Marzetti v. Marzetti

Marzetti v. Marzetti
Collection
Supreme Court Judgments
Date
1994-07-14
Report
[1994] 2 SCR 765
Case number
23273
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank
On appeal from
Alberta
Subjects
Bankruptcy and insolvency
Notes
SCC Case Information: 23273
Decision Content
Marzetti v. Marzetti, [1994] 2 S.C.R. 765
Peat Marwick Thorne Inc., Trustee of the
Estate of Arden Anthony Marzetti, a Bankrupt Appellant
v.
The Director of Maintenance Enforcement,
the Attorney General of Canada and
the Attorney General for Alberta Respondents
and
The Superintendent of Bankruptcy Intervener
and between
Jacqueline Jeannine Marzetti Petitioner
v.
Arden Anthony Marzetti Respondent
Indexed as: Marzetti v. Marzetti
File No.: 23273.
1994: February 3; 1994: July 14.
Present: La Forest, L'Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin and Iacobucci JJ.
on appeal from the court of appeal for alberta
Bankruptcy ‑‑ Priority ‑‑ Post‑bankruptcy income tax refund ‑‑ Husband ordered to pay monthly amount for child and spousal support to Director of Maintenance Enforcement ‑‑ Husband later filing voluntary assignment in bankruptcy and assigning post‑bankruptcy income tax refund to trustee ‑‑ Director filing notice of continuing attachment against federal Crown ‑‑ Whether income tax refund properly payable to trustee or to Director ‑‑ Bankruptcy Act, R.S.C., 1985, c. B‑3, ss. 67 , 68 .
After his payments of child and spousal support fell into arrears, M was ordered to pay a monthly sum to the Director of Maintenance Enforcement. He later filed a voluntary assignment in bankruptcy and executed an agreement letter authorizing that any refund resulting from a post‑bankruptcy income tax return be mailed to the appellant trustee as an asset for distribution to the creditors. The Director filed a notice of continuing attachment against the federal Crown. After M was discharged from bankruptcy, a garnishee summons was issued putting the notice of continuing attachment into effect. The trustee filed a post‑bankruptcy income tax return, and a refund became payable. In response to a motion by the trustee, the Master declared that the refund constituted property of the bankrupt which vested in the trustee. Under s. 67(c) of the Bankruptcy Act, the property of a bankrupt divisible among his creditors comprises all property of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge. Under s. 68(1), however, "the trustee, if directed by the inspectors or the creditors, shall apply to the court for an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the court may determine, having regard to the family responsibilities and personal situation of the bankrupt". Section 68(2) provides that the order must be directed to the bankrupt and his employer. The Master was prepared to accept that s. 68 removes wages from the scope of s. 67 (c), but was not prepared to accept that income tax deductions from an employee's wages retain the character of wages. The Court of Queen's Bench reversed the Master's decision and ordered that the refund be returned to the Director. The Court of Appeal affirmed that judgment.
Held: The appeal should be dismissed.
A bankrupt's interest in a post‑bankruptcy income tax refund can be considered "property" for the purposes of s. 67(c) of the Bankruptcy Act. Even if a taxpayer who makes overpayments has no right to compel a refund prior to filing a return, that taxpayer has at least a future and contingent interest in the ultimate tax refund which would come within the definition of "property" in s. 2 of the Act. The property need not also meet the requirements of s. 67 (d) before the trustee can claim it, since s. 67 (c) and (d) should be treated as alternatives. The bankrupt's interest in his refund did not, however, vest automatically in his trustee. Section 68 is a complete code in respect of a bankrupt's salary, wages or other remuneration, and such forms of property thus cannot be "property of a bankrupt divisible among his creditors" for purposes of s. 67 . The trustee can access them only following a court application as contemplated by s. 68(1), and no such application was made in this case. A plain language interpretation of s. 68(1) favours the view that it is a substantive provision: the opening words "[n]otwithstanding section 67 " are intended to make it clear that wages will not come within s. 67 (c) but will be dealt with by s. 68 . The mischief which s. 68 was intended to remedy reinforces this view. Since the section was intended to remedy province‑to‑province disparities in the application of the Bankruptcy Act, it necessarily follows that it is a substantive rather than a procedural modification to the pre‑existing scheme.
The post‑bankruptcy income tax refund in this case retained the character of wages to the extent that it represented a return of employer withholdings. The bankrupt earned a certain amount as wages after his voluntary assignment in bankruptcy, and the fundamental character of these wages is not affected by the fact that a portion was, by virtue of statute, automatically directed toward his tax liability. The only problems with the characterization of an income tax refund as deferred wages for the purposes of s. 68 of the Bankruptcy Act are structural ones. The trustee's inability to act independently is a flaw inherent in s. 68(1), which has now been corrected by a statutory amendment. The fact that s. 68(2) orders can be directed only toward "the bankrupt and his employer" is a more serious problem, but this deficiency cannot affect the conclusion that an income tax refund retains its character as wages. While it would be preferable, from a trustee's point of view, to obtain an order directly against the Crown in respect of an income tax refund, an order against the bankrupt person alone does provide the trustee with the necessary legal entitlement to the refund. Moreover, the fact that the court is to have "regard to the family responsibilities and personal situation of the bankrupt" demonstrates an overriding concern for the support of families. The discretion given to courts by s. 68 is amplified by the discretion which is necessarily left in the trustee, creditors and inspectors. Since these kinds of discretion are better able to respond to the costs of raising families, a purposive interpretation should be given to the word "wages" in s. 68 , notwithstanding difficulties associated with s. 68(2).
The agreement letter was incapable of creating an effective assignment owing to s. 67 of the Financial Administration Act , which states that "[e]xcept as provided in this Act or any other Act of Parliament . . . a Crown debt is not assignable". "Crown debt" is defined to include not only existing debts, but also future debts "due or becoming due". The Financial Administration Act fails to permit such assignment, and no express authorization appears in any other federal statute. By taking steps to garnish the income tax refund, the Director thus necessarily obtained priority in this case.
Cases Cited
Disapproved: Re Northward Airlines Ltd. (1981), 37 C.B.R. (N.S.) 137; Re Beaton (1979), 30 C.B.R. (N.S.) 225; Re Hoffer (1980), 34 C.B.R. (N.S.) 222; Re Kellaway (1977), 24 C.B.R. (N.S.) 14; distinguished: Re Bertrand, [1980] 2 N.Z.L.R. 72; referred to: Tailby v. Official Receiver (1888), 13 App. Cas. 523; Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109; Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R. 300; Re Goulet (1977), 24 C.B.R. (N.S.) 222; Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182; Munich Reinsurance Co. (Canada Branch) v. M.N.R., 91 D.T.C. 1137; Hughes v. The Queen, 91 D.T.C. 5290; Re Giroux (1983), 45 C.B.R. (N.S.) 245; Re McCullough (1984), 52 C.B.R. (N.S.) 313; Re Ali (1987), 62 C.B.R. (N.S.) 64; Vachon v. Canada Employment and Immigration Commission, [1985] 2 S.C.R. 417; Re Szatmari (1972), 18 C.B.R. (N.S.) 309; Re Walker (1982), 43 C.B.R. (N.S.) 319; Moge v. Moge, [1992] 3 S.C.R. 813.
Statutes and Regulations Cited
Act to amend the Bankruptcy Act, S.C. 1966-67, c. 32, s. 10.
Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C. 1992, c. 27, ss. 1, 2, 34(1).
Bankruptcy Act, R.S.C., 1985, c. B‑3, ss. 2 , 67 , 68 , 70 , 71 , 158 .
Bankruptcy Act, S.C. 1919, c. 36, s. 25.
Divorce Act, R.S.C., 1985, c. 3 (2nd Supp .).
Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp .), ss. 23 , 24 , 28 .
Family Support Orders and Agreements Garnishment Regulations, SOR/88‑181, s. 3(a).
Financial Administration Act, R.S.C., 1985, c. F‑11, ss. 66 , 67 , 68(1) , 69 , 70 .
Income Tax Act, R.S.C. 1952, c. 148, ss. 153(3), 164(1).
Maintenance Enforcement Act, S.A. 1985, c. M‑0.5, s. 4.
Tax Rebate Discounting Act, R.S.C., 1985, c. T-3, s. 2(2) .
Authors Cited
Canadian Encyclopedic Digest (Ontario 3rd ed.), vol. 12, Title 58. Toronto: Carswell.
Canadian Encyclopedic Digest (Western 3rd ed.), vol. 13, Title 59. Calgary: Carswell.
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Houlden, L. W., and C. H. Morawetz. Bankruptcy and Insolvency Law of Canada, vol. 1, 3rd ed. Toronto: Carswell, 1992 (looseleaf).
House of Commons Debates, vol. VI, 1st Sess., 27th Parl., June 16, 1966, at p. 6488.
APPEAL from a judgment of the Alberta Court of Appeal (1992), 14 C.B.R. (3d) 127, 131 A.R. 154, 25 W.A.C. 154, 4 Alta. L.R. (3d) 97, 42 R.F.L. (3d) 76, 94 D.L.R. (4th) 394, affirming a judgment of the Court of Queen's Bench (1991), 8 C.B.R. (3d) 238, 123 A.R. 1, 82 Alta. L.R. (2d) 67, 35 R.F.L. (3d) 225, reversing a decision of Master Funduk (1990), 2 C.B.R. (3d) 109, 112 A.R. 70, awarding the bankrupt's income tax refund to the trustee of his estate. Appeal dismissed.
Michael J. McCabe, for the appellant.
Jeanette Fedorak, for the respondent the Director of Maintenance Enforcement.
Ingrid C. Hutton, Q.C., and Robert Moen, for the respondent the Attorney General of Canada.
No one appeared for the respondent the Attorney General for Alberta.
Rick T. G. Reeson, for the intervener.
The judgment of the Court was delivered by
Iacobucci J. -- This appeal involves a priority contest, the subject matter of which is a bankrupt's post-bankruptcy income tax refund. The contestants are a trustee in bankruptcy and the Director of Maintenance Enforcement. The appeal has been brought as a test case, with the parties proceeding on an agreed statement of facts.
I. Facts
In 1986, Arden Anthony Marzetti was ordered to pay monthly child and spousal support pursuant to the Divorce Act, R.S.C., 1985, c. 3 (2nd Supp .). He fell into arrears, and a default hearing was held in December 1988. As a consequence, Marzetti was ordered to pay $250 per month to the Director of Maintenance Enforcement (the "Director"), who is appointed pursuant to s. 4 of the Maintenance Enforcement Act, S.A. 1985, c. M-0.5.
On June 7, 1989, Marzetti filed a voluntary assignment into bankruptcy. On that date, he also executed an "Agreement Letter" as requested by his Trustee in Bankruptcy, Peat Marwick Thorne Inc. The Agreement Letter reads:
I hereby authorize Peat Marwick Limited, as Trustee of my Estate, to complete and file with Revenue Canada - Taxation my post-bankruptcy income tax return for the year 1989. I further authorize that any refund resulting from the post-bankruptcy income tax return be mailed to Peat Marwick Limited as an asset pursuant to Section 47 of the Bankruptcy Act for distribution to my creditors.
On February 15, 1990, the Director filed a Notice of Continuing Attachment against the federal Crown under the Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp .). The Notice instructed the Crown to pay to the Director specified monies, namely, sums otherwise payable to Marzetti under any Act of Parliament.
On March 7, 1990, Marzetti was granted an absolute discharge from bankruptcy.
On April 13, 1990, the Department of Justice issued a garnishee summons, thus putting into effect the Notice of Continuing Attachment previously filed.
On April 30, 1990, the Trustee filed a post-bankruptcy income tax return for Marzetti. That return summarized Marzetti's tax liability for the period between June 7, 1989 and December 31, 1989. A post-bankruptcy income tax refund totalling $2,066.90 became payable.
Before the refund was paid, the Trustee applied for a declaration that the refund was properly payable to the Trustee rather than the Director. Although the Crown in right of Canada was served with notice of the Trustee's motion, the tax refund was nonetheless paid to the Director in August 1990. Counsel for the Attorney General of Canada acknowledged that this payment was made in error, and that the Minister of National Revenue did not intentionally make payment prior to resolution of the priority dispute.
In response to the Trustee's motion, an Alberta Master declared that the refund constitutes property of Marzetti which vested in the Trustee: (1990), 2 C.B.R. (3d) 109, 112 A.R. 70. The Director was ordered to pay the amount of the refund to the Trustee. The Court of Queen's Bench of Alberta allowed the Director's appeal, and ordered that the refund be returned to the Director: (1991), 8 C.B.R. (3d) 238, 123 A.R. 1, 82 Alta. L.R. (2d) 67, 35 R.F.L. (3d) 225. The Court of Appeal for Alberta dismissed the Trustee's appeal: (1992), 14 C.B.R. (3d) 127, 131 A.R. 154, 25 W.A.C. 154, 4 Alta. L.R. (3d) 97, 42 R.F.L. (3d) 76, 94 D.L.R. (4th) 394. This Court granted leave to appeal from that decision: [1993] 1 S.C.R. vii.
The Attorney General for Alberta, a named respondent who participated in the proceedings below, was not represented in the appeal before this Court.
II. Relevant Statutory Provisions
A.Bankruptcy Act, R.S.C., 1985, c. B-3
2. In this Act,
. . .
"property" includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property;
. . .
67. The property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any other person,
(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,
but it shall comprise
(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
68. (1) Notwithstanding section 67, where a bankrupt is in receipt of, or is entitled to receive, any salary, wages or other remuneration from any person employing, or using the services of, the bankrupt, in this section referred to as the "employer", the trustee, if directed by the inspectors or the creditors, shall apply to the court for an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the court may determine, having regard to the family responsibilities and personal situation of the bankrupt.
(2) An order under subsection (1) shall be directed to the bankrupt and his employer and shall be expressed to continue for such time as the court may fix or until payment of a sum specified in the order and, unless otherwise stated in the order, it ceases to have effect on the discharge of the bankrupt.
. . .
(4) An order under subsection (1) shall be served on the bankrupt and is binding on him, and when the order is served on his employer, it is binding on the employer named therein and any subsequent employer of the bankrupt if a copy of the order is served on the subsequent employer, but nothing in this section shall be construed as requiring the trustee to serve such an order on any employer of a bankrupt if it appears to the trustee inexpedient to do so.
. . .
70. (1) Every receiving order and every assignment made in pursuance of this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, judgments operating as hypothecs, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or his agent, and except the rights of a secured creditor.
. . .
71. ...
(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.
. . .
158. A bankrupt shall
. . .
(l) execute such powers of attorney, conveyances, deeds and instruments as may be required;
. . .
(o) generally do all such acts and things in relation to his property and the distribution of the proceeds among his creditors as may be reasonably required by the trustee, or may be prescribed by the General Rules, or may be directed by the court by any special order made with reference to any particular case or made on the occasion of any special application by the trustee, or any creditor or person interested . . .
B.Family Orders and Agreements Enforcement Assistance Act, R.S.C., 1985, c. 4 (2nd Supp .)
23. In this Part,
"garnishable moneys" means moneys authorized to be paid by Her Majesty by or under such Acts of Parliament or provisions thereof or programs thereunder as are designated by the regulations;
. . .
24. Notwithstanding any other Act of Parliament preventing the garnishment of Her Majesty, Her Majesty may, for the enforcement of support orders and support provisions, be garnisheed in accordance with this Part in respect of all garnishable moneys.
. . .
28. Subject to this Part and the regulations, service of the following documents on the Minister, namely,
(a) a garnishee summons,
(b) a copy of the support order or agreement containing the support provision to which the garnishee summons relates, and
(c) an application in the form prescribed by the regulations,
binds Her Majesty for one year in respect of all garnishable moneys payable to the judgment debtor named in the garnishee summons.
C.Family Support Orders and Agreements Garnishment Regulations, SOR/88-181
3. The following Acts, provisions thereof and programs thereunder are designated for the purposes of the definition "garnishable moneys" in section 23 of the Act:
(a) sections 164 and 216 of the Income Tax Act as they relate to the personal return of income of the taxpayer for a particular taxation year; . . .
D. Financial Administration Act, R.S.C., 1985, c. F-11
66. In this Part,
. . .
"Crown debt" means any existing or future debt due or becoming due by the Crown, and any other chose in action in respect of which there is a right of recovery enforceable by action against the Crown;
. . .
67. Except as provided in this Act or any other Act of Parliament,
(a) a Crown debt is not assignable; and
(b) no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person any rights or remedies in respect of that debt.
E. Tax Rebate Discounting Act, R.S.C., 1985, c. T-3
2. ...
(2) For the purposes of this Act, a person acquires a right to a refund of tax where that person, as between himself and another person, acquires a right to a refund of tax or to an amount equal to the amount of a refund of tax, notwithstanding that, by virtue of section 67 of the Financial Administration Act or any provision of any other Act of Parliament or of the legislature of a province, the refund of tax is not assignable.
III. Judgments
A.Alberta Court of Queen's Bench (1990), 2 C.B.R. (3d) 109 (Master Funduk in Chambers)
Master Funduk asked whether an income tax refund can be considered property of a bankrupt which vests in a trustee by virtue of the Bankruptcy Act, R.S.C., 1985, c. B-3 . He answered that a refund is prima facie "property", as that term is used in s. 67 of the Bankruptcy Act. However, he realized that some courts have treated refunds as deferred wages, and that such courts, by invoking s. 68 of the Bankruptcy Act, have held that refunds do not automatically vest in trustees under s. 67 .
Master Funduk was prepared to accept that s. 68 of the Bankruptcy Act removes wages from the scope of s. 67 (c). But after a comprehensive review of case law, he was not prepared to accept that income tax deductions from an employee's wages retain the character of wages. He stated, plainly: "I do not think that an income tax refund can logically be considered to be `deferred wages'" (p. 119).
Further, Master Funduk noted that, if the refund retained its character as wages, then the plain language of s. 68 would seem to preclude trustees from obtaining orders in respect of the refund. Pursuant to s. 68 , while a trustee can secure an order to obtain wages, the s. 68 order can be directed only toward "the bankrupt and his employer". Master Funduk stated that s. 68 does not permit the attachment of a debt owed by a third party to a bankrupt.
Accordingly, Master Funduk held that the income tax refund is not within the scope of s. 68 of the Bankruptcy Act. He held that it is property of the bankrupt within s. 67 (c) which vested automatically in the Trustee. In light of these holdings, Master Funduk did not consider arguments relating to the Agreement Letter.
B.Alberta Court of Queen's Bench (1991), 8 C.B.R. (3d) 238 (Wachowich J.)
Wachowich J. (as he then was) agreed with Master Funduk that the tax refund is prima facie property within s. 67(c) of the Bankruptcy Act. He also agreed that the refund is neither wages nor deferred wages within s. 68 . However, Wachowich J. indicated that "[w]hile the tax refund falls within s. 67 (c), it seems clear from the language of the Bankruptcy Act that s. 67 (d) must also apply before the property can be dealt with by the trustee" (pp. 246-47). Wachowich J. stated (at p. 247):
This means that the trustee's right to deal with this property is limited to those rights the bankrupt would have had had he not been bankrupt . . . . if Marzetti had not been bankrupt, he would have had no power to collect the portion of the tax refund garnisheed by the Director because of the Family Orders and Agreements Enforcement Assistance Act . Similarly then, the trustee has no right to that portion of the tax refund garnisheed and paid to the Director.
. . .
Thus, the tax refund does not automatically vest in the trustee under ss. 67 (c) and (d).
Wachowich J. next considered the Agreement Letter. He found that, under ss. 66 and 67 of the Financial Administration Act, R.S.C., 1985, c. F-11 , "there is a statutory prohibition against the assignment of Crown debts except as specifically authorized by federal legislation" (p. 247). Wachowich J. accepted that, by virtue of Re Northward Airlines Ltd. (1981), 37 C.B.R. (N.S.) 137 (Alta. Q.B.), an assignment might nonetheless be effective as between an assignor and an assignee. However, Wachowich J. referred to Tailby v. Official Receiver (1888), 13 App. Cas. 523 (H.L.), and stated (at p. 249):
... while the assignment might bind the conscience of the assignor, it cannot bind the property until such time as the contract becomes capable of being performed. . . . the contract between the assignor and the assignee cannot be performed until the assignor has received his tax refund. Because of the nature of the garnishment proceedings available to the Director, the assignor (the bankrupt) never does receive the tax refund. Thus, the assignee's rights to the property never materialize.
Thus, Wachowich J. distinguished Re Northward Airlines on the ground that it did not involve a prior right to garnishee a Crown debt.
On the question of assignment, then, Wachowich J. concluded that the Trustee is "attempting to get through the back door something it could not get through the front" (p. 249). He stated that the Trustee could take action against the Director only if Marzetti could similarly take action, which he could not. He found that, once the refund passed to the Director, it ceased to be Marzetti's property under s. 67 (c), in that Marzetti had "no power over or in respect of that property" (p. 249). Additionally, Wachowich J. stated that even if the assignment were otherwise enforceable, it would remain unenforceable on the facts because of the Trustee's failure to comply with ss. 69 and 70 of the Financial Administration Act .
The assignment being ineffective, and s. 67(c) of the Bankruptcy Act being inoperative, Wachowich J. allowed the appeal. He declared that the income tax refund was properly attached by the Director. Accordingly, he ordered the Trustee to remit the refund plus interest to the Director.
C.Alberta Court of Appeal (1992), 14 C.B.R. (3d) 127 (Major J.A. for the Court)
Major J.A. (as he then was) first discussed the role of s. 68 of the Bankruptcy Act. In his opinion, s. 68 legislatively overruled Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109. Thus, Major J.A. interpreted s. 68 to mean that "only upon application to the court having regard to the enumerated considerations can a trustee access the wages or salary earned by a bankrupt" (p. 131).
Major J.A. next accepted as correct both Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R. 300 (Austr. H.C.) and Re Goulet (1977), 24 C.B.R. (N.S.) 222 (Ont. S.C.). This acceptance supported his conclusion, namely, that "tax deductions taken at source by an employer and remitted to Revenue Canada do not lose their character as wages" (p. 135). Major J.A. explained that "[t]he reality of the situation is that the income tax refund, insofar as it relates to employer withholdings, represents wages that otherwise would have been paid to the bankrupt" (p. 134). He buttressed his conclusion with dicta from Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182. But he also qualified his conclusion by stating (at p. 135):
I do not conclude that all tax refunds are wages. It depends on the nature of the refund. In this case the refund was the result of taxes deducted directly from wages. Tax refunds may arise in other ways and can be determined when that case arises.
Then, as a final point on the wages issue, Major J.A. considered whether the language of s. 68 precludes a wages characterization for income tax refunds. He described the position of Master Funduk, namely, that since s. 68 does not contemplate an order against the Crown, a refund cannot constitute s. 68 "wages". For Major J.A., however, the alleged problem with s. 68 is irrelevant, inasmuch as it "cannot change the characterization of employer withholdings returned in the form of a tax refund as `wages'" (p. 135). He stated that any s. 68 problem associated with the making of orders is a problem for Parliament.
In the alternative, Major J.A. agreed with Wachowich J.'s other conclusions relating to the operation of s. 67 of the Bankruptcy Act, the effectiveness of the Agreement Letter, and the requirements of the Financial Administration Act . Major J.A. dismissed the appeal, and held that the Director was properly entitled to the refund because of the Notice of Continuing Attachment.
IV. Issues
The central issue in this appeal, as I have already noted, is whether the Trustee or the Director has priority in respect of Marzetti's post-bankruptcy income tax refund. In discussing this issue, I find it convenient to adopt the following structure:
A. What is the position under the Bankruptcy Act?
1.In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?
2.In specific terms, must a court conclude that both ss. 67(c) and 67(d) of the Bankruptcy Act have been satisfied in order to conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67 ?
3.Is s. 68 a complete code in respect of a bankrupt's wages?
4.Should a post-bankruptcy income tax refund be considered "wages" for the purposes of s. 68?
B. Did the Agreement Letter create an enforceable assignment?
In answering these questions, I will make frequent reference to the Bankruptcy Act. I do so with full knowledge that the relevant statute is now entitled the Bankruptcy and Insolvency Act : see S.C. 1992, c. 27, ss. 1 and 2. However, since the statute was known as the Bankruptcy Act at the pertinent times, and since none of the 1992 amendments materially affects my opinion, I will generally find it unnecessary to have regard to the amended version.
V. Analysis
A.What is the Position Under the Bankruptcy Act?
Perhaps more for logic than for law, I consider it helpful, as an initial matter, to consider s. 67 of the Bankruptcy Act in isolation. That section is of critical importance to the Act's operation, inasmuch as it establishes certain rules regarding what will, and what will not, comprise "property of a bankrupt divisible among his creditors". These rules, in turn, rest upon a definition of "property" found in s. 2 of the Bankruptcy Act.
Both s. 67 and the "property" definition can trace their legislative roots back to the original Bankruptcy Act, S.C. 1919, c. 36. The "property" definition in that early statute is nearly identical to the existing definition found in s. 2 . Likewise, s. 25 of the early statute performed much the same function as the current s. 67. In contrast, s. 68 is historically rooted in a relatively recent amendment: S.C. 1966-67, c. 32, s. 10. Although I will later conclude that s. 68 is operative in this case, both the long history and the fundamental importance of s. 67 lead me first to consider that section of the Bankruptcy Act in isolation.
1.In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?
Section 67(c) of the Bankruptcy Act provides that "[t]he property of a bankrupt divisible among his creditors . . . shall comprise . . . all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge". At the "date of his bankruptcy" in this case, Marzetti had no interest in the tax refund, since that refund relates to income he earned following his voluntary assignment into bankruptcy. Accordingly, the relevant issue is whether Marzetti "acquired" any property, or whether any property "devolve[d] on him", prior to his discharge.
In discussing this issue, it must first be observed that Marzetti's income tax return was not filed until after his discharge from bankruptcy. This means that, if Marzetti acquired property in respect of the refund, or had such property devolve upon him, the acquisition or devolution cannot depend upon the filing of the income tax return itself. Can it be said that, prior to his discharge, Marzetti had property in respect of his eventual income tax refund, even though a return was not filed until after his discharge?
According to the Director, it cannot, and for this proposition the Director cited Munich Reinsurance Co. (Canada Branch) v. M.N.R., 91 D.T.C. 1137 (T.C.C.). In that case, Rip T.C.J. stated that "the right to a refund does not arise at the time an overpayment of any tax instalment is made but it arises on the day a return is filed" (p. 1143). In making this statement, however, Rip T.C.J. was speaking in terms of the taxpayer having "an enforceable right against the Minister" (p. 1143, emphasis added). In particular, he was considering whether the taxpayer who overpays an instalment acquires a right to receive interest income.
Viewed in context, therefore, the conclusion in Munich does not rest upon Rip T.C.J.'s independent assessment of the proprietary character of overpayments. Rather, it derives inferentially from the existence of a statutory refund procedure in s. 164(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended. In the words of Rip T.C.J., "[a]s section 164 makes clear, a refund is not due and payable until a return is filed" (p. 1143). Accordingly, assuming that Munich is correctly decided, it is of little assistance to the Director. There is a marked distinction between the existence, and the statutory enforceability, of a proprietary right.
Is there, then, a proprietary character to tax overpayments? Not surprisingly, the Bankruptcy Act defines the word "property" in very broad terms. In particular, I note that the definition includes "every description of property, whether . . . legal or equitable", and it specifically mentions "every description of . . . interest . . . present or future, vested or contingent, in, arising out of or incident to property": s. 2 . Even if a taxpayer who makes overpayments has no right to compel a refund prior to filing a return, surely that taxpayer has at least a future and contingent interest in the ultimate tax refund.
During oral argument, counsel for the Director was asked whether it might be valid to compare a tax overpayment to a demand promissory note, the suggestion being that each is a form of property, but that neither is enforceable prior to the satisfaction of certain preconditions. In the case of the promissory note, the precondition is the demand. In the case of the tax overpayment, the recognized preconditions relate to the filing of the return: see, e.g., Munich, supra, and Hughes v. The Queen, 91 D.T.C. 5290 (F.C.T.D.). In my view, the comparison is a good one. The argument of the Director artificially restricts the Bankruptcy Act definition of "property", and it fails to distinguish between accrued legal debts and other, inchoate, forms of property.
On this preliminary issue, therefore, I conclude that the Bankruptcy Act's reference to "property" is broad enough to embrace the facts of this case. More specifically, using the language of s. 67(c), I conclude that Marzetti acquired at least a future and contingent interest in his income tax refund at the time excess overpayments were withheld on his behalf.
2.In specific terms, must a court conclude that both ss. 67(c) and 67(d) of the Bankruptcy Act have been satisfied in order to conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67?
According to Wachowich J., ss. 67(c) and 67(d) of the Bankruptcy Act must both be satisfied before a court can conclude that there exists "property of a bankrupt divisible among his creditors". Those two paragraphs provide:
The property of a bankrupt divisible among his creditors . . . shall comprise
(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
In other words, like Master Funduk, Wachowich J. concluded that the income tax refund could be considered "property" for the purposes of s. 67(c), such that it was capable of vesting automatically in the Trustee. However, for Wachowich J., s. 67(d) precluded automatic vesting on the facts. He reasoned that, by virtue of s. 67(d), the Trustee could exercise only those powers in respect of the refund which might have been exercised by Marzetti but for the bankruptcy. And, he stated, if the bankruptcy had not occurred, Marzetti could have exercised no power over the refund because of the garnishee instituted by the Director. So while Marzetti had "property" in respect of the refund, there was no "property of a bankrupt divisible among his creditors". The Court of Appeal approved this reasoning, but without analysis.
With respect, Wachowich J. misinterpreted ss. 67(c) and 67(d). In effect, Wachowich J. characterized s. 67(c) as an inclusionary provision, and s. 67(d) as an exclusionary provision. Section 67(c) giveth, and s. 67(d) taketh away. But this interpretation ignores the structure of s. 67 as a whole, since ss. 67(a) and (b) are preceded by the phrase "[t]he property of a bankrupt . . . shall not comprise" (emphasis added), whereas ss. 67(c) and (d) are preceded by the phrase "[t]he property of a bankrupt...shall comprise" (emphasis added). If s. 67(d) were intended to limit the scope of s. 67(c), why would it not have been placed with (a) and (b)?
This criticism of Wachowich J.'s interpretation is echoed by L. W. Houlden and C. H. Morawetz in Bankruptcy and Insolvency Law of Canada (3rd ed. rev. 1992), vol. 1, at p. 3-6, where the authors comment upon Wachowich J.'s trial decision:
. . . Wachowich J. of the Alberta Court of Queen's Bench was of the opinion that if property falls within [s. 67(c)], it must also meet the requirements of [s. 67(d)] before the trustee can claim it. With respect, this seems wrong. Section [67(c)] and (d) have always been treated as alternatives.
In other words, because of the statutory structure, it is inappropriate to read paragraphs (c) and (d) restrictively when those paragraphs are intended broadly and inclusively to define the "property of a bankrupt divisible among his creditors". Surely the better view is to give, at least at this stage of the analysis, a wider effect to these paragraphs so as not to reduce artificially the estate available to creditors. In grammatical terms, the word "and" which appears at the end of the English version of s. 67(c) must, by reason of its context, be read disjunctively. As stated by E. A. Driedger, "[t]he inclusive or and the several and produce the same result, and it remains for the context to indicate in what sense these two little words are used": Construction of Statutes (2nd ed. 1983), at p. 18.
Moreover, I am fortified in this conclusion by the French text of s. 67. Although the parties failed to highlight the point, the word "et" does not appear as a conjunction between ss. 67(c) and 67(d). Although the absence of a conjunction in the French version does not make Wachowich J.'s interpretation impossible, it does make the interpretation even less defensible.
For these reasons, a bankrupt's interest in a post-bankruptcy income tax refund can be considered "property" for the purposes of s. 67(c) of the Bankruptcy Act. Moreover, it can be considered "property of a bankrupt divisible among his creditors" for the purposes of s. 67 as a whole, since s. 67(d) in no way qualifies the operation of s. 67(c). This, then, is my initial conclusion.
In the absence of other considerations, the logical consequence of my initial conclusion would be that Marzetti's interest in his refund vested automatically in his Trustee: see s. 71(2). In this way, the Trustee would have obtained priority over the Director's garnishment: see s. 70(1). However, as I will now proceed to explain, my initial conclusion cannot govern in this case. It is overruled by s. 68.
To assess the importance of s. 68 in this case, I must do two things. First, I must determine whether s. 68 always controls the disposition of a bankrupt's wages. Is s. 68 a substantive provision, that is, one which always removes wages from the scope of s. 67, or does it simply create a procedural device for trustees? Second, if I determine that s. 68 is a complete code in respect of a bankrupt's wages, I must then proceed to consi