collected accounts receivable assigned to him by a licensee under the Act) and paragraph 107(1)(j) of the Bankruptcy Act (establishing the scheme of distribution of the proceeds realized from the property of a bankrupt). The case law overwhelmingly gives priority to paragraph 107(1)(j). The provisions of the Bankruptcy Act are sufficiently clear to ward off any intrusion by the Excise Tax Act into its field of operation.

From the definitions of “property”, “creditor” and “secured creditor” in section 2 of the Bankruptcy Act and from paragraph 47(d) thereof, it can be concluded that even if the assignment of the debt operates to give the Bank secured creditor status, the property in which it holds such security is nonetheless, in the event of bankruptcy, a component of the assets of the bankruptcy, and that the Bank’s secured creditor status gave the Bank no absolute property right, at the time the debt became payable, in the moneys deriving from the ultimate collection of the account receivable. Moreover, the debtor still has a right to prevent its creditor from collecting the account in question, by paying its debt.

It cannot be said that when the Bank decided to collect the accounts receivable itself, it substituted itself for its debtor and thereby became a “manufacturer” or “producer” within the meaning of the Excise Tax Act , and subject to the same obligation: to pay the tax imposed. The Bank did not take over the business of its customer, it simply collected amounts owed to it pursuant to its security.

Nor can it be said that by collecting the bankrupt’s accounts receivable the Bank wrongfully appropriated the portion of the moneys collected that represented the excise tax payable. When a manufacturer is paid the price of the item it is selling, it does not collect a tax from the purchaser as agent of the Minister, since only the manufacturer, and not the purchaser, is liable for the tax. Since the Minister’s relationship with the manufacturers is strictly that of creditor to debtor, and not of principal to agent, it cannot be said that when the manufacturers collect what is owed to them, they are enriching themselves by collecting an excise tax. Therefore, the tax is a simple debt owing by the vendor manufacturers and, for recovery purposes, in the event of a bankruptcy, it has the rank accorded to it in paragraph 107(1)(j).

Per Décary J.A. (dissenting): The appeals in Court file nos. A-444-93, A-445-93 and A-464-93 should be allowed and the appeal in Court file no. A-607-94 should be dismissed. The Bank Act and the Bankruptcy Act are not relevant in these circumstances.

In Court file nos. A-444-93 (IHEC) and A-445-93 (Trush), as well as in Court file no. A-464-93 (Admiral), the Bank contended that when the three debtors in question became bankrupt, subsection 52(10) of the Excise Tax Act ceased to have any application.

The claim in question in all these cases is the Minister’s claim against the Bank under subsection 52(10), and not the Minister’s claim against the defaulting manufacturers. Under that subsection, the Bank becomes indebted to the Minister regardless of its debtor’s financial status, or bankruptcy; when the Bank receives moneys on account of the debt, it is indebted to the Minister for a sum equivalent to the amount of the tax imposed on the manufacturer.

In this instance, the sums that the Bank received by itself realizing the security it held in respect of payment of the manufacturers’ debts, although it did so under the Bankruptcy Act, were received “on account of” those debts. Since the only assets that are relevant in these cases are the Bank’s, it being the only tax debtor against which the Minister has brought proceedings, the bankruptcy of the manufacturer cannot interfere with these proceedings.

Even if, in theoretical terms, the Bank realizes its security as a secured creditor recognized by the Bankruptcy Act, nonetheless, in practical terms, it realizes it in the same manner as if there had been no bankruptcy. The sums that thus became part of the Bank’s assets are the same whether or not there has been a bankruptcy, and so the Crown can look to those assets for what is owed to it under subsection 52(10) of the Excise Tax Act.

In addition, if C.I.B.C. v. R. stands for the proposition that the excise tax does not belong to the debtor and accordingly cannot be assigned by it to the Bank, then that tax is not part of the property of the bankrupt and the trustee has no authority over it.

This was not a disguised expropriation of the Bank’s property, without compensation, since the debts that are transferred to it pursuant to the realization of its security consist in part of a tax that belongs to the Crown. What the Crown is recovering is its own property, which never was the property of the Bank.

In the four cases at bar, the requirements for subsection 52(10) to apply have been met: a book debt was assigned to the Bank; the Minister gave notice to the Bank; a business transaction took place that gave rise to excise tax; the Bank received moneys as a result of that transaction and those moneys included a sum equivalent to the excise tax.

With respect to Court file nos. A-464-93 (Admiral) and A-607-94 (King Seagrave), the Bank contended that subsection 52(10) of the Excise Tax Act did not apply since the security which the Bank held under section 178 of the Bank Act was not “any assignment of any book debt” within the meaning of that subsection. However, subsection 52(10) of the Excise Tax Act is clear: once the conditions provided therein concerning assignments of book debts and notices by the Minister have been met, the Bank becomes indebted to the Minister for “a sum equivalent to the amount of any tax imposed by this Act”. Accordingly, the Bank has an independent fiscal debt, and is not indebted for the tax per se , but for a sum equivalent to the tax.

The fact that, apart from that assignment, security was given, and possession then taken under section 178 of the Bank Act, in no way changes the basic element demanded by subsection 52(10) of the Excise Tax Act, that on November 5, 1981, there was in fact an assignment within the meaning of that subsection. Parliament did not intend to exclude any bank that obtained security from its debtor under section 178 of the Bank Act, in addition to obtaining the traditional general assignment of book debts, from the operation of subsection 52(10).

Moreover, in C.I.B.C. v. R., this Court held that the debtor may not assign sums equivalent to the amount of the excise tax to its creditor for the simple reason that those sums do not belong to the debtor. Accordingly, the Bank may not set up its security against the Minister since the security does not extend to the sums in issue.

The proceedings in the Admiral and King Seagrave cases were not statute barred. In the case of proceedings brought by the Minister against the Bank under subsections 52(10) and (11) of the Excise Tax Act, the limitation cannot begin to run before the Bank has at least received the notice from the Minister.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Bank Act, R.S.C. 1970, c. B-1, s. 88.

Bank Act, R.S.C., 1985, c. B-1, s. 178.

Bank Act, S.C. 1991, c. 46, s. 427.

Bankruptcy Act, R.S.C. 1970, c. B-3, ss. 2 “creditor”, “property”, “secured creditor”, 47, 49(2), 107(1)(h ),(i),(j).

Banks and Banking Law Revision Act, 1980, S.C. 1980-81-82-83, c. 40, s. 178.

Courts of Justice Act, R.S.O. 1990, c. C.43.

Excise Tax Act, R.S.C. 1970, c. E-13, ss. 2 “manufacturer or producer”, 52(1) (as am. by S.C. 1980-81-82-83, c. 68, s. 21), (1.4) (as enacted idem), (10),(11).

CASES JUDICIALLY CONSIDERED

APPLIED:

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), 37 C.B.R. (N.S.) 176 (N.S.S.C.); 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; Alberta (Treasury Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1 S.C.R. 963; (1996), 184 A.R. 1; 133 D.L.R. (4th) 609; [1996] 5 W.W.R. 153; 38 Alta. L.R. (3d) 1; 39 C.B.R. (3d) 157; [1996] 1 C.T.C. 395; 96 DTC 6245; 196 N.R. 105; 11 P.P.S.A.C. (2d) 1; 122 W.A.C. 1; Saugeen Indian Band v. Canada, [1990] 1 F.C. 403 (1989), 104 N.R. 201 (C.A.).

NOT FOLLOWED:

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.).

REFERRED TO:

Bank of Toronto v. Lambe (1887), 12 App. Cas. 575 (P.C.); C.I.B.C. v. R. (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.); confg 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.).

APPEALS from Trial Division decisions (Canada v. National Bank of Canada, [1993] 2 F.C. 206 (1993), 18 C.B.R. (3d) 35; [1993] 2 C.T.C. 149; 63 F.T.R. 9 (T.D.)) dismissing the Minister of National Revenue’s actions against the Bank for the federal sales tax associated with the book debts of a bankrupt licensed manufacturer collected by the Bank pursuant to security which included general assignments of book debts. Appeals dismissed.

COUNSEL:

Maria G. Bittichesu for appellant.

Michel Legendre for respondent.

SOLICITORS:

Deputy Attorney General of Canada for appellant.

Desjardins Ducharme Stein Monast, Montréal, for respondent.

The following is the English version of the reasons for judgment rendered by

Décary J.A. (dissenting): With respect, I cannot concur in the reasons of my colleague Chevalier D.J., who chose to write reasons in respect of file no. A-444-93 and A-445-93 (decisions of Rothstein J.)[1] and separate reasons in respect of file nos. A-464-93 (decision of Pinard J.)[2] and A-607-94 (decision of Nadon J.).[3] My preference is to write reasons that will apply to the four cases in issue, which I shall place on the record in each one.

The National Bank of Canada (the Bank) has presented two main arguments.

In file nos. A-464-93 (Canadian Admiral Corporation Ltd. (Admiral)) and A-607-94 (King Seagrave (1982) Inc. (King Seagrave)), in which the Bank held security under section 178 of the Bank Act[4] upon the property of those of its debtors covered by that section, the Bank contends that subsection 52(10) of the Excise Tax Act[5] does not apply since the security given under the Bank Act is not “any assignment of any book debt” within the meaning of that subsection.[6]

In the Admiral case, and in file nos. A-444-93 (IHEC Ltd. (IHEC)) and A-445-93 (Trush Incorporated (Trush)), the Bank contends that when the three debtors in question became bankrupt subsection 52(10) of the Excise Tax Act ceased to have any application.

I am of the opinion that the Bank is trying to import concepts into these cases that are associated with the Bank Act and the Bankruptcy Act[7] which are not relevant in these circumstances. In so doing, the Bank has complicated and distorted an issue which seems to me to be really quite simple.

I shall first reproduce the text of subsections 52(10) and (11) and subsection 52(1.4) [as enacted by S.C. 1980-81-82-83, c. 68, s. 21] of the Excise Tax Act, on the basis of which, in my opinion, this matter may be disposed of:[8]

Procedure

52. …

(1.4) All taxes or sums payable under this Act are debts due to Her Majesty and are recoverable as such in the Federal Court or in any other court of competent jurisdiction.

…

(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 text of subsection 52(10) is clear: once there has been any assignment of any book debt by the manufacturer to the Bank, once the notice has been given to the Bank by the Minister, once the transaction that resulted in the assigned debt has been completed, and once the moneys “on account of” the assigned debt have been received by the Bank, the Bank becomes indebted to the Minister for “a sum equivalent to the amount of any tax imposed by this Act”. Accordingly, the Bank then has an independent fiscal debt, and is indebted not for the tax per se, but for a sum equivalent to the tax. In short, once the proceeds of the sale, including the amount payable as excise tax, have become part of the Bank’s assets, the Minister may demand that the Bank itself pay a sum equivalent to the amount of the tax that the manufacturer has not paid.

If the Bank’s argument were to be sound, requirements would have to be read into the text of subsection 52(10) that are quite simply not there.

I.          The argument relating to the security given under section 178 of the Bank Act

In the Admiral case, the Bank had been granted a general assignment of book debts on August 21, 1981. On November 5, 1981, the Minister served the notice required under subsection 52(10) of the Excise Tax Act. On November 4, 1985, the Minister commenced recovery proceedings; the text of paragraphs 5, 6, 7 and 8 of that claim is set out below:

5. A General Assignment of Book debts was executed between the Defendant, the National Bank, and Canadian Admiral on the 21st day of August, 1981.

6. On or about the 5th day of November, 1981, the Minister of National Revenue, pursuant to the provisions of the Act, served on the Defendant Banks demands for payment of moneys received by the Defendant Banks subsequent to the service of the said demands equivalent to the amount of tax imposed by the Act upon the transactions giving rise to the debts assigned by Canadian Admiral to the Defendant Banks pursuant to the General Assignments of Book Debts referred to in paragraphs 4 and 5 hereof.

7. After service of the demands referred to in paragraph 6 hereof, the Defendant Banks collected various amounts pursuant to the General Assignments of Book Debts, of which amounts the sum of $302,009.17 was a sum equivalent to the sales tax payable upon the transactions giving rise to the debt assigned by Canadian Admiral and which sum the Defendant Banks did not remit to the Plaintiff.

8. Despite the subsequent demands for the unremitted sum, as set out in paragraph 7 thereof, the Defendant Banks have refused or neglected to remit the sum of $302,009.17 or any part thereof to the Plaintiff. [A.B., A-464-93, Appendix I, at pp. 2-3.]

At paragraphs 3 and 6 of the defence it filed on April 18, 1986, the Bank made the following admissions:

[translation]

3. They admit paragraphs 4 and 5 of the statement of claim, subject to what is hereinafter pleaded;

4. They admit paragraph 6 of the statement of claim;

5. They admit, in paragraph 7 of the statement of claim, that if the position taken by the plaintiff is sound in law and if the rights she claims to have take priority over the rights of the defendants, $302,009.17 is the correct amount, and they deny the rest of that paragraph;

6. They admit paragraph 8 of the statement of claim and they add that it is their position that they owe nothing to the plaintiff; [A.B., A-464-93, Appendix I, at pp. 6-7.]

Accordingly, the Bank has acknowledged that a book debt was assigned and that the assignment is the reason why the Minister proceeded under subsection 52(10) of the Excise Tax Act. The fact that, apart from that assignment, security was given, and possession then taken under section 178 of the Bank Act, in no way changes the basic element demanded by subsection 52(10), that on November 5, 1981, there was in fact an assignment within the meaning of that subsection. I fail to see how the fact that the Bank had obtained the additional security that the Bank Act allowed it to obtain could vitiate the fact that it had also obtained an assignment. If the Bank had obtained only the security provided for in the Bank Act, it could likely have argued, although I make no finding on this point, that that security is not an assignment such as is contemplated by subsection 52(10). Since the Bank obtained both an assignment and security, I fail to understand how it could argue that there was no assignment simply because there was also security.

That would mean adding a requirement to the provision that it does not contain, which would exclude any bank that obtained security from its debtor under section 178 of the Bank Act, in addition to obtaining the traditional general assignment of book debts, from the operation of subsection 52(10). In my opinion, that would amount to imputing to Parliament a profound misapprehension of commercial reality, and giving banks special status which is not consistent with Parliament’s stated intention, which Rothstein J. described as follows, at page 227:[9]

In the notes of argument supplied by counsel for the Bank, and 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 this include banks as well?

Mr. ILSLEY: Yes.

I further note that Rothstein J. himself stated the opinion, again at page 227:

… 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. [Emphasis mine.]

He concluded, at page 228:

… 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. [Emphasis mine.]

The King Seagrave case contains allegations and admissions that are analogous to those found in the Admiral case, the difference being that the Bank stated that it had no knowledge of the allegation that the Bank received $15,024.81 pursuant to subsection 52(10). Since then, the amount in question has risen to $27,662 and at the hearing, counsel for the Bank did not pursue the objections he had raised in his factum with respect to the origins and accuracy of that figure.

I therefore conclude that in both the Admiral case and the King Seagrave case, the first requirement for subsection 52(10) of the Excise Tax Act to apply, namely that there have been an assignment of a book debt, has been met.

Moreover, in C.I.B.C. v. R.,[10] this Court held that the debtor may not assign sums equivalent to the amount of the excise tax to its creditor for the simple reason that those sums do not belong to the debtor. Accordingly, the Bank may not set up its security against the Minister since the security does not extend to the sums in issue. On this point, I adopt the following comments by Nadon J. in King Seagrave:[11]

I must frankly confess that I see no substance in any of the arguments put forward by the bank. The bank, pursuant to an assignment of book debts and to security held under s. 178 of the Bank Act, collected from customers of its defaulting client payment of accounts which were outstanding on December 18, 1984. A portion of these accounts represented the applicable F.S.T. upon the sale of the goods. The bank collected monies which never belonged to its client. As Mr. Justice Muldoon stated in the Canadian Imperial Bank of Commerce case, supra, at page 450 thereof:

“…, but they (the bank’s defaulting customers) could not give or assign to the bank this specific tax on the sale price of their goods. The amount of that tax was, once identified, not yet paid, and demanded—and it is still—not theirs to give.”

Since the tax claimed by the Minister under s. 52(10) of the Act never belonged to Seagrave, the bank did not and could not obtain an assignment of this tax pursuant to the general assignment of book debts. Furthermore, to repeat myself, as the tax did not belong to Seagrave, the amount of the tax could not be the property of the bank as provided for in section 5 of the Agreement. Whichever way one looks at the problem, the Bank is not entitled to the amount of the tax when, as in the present instance, the Minister has diligently exercised his statutory right under s. 52(10) of the Act.

Were I to give s. 52(10) of the Act the interpretation which the Defendant proposes, I certainly would not be giving effect to the clear intention of Parliament. [Emphasis mine.]

II.         The argument concerning the bankruptcy

In the IHEC, Trush and Admiral cases, the debtors in question all declared bankruptcy. The Bank’s argument comes down to this: when a bankruptcy occurs, the debts assigned are considered to form part of the property of the bankrupt and the provisions of the Bankruptcy Act apply, including, inter alia, those provisions (section 107) relating to the scheme of distribution of the proceeds realized from the property of a bankrupt. Accordingly, the Minister’s claim has the priority assigned to it by paragraph 107(1)(j):[12]

Scheme of Distribution

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:

…

(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;

…

(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.

Here again, I believe that there has been a misapprehension. The claim in question in all these cases is the Minister’s claim against the Bank under subsection 52(10) of the Excise Tax Act, and not the Minister’s claim against the defaulting manufacturers. Under subsection 52(10), the Bank becomes indebted to the Minister regardless of its debtor’s financial status; when the Bank receives moneys on account of the debt, it is indebted to the Minister for a sum equivalent to the amount of the tax imposed on the manufacturer.

In my view, it is of little consequence whether the Bank receives these moneys in the context of a bankruptcy or otherwise. Where the transaction giving rise to the debt assigned takes place, and where the Bank receives the moneys and receives them on account of the manufacturer’s debt, it becomes indebted itself for the tax. In this instance, it seems certain to me, having regard to the admissions and the evidence, that the sums that the Bank received by itself realizing the security it held in respect of payment of the manufacturers’ debts, although it did so under the Bankruptcy Act, were received “on account of” those debts. Since the only assets that are relevant in these cases are the Bank’s, it being the only tax debtor against which the Minister has brought proceedings, the bankruptcy of the manufacturer cannot interfere with these proceedings.

It is worth recalling, at this point, that even if, in theoretical terms, the Bank realizes its security as a secured creditor recognized by the Bankruptcy Act, nonetheless, in practical terms, it realizes it in the same manner as if there had been no bankruptcy, or, in the words of Lamer J. (as he then was) in Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail),[13] “outside the bankruptcy proceedings”,[14] as provided by subsection 49(2) of the Bankruptcy Act. The sums that thus became part of the Bank’s assets are the same whether or not there has been a bankruptcy, and so the Crown can look to those assets for what is owed to it under subsection 52(10) of the Excise Tax Act.

In addition, if I am right in concluding earlier, relying on the decision of this Court in C.I.B.C. v. R.,[15] that the excise tax does not belong to the debtor and accordingly cannot be assigned by it to the Bank, then that tax is not, properly speaking, part of the property of the bankrupt and the trustee has no authority over it. That is also why I would be much more reluctant to apply the comments of Lamer J. in Federal Business Development Bank, in relation to the Bankruptcy Act, to this case. What Lamer J. concluded in that case was that the immovable in question was the property of the bankrupt within the meaning of the Bankruptcy Act since “[e]ven if the trustee takes possession of the immovable before the bankruptcy, the bankrupt remains the owner of his property”.[16] This is not the situation in this case.

The Bank contends that subsection 52(10) amounts to a disguised expropriation of its property, without compensation. That argument cannot stand. Subsection 52(10) takes nothing away from the Bank, since the debts that are transferred to it pursuant to the realization of its security consist in part of a tax that belongs to the Crown. What the Crown is recovering is its own property, which is not and has never been the property of the Bank.

I therefore conclude that in the four cases at bar the requirements for subsection 52(10) to apply have been met: a book debt was assigned to the Bank; the Minister gave notice to the Bank; a business transaction took place that gave rise to excise tax; the Bank received moneys as a result of that transaction and those moneys included a sum equivalent to the excise tax. The Crown’s actions are sound.

III.        Limitation

One question remains to be resolved: the limitation that applies to the proceedings brought by the Crown in the Admiral and King Seagrave cases.

Subsection 52(1) of the Excise Tax Act provides:[17]

52. (1) … no proceedings to recover taxes or sums payable under this Act shall be commenced after four years from the time the taxes or sums first became payable.

The Bank contends that the four-year period began to run from the date when the goods produced by Admiral and King Seagrave were sold or when those goods were delivered to the purchasers, and that in this instance the Crown took more than four years before commencing its proceedings.

That argument does not stand up to analysis. In the case of proceedings brought by the Minister against the Bank under subsections 52(10) and (11) of the Excise Tax Act, the limitation cannot begin to run before the Bank has at least received the notice from the Minister. Accordingly, in the instant case, the proceedings that the Crown commenced within four years of receipt of the notice are not prescribed.

Disposition

I would dismiss the appeal in file no. A-607-94 with costs.

In file nos. A-444-93, A-445-93 and A-464-93, I would allow the appeal, set aside the judgment at trial, allow the appellant’s action and order that the respondent Bank pay the appellant $79,998.60 in file no. A-444-93, $54,877.33 in file no. A-445-93 and $302,009.17 in file no. A-464-93, with interest in each of these cases from service of the actions, at the rate prescribed by the Courts of Justice Act, R.S.O. 1990, c. C.43, and costs in both divisions of this Court.

* * *

The following is the English version of the reasons for judgment rendered by

Chevalier D.J.: These are appeals from two judgments of Rothstein J.[18] which were heard jointly in this Court, both at trial and on appeal.

THE FACTS

The case of IHEC (File No. A-444-93)

At the time in issue, this company was a manufacturer with a licence issued under the Excise Tax Act[19] which obliged it to pay the appellant a tax on the price of any goods sold by it and delivered to a purchaser of its products.

In 1984, the Mercantile Bank of Canada, which subsequently merged with the respondent bank, granted IHEC a number of loans. To secure repayment, it obtained a general assignment of book debts (accounts receivable) which it duly registered under the applicable legislation.

When the debtor defaulted on the payment of its debt, the Bank instructed an agent to collect the accounts then owing. Subsequently, IHEC declared bankruptcy and a trustee was appointed for its property.

Relying on subsection 52(10) of the Excise Tax Act, the Minister of National Revenue brought action against the Bank claiming $79,998.60, representing a percentage of the moneys collected by it in respect of the accounts receivable.

The case of Thrush Incorporated (Thrush) (A-445-93)

The circumstances relating to this case are identical to those recounted in respect of the preceding case. The only differences are the identity of the bankrupt debtor and the quantum ($54,877.33) of the Minister’s claim.

THE JUDGMENT a quo

The Trial Judge first quoted the relevant provisions of the Excise Tax Act and the Bankruptcy Act,[20] and in particular subsection 52(10) of the former and subsection 107(1) of the latter. He then analyzed the case law relating thereto and found that some decisions gave precedence to the provision of the Excise Tax Act cited supra, while others preferred to give precedence to the provision of the Bankruptcy Act; the precedence accorded stemmed directly from the phraseology used by Parliament in paragraph 107(1)(j) of that Act. The Judge concluded that had there been no bankruptcy, subsection 52(10) might have taken precedence, but that in the instant case this was not the situation and accordingly the appellant’s application had to be dismissed.

Analysis

I find that judgment to be sound. It is based on a rational interpretation, for which reasons are stated and which is supported by a decisive line of authorities, the statutory provisions and a correct application of the legal principles at issue.

In the instant case, four issues had to be addressed. They were:

(a) where paragraph 107(1)(j) of the Bankruptcy Act stands in relation to subsection 52(10) of the Excise Tax Act, and in the factual context of the case, which of the two should be applied;

(b) what the specific nature of the contract between the Bank and its borrower was, and whether the subject-matter assigned by it was property of the bankrupt and, based on the answers to those two questions, whether paragraph 107(l)(j) had to be applied to it, based on its true substance and meaning;

(c) as the appellant suggested, whether, in order for precedence to be given to subsection 52(10), the Bank transformed itself into a manufacturer, by deciding to collect the accounts receivable, and became subject to its borrower’s obligation;

(d) lastly, whether by collecting an account owing to its debtor, in its stead, the Bank collected the tax owing to the Minister, and whether, in so doing, it used property belonging to someone else to unduly enrich itself.

On the first question, it must be noted that, a priori, there would seem to be a contradiction between subsection 52(10) of the Excise Tax Act and paragraph 107(1)(j) of the Bankruptcy Act. The relevant portions of those provisions read as follows:

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.

…

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:

…

(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.

Thus the first of these provisions gives the Minister the right to make a direct claim against anyone to whom the right to collect an account receivable has been assigned, while the next requires that, in the event of a bankruptcy, the Minister be satisfied to be a preferred creditor in respect of the property of the bankrupt and even to rank after a number of other creditors.

As the Trial Judge acknowledged, there have been two decisions[21] which favoured giving subsection 52(10) precedence over paragraph 107(1)(j). However, the vast majority of judgments and decisions favour the opposite position, and give the provision set out in paragraph 107(1)(j) definite priority. That position, which seems to me to be conclusive and compelling, is plainly based on the unavoidable presence and inclusion in the first portion of subsection 107(1) of the words “Subject to the rights of secured creditors” (which the Minister is not) and, in paragraph (j), of the words “notwithstanding any statutory preference to the contrary”.

As to the intention of Parliament in respect of the wording of that paragraph, Mr. Justice Pigeon’s opinion was categorical:[22]

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, namely, …. The purpose of this part of the provision is obvious. Parliament intended to put all debts to a government on an equal footing …. [Emphasis mine.]

The underlined portion of this passage alone indicates in the clearest possible terms that this precedence applies equally to both Parliament and, as in Rainville, a provincial legislature.

The same opinion is stated in Deloitte,[23] in which Wilson J. cited with approval the conclusion reached by Chief Justice Cowan, who wrote, in Re Black Forest Restaurant Ltd.;[24] after comparing a provincial statute with the provision in section 107 of the Bankruptcy Act:

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 Workers’ 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.

Mr. Justice Lamer [as he then was] stated an equally categorical conclusion on the same point:[25]

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.

These decisions seem to me to be conclusive: there is no real contradiction between subsection 52(10) and paragraph 107(1)(j), and the provisions of the Bankruptcy Act are sufficiently clear to ward off any intrusion by the Excise Tax Act into its field of operation.

Second, I find that the Bank is correct in arguing that even if the assignment of the debt operates to give it secured creditor status, the property in which it holds such security is nonetheless, in the event of bankruptcy, a component of the assets of the bankruptcy.

Section 2 of the Bankruptcy Act defines the key word:

2. …

“property” includes 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;

That section also defines the expressions “creditor” and “secured creditor”:

2. …

“creditor” means a person having a claim, preferred, secured or unsecured, provable as a claim under this Act;

“secured creditor” means a person holding a mortgage, hypothec, pledge, charge, lien or privilege on or against the property of the debtor or any part thereof as security for a debt due or accruing due to him from the debtor, or a person whose claim is based upon, or secured by, a negotiable instrument held as collateral security and upon which the debtor is only indirectly or secondarily liable;

Lastly, section 47 of that Act describes the components of the property of a bankrupt which is divisible among his or her creditors. It shall comprise:

47. …

(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. [Emphasis added.]

It seems to me to be clear from these definitions that where a debt owed to a bank is accompanied by security in the form of an assignment of book debts (accounts receivables) it is still property of the bankrupt, and at the time of the receivership order it automatically vests in the trustee. This is what Lamer J. unequivocally stated in Federal Business Development Bank,[26] in which he cited a number of decisions with approval. He wrote:

Under s. 47 of the Bankruptcy Act, the fact that property is owned by the bankrupt at the time of the bankruptcy is sufficient to make it part of the bankrupt’s estate and for it to pass to the trustee in bankruptcy automatically. Thus the immovable is “property of the bankrupt” within the meaning of s. 47 of the Act, regardless of the rights conferred on the trustee by the security.

In that judgment, he concluded:[27]

I therefore consider that the claims of the parties to the case must be ranked in the order determined by the Bankruptcy Act. As the federal Parliament has exclusive jurisdiction to set priorities in a bankruptcy matter, the scheme of distribution in s. 107 of the Bankruptcy Act must be applied here. As respondent’s claim was covered by s. 107(1)(h) of the Act, respondent is a preferred creditor whose claim must be ranked after that of appellant, whether or not the trustee realized on his security outside the bankruptcy proceeding. Once the bankruptcy has occurred, the federal statute applies to all creditors of the debtor.

There is also another aspect to the status of the creditor bank from which it can be concluded that even though the bank is a secured creditor the debt owing to it gave it no absolute property right, at the time the debt became payable, in the moneys deriving from the ultimate collection of the account receivable.

In the case before us, the debtor still has a right to prevent its creditor from collecting the account in question, by paying its debt. That is what is meant by the expression “equity of redemption”, to which Major J. referred in Alberta (Treasury Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R.[28] That right applies in the same manner in favour of the trustee, successor and heir of all the rights the debtor had before being put into bankruptcy.

It may rightly then be concluded, as stated in section 47, cited supra, that the ability to repay the debt is “[a power] in or over or in respect of the property [which] might have been exercised by the bankrupt for his own benefit”.

Third, the appellant argues that when the Bank decided to collect the accounts receivable itself, it substituted itself for its debtor and thereby became a “manufacturer” or “producer” within the meaning of the Excise Tax Act, and subject to the same obligation: to pay the tax imposed.

The relevant portion of section 2 describes what these words include:

2. (1) …

“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,

On this point, I can only adopt the reasoning of the Trial Judge, who stated [at pages 226-227]:

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.

Lastly, I do not share the appellant’s opinion, when she argues that by collecting the bankrupt’s accounts receivable the Bank wrongfully appropriated the portion of the moneys collected that represented the excise tax payable.

This question was examined in a decision[29] in which the Court expressed the opinion that an excise tax is an indirect tax, a tax which is “demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another”.[30] In that case, the appellant wanted to obtain repayment of part of the price paid by it for its purchase, on the ground that it represented the sales tax payable to the Minister by the vendor as intermediary. The Court concluded that the sales taxes set out in the Excise Tax Act are not taxes on property, but taxes on business transactions, which are collected at the time of the transaction. On this point, MacGuigan J.A. wrote:[31]

The tax was not, however, paid on the personal property of a band on a reserve, because it was not paid by the band at all, but by a licensed manufacturer, importer, or wholesaler. Thus, even where … the goods passed to the appellant on the reserve, that is immaterial, because the tax was levied on the vendor with respect to his sale of the goods, and not on the Band as purchaser or on the property of the Band.

Thus it must be understood that when the manufacturer is paid the price of the item it is selling, it does not collect a tax from the purchaser as agent for the Minister, since only the manufacturer, and not the purchaser, is liable for the tax. The manufacturer is the direct debtor of the Minister, and plainly the Minister is not entitled to look to the consumer of the product for payment. Accordingly, since the Minister’s relationship with the manufacturer is strictly that of creditor to debtor, and not of principal to agent, it cannot be said that when the manufacturer collects what is owed to it, it is enriching itself by collecting an excise tax. This being the case, the tax is a simple debt owing by the vendor manufacturer and, for recovery purposes, in the event of a bankruptcy it has the rank accorded to it in paragraph 107(1)(j), cited supra.

In conclusion, I find that, in the circumstances, the Minister had to make his claim to the trustee, and be given priority as a preferred creditor, based on his ranking, and not seek payment directly from the respondent.

For these reasons, I am of the opinion that both appeals must be dismissed with costs.

Hugessen J.A. I concur.

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