Canada v. Toronto-Dominion Bank (TD Canada Trust)

Canada v. Toronto-Dominion Bank (TD Canada Trust)
Court (s) Database
Federal Court Decisions
Date
2024-03-19
Neutral citation
2024 FC 441
File numbers
T-1841-21
Decision Content
Date: 20240319
Docket: T-1841-21
Citation: 2024 FC 441
Ottawa, Ontario, March 19, 2024
PRESENT: The Honourable Mr. Justice Southcott
BETWEEN:
HIS MAJESTY THE KING
Plaintiff
and
THE TORONTO-DOMINION BANK (TD CANADA TRUST)
Defendant
ORDER AND REASONS
I. Overview [1] This decision addresses a motion for the determination of two questions of law pursuant to Rule 220 of the Federal Courts Rules, SOR/98-106. The questions relate to the interpretation of the deemed trust provisions in section 227 of the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] that apply to payroll deductions in respect of employee income tax that employers withhold but fail to remit.
[2] These questions arise in the context of the within action by the Plaintiff, His Majesty the King [the Crown], against the Defendant, The Toronto-Dominion Bank [the Bank], related to proceeds the Bank received from its customer H.N.J. Enterprises Ltd. [the Debtor] after the Debtor had failed to remit payroll deductions to the Crown. Those proceeds resulted from the Debtor’s sale of its business and were applied by the Bank in payment of the Debtor’s overdraft with the Bank. The Bank is an unsecured creditor of the Debtor and, in defence of the Crown’s claim, it argues that the deemed trust provisions of section 227 of the ITA do not apply to it and that, when it received the proceeds from the Debtor, it provided value to the Debtor through the reduction of its overdraft.
[3] In the context of those defence positions, the parties proposed that two questions of law be determined by the Court under Rule 220. In an Order dated May 18, 2023, Associate Judge Horne approved this proposal and prescribed a process for written and oral submissions, leading to a determination of those questions, which the Order framed as follows:
Do the deemed trust provisions in section 227 of the ITA apply to unsecured creditors?
Can unsecured creditors rely on the bona fide purchaser for value defence to defend against a deemed trust claim?
[4] As explained in greater detail below, my conclusion is that the answer to the first question is “yes” and the answer to the second question is “no”.
II. Background [5] In support of this motion, the parties provided an Agreed Statement of Facts, which sets out the factual foundation for their dispute. While not strictly necessary for the determination of the questions of law, that factual foundation assists the Court in understanding the context in which the questions are raised. The following is a summary of the agreed facts that I consider to be most material to that understanding:
The Debtor operated a restaurant between June 2000 and October 2015 [the Business] and had employees to whom it paid wages.
During the Debtor’s 2013, 2014, and 2015 taxation years, the Debtor withheld, but failed to remit to the Canadian Revenue Agency [CRA], $74,518.17 in prescribed amounts under the ITA, the Canada Pension Plan Act, the Employment Insurance Act, and their regulations [collectively, Payroll Source Deductions]. $36,250.86 of the Payroll Source Deductions were for employee CPP/EI contributions and employee federal/provincial income taxes and were therefore subject to a deemed trust in favour of the Crown pursuant to sections 222 and 227 of the ITA.
In October 2015, the Debtor ceased operating the Business and sold it to an unrelated third party for $100,000.
The Bank provided banking services to the Debtor and its Director. The Debtor opened a business account with the Bank in 2004 [the Corporate Account], and the Director held a personal account with the Bank [the Personal Account]. The Debtor incurred overdrafts on the Corporate Account both before and after the sale of the Business in October 2015 and until the account was closed in March 2016, making the Bank an unsecured creditor of the Debtor.
The Bank was unaware of the Debtor’s failure to remit Payroll Source Deductions until it received notice from CRA on January 8, 2018.
The timeframe most material to the questions posed to the Court is October 13, 2015 to January 6, 2016:
During this period, a total of 92 separate transactions were processed on the Corporate Account. In early October 2015, the sale of the Business netted the Debtor proceeds (after deductions) of $89,500.00 [the Proceeds]. At that time, the Bank had no knowledge of the Debtor’s sale of the Business or the source of the Proceeds.
On October 13, 2015, the Director deposited the Proceeds into the Corporate Account and used those funds to pay the existing overdraft of $11,344.88. The Director then transferred $69,500.00 of the Proceeds to the Personal Account. After a series of transactions on October 13, 2015, the closing balance of the Corporate Account on that day was an overdraft of $6,450.19.
On October 15, 2015, the Director transferred $6,730.48 from the Personal Account to the Corporate Account to cover the overdraft of $6,450.19. The balance of the Corporate Account at the end of the day on October 15, 2015, was $280.29.
Between October 15, 2015 and January 6, 2016, the Bank advanced funds to the Debtor in the form of overdrafts and the Director transferred funds from the Personal Account to the Corporate Account to pay off the Debtor’s overdrafts.
In total, the Bank received $37,595.07 from the Debtor between October 13, 2015 and January 6, 2016. None of these transactions were a result of any demand for payment by the Bank or the exercise of any form of security.
On January 8, 2018, CRA notified the Bank of its claim to $36,250.86 plus interest. The Bank did not pay the Crown, and the Crown commenced the within action.
III. Issues [6] The issues for the Court’s determination are the two questions of law articulated earlier in these Reasons.
IV. Analysis A. Statutory provisions [7] The statutory provisions most relevant to the questions of law are subsection 227(4) and (4.1) of the ITA, which read as follows:
Trust for moneys deducted
Montant détenu en fiducie
(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.
(4) Toute personne qui déduit ou retient un montant en vertu de la présente loi est réputée, malgré toute autre garantie au sens du paragraphe 224(1.3) le concernant, le détenir en fiducie pour Sa Majesté, séparé de ses propres biens et des biens détenus par son créancier garanti au sens de ce paragraphe qui, en l’absence de la garantie, seraient ceux de la personne, et en vue de le verser à Sa Majesté selon les modalités et dans le délai prévus par la présente loi.
Extension of trust
Non-versement
(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed
(4.1) Malgré les autres dispositions de la présente loi, la Loi sur la faillite et l’insolvabilité (sauf ses articles 81.1 et 81.2), tout autre texte législatif fédéral ou provincial ou toute règle de droit, en cas de non-versement à Sa Majesté, selon les modalités et dans le délai prévus par la présente loi, d’un montant qu’une personne est réputée par le paragraphe (4) détenir en fiducie pour Sa Majesté, les biens de la personne, et les biens détenus par son créancier garanti au sens du paragraphe 224(1.3) qui, en l’absence d’une garantie au sens du même paragraphe, seraient ceux de la personne, d’une valeur égale à ce montant sont réputés
(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and
a)être détenus en fiducie pour Sa Majesté, à compter du moment où le montant est déduit ou retenu, séparés des propres biens de la personne, qu’ils soient ou non assujettis à une telle garantie;
(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest
b) ne pas faire partie du patrimoine ou des biens de la personne à compter du moment où le montant est déduit ou retenu, que ces biens aient été ou non tenus séparés de ses propres biens ou de son patrimoine et qu’ils soient ou non assujettis à une telle garantie.
and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
Ces biens sont des biens dans lesquels Sa Majesté a un droit de bénéficiaire malgré toute autre garantie sur ces biens ou sur le produit en découlant, et le produit découlant de ces biens est payé au receveur général par priorité sur une telle garantie.
B. Principles of statutory interpretation [8] Both questions that the Court is required to answer in this motion turn on the proper interpretation of section 227 of the ITA. As with any statutory provision, this interpretation must employ a textual, contextual, and purposive analysis. Rizzo & Rizzo Shoes Ltd (Re), 1998 CanLII 837 (SCC), [1998] 1 SCR 27 at paragraph 21, explains that the words of the statute are to be read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the statute, the object of the statute, and the intention of Parliament. As expressed in Alberta (Treasury Branches) v. MNR, 1996 CanLII 244 (SCC), [1996] 1 SCR 963 at paragraph 38, the words of the ITA should be given their plain and ordinary meaning in accordance with the structure and purpose of the statute.
[9] However, the Bank emphasizes that, in tax cases, the jurisprudence recognizes that, given the particularity and detail of many tax provisions, the construction of taxation statutes requires an emphasis on textual interpretation (Canada Trustco Mortgage Co v Canada, 2005 SCC 54, [2005] 2 SCR 601 at para 11). As this point is described in Canada v Loblaw Financial Holdings Inc, 2021 SCC 51 at paragraph 41, the requirement for attention to the text, context and purpose of the statute continues to apply in the taxation context but, in determining the relative weight to be afforded to those components of the analysis, it is important that full effect be given to Parliament’s precise and unequivocal words.
[10] I do not understand these interpretive principles to be in dispute between the parties.
C. Do the deemed trust provisions in section 227 of the ITA apply to unsecured creditors? (1) Explanation of the question [11] In First Vancouver Finance v MNR, 2002 SCC 49 [First Vancouver] at paragraph 3, the Supreme Court of Canada [SCC] provided a helpful summary of how the deemed trust in the ITA operates:
3. Section 153(1) of the ITA requires employers to deduct and withhold amounts from their employees’ wages (“source deductions”) and remit these amounts to the Receiver General by a specified due date. By virtue of s. 227(4), when source deductions are made, they are deemed to be held separate and apart from the property of the employer in trust for Her Majesty. If the source deductions are not remitted to the Receiver General by the due date, the deemed trust in s. 227(4.1) of the ITA becomes operative and attaches to property of the employer to the extent of the amount of the unremitted source deductions. As well, the trust is deemed to have existed from the moment the source deductions were made.
[12] The dispute between the parties in this case, which leads to the questions posed to the Court, focuses upon the operation of subsection 227(4.1). As is plain from the text of that subsection, in broad strokes, the deemed trust created thereby is imposed both upon property of the tax debtor and upon property held by any secured creditor of the tax debtor that, but for a security interest, would be property of the tax debtor.
[13] I pause at this point in my analysis to emphasize what is, and is not, in dispute between the parties. As the parties acknowledged at the hearing, the first question posed in this motion (whether the deemed trust provisions apply to unsecured creditors) is perhaps somewhat lacking in precision in identifying the nature of the dispute.
[14] The Bank acknowledges that if, for instance, it (as an unsecured creditor) and the Crown (as the beneficiary of the trust) were both claimants against a debtor that continued to hold particular property, the Crown would prevail against the Bank in a priorities dispute in accessing the value of that property to pay its claim. In that respect, the deemed trust provisions clearly apply to unsecured creditors, in the sense that they exclude unsecured creditors from, for instance, obtaining a judgment and executing that judgment against the debtor’s property, to the extent the value of that property is impressed with the deemed trust. This result follows from the fact that the trust deems such property, to the value of the amount owed to the Crown, to be beneficially owned by the Crown rather than by the debtor.
[15] The dispute between the parties surrounds a situation where the debtor no longer holds its property. The Rule 220 questions are questions of law and are not formally rooted in the particular facts of the dispute between the Crown and the Bank. However, those facts serve to illustrate the type of situation that the parties wish the answer to the question to address.
[16] The Debtor owned the assets of the Business, but it sold those assets to an arm’s length third party. The Debtor received money for the sale. As I understand the Bank’s position, consistent with the explanation above, it would accept that, as long as the Debtor continued to hold the money from the sale, that money was impressed with the deemed trust. However, the Debtor conveyed that money to the Bank, through a series of transactions in which the Debtor paid unsecured overdraft amounts on its Corporate Account. The Bank takes the position that, once the money was conveyed by the Debtor to the Bank, the deemed trust no longer applied. It is in a scenario of that sort that the Bank argues that the deemed trust provisions do not apply to unsecured creditors.
[17] In taking this position, the Bank relies on the nature of the deemed trust, which First Vancouver described as follows (at paras 4-5):
4 For the reasons set forth below, I find that the s. 227(4.1) deemed trust is similar in principle to a floating charge over all the tax debtor’s assets in favour of Her Majesty. The trust arises the moment the tax debtor fails to remit source deductions by the specified due date, but is deemed to have been in existence from the moment the deductions were made. As long as the tax debtor continues to be in default, the trust continues to float over the tax debtor’s property. Thus, at any given point in time, whatever property then belonging to the tax debtor is subject to the deemed trust.
5 Viewed in this way, it is clear that, as property comes into possession of the tax debtor, it is caught by the trust and becomes subject to Her Majesty’s interest. Similarly, property which the tax debtor disposes of is thereby released from the deemed trust. This mutuality of treatment between incoming and outgoing property relating to the deemed trust is supported by both the plain language of the provisions as well as their purpose and intent. Most importantly, Her Majesty’s interest in the tax debtor’s property is protected because, while property which is sold to third party purchasers is released from the trust, at the same time, the proceeds of disposition of the alienated property are captured by the trust. Moreover, commercial certainty is promoted owing to the fact that third party purchasers are free to transact with tax debtors or suspected tax debtors without fearing that Her Majesty may subsequently assert an interest in the property so acquired.
[18] The Crown disagrees with the Bank’s position, but it does not rely on an argument that the money remained impressed with the deemed trust after it had been conveyed by the Debtor to the Bank. Rather, the Crown relies on the language at the end of subsection 227(4.1), which requires proceeds of deemed trust property to be paid to the Crown. In a decision that will figure significantly in the analysis of the Rule 220 questions, my colleague, Justice Grammond, explained at paragraph 17 (in considering parallel provisions in section 222 of the Excise Tax Act, RSC 1985, c E-15 [ETA]) that this obligation is often referred to as a “statutory obligation”, distinguishing it from the establishment of the deemed trust itself (Canada v Toronto-Dominion Bank, 2018 FC 538 [TD Bank FC], affirmed Toronto-Dominion Bank v Canada, 2020 FCA 80 [TD Bank FCA]).
[19] In short, the disagreement between the parties arises from the deemed trust being similar in nature to a floating charge, coupled with the statutory obligation to pay proceeds of trust property to the Crown. In that context, the Bank argues that the section 227 provisions do not apply to unsecured creditors to which a debtor conveys money that had been subject to the deemed trust. The Crown argues that the section 227 provisions do apply to such an unsecured creditor, because such money represents proceeds of trust property and the secured creditor that receives the money must therefore remit it to the Crown pursuant to the statutory obligation.
[20] At the hearing of the motion, the Court consulted counsel on whether the first of the Rule 220 questions should be reformulated to capture with more precision the legal point in dispute between the parties. However, counsel were content to leave the question as framed, on the understanding that the question did not necessarily require a “yes” or “no” answer, but rather could if necessary be answered in a nuanced manner that addresses the point in dispute.
[21] With the benefit of that explanation, I will set out the parties’ principal arguments as to how a textual, contextual and purposive interpretation of subsection 227(4.1) favours their respective positions on the first Rule 220 question, taking into account existing jurisprudence that has interpreted this subsection.
(2) The Crown’s arguments [22] Noting the explanation in TD Bank FCA (at paras 42 and 48) that the evolution of legislation represents an important contextual factor in statutory construction, the Crown’s argument begins by drawing the Court’s attention to the legislative and jurisprudential history of subsections 227(4) and (4.1). Jurisprudentially, the Crown’s submissions begin with the decision of the SCC in Royal Bank of Canada v Sparrow Electric Corp, 1997 CanLII 377 (SCC), [1997] 1 SCR 411 [Sparrow], which interpreted predecessors to those subsections, being respectively subsections 227(4) and (5), that read as follows:
227
227
[…]
[…]
(4) Every person who deducts or withholds any amount under this Act shall be deemed to hold the amount so deducted or withheld in trust for Her Majesty.
(4) Toute personne qui déduit ou retient un montant quelconque en vertu de la présente loi est réputée retenir le montant ainsi déduit ou retenu en fiducie pour Sa Majesté.
(5) Notwithstanding any provision of the Bankruptcy Act, in the event of any liquidation, assignment, receivership or bankruptcy of or by a person, an amount equal to any amount
(5) Malgré la Loi sur la faillite, en cas de liquidation, cession, mise sous séquestre ou faillite d’une personne, un montant égal à l’un ou l’autre des montants suivants est considéré comme tenu séparé et ne formant pas partie du patrimoine visé par la liquidation, cession, mise sous séquestre ou faillite, que ce montant ait été ou non, en fait, tenu séparé des propres fonds de la personne ou des éléments du patrimoine:
(a) deemed by subsection (4) to be held in trust for Her Majesty, […]
a) le montant réputé, selon le paragraphe (4), être détenu en fiducie pour Sa Majesté;
shall be deemed to be separate from and form no part of the estate in liquidation, assignment, receivership or bankruptcy, whether or not that amount has in fact been kept separate and apart from the person's own moneys or from the assets of the estate.
[23] In Sparrow, the SCC found that the Crown’s deemed trust was able to attach to a tax debtor’s unencumbered property (i.e., property not subject to a security interest) but did not oust a secured creditor’s pre-existing security interest (at paras 98-99). However, the Court explained that it was available to Parliament to step in and assign absolute priority to the Crown through the deemed trust (at para 112). As described in TD Bank FCA (at paras 26, 27 and 48), Parliament then amended the predecessor legislation to section 227 of the ITA in response to this invitation in Sparrow to expand the application of the deemed trust provisions.
[24] As part of its contextual analysis (related to the parallel ETA provisions), TD Bank FCA also noted that, when the post-Sparrow amendments were announced in 1997, the government’s press release referred to “absolute priority” to be given to the collection of unremitted GST, in exchange for the Crown waiving all other priorities in bankruptcy. TD Bank FCA explained at paragraph 45 that this reflected a policy decision by Parliament that, in exchange for the super-priority ordinarily given to the deemed trust provisions of the ETA, the priority did not survive bankruptcy under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA] or apply to arrangements under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 [CCAA]).
[25] In the case at hand, the Crown notes that the ITA similarly creates limited exemptions from the super priority of the deemed trust, for the benefit of certain categories of unsecured creditors in the event of a bankruptcy or receivership under the BIA. This is accomplished through the parenthetical language, “(except sections 81.1 and 81.2 of that Act)”, following reference to the BIA in the introductory wording of subsection 227(4.1).
[26] In reviewing the deemed trust amendments, First Vancouver explained the deemed trust provisions give the Minister of National Revenue [Minister] special priority over other creditors to collect unremitted taxes (at para 23) and described the post-Sparrow changes as representing a concerted effort by Parliament to broaden and strengthen the deemed trust in order to facilitate the collection efforts of the Minister (at para 29).
[27] Against that background of the legislative and jurisprudential history, which the Crown argues speaks to both the context and purpose of the current deemed trust provisions, its submissions turn to the text of the provisions. It argues that the grammatical and ordinary language of subsection 227(4.1) extends the deemed trust to two types of property: (a) “property of the person”, the person being the tax debtor; and (b) “property held by any secured creditor … of that person that but for a security interest ... would be property of the person”. The Crown submits that it is the reference to the first category of property, that of the tax debtor, that affords the Crown priority over unsecured creditors, because the Crown has the benefit of the deemed trust over the tax debtor’s property while unsecured creditors lack any proprietary interest in that property.
[28] Anticipating the Bank’s arguments (as will be canvassed shortly) that the Court should favour its position because subsection 227(4.1) is replete with references to secured creditors and has no references to unsecured creditors, the Crown submits that this does not support a conclusion that the text does not afford the Crown priority over unsecured creditors. Rather, the express references to secured creditors are a function of the fact that secured creditors have proprietary interests in the tax debtor’s property such that, per the analysis in Sparrow, these references are necessary to expressly override those proprietary interests. In contrast, it is not necessary for the text to expressly override the interests of unsecured creditors, as that is accomplished simply by the text applying the deemed trust to the property of the debtor.
[29] Against the background of those submissions, the Crown emphasized at the hearing of this motion that its position is based principally on the statutory obligation, embodied in the language at the end of subsection 227(4.1), that “… the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.”
[30] The Crown refers the Court to Canada (Attorney General) v National Bank of Canada, 2004 FCA 92 [National Bank], which considered the application of this language, albeit in a context involving a secured creditor. Relying on First Vancouver (at para 40), National Bank (at para 29) referred to the deemed trust as resembling a floating charge such that, once a tax debtor alienates its property in the normal course of its business, the trust extends to the proceeds of sale or replacement property. When the secured creditor in that case received the proceeds of property subject to the deemed trust, it was obliged to pay them to the Receiver General (National Bank at para 40).
[31] National Bank involved a circumstance where the proceeds resulted from the forced sale of assets by the secured creditor. However, the Crown also refers to the analysis in TD Bank FC, which considered that authority and others in concluding that the same analysis applied where a debtor voluntarily sold its property and used the sale price to make payments to a secured creditor (at paras 24 to 31). As expressed in TD Bank FC at paragraph 31 (in the context of the parallel provisions of the ETA):
31 To summarize, the phrase “the proceeds of the property shall be paid to the Receiver General” in section 222(3) of the ETA encompasses proceeds flowing from the voluntary sale of the tax debtor’s property. Upon such a sale, a tax debtor has an obligation to pay the proceeds to the Receiver General. If the tax debtor fails to do so and pays a secured creditor instead, that creditor has an obligation to repay the money to the Crown.
[32] As I will explain shortly, there are other portions of the decision in TD Bank FC that comment upon the position of unsecured creditors. The Crown argues that such comments are obiter and should not be relied upon. However, the Crown agrees with the conclusion in paragraph 31 of the decision and submits that the logic leading to the conclusions in National Bank at paragraph 40 and TD Bank FC at paragraph 31 apply equally to a situation where the sale of a tax debtor’s property generates proceeds that are ultimately received by an unsecured creditor. The Crown argues that the tax debtor has an obligation to pay such proceeds to the Receiver General and, if it fails to do so and pays an unsecured creditor instead, that creditor has an obligation to pay the money to the Crown.
[33] The Crown cites jurisprudence that it considers to favour this argument. It relies on AG Canada (MNR) v GlassCell Isofab Inc, 2011 ONSC 2660 [GlassCell], in which an unsecured creditor, claiming the cost of goods sold and delivered to a debtor, obtained a judgment against the debtor and, through a garnishment process, was paid funds obtained by the sheriff. Based on unremitted source deductions under the ITA, the Crown sought an order requiring the unsecured creditor to pay it those funds. The Ontario Superior Court of Justice held that, by virtue of the super priority created by the deemed trust provisions of the ITA, the Crown had priority over the claim of the unsecured creditor to the proceeds of the garnishment (at para 38).
[34] The unsecured creditor in GlassCell attempted to rely on the explanation in First Vancouver that, as a result of the floating charge nature of the deemed trust, the trust released property alienated by the tax debtor, because the trust then applied to the property received by the debtor in exchange, such that the trust was neither depleted nor enhanced (First Vancouver at para 42). The Court in GlassCell rejected this argument, finding at paragraph 37 that there had been no sale or disposition in the nature of a sale by the tax debtor of the sort to which First Vancouver applied.
[35] The Crown also relies on Proman Ltd v RCL Operators Ltd, 1993 CanLII 3328, (NB KB) [Proman], in which an unsecured judgment creditor argued that the subsection 224(1.2) of the ITA (which is worded similarly to subsection 227(4.1)) gave the Crown priority over secured creditors but not unsecured creditors. The New Brunswick Court of King’s Bench concluded that the statute made the money required to be paid to the Minister take precedence over all claims, notwithstanding that there may be a security interest. This did not give unsecured creditors a preferred position.
(3) The Bank’s Arguments [36] I will now canvass the Bank’s arguments in response to those of the Crown. As anticipated by the Crown, the Bank relies on the importance of the statutory text in the construction of taxation provisions and emphasizes the repeated references to secured creditors in both subsections 227(4) and (4.1) and the lack of any references to unsecured creditors.
[37] The Bank invokes the principle that, in the absence of clear language to the contrary, a tax on one person cannot be collected out of property belonging to another (Pembina on the Red Development Corp Ltd v Triman Industries Ltd, 1991 CanLII 2699 (MBCA) and argues that, unlike in relation to the property of secured creditors, the language of subsection (4.1) does not speak of imposing the deemed trust upon the property of unsecured creditors. The Bank emphasizes the past conclusions of the SCC that the deemed trust provisions should not be interpreted to extend to the property of other parties in the absence of language to that effect (Sparrow at paras 39 and 112; First Vancouver at para 43).
[38] The Bank also takes issue with the Crown’s argument that the legislative history supports its position. The Bank refers to the Crown’s argument that the pre-Sparrow legislation already extended the deemed trust to unsecured creditors and submits that there is no language in that legislation or in Sparrow that supports such a conclusion.
[39] In relation to the Crown’s authorities, the Bank argues that this Court cannot be guided by GlassCell or Proman, because they are not binding on this Court, they did not undertake the required textual, contextual and purposive analysis of the legislation, and they did not take into account authorities from the SCC that the Bank considers to be instructive on the question now before the Court.
[40] The Bank first relies on Canada v Canada North Group Inc, 2021 SCC 30 [Canada North], which considered the priority between the Crown’s deemed trust and priming charges incurred pursuant to the CCAA in connection with a plan of arrangement intended to avoid a company’s bankruptcy. The Bank refers the Court to the SCC’s comment (per Côté, J.) that the deemed trust created by the ITA has priority over only a defined set of security interests, not priority over all possible interests (at paras 4 and 60). Based thereon, the Bank submits that the trust does not extend to all creditors and does not extend to secured creditors.
[41] Similarly, the Bank notes that, in Caisse populaire Desjardins de l'Est de Drummond v Canada, 2009 SCC 29, [2009] 2 SCR 94 [Caisse populaire] at paragraph 10, the SCC identified that the scope of the deemed trust created by the ITA is to be defined in terms of the particular statutory definition of “security interest” adopted in the ITA itself.
[42] In relation to Caisse populaire, the Bank also raised an additional argument at the hearing of this motion. In that case, the SCC adjudicated whether agreements between the Caisse populaire [Caisse] and its customer, Camvrac Enterprises Inc [Camvrac], who was also a tax debtor, represented a “security interest” within the meaning of the ITA deemed trust provisions. The Crown argues that the premise of this dispute must have been that, if Caisse did not have a security interest, it would have been able to prevail against the Crown. In other words, the Bank submits that implicit in the SCC’s adjudication of that dispute is an assumption that the deemed trust provisions do not apply to unsecured creditors.
[43] The Bank also refers the Court to comments in TD Bank FC on the application of the deemed trust provisions in the ETA to unsecured creditors. While the dispute in that case was between the Crown and a secured creditor, the decision also makes observations about the position of unsecured creditors. As explained earlier in these Reasons, in analysing the position of the secured creditor that was before the Court, it held that upon a sale of its property a tax debtor has obligation to pay the proceeds to the Receiver General and, if the debtor fails to do so and pays the secured creditor instead, that creditor has an obligation to repay the money to the Crown (at para 31). Following that finding, the Court observed that it was uncertain that the same logic would apply to unsecured creditors, although it was unnecessary for it to decide that issue (at para 32).
[44] At the hearing of this motion, the Bank emphasized that its position on the Rule 220 questions does not depend upon those observations in TD Bank FC (or upon other observations in that case as to the position of unsecured creditors, to which I will refer when considering the second question later in these Reasons). The Bank argues that those observations are correct. However, the Bank’s position is based principally upon its arguments surrounding the principles of statutory interpretation and the required focus on the text of the relevant taxation provisions, in conjunction with the SCC jurisprudence referenced above.
(4) Analysis [45] As a preliminary point, I note that the parties’ arguments, and therefore this analysis, are based on the English version of the relevant provisions. While the French version is equally authoritative, neither party argued that any ambiguity exists between the two versions. The argument and analysis in TD Bank FCA proceeded in the same manner (see para 32).
[46] I have considered the Bank’s submissions surrounding the repeated references to secured creditors in subsections 227(4) and (4.1), the lack of any such references to unsecured creditors, the requirement for clear statutory language for the tax on one person to be collected out of the property of another, and the absence of any such language in the predecessors to subsections 227(4) and (4.1) or Sparrow to support a conclusion that the pre-Sparrow legislation already extended the deemed trust to unsecured creditors.
[47] In my view, these submissions do not engage with the Crown’s position as to how subsection 227(4.1) applies in a situation where a tax debtor’s property has been sold. The Crown does not argue that the deemed trust applies to the property of an unsecured creditor. Indeed, as explained above, it submits that such application would be unnecessary to grant the Crown the protection created by the deemed trust, as the trust need only apply to the property of those parties that potentially have relevant property interests, i.e., the tax debtor and any secured creditor. Rather, the Crown relies on the statutory obligation, embodied in the language at the end of subsection 227(4.1), that “… the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.”
[48] As previously explained, the parties’ disagreement on the first Rule 220 question surrounds the circumstance where a tax debtor has conveyed trust property (in particular, money derived from the sale of other trust property) to an unsecured creditor. The Crown’s position is that such circumstances engage the statutory obligation, as the money represents proceeds within the meaning of subsection 227(4.1), requiring the unsecured creditor to pay those proceeds to the Crown.
[49] I have also considered the Bank’s reliance on Canada North and Caisse populaire and do not consider those authorities to assist the Bank on the subject of the parties’ particular disagreement. I accept the principles that the deemed trust created by the ITA is not intended to afford the Crown priority over all possible interests (Canada North at paras 4 and 60) and that one must have recourse to the particular statutory definition in the ITA in determining the scope of the deemed trust (Caisse populaire at para 10). However, those authorities do not focus upon the scope or operation of the statutory obligation surrounding proceeds of deemed trust property.
[50] In relation to the Bank’s additional argument based on Caisse populaire (that implicit in the SCC’s adjudication of that dispute in that case is an assumption that the deemed trust provisions do not apply to unsecured creditors), it is necessary to review briefly the facts of that case and the particular arguments before the SCC. Caisse had granted its customer Camvrac a line of credit, and Camvrac also lodged a term deposit with Caisse, pursuant to an agreement that allowed Caisse to withhold repayment of the deposit to the extent the line of credit remained owing (paras 1-4).
[51] As explained in the majority decision of Rothstein, J., the issue for the Court’s determination was whether the Crown was the beneficial owner of Camvrac’s term deposit as a result of the deemed trust provisions (at para 7). Caisse had argued that it did not hold a security interest, but rather that the terms of its agreement with Camvrac conferred upon it a contractual right to simply extinguish its own indebtedness to Camvrac (see para 26). Justice Rothstein rejected this position and held that Caisse’s right of set-off or compensation did represent a “security interest” within the meaning of the deemed trust provisions (see para 17). The dissent by Deschamps, J. found that the right of compensation was not a security interest and that Caisse’s contractual right could be set up against the Crown, because the Crown did not have any more rights than Camvrac had (at para 65).
[52] I am not convinced that Caisse populaire supports the Bank’s submission that implicit in the SCC’s adjudication of that dispute is an assumption that the deemed trust provisions do not apply to unsecured creditors. Rather, Caisse was arguing that its contractual rights allowed it to extinguish its debt to Camvrac, as represented by the term deposit, such that there was no asset of Camvrac to which the Crown’s deemed trust could apply. Certainly, the decision in Caisse populaire di