Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd.

Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd.
Collection
Supreme Court Judgments
Date
1980-03-18
Report
[1980] 1 SCR 1182
Judges
Martland, Ronald; Ritchie, Roland Almon; Pigeon, Louis-Philippe; Beetz, Jean; Estey, Willard Zebedee; McIntyre, William Rogers; Chouinard, Julien
On appeal from
Manitoba
Subjects
Contract
Decision Content
Supreme Court of Canada
Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182
Date: 1980-03-18
Dauphin Plains Credit Union Limited (Plaintiff) Appellant;
and
Xyloid Industries Ltd. (Defendant);
and
Her Majesty The Queen (Applicant) Respondent.
1979: November 7; 1980: March 18.
Present: Martland, Ritchie, Pigeon, Beetz, Estey, McIntyre and Chouinard JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA
Receivership—Revenue—Deductions from wages prescribed by three federal statutes—Deductions effected by debtor company on wages paid—Funds not remitted nor kept separate—Appointment of receiver—Wages earned prior to appointment paid by receiver pursuant to Payment of Wages Act of Manitoba—Wages paid less deductions—No remittance by receiver of amount deducted—Priority of claims as between Crown and secured creditor—The Payment of Wages Act, 1975 (Man.), c. 21, ss. 1(h), 7(1)—Income Tax Act, 1970-71-72 (Can.), c. 63, s. 153(1)(a), (3), 227(4), (5)—Canada Pension Plan, R.S.C. 1970, c. C-5, s. 24(3), (4)—Unemployment Insurance Act, 1970-71-72 (Can.), c. 48, s. 71(2), (3).
As security for debts in excess of $1,000,000, the appellant credit union (Dauphin) obtained from the defendant company (Xyloid) debentures whereby a first fixed and specific charge was created on all its real and immovable property with a floating charge on all of its other assets. On March 31, 1977, the appellant obtained the appointment of a receiver of “all the undertaking, property and assets” of the defendant. In due course, the receiver realized the assets of the company and distributed the net proceeds of such realization, less the sum of $7,416.57, which upon the discharge of the receiver was directed to be held until the validity and priority of the claims of the respondent Crown under certain federal statutes was determined by the Court.
Prior to the appointment of the receiver, Xyloid had paid wages to its employees and effected the deductions prescribed by the Income Tax Act of Canada, the Canada Pension Plan Act and the Unemployment Insurance Act. However, Xyloid did not remit the amounts
[Page 1183]
so deducted to the respondent nor did it keep such deductions or withholdings separate and apart from its “own moneys or from the assets of…” Xyloid. After his appointment the receiver paid to the employees of Xyloid wages earned prior to his appointment, as required by The Payment of Wages Act of Manitoba. This payment was made less the prescribed deductions but the receiver made no remittance to the respondent in respect of the aforementioned federal statutes.
The only issue arising was what priority, if any, did the respondent enjoy by virtue of the said statutes over the claims of Dauphin as the secured creditor of Xyloid with reference to the moneys held by the receiver in the amount of $7,416.57.
The trial judge held that the Crown had failed to establish priority for any portion of the amount claimed and ordered that the receiver pay out to Dauphin the entire sum of $7,416.57. The Manitoba Court of Appeal, reversing the judgment of the trial judge, directed that Dauphin do pay to the Crown the sum of $6,278.81. With leave of this Court, Dauphin appealed from the judgment of the Court of Appeal.
Held (Estey and Chouinard JJ. dissenting in part): The appeal should be allowed only to the extent of deducting from the amount allowed by the judgment of the Court of Appeal the sum claimed for income tax deductions made prior to the date of the receiving order, that is, $2,550.78, with the appropriate adjustment for interest and penalties.
Per Martland, Ritchie, Pigeon, Beetz and McIntyre JJ.: The appeal failed in respect of the deductions made by the receiver out of wages paid under The Payment of Wages Act. Dauphin was, in effect, contending that The Payment of Wages Act authorized the receiver to make the income tax deduction for the benefit of the debenture holder. This was a complete subversion of the purpose of such a deduction. Section 153 of the Income Tax Act is the only law under which anyone can make a deduction for income tax, but this section goes on to provide in subs. (4) that the amount so deducted shall be held “in trust for Her Majesty”. No law of Manitoba can possibly change that. Also, by virtue of s. 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. But, the position taken by Dauphin means that it would get the benefit of the deductions so that the employees would have to pay income tax to the Department of National Revenue on what they have not received and for which they would get no credit.
[Page 1184]
The trial judge failed to consider the consequences of allowing a receiver to make deductions for income tax when paying wages and then failing to treat those deductions as withholdings on account of income tax. This is not only a contradictory position but, if upheld, would amount to an unfair diversion which the Legislature of Manitoba cannot possibly have intended to authorize by the definition of wages in The Payment of Wages Act.
In view of the purpose of The Payment of Wages Act the deductions contemplated in the definition of “wages” are only those which may be made for the benefit of the employer. The statute should not be construed in a manner which would deprive a third party, the tax collector, of his proper rights. The Legislature is not presumed to have intended an inconsistency and it would be inconsistent to authorize deductions to be made for income tax only to be appropriated to the benefit of the employer’s creditor.
With respect to the deductions made by the receiver for the Canada Pension Plan, and Unemployment Insurance, employee portion, the amounts withheld represented a debt due by the recipients of the wages under the provisions of s. 8 of the Canada Pension Plan and s. 62 of the Unemployment Insurance Act, 1971. The receiver had ample funds for paying the full amount of wages due and therefore the deductions made were true deductions, not mere book-keeping entries, they were money withheld for the purpose of satisfying the employees’ indebtedness for contributions and premiums in respect of those earnings. This money withheld for such purpose became held in trust in favour of the tax collector who is therefore entitled to claim it from the receiver. Dauphin cannot justify the judgment at trial directing the receiver to give it those moneys and it was therefore properly ordered by the judgment of the Court of Appeal to turn them over to the Department of National Revenue so that they may be credited against the employees’ indebtedness.
The Court of Appeal was correct in holding that there was no legal basis for the claims for the Canada Pension Plan and Unemployment Insurance deductions, employer portion. This conclusion was not challenged on the appeal to this Court and no question was raised as to the correctness of the adjustments which were made for those sums with interest and penalties and resulted in the amount fixed by the judgment.
Following the reasoning in Re Deslauriers Construction Products Ltd., [1970] 3 O.R. 599, the claim for income tax deductions on wages paid by the employer
[Page 1185]
itself before the receiving order could not be supported. Deslauriers dealt with the Canada Pension Plan, the relevant provisions of which were subss. 24(3) and (4). After providing in subs. 24(3) as in subs. 227(4) of the Income Tax Act, that the employer who has deducted an amount “shall be deemed to hold the amount so deducted in trust for Her Majesty”, subs. 24(4) goes on to provide that “In the event of any liquidation” an equal amount “shall be deemed to be separate from… the estate in liquidation …whether or not that amount has in fact been kept separate”. The claim for the Pension Plan deductions was upheld in Deslauriers by reason only of those words which are not in the Income Tax Act.
There remained the further question whether the quoted provisions of the Canada Pension Plan and the similar provisions of the Unemployment Insurance Act are applicable to a receiver appointed by the Court pursuant to fixed and floating charges covering all assets of an employer company. The claim for Pension Plan and Unemployment Insurance deductions cannot affect the proceeds of realization of property subject to a fixed and specific charge. From the moment such charge was created, the assets subject thereto were no longer the property of the debtor except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing. However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.
The final question was whether the realization by the receiver is a “liquidation, assignment or bankruptcy” within the meaning of the provisions under consideration. There was no reason not to give the word “liquidation” its wide meaning in usual language. The majority in the Court of Appeal properly held that the amount deducted by the employer from employees’ wages for Pension Plan and Unemployment Insurance contributions was to be deemed to have been held in trust for Her Majesty at the date of the receiving order and consequently was to be deemed to have been realized by the receiver out of the assets subject to the floating charge.
Board of Industrial Relations v. Avco, [1979] 2 S.C.R. 699; Wiltshire v. Barrett, [1966] 1 Q.B. 312; Royal Trust Co. v. Montex Apparel Industries Ltd.,
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[1972] 2 O.R. 673, aff’d [1972] 3 O.R. 132; Davey v. Gibson (1930), 65 O.L.R. 379, referred to.
Per Estey and Chouinard JJ., dissenting in part: The Payment of Wages Act of Manitoba created a charge secured by a statutory lien against the assets of Xyloid, in an amount equal to the wages owing as defined in the Act, which means those wages owing less an amount equal to lawful deductions that may be made by an employer.
The lien against the assets of Xyloid as subsequently received by the receiver on its appointment was in existence at the time of that appointment, and attached to and continued to exist as a lien and charge on those assets into the post-appointment period. The receiver, in making the payments it did to the former employees of Xyloid, was not distributing wages to those employees but was rather simply paying off the statutory lien and charge. In doing so, it clearly did not act as the agent of Xyloid but simply as an officer of the court in the discharge of its responsibilities under the order of appointment. Dauphin therefore was entitled against the respondent to retain the sum of $3,474.83 claimed by the respondent with reference to the post-appointment period.
Xyloid contrary to the direction contained in each of the Canada Pension Plan Act, the Unemployment Insurance Act and the Income Tax Act failed to keep “separate and apart from his own moneys…” any amount so deducted or withheld upon the payment of wages to its then employees. Each of the three sections, after giving such a direction, provides in different ways that the moneys deducted or withheld are held “in trust for Her Majesty”. The terms of the Canada Pension Plan Act and the Unemployment Insurance Act provide further that “in the event of any liquidation, assignment or bankruptcy of an employer [an amount equal to these moneys] shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate”.
Clearly, there was no assigment or bankruptcy of Xyloid. The meaning to be properly applied to the word ‘liquidation’ in each of the three statutes is liquidation of the employer entity. In legal matters, such a term connotes the winding up of the entity by realizing upon its assets, paying off its liabilities, and distributing the surplus, if any, rateably amongst shareholders according to their precedence. There was no such proceeding with reference to Xyloid and hence the provisions of subs. (4) of s. 24 of the Canada Pension Plan Act, subs. (3) of s.
[Page 1187]
71 of the Unemployment Insurance Act and s. 227(4) and (5) of the Income Tax Act have no application.
The Income Tax Act provision (s. 227(5)) does not include the extended provision with reference to a deeming of separation in the event of liquidation and hence the respondent, even if the event of liquidation had occurred, would have no assistance from the statute in determining a segregation of accounts.
The payments by Xyloid, therefore, in the pre-appointment period post-date the accrual of the wage entitlement. Xyloid failed to maintain the deductions separate and apart from its own moneys and assets, and Xyloid was not in liquidation, was not in bankruptcy, and had made no assignment, and therefore the express waiver of the requirement of separation legislated in two of the three statutes does not avail the respondent. Therefore, as in the case of the post-appointment period, the appellant is entitled to those moneys withheld by the receiver with reference to deductions made in this period as well.
Royal Trust Co. v. Montex Apparel Industries Ltd., supra; Bank of Nova Scotia v. Middleton Motors Ltd. (1978), 78 D.T.C. 6307; Re KRA Restaurants Ltd. v. Toronto Dominion Bank (1977), 74 D.L.R. (3d) 272, referred to.
APPEAL from a judgment of the Court of Appeal for Manitoba[1], reversing a judgment of Wright J., and allowing certain claims of the Crown in respect of source deductions under the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act. Appeal allowed in part, Estey and Chouinard JJ. dissenting in part.
John Lamont and R.T. Willis, for the plaintiff appellant.
T.B. Smith, Q.C., and Craig Henderson, for the applicant, respondent.
The judgment of Martland, Ritchie, Pigeon, Beetz and McIntyre JJ. was delivered by
PIGEON J.—This is an appeal by leave of this Court from the judgment of the Court of Appeal for Manitoba1 reversing the judgment of Wright J.[2] and directing that Dauphin Plains Credit
[Page 1188]
Union Limited (the “Credit Union”), the appellant in this Court, do pay to Her Majesty The Queen, the respondent in this Court, the sum of $6,278.81.
As security for debts in excess of a million dollars, the Credit Union had obtained from Xyloid Industries Ltd. (the “Company”) debentures whereby a first fixed and specific charge was created on all its real and immovable property with a floating charge on all its other assets. The debtor being in default, the Credit Union instituted an action on March 30, 1977 and, on the following day, March 31, 1977, obtained a receiving order whereby the Clarkson Company Limited was appointed receiver. The receiver having realized the assets of the company was authorized to pay the net proceeds of realization to the secured creditor, the Credit Union, subject to a claim of the Department of National Revenue in the amount of $7,416.57. An application for an order directing the payment of this sum was made on behalf of the Crown based on assessments made up as follows:
1. Pre March 31, 1977
Income tax source deductions
$2,550.78
Canada Pension Plan, employee portion
275.43
Canada Pension Plan, employer portion
275.43
Unemployment Insurance deduction employee portion
244.77
Unemployment Insurance deduction employer portion
342.68
Interest and penalties
647.25
TOTAL ASSESSMENT
$4,336.34
2. Post March 31, 1977
Income tax source deductions
2,068.05
Canada Pension Plan, employee portion
220.05
Canada Pension Plan, employer portion
220.05
Unemployment Insurance deduction employee portion
196.16
Unemployment Insurance deduction employer portion
274.63
Interest and penalties
495.89
$3,474.83
[Page 1189]
The amounts under the heading “Pre March 31, 1977” were claimed in respect of wages paid by the company before the receiving order and as to this the trial judge made the following finding (at p. 660):
… Because of the specific allegation of Mr. Johnson (para. 4 of his affidavit) that an audit shows the deductions claimed were in fact made, and because, in argument, counsel for the defendant made no submission otherwise, I accept as factual that the required statutory amounts were deducted by the defendant before or when the wage payments were made by it before the date of receivership.
The allegation referred to by the trial judge is para. 2 of the affidavit reading as quoted (at p. 659):
2. That I am advised and believe that the Minister of National Revenue caused an assessment to be raised against Xyloid Industries Ltd. This assessment was raised pursuant to an audit that was performed on the books of Xyloid Industries Ltd. in Receivership and represents unpaid source deductions apparent on the books of Xyloid Industries Ltd. for the months of February, March, and April, 1977.
The assessment under the heading “Post March 31, 1977” was made against the receiver but it did not relate as Monnin J.A. said (at p. 517) to “wages earned in April 1977, after the receivership”. It was admitted at the hearing in this Court that deductions on wages earned in the service of the receiver had been duly remitted. The assessment related to wages which were earned prior to March 31, 1977, but were paid by the receiver pursuant to The Payment of Wages Act of Manitoba. Counsel for the Credit Union admitted that when paying those wages to the employees the receiver had withheld the amounts claimed as income tax source deductions, Canada Pension Plan, employee portion and Unemployment Insurance deduction, employee portion. In other words, the receiver paid the employees the amount of wages due, net of those deductions and he was assessed under date January 25, 1978, “for failure to remit as required” in this respect. I find it
[Page 1190]
convenient to deal with this part of the claim first.
The Payment of Wages Act, 1975 (Man.), c. 21, provides:
1. In this Act,
…
(h) “wage” or “wages” includes salaries, commissions, or any compensation for labour or services measured by time, piece, or otherwise, and any pay which is due and payable to an employee including moneys payable under The Vacations With Pay Act or moneys payable in cases of termination of employment under The Employment Standards Act; but does not include any deductions from wages that may be lawfully made by an employer.
…
7(1) Notwithstanding any other Act, the amount of wages due and payable by an employer to an employee not exceeding $2,000.00 constitutes a lien and charge on the property and assets of the employer in favour of the employee, and is payable in priority to any other claim or right, including those of the Crown in right of Manitoba, and without limiting the generality of the foregoing that priority extends over every assignment, including an assignment of book debts, whether absolute or otherwise, every mortgage on real or personal property, and every debenture.
The relevant provisions of the Income Tax Act (enacted 1970-71-72, c. 63) are:
153. (1) Every person paying
(a) salary or wages or other remuneration to an officer or employee,
…
at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on account of the payee’s tax for the year under this Part.
…
(3) When an amount has been deducted or withheld under subsection (1), it shall, for all the purposes of this Act, be deemed to have been received at that time by
[Page 1191]
the person to whom the remuneration, benefit, payment, fees, commissions or other amounts were paid.
It is important to consider the nature of the deduction for income tax. It is not a deduction for the benefit of the employer, it is a withholding for the benefit of the employee because it is to be remitted to the Receiver General of Canada on account of the employee’s tax indebtedness. By virtue of other provisions of the Income Tax Act if, as happens in a large number of cases, the withholdings exceed the employee’s tax liabilities, a refund will be made to the employee by the Department of National Revenue. Therefore, the amount withheld remains a part of the wages, and subs. 153(3) provides that it is “deemed to have been received” by him at the time the payment was made less the deduction. Furthermore, subs. 227(4) of the Income Tax Act provides:
(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.
In the present case, the Credit Union is, in effect, contending that The Payment of Wages Act authorized the receiver to make the income tax deduction for the benefit of the debenture holder. In my view, this is a complete subversion of the purpose of such a deduction. At the hearing, I said to the appellant’s counsel: “You contend that the deductions made from the wages enure to the benefit of the creditor?” His answer was: “That is the practical, but not the legal result”. I just cannot see how what is true in fact, may be false in law. In my view, counsel’s assertion reveals the inherent contradiction in the Credit Union’s position. Section 153 of the Income Tax Act is the only law under which anyone can make a deduction for income tax, but this section goes on to provide in subs. (4), that the amount so deducted shall be held “in trust for Her Majesty”. No law of Manitoba can possibly change that. How can the Credit Union claim that the amount deducted was held for its benefit?
[Page 1192]
It must also be considered that, by virtue of s. 153(3) the employees are deemed to have received their wages in full, so that they are liable for income tax on that basis. But, the position taken by the Credit Union means that it would get the benefit of the deductions so that the employees would have to pay income tax to the Department of National Revenue on what they have not received and for which they would get no credit.
With respect, it appears to me that the trial judge has failed to consider the consequences of allowing a receiver to make deductions for income tax when paying wages and then failing to treat those deductions as withholdings on account of income tax. This is not only a contradictory position but, if upheld, would amount to an unfair diversion which the Legislature of Manitoba cannot possibly have intended to authorize by the definition of wages in The Payment of Wages Act.
In view of the purpose of The Payment of Wages Act it appears to me that the deductions contemplated in the definition of “wages” are only those which may be made for the benefit of the employer. This appears not only from the considerations above stated, but also from the very wording of the provision: “deductions from wages that may be lawfully made by an employer”. The withholdings directed by the Income Tax Act etc. are not deductions that may be made by an employer, they are deductions that shall be made. In my view, the Legislature of Manitoba when speaking of deductions that may be made by an employer had in mind deductions of the same nature as those which are contemplated in s. 25 of The Employment Standards Act, R.S.M. 1970, c. E110:
25. A board upon the written authorization of the minister may, with respect to the area for which it is appointed, make recommendations in writing respecting
(a) standards of minimum wages to be paid to employees
(i) of different ages; or
(ii) who are inexperienced, handicapped, or special employees;
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(b) the maximum proportion of employees classified under sub-clause (ii) of clause (a) to other employees in the same employment; and
(c) the maximum amount, if any, that may be deducted from the prescribed minimum wage in cases where the employer furnishes to the employee board, lodging, uniforms, laundry, or other service.
I have underlined the words “that may be deducted” which appear in this statute in pari materia of the same province; they are indicative of what was contemplated. In The Payment of Wages Act as in The Employment Standards Act the legislature was exclusively concerned with matters within its jurisdiction. In respect of deductions, minimum wage orders are concerned only with those which are under the control of the provincial legislature, they make no reference to the deductions required by federal statutes although employers obviously have to make them. In my view, the provision with respect to deductions in The Payment of Wages Act is to be similarly viewed. It is concerned only with matters under the control of the Legislature. It is a well-established rule that provincial enactments are presumed to be intended to avoid interference with federal legislation.
The recent judgment of this Court in Board of Industrial Relations v. Avco[3] affords an example of a restricted meaning ascribed to a provision of the British Columbia Payment of Wages Act to avoid untoward consequences. The provision under consideration created “a lien and charge… payable in priority over any other claim or right…”. Giving the unanimous opinion, Martland J. said (at p. 706):
…The property to which a s. 5A lien attaches is not defined nor identified. In the absence of a specific statutory provision to that effect, in my view it should not be construed in a manner which could deprive third parties of their pre-existing property rights.
In my view, the Manitoba statute should not be construed in a manner which would deprive a third party, the tax collector, of his proper rights. The Legislature is not presumed to have intended an inconsistency and I would find it inconsistent to
[Page 1194]
authorize deductions to be made for income tax only to be appropriated to the benefit of the employer’s creditor.
In R. v. Biron[4] the majority in this Court approved and applied the decision in Wiltshire v. Barrett[5] where a provision reading: “A police constable may arrest without warrant a person committing an offence under this section” was held to mean “apparently committing an offence”. In that case Lord Denning, dealing with the argument that if the man arrested was not prosecuted then the arrest was unlawful, said (at p. 325):
…The section does not mention cases of a third kind, namely, those cases where on inquiry at the police station it appears that there is no sufficient ground on which to proceed further against the man. Clearly, in those cases, the man should be released forthwith. There was no need in the statute to mention that contingency. It is too obvious for words. (Emphasis added.)
The trial judge held that the receiver in this case was not a person within the meaning of subs. 153(1) of the Income Tax Act. For this conclusion he relied on the decision of the Ontario Court of Appeal in Royal Trust Co. v. Montex Apparel Industries Ltd.[6] But, in that case the question was whether the receiver came within the provisions of subs. 50(9) of the Excise Tax Act reading:
When the Minister has knowledge that any person has received from a licensee any assignment of any book debt…
Here the question is whether the receiver comes within the words “Every person paying salary or wages…” and I fail to see any reason for holding that the receiver did not come within the terms of this provision. There is no need to consider the definition of “person” in the Act. In any case this definition is not a restrictive but an extensive definition due to the word “includes”. Assuming the receiver was not authorized to make the deduc-
[Page 1195]
tions, the Credit Union is not entitled to that part of the employees’ wages, it should go to them. By having it remitted to the tax authorities the employees will be given credit therefor.
I will finally note that no argument was addressed to the Court urging that, by virtue of subs. 152(8) and 227(10), the assessment on the receiver could not be disputed otherwise than by appeal under the provisions of the Income Tax Act. Under the circumstances, I do not find it necessary to consider the point before coming to the conclusion that the appeal fails in respect of the deductions made by the receiver out of wages paid under The Payment of Wages Act.
With respect to the deductions made by the receiver for the Canada Pension Plan, employee portion, and the Unemployment Insurance, employee portion, the trial judge said (at pp. 664‑665):
Both acts speak in terms of the obligation to deduct as lying with the employer of the persons receiving the payments, and the receiver-manager, not being such an employer, therefore had no obligation to make the deductions claimed.
In my view, the question is not whether the claim would succeed if the receiver had not made those decuctions. The fact is, as appears from the Johnson affidavit already quoted, that the deductions were duly made and entered in the books. In making payments to the employees pursuant to The Payment of Wages Act the receiver actually withheld the proper amount for Pension Plan contributions and Unemployment Insurance premiums. These amounts represented a debt due by the recipients of the wages under the provisions of s. 8 of the Canada Pension Plan and s. 62 of the Unemployment Insurance Act, 1971. The receiver had ample funds for paying the full amount of wages due and therefore the deductions made were true deductions, not mere book-keeping entries, they were money withheld for the purpose of satisfying the employees’ indebtedness for contributions and premiums in respect of those earnings. This money withheld for such purpose became held in trust in favour of the tax collector who is therefore entitled to claim it from the receiver.
[Page 1196]
The Credit Union cannot justify the judgment at trial directing the receiver to give it those moneys and it was therefore properly ordered by the judgment of the Court of Appeal to turn them over to the Department of National Revenue so that they may be credited against the employees’ indebtedness.
I find it clear that the Court of Appeal was correct in holding that there was no legal basis for the claims for the Canada Pension Plan, employer portion, and the Unemployment Insurance deduction, employer portion. This conclusion was not challenged on the appeal to this Court and no question has been raised as to the correctness of the adjustments which were made for those sums with interest and penalties and resulted in the amount fixed by the judgment.
The assessment entitled “Pre March 31, 1977” involves entirely different considerations. The claim is for deductions which were made by the employer when paying wages prior to the making of the receiving order. The sums withheld were merely deducted from the wages paid, they were not set apart. In fact, the company was short of funds and did not have funds available to be set aside as required by law. It was not disputed that the funds corresponding to the deductions could not be traced. These withholdings merely represented deductions from the wages paid, not money set aside at the time. The material statutory provisions of the Income Tax Act are subss. 227(4) and (5):
(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.
(5) All amounts deducted or withheld by a person under this Act shall be kept separate and apart from his own moneys and in the event of any liquidation, assignment or bankruptcy the said amounts shall remain apart and form no part of the estate in liquidation, assignment or bankruptcy.
The trial judge said on this point (at p. 662):
Insofar as the claim for income tax deductions from wages paid before the receivership is concerned, under
[Page 1197]
the above provisions the employer must first deduct or withhold the requisite moneys, which then must be kept separate. If they are not kept separate they must be traceable as trust moneys in order to be recovered by the Crown: Re Hallets Estate; Knatchbull v. Hallett (1880), 13 Ch. D. 696 (C.A.); Re Craftsmen Painting Contractors Ltd., [1968] 1 O.R. at 522, 11 C.B.R. (N.S.) 91, 67 D.L.R. (2d) 37, leave to appeal refused 11 C.B.R. (N.S.) 91n, and cases cited there. In the present circumstances the Crown has not established that the moneys purported to be deducted actually existed, or, if they did, that the moneys were kept in such a way as to be traceable. Thus the Crown’s claim here cannot succeed.
The majority opinion in the Court of Appeal was based on the overruling of the Craftsmen’s case by the Ontario Court of Appeal in Re Deslauriers Construction Products Ltd.[7] That case, like Craftsmen’s, dealt with the Canada Pension Plan, 1964-65 (Can.), c. 51 (now R.S.C. 1970, c. C-5). The relevant provisions are subss. 24(3) and (4) as follows:
(3) Where an employer has deducted an amount from the remuneration of an employee as or on account of any contribution required to be made by the employee but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own moneys and shall be deemed to hold the amount so deducted in trust for Her Majesty.
(4) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (3) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate.
It will be noted that after providing in subs. 24(3) as in subs. 227(4) of the Income Tax Act, that the employer who has deducted an amount “shall be deemed to hold the amount so deducted in trust for Her Majesty”, subs. 24(4) goes on to provide that “In the event of any liquidation” an equal amount “shall be deemed to be separate from… the estate in liquidation… whether or
[Page 1198]
not that amount has in fact been kept separate”. It is clear from the following passage of the judgment delivered by Gale C.J.O. (at pp. 601-602) that the claim for the Pension Plan deductions was upheld in Deslauriers by reason only of those words which are not in the Income Tax Act:
On the facts of the instant case again, only notional deductions appearing on the payroll records had been made as the company could meet only its net payroll and its operational expenses.
On behalf of the Attorney-General it was submitted that, while the Minister would have no claim such as is asserted in this case under s-s. (3) if s. 24 ended there, none the less, in the light of s-s. (4), the Minister did have the right to receive out of the realization of the assets a sum representing the amount which was deducted from the employees’ salaries, totalling $1,068.82. We agree with that interpretation of s-s. (4). It seems to us that s-s. (4), and particularly the concluding six words thereof, were inserted in the Act specifically for the purpose of taking the moneys equivalent to the deductions out of the estate of the bankrupt by the creation of a trust and making those moneys the property of the Minister.
…
We agree with Mr. Olsson on behalf of the Attorney-General that the word “deemed” in the fourth line of s-s. (4) must be used in the sense of a conclusive rather than a rebuttable presumption since the contrary case, where the amount has not in fact been kept separate and apart, is specifically dealt with in the concluding part of that very subsection.
I find the reasoning in Deslauriers wholly persuasive and would note that in 1956, (c. 39, s. 27) Parliament repealed subs. (6) of s. 123 of the Income Tax Act, R.S.C. 1952, c. 148, whereby a first charge was created on the property of an employer for income tax deductions. I must therefore hold that the claim for the income tax deductions on wages paid by the employer itself before the receiving order cannot be supported.
There remains for consideration the further question whether the quoted provisions of the Canada Pension Plan and the similar provisions of
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the Unemployment Insurance Act are applicable to a receiver appointed by the Court pursuant to fixed and floating charges covering all assets of an employer company. Subsections 71(2) and (3) of the Unemployment Insurance Act, 1971 (enacted 1970-71-72, c. 8) read:
(2) Where an employer has deducted an amount from the remuneration of an insured person as or on account of any employee’s premium required to be made by the insured person but has not remitted such amount to the Receiver General, the employer shall keep such amount separate and apart from his own monies and shall be deemed to hold the amount so deducted in trust for Her Majesty.
(3) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (2) is deemed to be held in trust for Her Majesty shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own monies or from the assets of the estate.
It should first be observed that, for reasons similar to those on which the decision in the Avco case, supra, was based, the claim for Pension Plan and Unemployment Insurance deductions cannot affect the proceeds of realization of property subject to a fixed and specific charge. From the moment such charge was created, the assets subject thereto, were no longer the property of the debtor except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing. However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.
The remaining question is whether the realization by the receiver is a “liquidation, assignment or bankruptcy” within the meaning of the provisions under consideration. This question was considered by Osler J. in Royal Trust Co. v. Montex Apparel Industries Ltd.[8] His conclusion denying the claim for Unemployment Insurance deductions was
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affirmed on appeal[9]. However, it is important to note that the provision in force at the material time (R.S.C. 1970, c. U-2, subs. 40(2)) did not include the words “whether or not the amount thereof has in fact been kept separate and apart from the employer’s own assets or from the assets of the bankrupt estate”. At that time those words which are now in subs. 71(3) of the Unemployment Insurance Act, 1971, were found only in subs. 24(4) of the Pension Plan and, as we have seen, it is only by reason of those additional words that the claim was allowed in Deslauriers. Consequently, in their absence the claim failed on the basis of the reasoning made by Gale C.J.O. which I have already quoted and on which Osler J. relied. This was clearly sufficient to dispose of the point but he went on to say obiter (at p. 681):
Although no authority on this branch of the case was cited to me, it is trite law that taxing statutes are to be strictly construed and, in my view, a receivership by order of the Court is not a liquidation, assignment or bankruptcy and hen