T-2725-84
Lennox Industries (Canada) Ltd. (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: LENNOX INDUSTRIES (CANADA) LTD. V. CANADA
Trial Division, Reed J.—Calgary, December 16,
1986; Ottawa, January 5, 1987.
Equity — Tracing — Claim for recovery of money stolen by
employee — Crown claiming for taxes owing on stolen funds
— Priorities — Stolen goods in thief hands remaining vic
tim's property — Stolen monies impressed with a trust —
May be followed and recovered by true owner unless acquired
by bona fide purchaser for value without notice — "Fruits" of
stolen property also recoverable — When misappropriated
funds mixed with wrong-doer's and monies withdrawn, wrong
doer deemed to have withdrawn own first — Doctrine of
tracing applicable herein — Declaration plaintiff entitled to
funds and profits therefrom traced as stolen from it.
Crown — Prerogatives — Priority — Claim by plaintiff for
recovery of monies stolen from it and by Crown for taxes
owing on stolen funds — Application of doctrine of tracing —
Plaintiff entitled to proceeds derived from stolen funds —
Prerogative right of Crown to priority of payment on remain
ing assets — Debts of equal degree — Respective claims
unsecured — Both parties judgment creditors — Crown's
claim not incurred in course of ordinary commercial
transaction.
Income tax — Collection — Priority among creditors —
Recovery from thief s assets sought by plaintiff for monies
stolen and by Crown for recovery of taxes owing on said
monies — Doctrine of tracing applied — Plaintiff entitled to
proceeds derived from stolen funds but not to pro rata share of
remaining assets — Debts of equal degree — Respective
claims flowing from position of parties as judgment creditors
— Claims unsecured.
Constitutional law — Charter of Rights — Equality rights
— Claim by plaintiff for recovery of monies stolen and by
Crown for unpaid taxes owing on monies — Crown's priority
claim not infringing s. 15 rights — In any event, s. 15
inapplicable as events occurring before coming into force of
provision — Canadian Charter of Rights and Freedoms, being
Part I of the Constitution Act, 1982, Schedule B, Canada Act
1982, 1982, c. 11 (U.K.), ss. 15, 32(1).
The plaintiff claims recovery of monies stolen from it by a
former employee. The Crown seeks to recover the taxes owing
on the stolen funds as income in the hands of the employee.
Funds deposited in the employee's savings account were seized
to pay a portion of the taxes. The employee's residence and two
automobiles were eventually sold and the proceeds of the sales
placed in an interest-bearing trust account pending the outcome
of the present litigation.
The plaintiff seeks a declaration that it is entitled to the
funds and profits which can be traced as having been stolen and
to a pro rata share with the Crown of the remaining assets. In
support of its position, it argues that the Crown's prerogative
right to priority infringes section 15 of the Charter; that certain
of the assets in question belong to it by virtue of the doctrine of
tracing and that the debts owed to the plaintiff and the Crown
are not of "equal degree".
Held, the plaintiff's claim respecting amounts to be recov
ered by virtue of the doctrine of tracing should be allowed. Its
claim to a pro rata share of the remaining assets should be
dismissed.
The purpose of section 15 of the Charter is to ensure that the
law treats equals equally. In proceedings for tax collection, the
Crown stands in the place of all taxpayers, acts for all citizens
who benefit from the spending of the revenues so collected. The
Crown as creditor is therefore not in the same position as the
private individual. The plaintiff's submission, that the Crown's
priority claim is a distinction that constitutes discrimination,
fails. In any event, section 15 is inapplicable since the circum
stances giving rise to the claims occurred before the coming
into force of that provision which has no retroactive effect.
The plaintiff's second argument is based on the principle that
stolen goods in the hands of a thief, or a trustee who has
misappropriated funds, remain the property of the person from
whom they were stolen. The monies stolen are impressed with a
trust and may be recovered by the true owner unless acquired
by a bona fide purchaser for value, without notice of the theft
or fraud. Any proceeds derived from the stolen property are
recoverable as well. When misappropriated funds or the pro
ceeds therefrom are mixed with the wrong-doer's own funds,
and monies are withdrawn from the mixed funds, the wrong
doer is deemed to have withdrawn his own funds first (the first
out principle). Applying those principles, a declaration should
be made that the plaintiff was entitled, as owner, to the
amounts which could be traced to monies stolen from it.
The plaintiff's submission, that its claim and that of the
Crown are not debts of equal degree and that it should be
entitled to a share of the remaining assets on a pro rata basis
with the Crown, was dismissed. The plaintiff's claim (for the
return of the funds or damages for conversion) and the Crown's
claim (for unpaid taxes) were equally unsecured—except for
the monies belonging to the plaintiff by virtue of the doctrine of
tracing. Both claims flow from the respective positions of the
parties as judgment creditors. Moreover, the Crown's claim is
not one incurred in the course of an ordinary commercial or
industrial transaction. Since both claims are of equal degree,
the Crown's prerogative right comes into play to accord it
priority of payment.
CASES JUDICIALLY CONSIDERED
CONSIDERED:
Household Realty Corporation Ltd. et al. v. Attorney
General of Canada, [1980] 1 S.C.R. 423; (1979), 29
N.R. 174 (sub nom. MacCulloch & Co. Ltd. et al. v.
Attorney General of Canada); Smith, Kline & French
Laboratories Limited v. Attorney General of Canada,
[1986] 1 F.C. 274; 7 C.P.R. (3d) 145 (T.D.); affd [1987]
2 F.C. 359 (C.A.); Banque Belge v. Hambrouck, [1921]
1 K.B. 321 (C.A.); B.C. Teachers' Credit Union v. Bet-
terly (1975), 61 D.L.R. (3d) 755 (B.C.S.C.); Nelson v.
Larholt, [1947] 2 All E.R. 751 (K.B.D.); Re Kolari
(1981), 36 O.R. (2d) 473 (Dist. Ct.).
REFERRED TO:
Minister of National Revenue v. Eldridge, Olva Diana,
[1965] 1 Ex.C.R. 758; (1964), 64 DTC 5338; The Queen
v. Poynton (1972), 72 DTC 6329 (Ont. C.A.); The Queen
v. Bank of Nova Scotia (1885), 11 S.C.R. 1; Re Marten;
Re Royal Bank of Canada and The Queen in right of
Canada (1981), 130 D.L.R. (3d) 607 (Ont. Div. Ct.);
Wright v. Canada (Attorney General), Ont. Dist. Ct.,
judgment dated October 6, 1986, file no. 3356, not yet
reported; Surrey Credit Union v. Mendonca et al. (1985),
19 C.R.R. 230 (B.C.S.C.); Law Society of Upper Canada
v. Skapinker, [1984],1 S.C.R. 357; (1984), 53 N.R. 169;
Hunter et al. v. Southam Inc., [1984] 2 S.C.R. 145;
(1985), 55 N.R. 241; R. v. Big M Drug Mart Ltd. et al.,
[1985] 1 S.C.R. 295; (1985), 58 N.R. 81; Re Blackhawk
Downs, Inc. and Arnold et al., [1973] 3 O.R. 729 (H.C.);
In re Hallett's Estate (1878), 13 Ch. D. 696 (C.A.); In re
Oatway, [1903] 2 Ch. 356; Re Henley & Co. (1878), 9
Ch. D. 469 (C.A.); City of Toronto, and Toronto Electric
Commissioners v. Wade, [1931] O.R. 470 (S.C.); The
Queen v. Workmen's Compensation Board and City of
Edmonton (1962), 36 D.L.R. (2d) 166 (Alta. S.C.); affd
(1963), 42 W.W.R. 226 (Alta. C.A.).
COUNSEL:
James Lebo and Allan Fradsham for
plaintiff.
Larry Huculak for defendant.
SOLICITORS:
MacKimmie Matthews, Calgary, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
REED J.: This case deals with the claim of a
person from whom certain monies have been
stolen, for recovery of those monies, and the claim
of the Crown for taxes owing on the stolen funds,
as income in the hands of the thief. Both claims
are against the assets of Mathew N. Hasiuk, the
person convicted of the theft in question. There is
not enough money realizable from his assets to
satisfy both claims.
Mathew N. Hasiuk was employed by the
plaintiff from 1956 to 1982. During the course of
that employment he stole from the plaintiff
$1,064,386.79. The plaintiff recovered judgment
for this amount on June 27, 1983. Judgment for
interest on the money stolen plus costs was award
ed on September 6, 1985. This last amounted to
$1,107,999.83 which makes a total owing to the
plaintiff under both judgments of $2,172,386.62.
On January 14, 1983 the Minister of National
Revenue had issued assessments against Mathew
N. Hasiuk for the years 1976 to 1981 inclusive.
The total amount of these assessments, including
penalties and interest was $702,183.25. The assess
ments were in relation to certain unreported busi
ness income of Mr. Hasiuk (i.e. the money stolen
from the plaintiff) and an unreported capital gain
in 1981 arising out of a sale of real property. The
amount of the assessment attributable to unreport-
ed business income was $676,827.22; the amount
attributable to the unreported capital gain was
$25,356.03.
On January 18, 1983 the Minister of National
Revenue obtained a writ against Mathew Hasiuk
for payment of $509,667.10. As a result thereof on
January 25, 1983 funds in the amount of
$354,096.35, on deposit in Hasiuk's savings
account at the Canadian Imperial Bank of Com
merce (58th Avenue S.E., Calgary) were paid, to
the Department of National Revenue, in response
to a demand on third parties which had been
served on the bank. In addition, payments being
made under what will be called the Mosco mort
gage, which Mr. Hasiuk held as mortgagee, were
made payable to the Department, in response to a
demand on third parties served on the mortgagors.
While the sums paid out of the savings account
and pursuant to the Mosco mortgage were credited
to the unpaid taxes, as of June 30, 1986 the
Department was still owed $115,914.78 for taxes
plus $303,481.54 in interest and penalties. Interest
continues to accrue on the unpaid taxes. The
Hasiuk Calgary residence was eventually sold in
1985 as were two automobiles owned by him and
the proceeds of those sales were placed in an
interest bearing trust account pending the outcome
of this litigation.
The plaintiff seeks a declaration that it is en
titled to: a large proportion of the money seized
from the Hasiuk savings account as belonging to it
alone and a pro rata share of the rest of the money
seized from that account; the payments accrued
and accruing under the Mosco mortgage; 50% of
the proceeds of the sale of the two motor vehicles
plus a pro rata share of the rest of those proceeds;
and, a pro rata share of the proceeds from the sale
of the Calgary residence.
The Crown's argument is simple. The funds
stolen from the plaintiff by Mr. Hasiuk is income
in his hands and taxes are payable thereon. The
principle is well established that proceeds fraudu
lently obtained or acquired from an illegal opera
tion or illicit business are subject to tax: Minister
of National Revenue v. Eldridge, Olva Diana,
[1965] 1 Ex.C.R. 758; (1964), 64 DTC 5338; The
Queen v. Poynton (1972), 72 DTC 6329 (Ont.
C.A.). Equally, it is clear law that the Crown has,
as a matter of prerogative right, a priority with
respect to debts owed to it: The Queen v. Bank of
Nova Scotia (1885), 11 S.C.R. 1; Re Marten; Re
Royal Bank of Canada and The Queen in right of
Canada (1981), 130 D.L.R. (3d) 607 (Ont. Div.
Ct.); Household Realty Corporation Ltd. et al. v.
Attorney General of Canada, [1980] 1 S.C.R. 423;
(1979), 29 N.R. 174 [sub nom. MacCulloch &
Co. Ltd. et al. v. Attorney General of Canada].
The Crown has the right to have any claims it
might have, paid in full prior to the payment of
claims held by private individuals. I quote from
the decision of Mr. Justice Ritchie, speaking for
the Supreme Court, at pages 426-427 S.C.R.; 178
N.R., of the Household Realty case:
I am satisfied that where a debt or claim due to the Crown
comes into competition with the debt or claim of a subject and
the claims are "of equal degree", the claim of the Crown
prevails ....
The plaintiff argues: (1) whatever may have
been the prerogative rights of the Crown at
common law, with the enactment of section 15 of
the Canadian Charter of Rights and Freedoms
[being Part I of the Constitution Act, 1982,
Schedule B, Canada Act 1982, 1982, c. 11 (U.K.)]
the Crown's priority with respect to the payment
of debts as set out above has been relinquished; (2)
certain of the assets in question in any event, by
virtue of the doctrine of tracing, belong to it free
of any claim by the Crown; and (3) the debts owed
to the plaintiff and the Crown in this case are not
of "equal degree".
Section 15 of the Canadian Charter of Rights and
Freedoms
With respect to the first argument reference is
made to the decision of the Ontario District Court
in Wright v. Canada (Attorney General)
(unreported decision of October 6, 1986, file
number 3356). In that case the Court indicated
that the Crown's prerogative right to priority was
prima facie invalid. Subsection 15(1) of the Chart
er provides:
15. (ï) Every individual is equal before and under the law
and has the right to the equal protection and equal benefit of
the law without discrimination and, in particular, without
discrimination based on race, national or ethnic origin, colour,
religion, sex, age or mental or physical disability.
The Ontario Court held that the Charter was
obviously intended to apply to governmental
action:
32. (1) This Charter applies
(a) to the Parliament and government of Canada in respect
of all matters within the authority of Parliament including all
matters relating to the Yukon Territory and Northwest
Territories; and
(b) to the legislature and government of each province in
respect of all matters within the authority of the legislature
of each province.
And, at page 14 of its decision the Ontario Court
held that the Crown prerogative right to priority
was clearly discriminatory:
The Crown priority claim has an inevitable and drastic dis
criminatory effect on the applicant's rights ....
The plaintiff recognizes at the outset that it has
a difficulty to meet in seeking to rely on section
15. The plaintiff is a corporation and the weight of
the jurisprudence, so far, indicates that only natu
ral persons can take advantage of the guarantees
accorded by section 15: Smith, Kline & French
Laboratories Limited v. Attorney General of
Canada, [1986] 1 F.C. 274, at page 316; 7 C.P.R.
(3d) 145 (T.D.), at page 192; Surrey Credit Union
v. Mendonca et al. (1985), 19 C.R.R. 230
(B.C.S.C.), at page 232. Counsel for the plaintiff
argues that a liberal and purposive interpretation
of section 15 requires that the word "individual"
be considered as including corporations which are
persons in the eyes of the law. In support of its
argument the plaintiff cites all the usual passages
calling for a liberal and purposive interpretation of
the Charter: Law Society of Upper Canada v.
Skapinker, [1984] 1 S.C.R. 357, at page 366;
(1984), 53 N.R. 169, at page 180; Hunter et al. v.
Southam Inc., [1984] 2 S.C.R. 145, at pages
155-156; (1985), 55 N.R. 241, at pages 247-248;
R. v. Big M Drug Mart Ltd. et al., [1985] 1
S.C.R. 295, at pages 343-344; (1985), 58 N.R. 81,
at page 112. I do not find it necessary to decide
this point because I do not think the argument
based on section 15 can succeed in any event.
The purpose of section 15 is to require the law to
apply to individuals and groups of individuals
(including or excluding corporations as may finally
be determined by the jurisprudence) without
regard to arbitrary distinctions. It is not every
distinction or difference in the law which consti
tutes discrimination. Priorities for the payment of
debts may be established with respect to several
criteria, e.g. time (first incurred creates a first
charge); wages (takes precedence over other types
of debts). These distinctions are not discrimination
although they obviously operate in a disadvanta
geous way for persons holding a lower ranking
priority. But what is the discrimination alleged in
this case? It is that the Crown as creditor is
treated in a more advantageous way than private
individuals. I cannot find that this constitutes dis
crimination. The purpose of section 15 is to ensure
that the law treats equals equally. The Crown in
proceedings for tax collection is standing in the
place of all taxpayers, or indeed for all citizens
who benefit from the spending of tax revenues so
collected. The Crown as creditor is not in the same
position as the private individual. As the Court of
Appeal noted in the recent decision in Smith,
Kline & French Laboratories Ltd. v. Canada
(Attorney General), [1987] 2 F.C. 359, at page
366:
At the most basic level, the equality rights guaranteed by
section 15 can only be the right of those similarly situated to
receive similar treatment.
I cannot classify the Crown as being similarly
situated to the plaintiff. I do not think the Crown's
priority claim in this case is a distinction or une -
quality to which section 15 was meant to apply.
The situation might be different if the Crown were
operating in a commercial or trade capacity and
had incurred the debts on the same basis as the
private citizen. But in the collection of income tax
the Crown is not acting as a private person would,
it is acting in its governmental capacity.
Whether the effect of the prerogative priority
claim is good social policy or "just" is a different
issue. I note, for example, that several studies have
recommended the abolition of that priority: Insol
vency Law and Practice, Report of the Review
Committee (Cmnd. 8558, 1982); Law Reform
Commission of British Columbia Report on The
Crown as Creditor: Priorities and Privileges
(1982); Bankruptcy and Insolvency: Report of the
Study Committee on Bankruptcy and Insolvency
Legislation (Canada 1970). In this last, it is noted
that [at page 123]:
It could even be argued that the government should rank after
ordinary creditors, as the public treasury is, in fact, in a better
position than anyone to bear the inevitable losses.
At the same time, others defend the appropriate
ness of at least a limited Crown priority: Ontario
Law Reform Commission Report on The Enforce
ment of Judgment Debts and Related Matters
[Part 5] (1983), at pages 59 ff.
In any event, I have some doubt that section 15
has any application at all in this case. The writ of
execution on which the Crown bases its claim was
issued January 18, 1983. The writs of execution on
which the plaintiff bases its claim were issued on
July 12, 1983 (for the principal amount stolen)
and on September 9, 1985 (for interest and costs).
The savings account assets were seized by the
Crown on January 24, 1983. The mortgage monies
were seized by third party notice as of the same
date. The motor vehicles and residence were sold
some time in 1985 (though presumably they were
also under seizure by the Crown as of the earlier
date). The statement of claim in this action was
filed November 16, 1984. Section 15 came into
force on April 17, 1985. It is well established that
section 15 does not have and was not intended to
have any retroactive effect. The events which gave
rise to the competing claims of the plaintiff and
the defendant (except for the plaintiff's September
1985 judgment respecting interest and costs) all
occurred before the coming into force of section
15. Therefore I do not think that that section is
applicable but I note that this point was not
argued before me.
The Doctrine of Tracing
To turn now to the plaintiff's second argument:
certain assets, in any event, belong to the plaintiff
by virtue of the doctrine of tracing. The starting
point is the principle that stolen goods in the hands
of a thief, or a trustee who has misappropriated
funds, are not his or her property; they remain the
property of the person from whom they were
stolen. This principle is expressed in Underhill's
Law Relating to Trusts and Trustees, 12th ed.
(1970), at page 243 as follows: "a court of equity
converts a party who has obtained property by
fraud into a trustee from the party who is injured
by that fraud". See: Re Blackhawk Downs, Inc.
and Arnold et al., [1973] 3 O.R. 729 (H.C.), for a
discussion of this principle.
The monies stolen or acquired by fraud are thus
impressed with a trust and may be followed and
recovered by the true owner, unless they are
acquired by a bona fide purchaser for value with-
out notice of the theft or fraud. In Banque Belge v.
Hambrouck, [1921] 1 K.B. 321 (C.A.), at pages
335-336, the principle is expressed in the following
terms:
If, following the principles laid down in In re Hallett's Estate,
it can be ascertained either that the money in the bank, or the
commodity which it has bought, is "the product of, or substi
tute for, the original thing," then it still follows "the nature of
the thing itself'. On these principles it would follow that as the
money paid into the bank can be identified as the product of
the original money, the plaintiffs have the common law right to
claim it, and can sue for money had and received.
And in B.C. Teachers' Credit Union v. Betterly
(1975), 61 D.L.R. (3d) 755 (B.C.S.C.), at page
758:
At the moment Smith stole the $45,000 from the plaintiff,
the law made him a constructive trustee of these moneys for
and on behalf of the plaintiff.
The principle as to the equitable right of tracing is set out in
Nelson et al. v. Larholt, [1947] 2 All E.R. 751 at p. 752, where
Denning, J., held that if property is taken from a rightful owner
it can be recovered from any person into whose hands it can be
traced unless the person who receives it does so in good faith,
for value and without notice of want of authority.
The passage referred to in the decision, by Den-
ning J. in Nelson v. Larholt, [1947] 2 All E.R. 751
(K.B.D.), is as follows [at page 752]:
The relevant legal principles have been much developed in
the last 35 years. A man's money is property which is protected
by law. It may exist in various forms, such as coins, Treasury
notes, cash at bank, cheques, or bills of exchange, but, whatever
its form, it is protected according to one uniform principle. If it
is taken from the rightful owner, or, indeed, from the beneficial
owner, without his authority, he can recover the amount from
any person into whose hands it can be traced unless and until it
reaches one who receives it in good faith and for value and
without notice of the want of authority. Even if the one who
received it acted in good faith, nevertheless, if he had notice—
that is, if he knew or ought to have known of the want of
authority—he must repay. All the cases in the books, such as
cases of trustees or agents who drew cheques on the trust
account or the principal's account for their private purposes, or
cases of directors who paid the company's cheques into their
own account, fall within this principle. The rightful owner can
recover the amount from anyone who takes the cheque with
notice, subject, of course, to the limitation that he cannot
recover twice over. This principle has been evolved by the
courts of law and equity side by side. In equity it took the form
of an action to follow moneys impressed with an express trust
or with a constructive trust owing to a fiduciary relationship. In
law it took the form of an action for money had and received or
damages for conversion of a cheque. It is no longer appropriate,
however, to draw a distinction between law and equity. Princi
ples have now to be stated in the light of their combined effect.
Nor is it necessary to canvass the niceties of the old forms of
action. Remedies now depend on the substance of the right, not
on whether they can be fitted into a particular framework. The
right here is not peculiar to equity or contract or tort, but falls
naturally within the important category of cases where the
court orders restitution if the justice of the case so requires.
Not only is the stolen property recoverable but
any "fruits" derived therefrom are recoverable as
well: D. W. M. Waters, Law of Trusts in Canada
(Toronto, 1974), pages 339-340; Banque Belge
case, supra. This is clearly so with respect to
profits derived from misappropriated trust funds
and it is equally so with respect to profits derived
from the use of stolen monies. To hold otherwise
would be to require a thief to return the principal
amount of the funds stolen but allow him or her to
keep profits derived from the use of those funds. It
is also clear that when misappropriated funds, or
the proceeds therefrom are mixed with the wrong
doer's own funds and monies are withdrawn from
that mixed funds the wrong-doer will be deemed to
have withdrawn his own funds first (the first out
principle): In re Hallett's Estate (1878), 13 Ch. D.
696 (C.A.), esp. at page 727; In re Oatway, [1903]
2 Ch. 356, esp. at page 360. These principles are
the basis of the plaintiff's claim in the present
case.
Applying these principles, then, I think the
plaintiff has established that a declaration should
issue to the effect that it is entitled to a share of
the $354,096.35 seized from the Hasiuk savings
account, free of any claim by the Crown, simply on
the basis that it is entitled as owner to those
proceeds. This amount comprises: $8,000, proceeds
from the sale of a motor home which asset had
originally been purchased with money stolen from
the plaintiff; $34,522.80, proceeds arising out of
repayment of the Mosco mortgage loan (I have not
accepted the argument that $700 per month as
opposed to $531.12 was being paid on that
account)—the mortgage loan had originally been
given from monies stolen from the plaintiff;
$148,936.74, proceeds from the sale of a property
in Fairmont, British Columbia, which property
had originally been purchased and a house built
thereon with money stolen from the plaintiff; and,
$17,100, interest paid to Hasiuk arising out of a
$300,000 investment in a clothing store (Sir Mens'
Wear) which $300,000 had originally been stolen
from the plaintiff. The amounts thus traced are all
proceeds derived from funds stolen from the plain
tiff. They total $208,559.54. Equally the plaintiff
is entitled to a declaration that it should be paid
the proceeds accrued and accruing with respect to
the repayment of the Mosco mortgage and 50% of
the proceeds derived from the sale of the two
motor vehicles as well as the proportionate share
of the interest earned by those proceeds since they
were deposited in the trust account. It is clear from
the evidence that approximately 50% of the monies
paid by Hasiuk for the purchase of those motor
vehicles could be traced to monies stolen from the
plaintiff.
While the savings account was the repository of
deposits from sources other than the stolen monies
and while withdrawals for various purposes were
made therefrom over the period of years in ques
tion, the application of the first out principle gives
the plaintiff first claim on the $208,559.54 as well
as on an additional amount with respect to the
interest earned thereon in the savings account.
Counsel for the defendant does not seriously con
tend that the tracing of the assets as described
above was not proved although he does contest the
method used by the plaintiff to calculate that
portion of the interest accruing in the savings
account which is properly attributable to the pro
ceeds flowing from the stolen monies. With respect
to the share of the savings account interest proper
ly payable to the plaintiff I accept the defendant's
argument that it should be calculated by reference
to the dates and amounts of the various deposits as
they were deposited. The interest attributable to
those proceeds should then be calculated by refer
ence to the applicable interest rate as it fluctuated
from time to time from the time of deposit and not
by reference to the global percentage calculation
claimed by the plaintiff.
Debts "of Equal Degree"
The plaintiff seeks, however, not only a declara
tion that it is entitled to the funds and profits
therefrom which can be traced as having been
stolen from it but also a declaration that it is
entitled to a prorated share, on an equal basis with
the Crown, of the remaining assets of Hasiuk; that
is with respect to: the remainder of the funds in the
savings account ($39,500.78); the remaining half
of the proceeds from the sale of the two motor
vehicles; the proceeds from the sale of the Hasiuk
residence. The plaintiff claims that it is so entitled
because the Crown's claim and the plaintiff's
claim are not debts "of equal degree" .' I note first
of all, a conundrum, pointed out by counsel for the
defendant: if the debt owed to the Crown and the
debt owed to the plaintiff are not of equal degree,
and the plaintiff's is of a higher degree, then the
plaintiff should be claiming priority for the total
amount owed to it under the judgments and not for
merely a pro rata share of the remaining funds.
The claim for a pro rata share of the sums carries
with it an assumption that the two claims are of
equal degree and if such is the case, the Crown's
prerogative right comes into play, as noted above,
to accord it priority of payment.
There is certainly a paucity of authority respect
ing what is meant by claims "of equal degree".
Counsel for the plaintiff referred to Household
Realty Corporation Ltd. et al. v. Attorney General
of Canada, [1980] 1 S.C.R. 423; (1979), 29 N.R.
174 in which it was held that a Crown claim as a
judgment creditor was not of equal degree to the
interest of a prior registered second mortgagee. It
was stated, at pages 429 S.C.R.; 180 N.R.:
In my view . .. the second mortgages here in question repre
senting as they do a part interest in the legal title, took
precedence over Crown judgments subsequently obtained and
recorded against the mortgagor owner of the equity of redemp
tion .... it follows that I find the mortgagee's claim to be of
higher and not of equal degree with that of the Crown ...
Counsel for the defendant argues that the two
claims in this case are of equal degree because
both arise from the parties' respective status as
unsecured judgment creditors: the plaintiff's claim
is based on judgments of the Alberta Court of
Queen's Bench for the return of monies fraudu-
The plaintiff's claim based on section 15 of the Canadian
Charter of Rights and Freedoms was dealt with above at pp.
343 and following.
lently stolen or for damages arising out of conver
sion and the defendant's claim is based on a
judgment of the Federal Court for sums as a result
of the non-payment of income tax. (I note that the
relevant judgments of the Alberta Court of
Queen's Bench have not been filed in evidence so
the exact text of those orders is not available.)
Counsel for the plaintiff responds that the defend
ant's position focusses too closely on the nature of
the respective judgments and particularly on the
fact that both are unsecured debts. He argues that
the question "of equal degree" must be tested by
reference to the circumstances which gave rise to
the two debts. A recent decision of the Ontario
District Court in Re Kolari (1981), 36 O.R. (2d)
473 is cited. In that case His Honour Judge Stor-
tini held that as between a victim of theft (Canada
Permanent Trust Co.) at the hands of an employee
(Mrs. Kolari) and the Minister of National Reve
nue (claiming for unpaid taxes) the victim of the
theft had a higher claim to the assets of the thief s
estate. At page 477:
In the case at bar the Crown is not a bona fide purchaser for
value without notice. It is not competing with general creditors
where its prerogative would, of course, prevail. It is competing
with a victimized beneficiary. Its rights are no higher than the
assessed taxpayer who in this case was convicted of stealing the
money against which income tax is levied.
Despite the breadth of this statement, however,
His Honour Judge Stortini makes it clear that the
basis of his judgment is the doctrine of tracing. It
is this which was relied on to accord the victim of
the theft a prior claim to that of the Crown in the
proceeds in question. With this, as noted above, I
agree. It is on this basis that the plaintiff in this
case is entitled $208,559.54 from the savings
account, the proceeds of the Mosco mortgage and
one-half of the proceeds from the sale of the two
motor vehicles, as well as the relevant interest
related to each.
If I understand counsel for the plaintiffs argu
ment correctly it is that the two debts in question
are not of equal degree because there is a pre
sumption which arises when a thief mixes his or
her own funds with those misappropriated—it is
up to the thief, then, to prove ownership of that
portion which it is claimed was not misappropriat
ed. If this is not done, the victim is entitled to
claim that the intermixed funds are those which
have been stolen (up to the amount of what was in
fact stolen plus the profit thereon). I do not see
how this principle applies in this case. The present
case is not one in which there is confusion as to
how much of the money in the savings account, or
in the other assets was stolen money or the product
of stolen money and how much was not. The
respective sums have been precisely identified:
there was some evidence that some utility bills
incurred with respect to the Hasiuk residence may
have been paid out of the proceeds of the stolen
money but this evidence is not clear enough to
establish that there was in fact any intermixing of
funds in relation to the payment of the utility bills.
Indeed, even if there had been any intermixing for
that purpose it is not clear that this would consti
tute an intermixing with relation to the residence
itself such as to entitle the plaintiff to the proceeds
of the sale of that residence.
With respect to the plaintiff's argument that the
nature of the respective claims (that of the Crown
for unpaid taxes and that of the plaintiff for return
of the funds or damages for conversion) is such
that they are not of equal degree, I note that there
is some authority that the Crown's prerogative is
not limited to priority merely in cases of claims
of equal degree: see C. R. B. Dunlop, Creditor-
Debtor Law in Canada (1981), at page 450, for
the observation that:
... there is authority for a more sweeping statement of the
prerogative as determining "a preference in favour of the
Crown in all cases, and touching all rights of what kind soever,
where the Crown's and the subject's right concur, and so come
into competition."
Be that as it may, I could find no authority, nor
was I referred to any by counsel which draws a
distinction between Crown claims and those of
private persons declaring them not to be of equal
degree, on the basis now argued by counsel for the
plaintiff. 2 There is authority which establishes that
claims are not of equal degree if one is secured and
one unsecured: Household Realty Corporation
Ltd. et al. v. Attorney General of Canada, [1980]
1 S.C.R. 423; (1979), 29 N.R. 174; City of
Toronto, and Toronto Electric Commissioners v.
Wade, [1931] O.R. 470 (S.C.). There is authority
which indicates that when Crown debts are
incurred in the course of ordinary commercial or
industrial transactions they may not be accorded
prerogative priority because they are not of a type
historically encompassed by the Crown's preroga
tive: The Queen v. Workmen's Compensation
Board and City of Edmonton (1962), 36 D.L.R.
(2d) 166 (Alta. S.C.), confirmed (1963), 42
W.W.R. 226 (Alta. C.A.). But neither of these
exceptions pertains in the present case.
The plaintiff's debt and the Crown's debt are
both equally unsecured (except for those portions
of the assets to which the plaintiff can lay claim in
specie by virtue of the doctrine of tracing). Both
claims flow from the respective positions of the
parties as judgment creditors. The Crown debt is
not one incurred in the course of an ordinary
commercial or industrial transaction. Accordingly,
I can find no reason to depart from the ordinary
rules and the plaintiffs claim to share on a pro
rata basis with the Crown is rejected.
Although success has been divided this is an
appropriate case in which the plaintiff should have
its costs of the action. A judgment will issue
accordingly.
2 The most comprehensive discussion of the distinction I
could find is that in the Law Reform Commission of British
Columbia's Report on The Crown as Creditor: Priorities and
Privileges (1982), at pp. 7-9 where it is noted that the distinc
tion first seems to have appeared in Re Henley & Co. (1878), 9
Ch. D. 469 (C.A.), at p. 481 in the context of a possible
distinction between specialty debts (under seal) and ordinary
contract debts.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.