A. GARNISHMENT THE GOODS AND SERVICES TAX:

Transcription

1 ) THE GOODS AND SERVICES TAX: RECEIVERSHIPS, BANKRUPTCIES, SEIZURES AND REPOSSESSIONS I. II SEIZURE AND REPOSSESSIONS. BANKRUPTCY. III. RECEIVERS...9 IV. REVENUE CANADA PRIORITIES... A. GARNISHMENT

2 THE GOODS AND SERVICES TAX: RECEIVERSHIPS, BANKRUPTCIES, SEIZURES AND REPOSSESSIONS ================================================================= In dealing with the areas that are subject of this paper a person should keep in the forefront of one's analysis the principal definitions contained in the Goods and Services Tax legislation (in this paper a reference to the "Act" is a reference to Part IX of The Excise Tax Act, R.S.C. 1985, c.e-15 as amended to and inclusive of the amendments implemented by the passage of Bill C 112). In any particular circumstance it is necessary in an analysis of the applicable provision in the Act to appreciate whether the parties to the transaction contemplated by the provision would normally, absent the provision, be subject to an obligation to pay and/or remit GST. While Ms. Hopkins will have reviewed the basic concepts and terminology of the Act, keep in mind the following, somewhat paraphrased and simplified, fundamental provisions or definitions. Section 165(1) provides that taxes imposed upon "every recipient.of a' taxable supply made in Canada" taxable supply means a supply that is made in the course of a commercial activity. a supply means the provision of property or a service in any manner including sale, transfer, barter, exchange, license, rental, lease, gift or disposition but excludes transfers or re-transfers of security interests. Commercial Activity means: (a) except to the extent the business involves the provision of exempt supplies, a business carried on by any person other than a business carried on by an individual or individuals without a reasonable

3 ) (b) (c) 2 expectation of profit; except to the extent involved with making of exempt supplies, a venture or concern in the nature of trade other than a venture or concern engaged in by an individual or individuals without a reasonable expectation of profit; other than in regard to an exempt supply, the making of a supply of real property. Most of the activities of banks and similar financial institutions are exempt from the application of the GST by virtue of the characterization of the bulk of their activities as being the provision of financial services which is exempt by virtue of VII of Schedule V to the Act. Among other things a financial service is defined as including most matters dealing with the payment, exchange or transfer of monies, the operation or maintenance of chequing or savings accounts or the iike, the issuance, transfer, repayment, lending or borrowing of a financial instrument, or dealings respecting a guarantee, an acceptance or an indemnity in respect of a financial instrument, and certain insurance related services. A financial service does not include payments in consideration of a supply which is other than a financial instrument or a financial service. As can be noted from the nature of a financial service many of the dealings with a financial instrument are exempt and the definition of a financial instrument encompasses a debt or equity security, insurance policy, a partnership or trust interest or right in respect of such interest, a precious metal and certain options or contracts for the future supply of a commodity. I. SEIZURE AND REPOSSESSIONS Section 183 is the section in the Act defining the impact of the Goods and Services Tax on parties involved in a seizure or

4 3 repossession of property. The current rules have been significantly modified from the original, I suspect in accordance with good government policy, rendering the current provisions significantly more complex and avoiding any adverse implication to Her Majesty by changing the title from "No Tax on Seizure and Repossession" to simply "Seizure and Repossession". Subsection 183(1) provides that where a creditor has seized or repossessed property that the seizure and repossession will be deemed to be a sale of the property from the defaulting person to the creditor at no consideration. Subsection 183(1) does not apply to a seizure or repossession occurring under a lease, license or similar arrangement. There are special rules that apply to foreclosures and seizures of real property, however, generally speaking the effect of this subsection is to ensure that the act of seizure and repossession does not give rise to GST liability. A subsequent sale by the creditor after seizure and repossession will, except when the supply is an exempt supply, attract a requirement to collect tax on the sale from the subsequent purchaser. The creditor is deemed to effect such subsequent sale in the course of a commercial activity and thus activities of the creditor in furtherance of that sale and expenses incurred by it in the course of those activities will give rise to an input tax credit in favour of the creditor. This is.of particular value to creditors whose normal business would be the provision of financial services, therefore in the exempt category disentitling the creditor to an input credit on expenses. The legislation makes clear that the ambit of activities giving rise to such input tax credits are limited to acts done in furtherance or in connection in the course of effecting the sale and not those activities undertaken by the creditor related to the original seizure or repossession. This is somewhat more restrictive in application than one might have concluded under the former provisions since seizure and repossession or at least certain aspects could have

5 4 qualified for input credits. In those circumstances where seizure or repossession is effected by a court through a sheriff, bailiff or other officer and where the court through its officers effects the sale (supply) of the repossessed property, the supply is deemed not to have occurred in the course of a commercial activity therefore does not attract a requirement on the purchaser to pay GST. There are several commentators who have indicated that in a judicial sale proceeding it is unclear that either the creditor or the court seizes or repossesses the real property in a manner sufficient to attract the application of 183(3). On this interpretation, the sale would constitute a taxable supply and GST would be payable by the purchaser. Yet, as we are all aware in a judici~l sale proceeding, the purchaser does in fact gain possession and in effect the court enforces possession. By an opinion dated November 7, 1991 to our office, the Department recognized that in the course of a judicial sale the court establishes the terms of sale, appoints a selling officer and supervises the sale. The court directs the way in which the sale is conducted and the proceeds distributed.. In these circumstances subsection 183(4) (now subsection 183(3)) was confirmed as applying to the judicial sale of the land. This has particular relevance where the prope~ty subject of sale is either commercial property or new residential property that would otherwise constitute a taxable supply. The opinion confirms the application of subsection of 183(4) to a judicial sale, whether occurring as a result of a application to court by the mortgagee or arising out of an exercise of the discretion of the court upon an application to have an agreement of sale cancelled. I see no reason that the opinion would not have equal application to current subsection 183(3). Subsections (4), (5), (6), (7) and (8) of s.183 all address the

6 5 timing at which the deeming of a supply of property to the creditor occurs where the creditor had previously repossessed or seized such property. Subsection 183(4) deals exclusively with real property and any use by the creditor of that property will generate what is in effect a deemed disposition for GST purposes where the creditor is deemed to have collected and paid tax equal to a tax fraction of the fair market value of the property at.the time of such use. This section has no application where because of the nature of property the supply is an exempt supply, such as residential property which is not new residential property or sufficiently improved to trigger the non-exempt rules. However, the impact of the provision will ensure that to the extent that the creditor is not using the property exclusively for the conduct of a commercial activity that GST will be remitted. In the case of a use in the course of a commercial activity, while a liability to' pay GST will arise an offsetting input tax credit will simultaneously occur. Under 183(4) real property is valued at the time the change in use occurred. Subsections 183(5) and (6) deal with changes of use in personal property by the creditor either before 1994 or after One should note that in respect to personal property, as opposed to real property, the determination of fair market value is made as at the time it was seized or repossessed rather than at the time of change of use which is the case in regard to real property. The major distinction between the two provisions is the conditions for deemed payment and deemed collection. Prior to 1994, the GST is deemed to have been paid by the creditor and to have been collected by the creditor only when the tax would have been payable had the seized property been purchased in Canada from the debtor at the time of seizure or repossession. After 1993, the creditor is always deemed to have paid the tax but is only deemed to have collected it where he would have had to pay the tax on the purchase from the debtor. The difference in treatment results in those )

7 6 circumstances where tax would not have been payable on an initial purchase from the debtor. After 1993, an input tax credit will arise in favour of the creditor with no offsetting collection of GST to nullify the effect. Additionally, where the use to which the property is put might not give rise to an entitlement to an input tax credit either as a result of personal use or use in an exempt activity, since there is no deemed collection there is no corresponding obligation of remittance. This would be of particular importance to financial institutions. Subsection 183(7) enumerates the general rule regarding personal property contemplated by the seizure and repossession scheme of the Act. Normally a creditor will repossess and seize property given as security by the debtor with the almost exclusive intention of subsequently reselling that property. Conceivably'the creditor could convert the property to other uses including personal uses and that is the circumstance contemplated by subsections 183(5) and (6). However, ih most circumstances the appropriate deeming provision will arise under subsection 183(7) (or its companion in the event of subsequent lease in 183 (8) ). Upon the subsequent sale by the creditor of personal property the creditor, provided no tax would have been payable by the creditor had he purchased the property seized from the debtor, will receive an input tax credit equivalent to the amount recoverable from the purchaser of the property on the subsequent sale by the creditor to that purchaser, less any prior input tax credits to which the creditor previously became entitled in respect of the property (an example of this latter circumstance would be subsequent improvements in anticipation of sale). The effect can be additional monetary recovery to the creditor. Subsection 183(7) applies strictly to personal property as a result of the appropriate input tax credits having been either taken previously by the person from whom the real property is seized or repossessed, either in the ordinary course or as a consequence of

8 7 the special credits provided public sector bodies and nonregistrants through the vehicle of sections 193 and 257. One problem that invariably arose under the former s.183 was whether or not a quit claim could trigger the application of s.183. Generally speaking, the use of a quit claim would not constitute a seizure or repossession of property so as to make 183 applicable though from the practical perspective the grant of the quit claim was an extra-judicial recognition of exactly the circumstances contemplated by s.183. This problem has been remedied explicitly by subsection 183(9) which deals with a voluntary transfer. The only matter to keep in mind for the application of this section is an explicit acknowledgment that the granting of the quit claim or the other voluntary transfer is in furtherance of satisfaction in whole or in part of a debt or obligation which 1s in default by the debtor to the creditor. II. BANKRUPTCY The topic of bankruptcy and its companion topic, receiverships, appears to be one of increasing interest and significance to many from a professional perspective. To the largest extent, the Act addresses the receivership and bankruptcy situations in a very similar manner. Many of the comments, therefore, which I made in this paper in regard to the circumstance of bankruptcy will apply so far as the Act is concerned in very similar ways to receivership situations. Under the topic of receivership I will try and highlight any major distinctions while dealing with the overall structure under the topic bankruptcy. Upon the occurrence of a bankruptcy which is dealt with by s.265 of the Act, a trustee is viewed for purposes of the Act as the agent of the bankrupt and all acts of the trustee in administering the bankrupt's estate or carrying on the business of the bankrupt is viewed as an agency function. While we generally view an )

9 8 assignment as having occurred upon a bankruptcy, the Act specifically provides that property and money of the bankrupt is deemed to remain vested in the bankrupt - as a result no GST is payable on such assignment or in the event of physical transfer to the trustee. The Act ensures that a trust is deemed not to have been created for the purposes of the Act. This ensures that the transfer provisions to a trust contained in s.268 and the distribution of assets from a trust to beneficiaries contained in s.268 of the Act have no application. The trustee is impressed with several responsibilities under the Act not the least of which is joint liability for the payment and remittance of amounts that become payable under the Act. This liability extends to all amounts that become payable or remittable by the bankrupt from the day following the assignment into bankruptcy to the date of discharge of the trustee. The liability of the trustee for this period is absolute. This liability does not extend, however, to activities initiated after bankruptcy which are not encompassed by the bankruptcy. Moreover, the trustee becomes liable for all remittances prior to the date of bankruptcy including remittances in respect to the acquisition of real property by the bankrupt.the liability of the trustee in respect of prior period remittances or remittances arising in connection with the acquisition of real property by the bankrupt prior to the date of bankruptcy is limited to the extent of property and money in the possession of the trustee. Where a receiver becomes liable to effect remittances, the trustee is not liable for the payment of that remittance, and, payments effected by the bankrupt operate to reduce the liability of the.. trustee to the extent of the payment. Upon bankruptcy a new reporting period for the bankrupt is created

10 9 under the Act commencing on the day the bankrupt became a bankrupt with a concurrent ending of the prior reporting period on the previous day. Otherwise the reporting periods remain the same pre and post bankruptcy. The trustee is responsible for the filing of all GST returns, including prior reporting period returns, until the bankrupt is discharged under the Bankruptcy and Insolvency Act. For GST purposes activities engaged in by the bankrupt after the date of bankruptcy are viewed as separate and apart both from the person as bankrupt and the trustee's responsibilities regarding those activities which were not commenced after the date of assignment into bankruptcy. Activities affecting assets of the bankrupt dealt with under the authority of the receiver are not required to be included in the returns filed by the trustee on behalf of the bankrupt. For the purposes of the Act, there is no transfer of property from the bankrupt to the trustee in bankruptcy on entering into bankruptcy nor on the subsequent discharge is there a transfer of property or a retransfer of property from the trustee to the now newly discharged bankrupt. All such assets, for purposes of GST, are viewed as being continuously owned by the discharged bankrupt. III. RECEIVERS Section 266 addresses the circumstances of a receiver under the Act. A receiver under the Act includes those persons you would normally consider as a receiver or a receiver-manager whether appointed under the authority of a bond, debenture~or other debt security or by virtue of a court order or a legislative enactment or by a trustee under a trust deed. The term encompasses an appointee of a bank under the provisions of the Bank Act as well as a corporately appointed litigator. It should be noted, however, that a receiver for purposes of the Act extends to a committee, guardian or curator. It should be kept in mind in general practice

11 10 when advising potential committees, curators and guardians that the joint and several liability contemplated by the Act extends to them in respect of persons under their charge. Many of the same prov1s1ons affecting a trustee in bankruptcy has a similar impact upon a receiver and I will not re-enumerate those rules. However, the more recent amendments to the Act have made a significant improvement in the application of the Act as it pertains to receivers. The Act now recognizes, as most of the population recognized before, that receivers are frequently appointed in respect of a portion of the assets of a person rather than the entirety of such assets. As the act formerly read the liability of the debtor for tax however arising would have attached to the assets under the administration of the receiver notwithstanding they may have been totally unrelated. In its current form s.266 make relatively clear that the liability for prior tax and its remittance only extends to those amounts that can be reasonably considered to relate to the relevant assets under the receiver's control. Note that throughout the section, as is the case in many portions of the Act, the language used is "can reasonably be considered to", the effect of which is that the onus is on the receiver to establish that it would be unreasonable for certain taxes to relate to the relevant assets under the control of the receiver. As in the bankruptcy situation, the receiver is liable for amounts payable or remittable before the receivership period but only to the extent of property under its control, but the receiver is permitted to satisfy the claims of creditors ranking in priority to the Crown and payments required to be made to a trustee in bankruptcy. Lastly, one should note that the provisions of subsections 183 (1), (2) seizure and repossession (dealing with supply and

12 11 commercial in the course of a commercial activity), (7) (dealing with subsequent sale) and (9) (dealing with voluntary transfer), has no application where the seizure or repossession is effected by a receiver. Subsection 183(11) ensures that the provisions of s.266 have priority over those seizure and repossession sections. As under the former sections, prior to the distribution of property and money by the receiver the receiver is required to obtain a certificate from the Minister certifying "that all amounts are, or can reasonably be expected to become, payable or remittable under this Part by the receiver in that capacity in respect of the reporting period during which the distribution is made, or any previous reporting period, have been paid" or satisfactory security provided. Would you consider that this certificate from the Minister is easily obtainable within a reasonable time frame? Failure to obtain such a certificate renders the receiver personally liable for payments or remittances to the extent of the distribution. IV. REVENUE CANADA PRIORITIES In regard to the Act a practitioner should be cognizant and it should come as no surprise that Her Majesty has diligently created for Herself an array of collection and enforcement tools and provisions. Not surprisingly these col~ection provisions and priority status closely mirror those found in the Income Tax Act (Canada). One can anticipate that the proposed amendments to that latter legislation will, as incorporated in the Income Tax Act (Canada) wield their way into the Goods and Services legislation at Her Majesty's first opportunity. The income tax provisions provide us a wealth of information as to the treatment in the courts of these provisions, their enforcement and limitation, and Revenue Canada's priorities. In light of the conclusions that follow, the bulk of this section

13 12 of this section of the paper concentrates on s.317 and in particular subsection 317(3). A. GARNISHMENT Section 317 of the Act deals with the special garnishment proceedings accorded the Minister under the Act. The comparable provision in The Income Tax Act is s.224. The provisions of s.317 (and always bear in mind that they have companions under the Income Tax Act (Canada), s.224) provide for the service of a demand by the Minister in any party who is likely or suspected to be liable for a payment to the tax debtor within 90 days of service. It also provides that service can be made on a financial institution such as a bank to divert loans or other advances from the bank intended for the tax debtor. As an aside, I have always wondered how many banks complete a loan after the service of this manner of notice. And lastly, this section-has what I would term the super garnishment provision as contained in subsection 317(3). Subsection 317 (3) provides that notwithstanding any other provision of the Act, any other enactment of Canada or any enactment of a province (other than certain provisions of the Bankruptcy and Insolvency Act) or any other law, the Minister may make a demand on a person who is liable to make a payment to a tax debtor within a 90 day period from service or is liable to make a payment to a secured creditor who has an entitlement to receive the payment that would otherwise be made in favour of a tax debtor which would require that such payment be made to Her Majesty. Upon payment such monies become the property of Her Majesty notwithstanding the interests of either the tax debtor or the secured creditor. As with the other garnishment provisions, the failure to comply by the payor renders the payor liable directly to Her Majesty in

14 13 respect of the amount paid otherwise than in accordance with the demand'to the extent of the tax debtor's liability to Her Majesty. One should note that under The Income Tax Act the super garnishment provision is limited in application to the tax debtor's liability arising under subsection 227(10.1) of the Income Tax Act (Canada), which restricts the use of that subsection, and I paraphrase here, to the collection 'of penalties, interest, non-remittances of deductions or withholdings and certain liabilities arising from non-resident persons. However, no such limitation applies to the super garnishment provision in the Act. One can expect therefore that would be the norm for collections under the Act almost rendering redundant the other garnishment provisions. Given this situation which is clearly different than that existing under the Income Tax Act (Canada), the applicable priority in respect to garnishment or demands by the Minister is to be found for.all practical purposes in the priority granted the super garnishment procedure. The major issue that arises is that priority could be granted by subsection 317(3) vis a vis secured creditors. Prior provisions did not expressly convey property or security interest to Her Majesty nor did they very explicitly provide an override of preexisting property or security interests (notwithstanding that that may have been the intention). One of the earliest cases on a formulation similar to the current provision was decided in Lloyd's Bank Canada et al v. International warranty Company Limited (1989), 60 D.L.R. (4th) 272. The Alberta Court of Appeal determined that the section as it was then formulated was not sufficiently plain or unambiguous to deprive a secured creditor of its priority without compensation, all for the purpose of paying a' debt totally unrelated to the security. It was sufficiently clear to effect expropriation without compensation. )

15 14 Less than 6 months after the decision was rendered in the Alberta Court of Appeal Her Majesty introduced a notice of ways and means motion to "clarify" this section. In the Income Tax Act (Canada), essentially the same formulation as clarified is found in the Act in subsection 317(3). One might note as a matter of interest that the British Columbia, Manitoba courts and the Federal Court Trial Division adopted similar approaches as taken by the Alberta Court of Appeal in the Lloyd's decision. However, the Saskatchewan courts, both at the Queen's Bench and Court of Appeal level, were not as reticent about expropriating the interests of secured creditors in favour of Revenue Canada and found in favour of Her Majesty even on the less explicit wording of the prior formulation of the section. It is today difficult for one to successfully avoid the priority granted Her Majesty over other creditors whether or not secured under subsection 317 (3) of the Act. As noted above in Saskatchewan it apparently has always been difficult. Under the Act Her Majesty has, in addition to the garnishment proceedings, several short-cut mechanisms to effect collection. Under s.316 the Minister may issue a certificate as to what he considers payable by any person and register it in the Federal Court at which time it has the same effect as a judgment of that Court. Such a registration can be filed as a charge on land pursuant to subsection 316(4) of the Act and operates as a lien and encumbrance against the land. Additionally, after 30 days notice the Minister has the right to seize chattels and ultimately require them to be sold at public auction in accordance with the provisions of s.321. This section does not grant, as is the case with the garnishment provisions of subsection 317(3), a super priority to Her Majesty, however, one

16 15 could only speculate that if Her Majesty caused property to be sold and concurrently with or prior to the sale served a demand on the recipient of the proceeds of sale claiming a super priority whether the effect would not be the same as if such a priority had been granted explicitly in the other sections of the Act. This interpretation is even more plausible and likely in Saskatchewan in light of former decisions.