Judgments

[1997] 3 F.C. 29

A-464-93

Her Majesty the Queen (Appellant)

v.

Mercantile Bank of Canada, National Bank of Canada (Respondents)

A-607-94

Her Majesty the Queen (Appellant)

v.

National Bank of Canada (Respondent)

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

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

Financial institutions — Banks — Where security given under Bank Act, s. 178 by licensed manufacturers to banks (bills of lading and warehouse receipts), Excise Tax Act, s. 52(10) cannot apply to allow M.N.R. to claim excise tax from banks.

Customs and Excise — Excise Tax Act — Excise Tax Act, s. 52(10) cannot apply to allow M.N.R. to claim excise tax from banks with respect to licensed manufacturers’ goods on which security given to banks under Bank Act, s. 178.

The appellant banks granted the respondent manufacturers a line of credit, taking security under section 178 of the Bank Act as guarantee (warehouse receipts or bills of lading). When the manufacturers, licensed for the purposes of the Excise Tax Act, defaulted on the payment of their debts, the banks decided to realize on their security and instructed their agent to take possession of all the goods covered by the security, consisting of raw materials, inventories of finished products and accounts receivable. At the same time, relying on subsection 52(10) of the Excise Tax Act, the Minister of National Revenue claimed from the banks an amount equivalent to the sales tax said to be payable in respect of the goods sold and delivered by the two banks after they took possession of the goods that comprised the security given to them. Ultimately, the manufacturers declared bankruptcy and the Minister filed his claim with the trustee. These were appeals from Trial Division decisions, in one case (file no. A-464-93) dismissing and in the other case (A-607-94), allowing the appellant’s application. In both cases, the question was whether, having regard to the specific nature of the security given by the borrowers to the lending institutions, subsection 52(10) of the Excise Tax Act could apply to allow the Minister to claim excise tax from the banks.

Held (Décary J.A. dissenting), the appeal in file no. A-464-93 should be dismissed but the appeal in file no. A-607-94 should be allowed.

Per Chevalier D.J.: Pursuant to section 178 of the Bank Act, in the event that the borrower fails to pay the debt, the bank has the absolute right to sell the property that is the subject of the security, and the moneys it obtains upon the sale belong to the bank against any other creditor of the borrower. It seems clear that there is no relationship between the book debt to which this provision refers and the bill of lading or warehouse receipt to which sections 178 and 179 of the Bank Act apply. Consequently, the Minister may not exercise his remedy against either the bank or the trustee where the debtor has declared bankruptcy, any more than he can where the debtor is in solvent, otherwise than under paragraph 107(1)(j). A clear distinction must be drawn between the security that results from an assignment of debts and the security defined in section 178. The first falls within provincial jurisdiction over property and civil rights, while the second is exclusively the creature of federal statute, the Bank Act. In this case, it is the Bank Act that must be considered in order to determine the rights of the parties, and the Minister will have to look elsewhere to find what remedy may be available to him.

The reasons of Décary J.A. (dissenting) were those rendered in Canada v. National Bank of Canada, [1997] 3 F.C. 3supra.

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, ss. 2 “bill of lading”, “warehouse receipt”, 178, 179(1),(7),(14).

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

Bankruptcy Act, R.S.C. 1970, c. B-3, ss. 49(2), 107(1)(j).

Excise Tax Act, R.S.C. 1970, c. E-13, ss. 27(1)(a)(i) (as am. by S.C. 1986, c. 9, s. 16), 52(10).

CASES JUDICIALLY CONSIDERED

APPLIED:

Landry Pulpwood Co. v. Banque Canadienne Nationale, [1927] S.C.R. 605; [1928] 1 D.L.R. 493; Banque Canadienne Nationale v. Lefaivre et Right Electronics Co. Ltd. (1950), 32 C.B.R. 1; [1951] Que. S.C. 75; Bank of Montreal v. Hall, [1990] 1 S.C.R. 121; (1990), 65 D.L.R. (4th) 361; [1990] 2 W.W.R. 193; 82 Sask. R. 120; 46 B.L.R. 161; 104 N.R. 110; 9 P.P.S.A.C. 177; C.I.B.C. v. R. (1984), 52 C.B.R. (N.S.) 145; [1985] CTC 442; 8 C.E.R. 4; 84 DTC 6426 (F.C.T.D.); Flintoft v. Royal Bank of Canada, [1964] S.C.R. 631; (1964), 47 D.L.R. (2d) 141; 49 W.W.R. 301; 7 C.B.R. (N.S.) 78.

DISTINGUISHED:

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.).

APPEALS from Trial Division decisions (Canada v. Mercantile Bank of Canada, [1993] F.C.J. No. 214 (T.D.) (QL) (file no. A-464-93) and Minister of National Revenue v. National Bank of Canada (1994), 85 F.T.R. 143 (F.C.T.D.) (in file no. A-607-94)), in the first case dismissing, in the second, allowing, the appellant’s action to recover, under subsection 52(10) of the Excise Tax Act, the excise tax from the banks. The appeal should be dismissed in file no. A-464-93 and allowed in file no. A-607-94.

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.

EDITOR’S NOTE

The reasons for judgment rendered by Décary J.A. (dissenting) in Canada v. National Bank of Canada, [1997] 3 F.C. 3 supra, also apply to the present appeals.

* * *

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

Chevalier D.J.: These are appeals from two judgments, the first by Pinard J. (file no. A-464-93) in Canada v. Mercantile Bank of Canada,[1] and the second by Nadon J. (file no. A-607-94) in Minister of National Revenue v. National Bank of Canada,[2] which were heard jointly on appeal.

THE FACTS

In file no. A-464-93

By supplementary letters patent, the National Bank of Canada and the Mercantile Bank of Canada were incorporated as a single corporation under the corporate name National Bank of Canada.

They granted a line of credit to Admiral Corporation Ltd. (Admiral), a manufacturer which held a licence issued under the Excise Tax Act,[3] subparagraph 27(1)(a)(i) [as am. by S.C. 1986, c. 9, s. 16] of which requires a manufacturer of this sort to pay sales tax to the appellant on the price of all goods delivered to a purchaser.

To guarantee repayment of the advances made, Admiral gave security under section 178 of the Bank Act[4] (formerly section 88 [R.S.C. 1970, c. B-1] and now section 427 [S.C. 1991, c. 46, s. 427]).

When the debtor defaulted on the payment of its debt ($40,000,000), the banks decided to realize on their security and instructed their agent to take possession of all the goods covered by the security, consisting of raw materials, inventories of finished products and accounts receivable.

At the same time, pursuant to subsection 52(10) of the Excise Tax Act, the Minister of National Revenue claimed $302,009.17 from the National Bank of Canada, an amount equivalent to the sales tax he claimed was payable in respect of the goods sold and delivered by the two banks after they took possession of the goods that comprised the security given to them.

Ultimately, Admiral declared bankruptcy and the Minister filed his claim with the trustee.

In the case at bar, an action has been brought against the banks for failing to respond to the demand made by the Minister for payment of his claim.

In file no. A-607-94

The facts in the preceding case are the same as in this instance, except that the National Bank of Canada was the only lending institution, the amount owed by the borrower King Seagrave (1982) Inc. was different ($995,433) and the Minister’s claim was $113,506.70.

THE JUDGMENTS a quo

In file no. A-464-93

Pinard J. dismissed the appellant’s application. He did not state his reasons, and simply referred the parties to a judgment in another case, Canada v. National Bank of Canada.[5] It should be noted that in so doing he failed to address the real problem, which in fact was not identical to that in Canada v. National Bank of Canada, as that case did not involve section 178 of the Bank Act.

In file no. A-607-94

Nadon J. allowed the application. He treated the claim as if it were for federal sales tax. He also concluded that subsection 52(10) of the Excise Tax Act was applicable to the security held by the Bank under the Bank Act.

ANALYSIS

It is my view that the appeal in file no. A-464-93 should be dismissed but that the appeal in file no. A-607-94 should be allowed.

In both of the instant cases, the real problem that arose was whether, having regard to the specific nature of the security given by the borrowers to the lending institutions, subsection 52(10) of the Excise Tax Act could apply to allow the Minister to claim excise tax from the banks in question.

The parties filed identical statements of claim on one specific point. The security given by the borrowers was given in the form and substance prescribed by (then) section 178 of the Bank Act.

The relevant portion of that section reads as follows:

178. (1) A bank may lend money and make advances,

…

(b) to any person engaged in business as a manufacturer, on the security of goods, wares and merchandise manufactured or produced by him or procured for such manufacture or production and of goods, wares and merchandise used in or procured for the packing of goods, wares and merchandise so manufactured or produced,

…

and the security may be given by signature and delivery to the bank by or on behalf of the person giving the security of a document in the form set out in Schedule VI or VII or in a form to the like effect.

(2) Delivery of a document giving security on property to a bank under the authority of this section vests in the bank in respect of the property therein described

(a) of which the person giving security is the owner at the time of the delivery of the document, or

(b) of which that person becomes the owner at any time thereafter before the release of the security by the bank, whether or not the property is in existence at the time of the delivery,

the following rights and powers, namely,

(c) if the property is property on which security is given under paragraph (1)(a),(b),(e),(f) or (i), … the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which such property was described.

Subsection 179(1) of that Act is also relevant:

179. (1) All the rights and powers of a bank in respect of the property mentioned in or covered by a warehouse receipt or bill of lading acquired and held by the bank, and the rights and powers of the bank in respect of the property covered by a security given to the bank under section 178 that are the same as if the bank had acquired a warehouse receipt or bill of lading in which such property was described, have, subject to subsection 178(4) and subsections (3) to (6) of this section, priority over all rights subsequently acquired in, on or in respect of such property, and also over any claim of any unpaid vendor.

The reference in the above provision to the expressions “bill of lading” and “warehouse receipt” should be noted. Both are defined in the Act (section 2):

2. (1) …

“bill of lading” includes all receipts for goods, wares and merchandise accompanied by an undertaking

(a) to move the goods, wares and merchandise from the place where they were received to some other place, by any means whatever, or

(b) to deliver at a place other than the place where the goods, wares and merchandise were received a like quantity of goods, wares and merchandise of the same or a similar grade or kind.

…

“warehouse receipt” includes

(a) any receipt given by any person for goods, wares and merchandise in his actual, visible and continued possession as bailee thereof in good faith and not as of his own property;

Lastly, the rights and remedies granted to a bank and deriving from such security are set out in subsections 179(7) and (14):

179. …

(7) In the event of non-payment of any debt, liability, loan or advance, as security for the payment of which a bank has acquired and holds a warehouse receipt or bill of lading or has taken any security under section 178, the bank may sell all or any part of the property mentioned therein or covered thereby and apply the proceeds against such debt, liability, loan or advance, with interest and expenses, returning the surplus, if any, to the person by whom such security was given.

…

(14) A bank may assign to any person all or any of its rights and powers in respect of any property on which security has been given to it under paragraph 178(1)(f),(g), (h),(i) or (j), whereupon such person has all or any of the assigned rights and powers of the bank under such security.

As for the provisions of the Excise Tax Act that are relevant to these proceedings, subsection 27(1) thereof starts by saying that the tax in question is a consumption or sales tax on the sale price of all goods:

27. (1) …

(a) produced or manufactured in Canada

(i) payable … 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….

Subsection 52(10) of this Act then provides:

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.

There is conclusive case law as to the precise nature of the rights conferred by section 178, supra.

First, it tells us that the effect of a lien created by this provision must be determined solely by applying the Bank Act.[6]

Second, it says that this right is a sui generis property right.[7] The legal title is as complete as the borrower’s title in the property that is the subject of the security, whether the property exists at the time the security was given or comes into the borrower’s possession at a later date.[8]

In the event that the borrower fails to pay the debt, the bank has the absolute right to sell the property that is the subject of the security, and the moneys it obtains upon the sale belong to the bank as against any other creditor of the borrower. This is what La Forest J. held in Bank of Montreal v. Hall[9] when he referred with approval to the opinion of Muldoon J. in C.I.B.C. v. R.:[10]

In the interpretation of the Bank Act security enunciated by the Supreme Court of Canada and latterly by Grant D.J., one can appreciate the great commercial utility and overriding importance which is inherent in Parliament’s creation of that security. The bank obtains and may assert its right to the goods and their proceeds against the world, except as only Parliament itself may reduce or modify those rights. [Emphasis added by La Forest J.]

As can be seen supra, subsection 52(10) of the Excise Tax Act allows the Minister to claim the tax from “any person [who] has received from a licensee any assignment of any book debt or of any negotiable instrument of title to any such debt”. (Emphasis added.)

It seems clear that there is no relationship between the book debt to which this provision refers and the bill of lading or warehouse receipt to which sections 178 and 179 of the Bank Act apply. It seems to me to be an unassailable fact that, as a logical consequence, the Minister may not exercise his remedy against either the Bank or the trustee where the debtor has declared bankruptcy, any more than he can where the debtor is insolvent, otherwise than under paragraph 107(1)(j):

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

…

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

On this point, Judson J. stated the following in Flintoft v. Royal Bank of Canada:[11]

Section 88 is a unique form of security. I know of no other jurisdiction where it exists. It permits certain classes of persons not of a custodier [sic] character, in this case a manufacturer, to give security on their own goods with the consequences above defined. Notwithstanding this, with the consent of the bank, the one who gives the security sells in the ordinary course of business and gives a good title to purchasers from him. But this does not mean that he owns the book debts when he has sold the goods. To me the fallacy in the dissenting reasons is the assumption that there is ownership of the book debts in the bank’s customer once the goods have been sold and that the bank can only recover these book debts if it is the assignee of them.

We are not concerned here with the rights of a purchaser for value without notice of the proceeds of the sale of the bank’s security. It is true that s. 63 of the Bankruptcy Act avoids in favour of the trustee the assignment of book debts held by the bank because of defective registration. Subject to this, the trustee has no higher rights than the bankrupt and he takes the property of the bankrupt merely as a successor in interest and not as an innocent purchaser for value without notice. He takes the property of the bankrupt subject to the express trust created by the agreement noted above, which, in my opinion, cannot be characterized as an assignment of books debts in another form. When these debts, the proceeds of the sale of the s. 88 security, come into existence they are subject to the agreement between bank and customer. As between these two the customer has nothing to assign to the bank. The actual assignment of book debts which was signed does no more than facilitate collection. Any other assignment, whether general or specific, of these debts by the customer to a third party would fail unless the third party was an innocent purchaser for value without notice.

In short, a clear distinction must be drawn between the security that results from an assignment of debts and the security defined in section 178. The first falls within provincial jurisdiction over property and civil rights, while the second is exclusively the creature of a federal statute, the Bank Act. It is the Bank Act that must be considered in order to determine the rights of the parties, and it seems clear to me that in order to claim what is owing to him, the Minister will have to look elsewhere to find what remedy may be available to him.

In light of this conclusion, I do not believe it would be useful to discuss the other arguments presented by the parties involved in each of the instant appeals.

For these reasons, it is my view that the appeal in file no. A-607-94 should be allowed and that the respondent’s application should be dismissed with costs in both courts.

In file no. A-464-93, the appeal should be dismissed with costs and the judgment at trial affirmed.

Hugessen J.A.: I concur.

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