Canada Trustco Mortgage Co. v. Canada

Canada Trustco Mortgage Co. v. Canada
Collection
Supreme Court Judgments
Date
2011-07-15
Neutral citation
2011 SCC 36
Report
[2011] 2 SCR 635
Case number
33422
Judges
McLachlin, Beverley; Binnie, William Ian Corneil; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Rothstein, Marshall; Cromwell, Thomas Albert
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 33422
Decision Content
SUPREME COURT OF CANADA
Citation: Canada Trustco Mortgage Co. v. Canada, 2011 SCC 36, [2011] 2 S.C.R. 635
Date: 20110715
Docket: 33422
Between:
Canada Trustco Mortgage Company
Appellant
and
Her Majesty The Queen
Respondent
Coram: McLachlin C.J. and Binnie, Deschamps, Fish, Abella, Rothstein and Cromwell JJ.
Reasons for Judgment:
(paras. 1 to 55)
Dissenting Reasons:
(paras. 56 to 85)
Deschamps J. (Binnie, Rothstein and Cromwell JJ. concurring)
McLachlin C.J. (Fish and Abella JJ. concurring)
Canada Trustco Mortgage Co. v. Canada, 2011 SCC 36, [2011] 2 S.C.R. 635
Canada Trustco Mortgage Company Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Canada Trustco Mortgage Co. v. Canada
2011 SCC 36
File No.: 33422.
2010: December 10; 2011: July 15.
Present: McLachlin C.J. and Binnie, Deschamps, Fish, Abella, Rothstein and Cromwell JJ.
on appeal from the federal court of appeal
Taxation ― Income tax ― Collection ― Bills of exchange ― Tax debtor drawing cheques from trust account and depositing them in a joint account owned by him and a third party ― Minister of National Revenue issuing three requirements to pay to Bank with respect to tax debtor’s tax liability ― Bank disputing liability ― Whether Bank liable to make payments to tax debtor named as payee of cheques ― Whether Bank liable to make payments to tax debtor when receiving cheques payable to tax debtor for deposit in account held jointly by tax debtor and third party ― Whether Bank required to comply with requirements to pay ― Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 224 ― Bills of Exchange Act, R.S.C. 1985, c. B-4 .
The tax debtor M owed tax to the federal government. The Minister of National Revenue became aware that cheques payable to M were being drawn on his trust account and deposited in a joint account owned by M and a third party. Each of the cheques drawn on the trust account was payable to M and delivered to the appellant, Canada Trustco Mortgage Company (the “Bank”), with an instruction to deposit the funds in the joint account. This instruction was given by writing “Dep to” and the account number on the back of the cheque.
The Minister issued three requirements to pay to the Bank as per s. 224 of the Income Tax Act (“ITA ”). The Bank disputed its liability and the Minister assessed the Bank for the amounts of the cheques for failing to comply with the three requirements to pay. The Tax Court of Canada dismissed the Bank’s appeal and the Federal Court of Appeal upheld the Tax Court decision.
Held (McLachlin C.J. and Fish and Abella JJ. dissenting): The appeal should be allowed, the lower courts’ decisions set aside and the assessments vacated.
Per Binnie, Deschamps, Rothstein and Cromwell JJ.: The Bank was at no point liable to pay M the proceeds of the cheques. The fact that a person is designated as payee on the face of a cheque does not on its own mean that a bank is liable to make a payment to the person. A drawee is answerable to the drawer. The question is to whom the drawee may make the payment. What is on the back of the cheque — the instructions or the endorsement — is crucial to this question. In this case, the instructions were to deposit the cheques into the joint account. The Bank’s liability to pay monies to M personally cannot be confused with its liability to pay monies to the holders of the joint account. There were no instructions that made the monies payable to M.
In this case, the cheques were neither expressed to be payable to bearer nor endorsed in blank. After the cheques had been delivered to the Bank for deposit into the joint account, M was no longer in possession of them, was not entitled to them and was therefore not their holder. Once the Bank received the cheques for deposit and credited them to the joint account, it acquired the rights of a holder in due course pursuant to s. 165(3) of the Bills of Exchange Act (“BEA ”) and was under a contractual obligation to the holders of the joint account to present the cheques for payment. In crediting the joint account, sending the cheques to a third party for clearing, and receiving the proceeds, the Bank was acting on the basis of its contractual relationship with the holders of the joint account and not on behalf of M personally. When the Bank debited the trust account the next day, it was not making a payment to M or to an agent acting for him alone. The Bank owed no money to M, as it was acting as the collecting bank for its customers, the holders of the joint account. It did not collect the proceeds of the cheques as agent for the payee, M.
A banker’s obligation arises out of the debtor-creditor relationship created when a bank account is opened. The payee of a cheque is not a party to this contractual relationship, and the mere fact of being a payee does not entail such a relationship with the drawee. A cheque operates neither as an assignment of funds in the hands of the payee nor as an assignment of funds in the hands of the drawee. In and of itself, a cheque imposes no obligation on a drawee bank to the payee. There is a distinction between delivery of a cheque for deposit and presentment for payment. It is clear from the rules applicable to presentment that the drawee bank’s obligation — to make payment to the holder of the cheque — is to the drawer only and that this obligation is triggered only when the cheque is presented to it. It is also clear that, except as provided in the BEA , the drawee is obliged, as between itself and the drawer, to disburse the funds only upon presentment of the bill by the holder — the person who is entitled to receive them — or by the holder’s agent. Viewed either from the angle of M being the payee or from that of the Bank being the drawee, the mere fact that cheques payable to M were delivered to the Bank for deposit did not make the latter liable to make a payment to the former within the meaning of s. 224(1) of the ITA .
Per McLachlin C.J. and Fish and Abella JJ. (dissenting): The Bank is liable to make a payment to M as a result of the cheques he wrote to himself. A bank that collects the funds from a deposited cheque receives the funds as agent for the customer (the payee). This involves two transactions. The funds are initially credited to its principal, the payee/customer. The bank then receives them back under the banking contract. The fact that these transactions follow one on the other does not change the conclusion that, legally, they are two distinct episodes. As such, a deposited cheque is payable to the customer when it is deposited; at no time is the cheque payable to the bank. Subsection 165(3) of the BEA does not establish that the bank becomes a holder of the cheque ― its limited objective is achieved by granting the collecting bank all the rights and powers of a holder in due course, and does not require the bank to be actually designated a holder in due course. Once the Bank received M’s cheques to himself, its liability to its customer was triggered. The Bank was therefore contractually bound to honour its customer’s demand to pay him. As such, all of the requirements of s. 224(1) of the ITA were met, and the requirement to pay attached to the money in transit between M’s accounts.
Regardless of the fact that the cheques were deposited into a joint account, the Bank was liable to M alone when it decided to honour the cheques. Once funds are irrevocably deposited in a joint account, they become the property of joint account holders jointly under the terms of their banking contract and cannot be garnished by the Minister because they are no longer the sole property of the tax debtor. However, it does not follow that the Minister could not intercept funds in transit before they arrived in the joint account. A requirement to pay in s. 224(1) intercepts funds while they are in transit. Before the funds arrive in the joint account and while the funds are being transferred, the drawee bank is only liable to make a payment to the payee of the cheque. The other joint account holder had no right to the funds before they arrived in the account. It is only M’s status as payee that matters for the purpose of triggering s. 224(1) , in the presence of a joint account.
Cases Cited
By Deschamps J.
Referred to: National Trust Co. v. Canada (1998), 162 D.L.R. (4th) 704; Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002; Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110; Bank of Montreal v. M.N.R., [1992] 1 C.T.C. 2292; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727; J.C. Creations Ltd. v. Vancouver City Savings Credit Union, 2004 BCCA 107, 236 D.L.R. (4th) 602; Westboro Flooring & Décor Inc. v. Bank of Nova Scotia (2004), 241 D.L.R. (4th) 257; B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504; Schroeder v. Central Bank of London (1876), 34 L.T. 735; Thomson v. Merchants Bank of Canada (1919), 58 S.C.R. 287; Schimnowski Estate, Re, [1996] 6 W.W.R. 194; Capital Associates Ltd. v. Royal Bank of Canada (1976), 65 D.L.R. (3d) 384, aff’g (1973), 36 D.L.R. (3d) 579; Boyd v. Emmerson (1834), 2 Ad. & E. 184, 111 E.R. 71.
By McLachlin C.J. (dissenting)
B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504; National Trust Co. v. Canada (1998), 162 D.L.R. (4th) 704; Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002; Schroeder v. Central Bank of London (1876), 34 L.T. 735; Thomson v. Merchants Bank of Canada (1919), 58 S.C.R. 287; Schimnowski Estate, Re, [1996] 6 W.W.R. 194; Westminster Bank Ltd. v. Hilton (1926), 43 T.L.R. 124; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727; Macdonald v. Tacquah Gold Mines Co. (1884), 13 Q.B.D. 535; Hirschorn v. Evans, [1938] 2 K.B. 801; Westcoast Commodities Inc. v. Chen (1986), 55 O.R. (2d) 264.
Statutes and Regulations Cited
Bills of Exchange Act, R.S.C. 1985, c. B‑4, ss. 2 “bearer”, 16(1), 20(3), 34, 67(2), 84(1), (3), 86(1), 126, 129, 138(2), 165(1), (3).
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 224 .
Authors Cited
Crawford, Bradley. The Law of Banking and Payment in Canada, vol. 2. Aurora, Ont.: Canada Law Book, 2008 (loose‑leaf updated October 2010, release 2).
Ellinger, E. P., Eva Lomnicka and Richard Hooley. Modern Banking Law, 3rd ed. Oxford: Oxford University Press, 2002.
Goode, R. M. “When is a cheque paid?”, [1983] J. Bus. L. 164.
Ogilvie, M. H. Bank and Customer Law in Canada. Toronto: Irwin Law, 2007.
Ogilvie, M. H. “Why Joint Accounts Should Not Be Garnished — Westcoast Commodities Inc. v. Jose Chow Chen” (1986‑1987), 1 B.F.L.R. 267.
Ziegel, Jacob S., Benjamin Geva and R. C. C. Cuming. Commercial and Consumer Transactions: Cases, Text and Materials, 3rd ed., vol. II, Negotiable Instruments and Banking, by Benjamin Geva. Toronto: Emond Montgomery, 1995.
APPEAL from a judgment of the Federal Court of Appeal (Sexton, Blais and Layden‑Stevenson JJ.A.), 2009 FCA 267, 2009 DTC 5171 (p. 6205), [2009] F.C.J. No. 1151 (QL), 2009 CarswellNat 2851, affirming a decision of Little J., 2008 TCC 482, [2009] 1 C.T.C. 2264, 2008 D.T.C. 4762, [2008] T.C.J. No. 372 (QL), 2008 CarswellNat 3092. Appeal allowed, decisions of the Federal Court of Appeal and the Tax Court of Canada set aside and the assessments vacated, McLachlin C.J. and Fish and Abella JJ. dissenting.
R. Paul Steep and Thomas N. T. Sutton, for the appellant.
Wendy Burnham and Michael Lema, for the respondent.
The judgment of Binnie, Deschamps, Rothstein and Cromwell JJ. was delivered by
[1] Deschamps J. — Few jurists thrive on exploring the mechanisms rooted in the Bills of Exchange Act, R.S.C. 1985, c. B-4 (“BEA ”); most find them technical and tedious. Important as electronic transactions have become in an increasingly paperless world, cheques are still popular bills of exchange that are processed daily in a multitude of transactions across Canada based on recognized mechanisms. The arguments accepted by the courts below disregard those mechanisms. If accepted, their interpretation would require a bank to which a third party has made a demand for payment to determine not only whether its customer is liable to pay the third party, but also whether the payee is liable to do so. No reason was advanced for imposing such an obligation. For the following reasons, I am of the view that the bank in this case was at no point liable to pay the tax debtor the proceeds of the cheques. I would allow the appeal with costs throughout.
[2] Section 224 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”), provides that the Minister of National Revenue may require a person who is, or will be within one year, liable to make a payment to a tax debtor to instead pay the money the person owes the tax debtor to the Receiver General (“requirement to pay”). The Minister’s authority to issue a requirement to pay in appropriate circumstances is not in dispute. The issue in this appeal is whether a bank that receives a cheque payable to the tax debtor for deposit in an account held jointly by that debtor and a third party becomes liable to make a payment to the tax debtor.
[3] The facts are uncontested. At the relevant time, the appellant, Canada Trustco Mortgage Company (“Trustco”), was authorized to offer financial services in Canada. The parties have described Trustco as a bank, as has the Tax Court of Canada, and for the sake of convenience, I will also refer to it as a bank.
[4] Cameron Clyde McLeod was a practising member of the Law Society of British Columbia. For the purposes of his law practice, he maintained a trust account with Trustco at the latter’s King George Highway branch in Surrey, B.C. In addition, he and another lawyer, Herbert Maier, held a joint account at the same branch. Each of the accounts was governed by an agreement.
[5] Mr. McLeod owed tax to the federal government. The Minister became aware that cheques payable to Mr. McLeod were being drawn on the trust account and deposited in the joint account. The Minister issued three requirements to pay to Trustco. According to these requirements, Trustco was to pay to the Receiver General moneys otherwise payable to Mr. McLeod. In response to the requirements to pay, Trustco disputed its liability on the ground that it was “not indebted to the [taxpayer] alone”.
[6] Each of the cheques on which the claim is based was issued during the period of effectiveness of the requirements to pay, was drawn on the trust account, was payable to Mr. McLeod and was delivered to Trustco with an instruction to deposit the funds in the joint account. This instruction was given by writing “Dep to” and the account number on the back of the cheque. Although the evidence is silent as to the identity of the person or persons who delivered the cheques and gave the instructions to deposit them, neither the authority to do so of the person or persons in question nor the legitimacy of Trustco’s receipt of the cheques for deposit is at issue. Trustco credited the joint account, sent the cheques to a third party for collection, processing and settlement — the third party’s stamp appears on the back of the cheque filed as a sample — and, on the following day, debited the trust account.
[7] The Minister assessed Trustco for the amounts of the cheques for failing to comply with the three requirements to pay. Trustco filed notices of objection. After they were rejected, it appealed to the Tax Court of Canada.
[8] I will pause here to underscore the various capacities in which the parties in this appeal interacted, capacities that must not be conflated. A bank’s relationship with a customer is based on a contract made up of both implied and express terms; I will elaborate on this below. Where a cheque is involved, the parties’ rights and obligations are also governed by the BEA . In most transactions involving cheques, a bank acts in only one capacity, that is, as either the drawee, the negotiating bank or the collecting bank, and the bank’s customer acts as either the drawer or the holder of a cheque. In this case, Trustco acted at times as the collecting bank and at other times as the drawee. Mr. McLeod acted variously as the drawer (he was the holder of the trust account), as the payee of the cheques (the cheques were made out to him) and as one of the two holders of the joint account.
[9] It is also important to point out that the respondent, Her Majesty The Queen (hereinafter referred to as “Canada”) made two significant concessions at trial (2008 TCC 482, [2009] 1 C.T.C. 2264, at para. 11):
(a) the requirements to pay do not apply to funds on deposit in the trust account, and Trustco accordingly had no obligation to remit funds on deposit in the trust account; and
(b) the requirements to pay do not apply to funds in the joint account, and Trustco accordingly had no obligation to remit funds on deposit in the joint account.
[10] Since Canada’s position does not rest on funds being held in the trust account or in the joint account, the question becomes whether Trustco was liable to make payments to the tax debtor, Mr. McLeod, because of the fact that he was named as the payee of the cheques. To answer this question, Trustco’s obligations must be examined in the two capacities in which it acted, as mentioned above: (1) as the collecting bank and (2) as the drawee of the cheque.
[11] Little J. dismissed Trustco’s appeal. He applied the test from National Trust Co. v. Canada (1998), 162 D.L.R. (4th) 704 (F.C.A.), to determine whether s. 224(1) of the ITA had been triggered. He asked whether Trustco was “liable” to make a payment and whether the amount would be “payable” to a tax debtor within a year. The need to “stop [the analysis] before considering that it was cheques that were presented to the bank” was pivotal to his reasoning (para. 20). He focussed on the “repayment” of the funds in the trust account (para. 12 (emphasis in original)).
[12] Little J. considered that the proceeds of the cheques were “payable” to Mr. McLeod because the debtor-creditor relationship between Trustco and Mr. McLeod required the former to repay the funds deposited in the trust account to the account holder on demand (para. 22). In his view, Trustco’s liability arose when Mr. McLeod “presented the bank with the cheques” (para. 28). This led Little J. to conclude that he did not need to examine the fact that the moneys had actually been transferred from the trust account to the joint account (para. 30).
[13] In addition, although he acknowledged that the “writing [of] a cheque is not by itself a withdrawal”, Little J. found that the situation was different once “the cheque is presented to the bank” (para. 31). He took into consideration the fact that Mr. McLeod was not only the payee but also the drawer and that as the drawer he was in a position to enforce the payment because of the debtor-creditor relationship that existed between Trustco and himself (ibid.). Little J. recognized — and he noted that Canada had conceded the point — that a bank is not liable to the payee of a cheque (para. 39). However, in his view, Trustco remained liable to pay the cheques to Mr. McLeod in his capacity as holder of the trust account. He accepted Canada’s submission that Mr. McLeod was the bearer of the cheque (para. 41).
[14] The Federal Court of Appeal found that no “palpable or overriding error” had been made and unanimously upheld Little J.’s decision (2009 FCA 267, 2009 DTC 5171 (p. 6205), at para. 1).
[15] Trustco argues that the trial judge failed to differentiate between a demand for repayment of funds deposited in an account and the delivery of a cheque for deposit. In its view, it was liable only — as drawee — to pay funds out of the trust account upon proper presentment for payment by the holder of the cheque. At no point was it liable to make a payment to Mr. McLeod, the tax debtor.
[16] Canada contends that there is no distinction between presentment of a cheque to the drawee for the payment of cash to Mr. McLeod and presentment of a cheque for deposit to the joint account. Its position is that when Mr. McLeod delivered the cheques to Trustco and instructed it to pay the amounts into the joint account, he acted as payee, creditor, drawer and depositor, but that his role as depositor is irrelevant.
[17] Canada’s contention implies that Trustco became liable to make a payment to Mr. McLeod when it accepted the cheque for deposit. To determine whether Trustco is liable to make a payment to the Receiver General, it will be necessary to review the relevant legal relationships.
I. Analysis
[18] The analysis of a bank’s relationship with its customers must begin with the seminal case of Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002:
The relation between a Banker and Customer, who pays money into the Bank, is the ordinary relation of debtor and creditor . . . .
. . .
. . . I am now speaking of the common position of a banker, which consists of the common case of receiving money from his customer on condition of paying it back when asked for, or when drawn upon, or of receiving money from other parties, to the credit of the customer, upon like conditions to be drawn out by the customer, or, in common parlance, the money being repaid when asked for, because the party who receives the money has the use of it as his own, and in the using of which his trade consists, and but for which no banker could exist, especially a banker who pays interest. [pp. 1002 and 1008]
[19] Implicit in the debtor-creditor relationship is the bank’s obligation to repay the funds deposited in the account when its customer demands payment. In the case at bar, Trustco is a party in two separate contractual relationships: the first is in connection with the trust account and the second with the joint account. Having conceded that it cannot attach funds in either of these accounts, Canada cannot rely merely on the debtor-creditor relationships that arose from the fact that funds were at some point in time held in them. Canada accordingly focusses on the fact that cheques were made to the order of Mr. McLeod, the tax debtor, which narrows the issues and makes it necessary to review the obligations a bank must meet upon receipt of a cheque for deposit and upon presentment of a cheque drawn on it.
A. Obligation of the Collecting Bank
[20] Counsel for Canada argues that the best way to view the receipt of the cheques for deposit is to break the transactions down into two steps: at the first, Mr. McLeod demanded to be paid as payee of the cheques and also demanded, as drawer, that the amounts be repaid out of funds owed to him in relation to the trust account; at the second, he instructed Trustco to deposit the funds into the joint account. In other words, notional payments were made to Mr. McLeod before the funds were deposited into the joint account.
[21] This approach disregards the instructions to deposit the funds into the joint account. The evidence shows that the cheques were initially received at the branch with instructions to deposit the funds into the joint account, not that Mr. McLeod, as drawer, demanded that payments be made to him as payee. The evidence is also clear that the cheques were credited to the joint account before being sent for clearing and before the funds were debited from the trust account. At no point did Trustco actually make a payment to Mr. McLeod.
[22] The argument of counsel for Canada also disregards the nature of the instrument used by the parties: a cheque. A cheque is an instrument that embodies both common law and statutory concepts. This means that both the statute governing the instrument — the BEA — and the common law must be taken into consideration.
[23] The argument accepted by the Tax Court judge that Mr. McLeod was the bearer of the cheque (para. 41) is inconsistent with the definition of the term “bearer” in the BEA , according to which a bearer is a specific type of holder, namely “the person in possession of a bill or note that is payable to bearer” (s. 2 BEA ). To be payable to bearer, a cheque must be expressed to be so payable, or the only or last endorsement on it must be an endorsement in blank (s. 20(3) BEA ). In this case, the cheques were neither expressed to be payable to bearer nor endorsed in blank. After the cheques had been delivered for deposit into the joint account, Mr. McLeod was no longer in possession of them, was not entitled to them and was therefore not their holder.
[24] More importantly, Canada’s approach and the Tax Court judge’s interpretation disregard the capacity in which Trustco acted. The receipt by a bank of a cheque for deposit carries with it obligations grounded both in the common law and in the banking agreement. Professor Ogilvie describes the bank’s legal position in such a situation as follows:
When a customer, the payee of a cheque, deposits a cheque or other instrument in an account with the customer’s bank, that bank takes on the role of collecting bank, which involves presenting the cheque for payment through the clearing system to the paying bank, that is, the bank of the drawer of the cheque from whose account at the paying bank it is expected that the cheque will be paid.
(M. H. Ogilvie, Bank and Customer Law in Canada (2007), at p. 288)
Whereas it was in Foley v. Hill that the House of Lords made clear that the bank is under an implied contractual duty to honour cheques drawn by its customers, it was in Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110, that the duty to collect the proceeds of a cheque was characterized as one of the common law incidents of the banking contract: “The bank undertakes to receive money and to collect bills for its customer’s account” (p. 127). (See also Ogilvie, at p. 288.) Professor Goode adds that when the customer is silent about what is expected from the bank, the bank may be presumed to act as a collecting bank: R. M. Goode, “When is a cheque paid?”, [1983] J. Bus. L. 164, at p. 164.
[25] For the collecting bank’s duty to its customer to be triggered, there must be a properly payable cheque and no suspicious circumstances. In undertaking to collect a deposited cheque, the collecting bank must select the collection method with reasonable care, promptly present the deposited cheque for collection, receive payment for it and credit the customer’s account or, if applicable, give notice of dishonour (B. Crawford, The Law of Banking and Payment in Canada (loose-leaf), vol. 2, at pp. 10-43, 10-46 and 10-51; E. P. Ellinger, E. Lomnicka and R. Hooley, Modern Banking Law (3rd ed. 2002), at p. 598).
[26] The situation of a bank that credits its customer’s account before actually receiving the proceeds of collection raises, in Crawford’s words (p. 24-6), an “interesting conceptual problem”. However, as he correctly points out, this interesting question is of no practical importance in Canada. Section 165(3) of the BEA provides that a bank which receives a cheque for deposit acquires all the rights and powers of a holder in due course (Crawford, at p. 10-78; J. S. Ziegel, B. Geva and R. C. C. Cuming, Commercial and Consumer Transactions: Cases, Text and Materials (3rd ed. 1995), vol. II, at pp. 362-63).
[27] In the case at bar, Trustco was put in possession of the cheques by the payee, Mr. McLeod, or by someone acting on his behalf, with instructions to deposit them. Not only was Mr. McLeod one of the holders of the joint account, but Trustco’s contract with the account’s holders authorized it to accept cheques from persons who provided the account number. It has not been suggested that the instructions to deposit the cheques were not actually given or that there was any doubt that the payee or his agent had the authority to give them. Since Trustco was in lawful possession of the cheques, it can safely be concluded that, once it had received the cheques for deposit and credited them to the joint account, it acquired the rights of a holder in due course pursuant to s. 165(3) of the BEA and was under a contractual obligation to the holders of the joint account to present the cheques for payment.
[28] With some exceptions that do not apply in this case, presentment is a precondition for payment (s. 84(1) BEA ). Presentment must be made by a holder (s. 84(3) BEA ), and payment must be made to a holder (s. 138(2) BEA ). This mechanism rests not on formalism, but on the internal logic of the BEA and on the contractual relationship of a bank with its account holders. The manner in which cheques deposited into bank accounts are processed is grounded in the premise that banks deal primarily with persons who hold accounts with them and in the implicit contractual undertaking of banks to collect the proceeds of cheques deposited in their customers’ accounts. In this case, Trustco collected the cheques on behalf of Mr. McLeod and Mr. Maier jointly, not of Mr. McLeod alone. As the Chief Justice acknowledges, there are good reasons not to confound the holders of a joint account with a single one of its holders: M. H. Ogilvie, “Why Joint Accounts Should Not Be Garnished — Westcoast Commodities Inc. v. Jose Chow Chen” (1986-1987), 1 B.F.L.R. 267. This means that in the instant case, the payee, Mr. McLeod, cannot be confused with the holders of the joint account even though he is one of them.
[29] In addition to the contract clause authorizing Trustco to accept deposits to the joint account from any person who could provide the account number, there was a clause to the effect that the amount of any instrument previously cashed, negotiated or credited by Trustco and returned unpaid or unsettled could be debited from the joint account. These clauses are relevant to a situation in which a bank receives a cheque, credits an account and then presents the cheque for payment. If the cheque is returned unpaid, the collecting bank may debit its customer’s account. The clauses in question do not support an inference that the receipt of a cheque for deposit in the joint account would on its own suffice for Trustco to become liable to make a payment to Mr. McLeod.
[30] In discharging its duties as the collecting bank, Trustco had to be alert to suspicious circumstances. However, the fact that cheques are drawn on a trust account is not material to the collecting bank’s duties. As Garon T.C.C.J. pointed out in Bank of Montreal v. M.N.R., [1992] 1 C.T.C. 2292, it is generally not incumbent on a bank to police a trust account (p. 2295). In crediting the joint account, sending the cheques to a third party for clearing, and receiving the proceeds, Trustco was acting on the basis of its contractual relationship with the holders of the joint account and not on behalf of Mr. McLeod personally. When Trustco debited the trust account the next day, it was not making a payment to Mr. McLeod or to an agent acting for him alone.
[31] The Chief Justice expresses the opinion that Trustco never became the holder of the cheques. With respect, the fact that the cheques were not endorsed does not mean that Trustco did not acquire the rights of a holder in due course which results from having received valid cheques in good faith. Section 165(3) of the BEA was in fact adopted to avoid the argument that a bank that receives for deposit a cheque bearing a restrictive endorsement or no endorsement at all is not a holder — its purpose was not to protect against fraudulent endorsements (see s. 67(2) BEA ; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727, at paras. 76-81; J.C. Creations Ltd. v. Vancouver City Savings Credit Union, 2004 BCCA 107, 236 D.L.R. (4th) 602; Westboro Flooring & Décor Inc. v. Bank of Nova Scotia (2004), 241 D.L.R. (4th) 257 (Ont. C.A.)). However, the fact that Trustco had acquired the rights and powers of a holder in due course of the cheques — as uncontroversial as it may be — is not the reason why Trustco was not liable to pay moneys to the tax debtor, Mr. McLeod. The reason Trustco owed no money to Mr. McLeod is that it was acting as the collecting bank for its customers, the holders of the joint account. It did not collect the proceeds of the cheques as agent for the payee, Mr. McLeod.
[32] The Chief Justice relies on B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504, in support of the proposition that, in the case at bar, Trustco, as the collecting bank, acted as agent for the payee. B.M.P. concerned a payment made under a mistake of fact. In it I wrote, in discussing the equitable defence of change of position (para. 63) and the consequences on tracing of the passage of a cheque through the clearing system (paras. 76 and 83), that the Bank of Nova Scotia, as the collecting bank, had received the funds as agent for the payee, B.M.P. In that case, because the payee had instructed its bank to deposit the cheque into its own account, the distinction in the instant case between the payee and the account holder on whose behalf the cheque is collected did not arise. The payee and the account holder were the same person, B.M.P. Since the contractual duty to collect the proceeds of a cheque is owed to the customer in whose account the cheque is deposited, it would have been more precise to say that the collecting bank acts as agent for the person in whose account the cheque has been deposited. This choice of words in a case dealing with mistake of fact and tracing cannot serve as a basis for holding that a collecting bank has a contractual relationship with someone other than the holder of the account to which the cheque is credited.
[33] In the case at bar, the only instructions received were to deposit the cheques to the credit of the joint account, and it is these instructions that triggered the duty to collect the proceeds of the cheques. The contract that incorporates the implied term imposing on the bank the duty to proceed to collect on the cheque is the one between Trustco and the holders of the joint account. There is no contract between a bank and a payee in his or her capacity as payee.
[34] This approach is not formalistic. No significance is attached to the fact that the cheques were processed through the clearing system. Trustco’s acceptance of the cheques for deposit in the joint account could not have resulted in a liability to pay the Receiver General: the obligation resulting from that acceptance was to the holders of the joint account, and Canada concedes that the funds in the joint account could not be attached.
[35] Canada nonetheless contends that the focus should be on the fact that Mr. McLeod was acting in this case in his capacity as payee and as a creditor of Trustco by virtue of his status as holder of the trust account, and that he was demanding payment from Trustco in its capacity as drawee. Since the Chief Justice accepts this argument, I will now explain why it must fail.
B. Obligation of a Drawee
[36] Schroeder v. Central Bank of London (1876), 34 L.T. 735 (C.P. Div.), is important to an understanding of the nature of the obligations of a drawee bank to the payee. In it, the payee contended that the cheque constituted an absolute assignment of the funds in his hands and that he was therefore entitled to receive payment from the drawee bank. The drawee bank countered that a bank on which a cheque is drawn is under no liability to pay the holder of the cheque. The court agreed with the bank (at p. 737):
A cheque is a request to pay and nothing more; it does not purport to be an assignment, and it is impossible, therefore, to regard it as an assignment of so much money. The bankers hold their customer’s money on an implied contract to pay his cheques up to the amount of his balance in their hands, for breach of which they would be liable in damages to the drawer. But there is no contract by the bankers with the payees of the cheque, and they can have no remedy against the bank unless by the statute.
[37] This approach is consistent with the reasoning in Foley v. Hill. A banker’s obligation arises out of the debtor-creditor relationship created when a bank account is opened. The payee is not a party to this contractual relationship, and the mere fact of being a payee does not entail such a relationship with the drawee.
[38] For the purpose of determining whether, absent any contractual relationship with the payee of a cheque, a drawee bank owes the payee any duty, the definition of a cheque in the BEA is relevant: “A cheque is a bill drawn on a bank, payable on demand” (s. 165(1) ). A bill is defined as follows (s. 16(1) BEA ):
16. (1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.
[39] In addition, the BEA explicitly states that the mere issuance of a cheque does not operate as an assignment of funds in the hands of the drawee (s. 126 BEA ):
126. A bill, of itself, does not operate as an assignment of funds in the hands of the drawee available for the payment thereof, and the drawee of a bill who does not accept as required by this Act is not liable on the instrument.
[40] These provisions, read together, mirror the principles stated in Schroeder and incorporate them into the statute. A cheque operates neither as an assignment of funds in the hands of the payee nor as an assignment of funds in the hands of the drawee. It is a document by means of which a customer orders his or her banker to pay funds the banker owes the customer to a person or to the order of that person out of the account specified on it. In and of itself, a cheque imposes no obligation on a drawee bank to the payee. This interpretation is well entrenched in our law and was accepted by Canada at trial: Schroeder; Thomson v. Merchants Bank of Canada (1919), 58 S.C.R. 287, at p. 298; Schimnowski Estate, Re, [1996] 6 W.W.R. 194 (Man. C.A.), at para. 19.
[41] The statutory duty of a bank to pay a cheque is governed by the rules applicable to presentment. With some exceptions, as I mentioned above, presentment is mandatory (s. 84(1) BEA ). The general rule for presentment of a cheque is as follows (s. 86(1) BEA ):
86. (1) Presentment of a bill must be made by the holder or by a person authorized to receive payment on his behalf, at the proper place as defined in section 87, and either to the person designated by the bill as payer or to his representative or a person authorized to pay or to refuse payment on his behalf, if with the exercise of reasonable diligence such person can there be found.
A bank may incur other liabilities in circumstances which do not arise in the case at bar, upon acceptance within the meaning of s. 34 of the BEA , for example. That is not the case here. At the time of presentment, Mr. McLeod was no longer a holder. Only Trustco had the rights and powers of a holder in due course.
[42] Bank of Montreal illustrates clearly that the duty to honour the customer’s cheque is triggered only at the time the holder presents the cheque to the drawee for payment. In that case, requirements to pay had been issued to the Bank of Montreal in relation to tax owed by a customer of the bank who held a trust account there. The tax debtor drew cheques payable to himself on the trust account and endorsed them in blank. The cheques were subsequently endorsed by his wife and presented to the Bank of Montreal