CROWN AND STATUTORY CLAIMS

Transcription

1 CROWN AND STATUTORY CLAIMS Prepared by Ronald J. Argue Financial Services Group CONTENTS I. INTRODUCTION II. III. IV. STATUTORY LIEN vs STATUTORY TRUST STATUTORY LIEN Corporation Capital Tax Act, R.S.B.C. 1996, c.73, sec. 36 Local Government Act, R.S.B.C. 1996, c.323, sec. 396 Employment Standards Act, R.S.B.C. 1996, c. 113, sec. 87 Workers Compensation Act, R.S.B.C. 1996, c. 492, sec. 52 Social Services Tax Act, R.S.B.C. 1996, c.431, sec. 103 Bankruptcy and Insolvency Act, R.S.C. 1985, c.b-3, secs. 86, 87 STATUTORY TRUST Income Tax Act, R.S.C. 1985, c. 1 (5 th Supp.), sec. 227(4) Employment Insurance Act, S.C. 1996, c.23, sec. 86 Canada Pension Plan Act, R.S.C. 1985, c.c-8, sec. 23 Excise Tax Act, R.S.C c. E-15, sec. 222 Bankruptcy and Insolvency Act, R.S.C. 1985, c.b-3, sec. 67 V. GARNISHMENT Income Tax Act, R.S.C. 1985, c. 1 (5 th Supp.), Sec. 224 (1.2) to (1.3)

2 I. Introduction In order to facilitate recovery of money owing to the Crown or collected on behalf of others by the Crown, both federal and provincial legislation have historically endeavoured to provide for priority for such claims over the claims of secured and/or unsecured claims against third party debtors. As a result of judicial interpretation (which has created some uncertainty at times because of the particular interest any one court has determined should be protected), amendments to such legislation have resulted in somewhat complicated methods to preserve the desired priority over such claims in addition to trying to resolve competing statutory priorities between federal and provincial claims. Although somewhat dated, the 1982 Law Reform Commission of B.C. Report on The Crown as Creditor: Priorities and Privileges is a useful reference in understanding the common law history of the Crown prerogative and the operation of the two basic mechanisms relied upon by the Crown in respect of its claims: the lien and the trust. Since 1982, apart from judicial interpretation, the two most significant factors which have resulted in legislative change have been the 1992 amendments to the Bankruptcy and Insolvency Act (Canada) (the BIA ) and the introduction of the Personal Property Security Act (BC) (the PPSA ). It is not intended that this paper be a comprehensive review of all federal and provincial legislation containing priority claims. However, it will highlight the ones ordinary creditors most frequently encounter when endeavouring to recover amounts owing to them. In addition to the competition between the Crown and an ordinary creditor, this paper will also discuss the competition which often arises between federal and provincial Crown claims. II. Statutory Lien vs Statutory Trust The statutory lien is a Crown imposed charge on some or all of the property of a debtor for money owing to the Crown. The issue that frequently has arisen in respect of the lien so created is the priority of the lien over secured debt which antedates the lien. The statutory trust has been created to enable the Crown to recover money collected from or withheld from payments to a third party on behalf of the Crown usually in the form of taxes. Creditors of a debtor have tried to defeat the Crown trust claim in circumstances where the debtor either has not kept the designated funds separate from other money or does not have any funds at all. It is primarily upon the bankruptcy of the debtor where this issue arises because of the particular provisions of the BIA which provide that trust funds do not form part of the estate of the bankrupt. III. Statutory Lien The use of the statutory lien is most common in provincial legislation. In respect of money owing to the Crown, two examples are the liens created by the Corporation Capital Tax Act (BC) and the Local Government Act (BC).

3 Corporation Capital Tax Act 36.(1) The tax imposed or assessed under this Act (a) is a lien and charge in favour of the government on the entire assets of the corporation, or the entire assets of the corporation in the hands of a trustee, effective as of the end of the taxation year of the corporation for which the tax is imposed, and (b) has priority over all other claims of every person except claims secured by liens, charges or encumbrances registered before date. (2) The liens and charges created by this section and their priority are not lost or impaired by any of the following: (a) the neglect, omission or error of the administrator or any agent or person acting under the administrator; (b) (c) (d) the taking or failing to take proceedings to recover the tax; the tender or acceptance of any partial payment of the tax; want of registration. Local Government Act 396. (1) Taxes accrued and to accrue on land and its improvements, and a judgment under section 397 for the taxes, are a charge that (a) is a special charge on the land and improvements, (b) has priority over any claim, lien, privilege or encumbrance of any person except the Crown, and (c) does not require registration to preserve it. (2) If it is necessary or advisable to protect or enforce a charge under subsection (1) by a proceeding, this may be done by order of the court, on application and on notice the court considers proper. For lands not located within the jurisdiction of the Local Government Act, a similar provision is found in section 30 of the Taxation (Rural Area) Act (BC). What distinguishes the Corporation Capital Tax Act is that the lien does not have priority over any charges registered prior to the end of the taxation year of the corporation for which the tax is imposed. For that reason, when acting for a lender, a search to determine whether any such tax is outstanding is critical to determine the priority position of the charge being registered to secure repayment of money being advanced thereunder. It has been suggested by the Crown that the lien has priority over advances made by a lender after the end of a taxation year notwithstanding registration of its encumbrance to secure such advances prior to the end of such taxation year. A

4 literal reading of section 36(1)(b) does not support such a position. And, there does not appear to be any jurisprudence testing such a position. Furthermore, the lien remains on the property of the corporation even after being transferred to a bona fides third party purchaser. Roynat Inc. v Glen Lake Village Ltd. et al, (1987) 11 B.C.L.R. (2d) 39 Section 87 of the Employment Standards Act (BC) creates a lien in favour of the Director of Employment Standards in respect of the collection of unpaid wages owing by an employer. Employment Standards Act 87. (1) Despite any other Act, unpaid wages constitute a lien, charge and secured debt in favour of the director, dating from the time the wages were earned, against all the real and personal property of the employer or other person named in a determination or order, including money due or accruing due to the employer or other person from any source. (1.1) If a talent agency named in a determination or order has (a) received wages from an employer on behalf of an employee, and (b) failed to pay those wages, less any fees allowed under the regulations, to the employee within the time required under the regulations, the wages, less any fees allowed under the regulations, constitute a lien, charge and secured debt in favour of the director, dating from the time the wages were received by the agency, against all the real and personal property of the agency, including money due or accruing due to the agency from any source., (2) Unpaid wages set out in a decision or order filed under section 30 of the Industrial Relations Act, R.S.B.C. 1979, c. 212, or under section 102 or 135 of the Labour Relations Code constitute a lien, charge and secured debt in favour of the persons named in the decision or order against all the real and personal property of the employer or other person named in the decision or order. (3) Despite any other Act but subject to subsection (5), the amount of a lien, charge and secured debt referred to in subsections (1), (1.1) and (2) is payable and enforceable in priority over all liens, judgments, charges and security interests or any other claims or rights, including the following: (a) any claim or right of the government including, but not limited to, the claims and rights of the Workers Compensation Board; (b) any claim or right arising through contract, account receivable, insurance claim or sale of goods; (c) any security interest within the meaning of the Personal Property Security Act.

5 (4) Subsection (3)(c) applies whether the lien, judgment, charge, security interest, claim or right was perfected within the meaning of the Personal Property Security Act, or was created or made, before or after (a) in the case of wages referred to in subsection (1) or (2), the date the wages were earned or the date a payment for the benefit of the employee became due, and (b) in the case of wages referred to in subsection (1.1), the date the wages were received by the talent agency. (5) The lien, charge and secured debt referred to in subsections (1), (1.1) and (2) has priority over a mortgage of, or debenture charging, land, that was registered in a land title office before registration against that land of a certificate of judgment obtained on the filing, under section 91, of a determination or an order of the tribunal, but only with respect to money advanced under the mortgage or debenture after the certificate of judgment was registered. Although the lien created by this statute is far-reaching, subsection (5), as can be seen, provides limited protection to a secured creditor of the debtor who has a charge registered against land of the debtor if the registration occurred before a certificate of judgment was filed against the land by the Director of Employment Standards. This protection exists, however, only in respect of money advanced under the security prior to the registration of the certificate of judgment. (Contrast this wording with section 36(1)(b) of the Corporation Capital Tax Act and the position of the Crown as to later advances). Section 52 of the Workers Compensation Act (BC) creates a lien in favour of the Workers Compensation Board (the WCB ) for unpaid assessments due by an employer to the WCB. Workers Compensation Act 52. (1) Notwithstanding anything contained in any other Act, the amount due by an employer to the board, or where an assignment has been made under subsection (4), its assignee, on an assessment made under this Act, or in respect of an amount which the employer is required to pay to the board under this Act, or on a judgment for it, constitutes a lien in favour of the board or its assignee payable in priority over all liens, charges or mortgages of every person, whenever created or to be created, with respect to the property or proceeds of property, real, personal or mixed, used in or in connection with or produced in or by the industry with respect to which the employer was assessed or the amount became payable, excepting liens for wages due to workers by their employer, and the lien for the amount due the board or its assignee continues to be valid and in force with respect to each assessment until the expiration of 5 years from the end of the calendar year for which the assessment was levied. (1.1) The exception in subsection (1) does not apply in respect of a lien for wages that is, by section 87(5) of the Employment Standards Act, postponed to a mortgage or debenture. (2) Where the employer is a corporation, the word property in subsection (1) includes the property of any director, manager or other principal of the corporation where the property is used in, or in connection with, the industry with respect to which the employer was assessed or the amount became payable, or was so used within the period in respect of which assessments are unpaid.

6 (3) Without limiting subsection (1), the board may enforce its lien by proceedings under the Court Order Enforcement Act. (4) The board may assign its lien rights to a person, contractor or subcontractor who has fully discharged his or her liability for the amount of an assessment under section 51 by payment of it. This lien created by the Workers Compensation Act has been regarded as being as effective as those created by the Local Government Act and the Taxation (Rural Area) Act in achieving the desired priority over any charge of an ordinary creditor regardless of the nature of the charge or when it arose. Because the statutory lien can interfere with previously created rights of secured creditors, the foregoing legislation has received a very restrictive judicial interpretation. As a result, the various statutory provisions have evolved in a manner such that they now appear to provide for the desired priorities. In Pacific Coast Savings Credit Union v McCullough, [1996] B.C.J. No. 404, Hutchison, J. commented as follows: [Counsel for the defendant] takes the position that the provisions of s. 52 [of the Workers Compensation Act] are draconian in that the legislation gives priority to previously registered charges and he argues the legislation should be construed narrowly. The case law is not in his favour. In that case, the WCB claimed entitlement in priority to other claims for payment of unpaid assessments out of the proceeds of sale of a home owned by the defendant. The defendant was a builder and operated under the name Boyd McCulloch Construction, a registered employer under the Workers Compensation Act. Because the defendant had built his home using his employees, the Court concluded that the residence became produced in the industry such that the proceeds of sale were subject to the lien of the WCB. The legislation which received the most extensive amendments following the implementation of the PPSA was the Social Services Tax Act. Section 103 has been added. Social Services Tax Act 103 (1) In this section associated corporation means a corporation that (a) is associated with another corporation within the meaning of section 256 of the Income Tax Act (Canada), or (b) is determined under subsection (11) to be associated with another corporation for the purposes of this section; collateral has the same meaning as in the Personal Property Security Act; inventory has the same meaning as in the Personal Property Security Act;

7 proceeds has the same meaning as in the Personal Property Security Act; property, when referring to the property of an associated corporation or a related individual, means property that is used in, or in conjunction with, the business in respect of which the taxes referred to in subsection (2) are required to be collected and remitted; purchase money security interest has the same meaning as in the Personal Property Security Act; related individual has the same meaning as in the Property Purchase Tax Act; secured party has the same meaning as in the Personal Property Security Act; security interest has the same meaning as in the Personal Property Security Act. (2) If a person is required to collect and remit taxes, or to pay taxes, under this Act or the regulations and does not collect, remit or pay the taxes, as the case may be, the commissioner may register a lien (a) against the real property of (i) the person, (ii) an associated corporation of the person, or (iii) a related individual of the person by registering a certificate of indebtedness in the prescribed form in the appropriate land title office in the same manner that a charge is registered under the Land Title Act, and (b) against the personal property of (i) (ii) (iii) the person, an associated corporation of the person, or a related individual of the person by designating the amount owing as a lien and entering the amount together with the date of the entry in an accounts receivable system maintained by the commissioner. (3) On registration of a certificate of indebtedness against the real property of a person under subsection (2)(a), a lien is created on the real property against which the lien is registered for, (a) if the lien relates to taxes that were required to be collected or were collected before registration, the amount of those taxes remaining uncollected or unremitted, or both, and any related interest and penalty on those taxes, or

8 (b) if the lien relates to taxes that were required to be paid before registration, the amount of those taxes remaining unpaid, and any related interest and penalty on those taxes. (4) On registration of a lien against the personal property of a person under subsection (2)(b), a lien is created on the personal property in which the person has a legal or equitable interest, including, in the case of a lien referred to in paragraph (a) of this subsection, any portion of the property that is subject to a prior lien or security interest, for, (a) if the lien relates to taxes that were required to be collected or were collected before registration, the amount of those taxes remaining uncollected or unremitted, or both, and any related interest and penalty on those taxes, or (b) if the lien relates to taxes that were required to be paid before registration, the amount of those taxes remaining unpaid, and any related interest and penalty on those taxes. (5) Subject to subsections (6) and (7), a lien, other than a lien referred to in subsection (4)(b), that is registered under subsection (2)(b) against personal property (a) is not limited to the equity that the person against whose personal property the lien is registered has in the personal property, and (b) despite the provisions of any other enactments, has priority over a security interest or other lien, whether or not the security interest or other lien existed before the lien was registered under subsection (2)(b). (6) A lien registered under subsection (2)(b) against personal property does not have priority over (7) If (a) a security interest that secures unpaid wages under section 87(3) of the Employment Standards Act, regardless of when that security interest arises, or (b) a purchase money security interest in collateral other than collateral that at the time the purchase money security interest attaches is inventory or its proceeds. (a) one or more liens are registered under subsection (2)(b) against the personal property of a person, and (b) the property referred to in paragraph (a) is subject to (i) a security interest perfected under the Personal Property Security Act before the registration of the first lien under subsection (2)(b), or

9 (ii) another lien created before the registration of the first lien under subsection (2)(b), the total amount secured by all the liens registered under subsection (2)(b), other than liens referred to in subsection (4)(b), is limited in amount, with respect to all the prior security interests or other liens referred to in paragraph (b) of this subsection, to the amount of taxes remaining uncollected or unremitted, or both, that were required to be collected or were collected by the person for the 6 calendar months before the date of the most recent registration of a lien under subsection (2)(b). (8) If a lien results from an estimate under section 115 or 116 and the estimate is for an amount that is different from the actual amount of the lien as established under subsections (3) and (4), the commissioner may correct the amount by registering a new lien in the revised amount and discharging the original lien, but for the purposes of subsection (7) the new registration is deemed to be registered at the same time as the registration it revises. (9) Despite section 4, the commissioner must, (a) on the oral or written request of a person, disclose in writing whether a lien is registered against the personal or real property of a named person, or (b) on the written request of a person accompanied by the written consent of a named person, disclose in writing whether a lien is registered against the personal or real property of the named person and, if a lien is registered, the amount of the lien and the date of its registration. (10) If the commissioner believes that one corporation is associated with another corporation within the meaning of section 256 of the Income Tax Act (Canada), the commissioner may request one or both of the corporations to provide to the commissioner the records and information required by the commissioner to confirm or rebut that belief. (11) The commissioner may determine that the corporations are associated corporations for the purposes of this section if (a) a corporation that has been requested to provide records or information to the commissioner under subsection (10) fails or refuses to comply with that request within a period of time considered by the commissioner to be reasonable in the circumstances, or (b) the records or information provided to the commissioner under this section confirm the commissioner s belief that the corporations are associated. (12) Immediately after a corporation is determined under this section to be associated with a person referred to in subsection (2)(a)(i) and (b)(i), the commissioner (a) must notify the corporation of this in writing, and (b) may register a lien under this section against the real and personal property of the corporation.

10 (13) The commissioner may seize personal property against which a lien is registered under subsection (12) at any time after the registration of the lien, but must not take any action to realize on those assets until the later of (a) the date that is 90 days after the date on which the notice required under subsection (12)(a) was sent to the corporation, and (b) if a notice of appeal is served on the minister in respect of the determination within the time provided by section 118(2), the date on which the minister upholds the determination under that appeal. (14) If, at any time, the commissioner becomes convinced that the corporations were not associated within the meaning of the section 256 of the Income Tax Act (Canada) at the time that the lien was registered under subsection (12)(b) of this section or the minister or a court of competent jurisdiction upholds the corporation s appeal against the commissioner s determination on the basis that the corporations were not associated at the time that the lien was registered, the commissioner must, (a) if the commissioner has not realized on any of the assets against which the lien was registered, promptly release the lien, and (b) if the commissioner has realized on some or all of the assets against which the lien was registered, promptly release the lien against the remaining assets and pay the proceeds realized from the sale of the realized assets minus any costs or expenses incurred in the sale (i) to the corporation, or (ii) if the commissioner considers it appropriate to do so, into the Supreme Court under Rule 48 of the Rules of Court. (15) The release of the lien under subsection (14)(a) or the release of the lien and payment of the applicable net sale proceeds under subsection (14)(b) is deemed to be full satisfaction of all claims any person, including the corporation, might have arising out of or in any way connected with the determination made under subsection (11), the registration of the lien or the seizure or sale of any or all of the assets against which the lien was registered. Because of jurisprudence considering prior provisions which concluded that any lien was limited to a charge on the debtor s equity in redemption in his property so as to allow the priority of prior fixed security interests, subsection (5) is far-reaching in enhancing the priority of the lien so as to allow it to rank ahead of all security interests in personal property except for a purchase money security interest in collateral other than inventory or its proceeds. The priority of the lien in respect of any real property of the debtor dates from the date of registration against such real property of a certificate of indebtedness and is only in respect of outstanding taxes, interest and penalty uncollected or unremitted before the date of such registration. (Again, it is not clear whether the lien would rank ahead of subsequent advances under a prior registered encumbrance).

11 Although the practice of the Social Services Tax Branch is to file a financing statement in the Personal Property Registry in respect of its lien for outstanding taxes, it must be noted that all that subsection (2)(b) requires is for the amount of the lien to be entered in an accounts receivable system maintained by the commissioner. Finally, the priority of the lien on personal property of the debtor is, by subsection (7), limited to the unpaid balance for the 6 months immediately prior to the most recent registration under subsection (2)(b). In the bankruptcy of a debtor, as a result of the 1992 amendments, unless specifically mentioned in section 136, the BIA removes the preferred status of Crown claims in its scheme of distribution. 86. (1) In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province or of any body under an Act respecting workers compensation, in this section and in section 87 called a workers compensation body, rank as unsecured claims. (2) Subsection (1) does not apply (a) to claims that are secured by a security or privilege of a kind that can be obtained by persons other than Her Majesty pr workers compensation body (i) pursuant to any law, or (ii) pursuant to provisions of federal or provincial legislation, where those provisions do not have as their sole or principal purpose the establishment of a means of securing claims of Her Majesty or r of a workers compensation body and (b) to the extent provided in subsection 87(2), to claims that are secured by a security referred to in subsection 87(1), if the security is registered in accordance with that subsection. (3) Subsection (1) does not affect the operation of (a) subsections 224(1.2) and (1.3) of the Income Tax Act; (b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee s premium, or employer s premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts; or (c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum

12 (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a provincial pension plan as defined in that subsection, and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2) of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts. 87. (1) A security provided for in federal or provincial legislation for the sole or principal purpose of securing a claim of Her Majesty in right of Canada or a province or of a workers compensation body is valid in relation to a bankruptcy or proposal only if the security is registered, before the earliest of (a) (b) (c) (d) the date a petition is filed against the debtor, the date the debtor makes an assignment, the date the debtor files a notice of intention under section 50.4, and the date on which a proposal is filed, pursuant to a prescribed system of registration. (2) In relation to a bankruptcy or proposal, a security referred to in subsection (1) that is registered in accordance with that subsection (a) is subordinate to securities in respect of which all steps necessary to make them effective against other creditors were taken before that registration; and (b) is valid only in respect of amounts owing to Her Majesty or a workers compensation body at the time of that registration, plus any interest subsequently accruing on those amounts. Sec. 103 of the Social Services Tax Act was added in order to deal specifically with section 87. The Rules to the BIA provide that a prescribed system of registration is a general system of registration that is available to any creditor and that is open to the public for inspection, for example the Personal Property Registry and a Land Title Office. However, it must be noted that registration for the purposes of the BIA does not result in priority over prior registered charges. In addition, only amounts owing at the time of registration are protected by the Crown s security interest.

13 It is interesting that section 30(4) of Taxation (Rural Area) Act authorizes its lien to be registered against the property in the appropriate Land Title Office in the same manner as any other charge under the Land Title Act. There is no similar provision in the Local Government Act. That Act provides for a tax sale notice to be registered only after the property was sold for taxes. If that registration comes within section 87, then until that time the lien of the Crown would not rank as a secured claim to enhance the priority of payment on the sale of the lands by the Trustee. But, by virtue of section 136(1)(e) of the BIA the municipality would have a preferred claim for outstanding taxes for the two years immediately preceding the bankruptcy. Section 31(2) of the Taxation (Rural Area) Act makes a subsequent purchaser jointly liable with the owner originally assessed for payment of the taxes. Again, there is no provision similar to this one in the Local Government Act. As a result of the decision of the Supreme Court of Canada in Husky Oil Operations Ltd. v The Minister of National Revenue, [1995] 3 S.C.R. 453, it may be argued that if the Crown is an unsecured creditor in a bankruptcy and does not receive payment in full of its claim, it can not look to a purchaser of the property from the Trustee to collect the deficiency because this would result in its recovering a greater amount than its share under the BIA distribution scheme whereas the bankrupt estate would receive correspondingly less since the purchaser would either hold back the amount claimed him by the Crown or seek indemnification from the bankrupt estate of the amount paid to the Crown. This may be viewed as a type of queue-jumping Husky Oil prohibits. Without going into any detail, the Court in Husky Oil held that certain provisions of the Saskatchewan workers compensation legislation were unenforceable in a bankruptcy because the effect of making an owner liable for assessments owed by his bankrupt contractor was to make the board effectively a secured creditor in recovering in full what it was owed out of the assets of the bankrupt, i.e. the owner could set-off the payment made to the board against money owed to the contractor for the work performed. The Saskatchewan WCB would have received more than allotted to it under the BIA at the expense of the other creditors of the bankrupt estate. In 1998, Canada Customs and Revenue Agency ( CCRA ) followed the provincial legislative amendments in order to come within section 86(2) of the BIA. It amended sections 223(5) to 223(7) of the Income Tax Act (the ITA ) so that CCRA can likewise register its claim, in accordance with provincial laws, to acquire a charge, lien or priority on or a binding interest in property of a debtor. Such registration protects the CCRA in respect of what otherwise would be unsecured claims for personal or corporate income tax liability. However, the lien it may require from such registration is subject to all amounts owing to prior secured creditors. It is important to note that, notwithstanding that it was the amendments to the BIA which resulted in such subsequent amendments to the ITA, CCRA will assert such status in non-bankruptcy situations. IV. Statutory Trust The concept of a statutory trust was developed primarily to avoid the provisions in the BIA which did not recognize the Crown as a secured creditor when asserting a statutory lien. If the Crown could allege successfully that certain property in the possession of the bankrupt was in fact not his property but property held in trust for the Crown, then such property would not become part of the estate of the bankrupt for distribution among his creditors. The relevant section in the BIA is sec. 67(1)(a) which provides that the property of a bankrupt available to his creditors is not to include any property held by the bankrupt in trust for any other person.

14 Where the statutory trust mechanism arises is in legislation under which the debtor either receives money on behalf of the Crown which he is required to remit or where he is to withhold payment of certain funds to a third party (usually an employee) and remit same to the Crown on behalf of the third party. Federal statutes most frequently considered in respect of competing creditor claims are the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act. Income Tax Act Trust for moneys deducted 227. (4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act. Extension of trust (4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed (a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and (b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart. from the estate or property of the person and whether or not the property is subject to such a security interest and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests. Meaning of security interest (4.2) For the purposes of subsections 227(4) and 227(4.1), a security interest does not include a prescribed security interest.

15 Excise Tax Act Trust for amounts collected 222. (1) Subject to subsection (1.1), every person who collects an amount as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from property held by any secured creditor of the person that, but for a security interest, would be property of the person, until the amount is remitted to the Receiver General or withdrawn under subsection (2). Amounts collected before bankruptcy (1.1) Subsection (1) does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II. Withdrawal from trust (2) A person who holds tax or amounts in trust by reason of subsection (1) may withdraw from the aggregate of the moneys so held in trust (a) the amount of any input tax credit claimed by the person in a return under this Division filed by the person in respect of a reporting period of the person, and (b) any amount that may be deducted by the person in determining the net tax of the person for a reporting period of the person, as and when the return under this Division for the reporting period in which the input tax credit is claimed or the deduction is made is filed with the Minister. Extension of trust (3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust, is deemed (a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and (b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact

16 been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests. Meaning of security interest (4) For the purposes of subsections (1) and (3), a security interest does not include a prescribed security interest. Amounts require to be withheld and remitted to CCRA under the Income Tax (British Columbia) Act are protected by the same form of trust mechanism. Until recent amendments to the BIA, considerable jurisprudence had been devoted to the issue of the effect of deemed trusts in various statutes when a bankrupt had not kept funds collected or withheld separate from other money or had no funds at the time of bankruptcy such that the Crown was unable to trace funds alleged to be subject to its statutory trust. Section 67 of the BIA now provides as follows: 67. (1) 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 any laws applicable in the province within which the property is situated and within which the bankrupt resides, or (b.1) such goods and services tax credit payments and prescribed payments relating to the essential needs of an individual as are made in prescribed circumstances and are not property referred to in paragraph (a) or (b), 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. (2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision. (3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada

17 Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which is in this subsection referred to as a federal provision ) nor in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where (a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4) or (4.1) of the Income Tax Act, or (b) the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan, that law of the province establishes a provincial pension plan as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan, and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision. The effect of subsection (2) is to disarm the Crown s reliance on the trust mechanism in bankruptcy if at law, and apart from any statutory provision, it could not establish such a trust relationship or could not trace the trust property. However, subsection (3) creates an exception to subsection (2) for federal and provincial legislation dealing with certain unremitted source deductions of the type referred to therein. Needless to say, it did not take long for a challenge to the amendments to the legislation. In Royal Bank of Canada v Tuxedo Transport Ltd. (1999) 64 B.C.L.R. (3d) 158 (B.C.S.C.), the issue was whether the language was so clear and unambiguous that accounts receivable not yet in existence at the time of the creation of the statutory trust would be caught by the deemed trust provisions as amended of the ITA. The Court held that they were not. In First Vancouver Finance v Her Majesty the Queen and Great West Transport Ltd. [2000] S.J. No. 330, the Saskatchewan Court of Queen s Bench followed the Tuxedo Transport decision. The appeal of the decision by CCRA was dismissed. Subsequently, the CCCA appeal of Tuxedo Transport was allowed by the B.C. Court of Appeal with the Court finding that the language in the ITA clearly states that the trust includes all assets whenever acquired. Although the Tuxedo Transport decision was followed in Ledcor Design Build (B.C.) Inc. v Smithers Construction Ltd. [2000] B.C.J. 1552, this latter case was not appealed. Most recently, the Supreme Court of Canada dismissed the appeal of CCRA in Great West on March 12, 2002 with reasons to follow. In the end, the cases may still be regarded as distinguishable in that Tuxedo Transport dealt with a security interest in receivables and the security interest in Great West arose from a factoring agreement whereby the Court held that all interest in a receivable is transferred to the factor with no rights remaining in the hands of the assignor in relation to the receivable assigned. The B. C. Court of Appeal has decided recently (April 18, 2002) in DaimlerChrysler Financial Services (Debis) Canada Inc. v Mega Pets Ltd. [2002] B.C.J. No. 808 that a conditional sales

18 agreement does not come within the ambit of section 227 of the ITA. The definition of security interest as it appears in section 224 of the ITA does not include conditional sales agreements. Following decisions of the Saskatchewan Court of Appeal in Canada (Deputy Attorney General) v Schwab Construction [2002] S. J. No. 16 (Sask. C.A.) and the Ontario Superior Court of Justice in The Bank of Nova Scotia v Turyders Trucking Ltd. (dated August 30, 2001, No. 00-CV-15437), the Court concluded that the vehicle in issue here was not property subject to a security interest within the meaning of s. 227 (4.1) because in the absence of clear language the courts will not construe a statute so as to expropriate a third party s property.. In Alberta, prior to the above appeal decisions, Master Funduk of the Alberta Court of Queen s Bench in Paccar Financial Services Ltd. v Win-storm Trucking Inc. et al held that CCRA s deemed trust did have priority over equipment leases and conditional sales contracts. He was not shy about making the following comment: The label that the parties attach to the lease contracts is irrelevant. Calling a jackass an eagle will not help the jackass to fly. In respect of the collection and remittance of GST, note that the bankruptcy of the person responsible for the collection of the GST effectively terminates any deemed trust. Unless the Crown can establish that a trust at common law exists in respect of money held on deposit, its claim for unremitted GST is treated in the same manner as the claims of all unsecured creditors of the bankrupt. Finally, the deemed trust interest of CCRA is subject to a prescribed security interest which, at present, is in respect of the obligation that is secured by a mortgage in land or a building registered before the deemed trust arises after deducting the value of all the rights of the secured creditor securing the obligation (i.e. the other collateral securities that guarantee the obligation). Furthermore, the claim of the secured creditor is limited to the outstanding amount of the obligation calculated at the time of the failure of the debtor to remit what is required. Although section 102 of the Social Services Tax Act may be effective outside bankruptcy situations, the amendments to the BIA remove this trust mechanism as a means of elevating the claim of the Crown over the claims of secured creditors following a bankruptcy. This reversal of priority following bankruptcy regularly inspires receivers to bankrupt companies in receivership to subordinate social services tax claims. If the Crown loses its first claim because of a bankruptcy and if it has failed to register a statutory lien in the Personal Property Registry before the bankruptcy, it will rank merely as an unsecured creditor in the bankruptcy. V. Garnishment To help to recover debts, several federal statutes enable the Crown (through the responsible minister) to deliver a requirement to pay to a person who is liable to make payment to the debtor. Priority issues arise when other creditors allege an interest in such indebtedness. Generally, the language of the legislation entitles the Crown to claim priority over the claims of secured creditors who have been given a specific charge on those funds. Section 224(1.2) of the Income Tax Act provides that a requirement to pay may be served on a person who is, or will become within a year, liable to make a payment to either the debtor or a secured creditor who has the right to receive a payment which, but for a security interest, would otherwise be payable to the debtor. Similar rights are given in the Canada Pension Plan Act and the Employment Insurance Act.

19 Garnishment 224(1.2) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any enactment of a province or any law, but subject to subsections 69 (1) and 69.1(1) of the Bankruptcy and Insolvency Act and section 11.4 of the Companies Creditors Arrangement Act, where the Minister has knowledge or suspects that a particular person is, or will become within one year, liable to make a payment (a) to another person (in this subsection referred to as the tax debtor ) who is liable to pay an amount assessed under subsection 227(10.1) or a similar provision, or (b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor, the Minister may in writing require the particular person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the money otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor s liability under subsection 227(10.1) or the similar provision, and on receipt of that requirement by the particular person, the amount of those moneys that is so required to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty to the extent of that liability as assessed by the Minister and shall be paid to the Receiver General in priority to any such security interest.

20 Definitions (1.3) In subsection 224(1.2), secured creditor means a person who has a security interest in the property of another person or who acts for or on behalf of that person with respect to the security interest and includes a trustee appointed under a trust deed relating to a security interest, a receiver or receiver-manager appointed by a secured creditor or by a court on the application of a secured creditor, a sequestrator or any other person performing a similar function; security interest means any interest in property that secures payment or performance of an obligation and includes an interest created by or arising out of a debenture, mortgage, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for; similar provision means a provision, similar to subsection 227(10.1), of any Act of a province that imposes a tax similar to the tax imposed under this Act, where the province has entered into an agreement with the Minister of Finance for the collection of the taxes payable to the province under that Act. Garnishment (1.4) Provisions of this Act that provide that a person who has been required to do so by the Minister must pay to the Receiver General an amount that would otherwise be lent, advanced or paid to a taxpayer who is liable to make a payment under this Act, or to that What is notable is that whereas the relevant section in the Income Tax Act (and the other two Acts referred to above) states that the priority applies notwithstanding the BIA, the Excise Tax Act does not exclude the operation of the BIA in respect of the enforcement by the Crown of its rights under this statute when the debtor is in bankruptcy. In all other respects the priority in favour of the Crown supersedes any other federal or provincial legislation. In Her Majesty the Queen v Province of Alberta Treasury Branches et al (1996) 96 DTC 6245, the Supreme Court of Canada decided that the claim of CCRA under its requirement to pay was prior to the claim of secured creditors over accounts receivable. BACK TO TOP