Section 224 of the Income Tax Act grants relatively broad powers to the Minister of National Revenue (the “Minister”) to compel a person who is liable to make a payment to a tax debtor to instead pay the amount to the Minister. The recent judgment by the Supreme Court of Canada (“SCC”) in Canada Trustco Mortgage Co. v. R 1examined the reach of section 224 in the context of the banking system, and whether a drawee bank is liable to make payment to a payee of a cheque.
The Appellant, Canada Trustco, is a deposit-taking financial institution. The tax debtor, Cameron McLeod, had a lawyer’s trust account and a joint account with the Appellant. Pursuant to subsection 224(1), Canada Revenue Agency (“CRA”) issued three Requirements to Pay (“Requirements”) to the Appellant. During the time period covered by each of the Requirements, cheques payable to Mr. McLeod, and drawn on the trust account were delivered to the Appellant. Each cheque contained written instructions directing the Appellant to deposit the cheques into the joint account.
Despite the Requirements, upon receipt of the cheques, the Appellant credited the joint account before sending the cheques for collection, processing and settlement. The trust account was debited the following day. In response, CRA assessed the Appellant for the amount of the cheques. The Appellant filed notices of objection which were rejected by CRA. Thereafter, the Appellant appealed to the Tax Court of Canada (“TCC”), which ruled against the Appellant. The judgment of the TCC was upheld in the Federal Court of Appeal. A divided SCC allowed the appeal and overturned the decisions in the lower courts.
Issue to be Decided
At the onset, the Minister conceded that section 224 did not obligate the Appellant to remit funds on deposit in both the trust account and joint account. Thus, the main issue to be decided was whether the Appellant “was liable to make payments to the tax debtor, Mr. McLeod, because of the fact that he was named as the payee of the cheques”.2 The majority decision addressed the issue by examining the Appellant’s obligations as the collecting bank, and as drawee of the cheques.
Obligations of the Collecting Bank
The majority of the SCC rejected the Minister’s argument that “notional payments were made to Mr. McLeod before the funds were deposited into the joint account”.3 This argument is predicated on breaking down the relevant transactions into two steps: The first step involved Mr. McLeod’s demand to be paid as payee, and his demand, as drawer, “that the amounts be repaid out of the funds owed to him in relation to the trust account”.4 The second step involved Mr. McLeod’s instruction to the Appellant to deposit the money into the joint account.
In rejecting the Minister’s argument, the majority noted that the cheques contained explicit instructions for the funds to be deposited into the joint account. Mr. McLeod did not demand payment as a payee. Moreover, the funds were credited into the joint account before the cheques were sent for clearing. According to the majority, the Appellant did not make a payment to Mr. McLeod.
With respect to the Appellant’s obligations as a collecting bank, the majority held that the Appellant collected the cheques on behalf of both holders of the joint account, and not to Mr. McLeod alone. The Appellant’s obligation is to both holders of the joint account. In general, the majority held that “[t]here is no contract between a bank and a payee in his or her capacity as payee”.5 There is only a contract between the drawee bank and customer or drawer. Thus, the Appellant’s acceptance of the cheques for deposit into the joint account could not result in an obligation to remit the funds to the Receiver General.
Obligations as a Drawee
The majority next considered the obligations of the Appellant as a drawee. The majority held that a bank and a depositor have a debtor-creditor relationship in which a payee is not a party. Absent a contractual relationship, the majority looked to the Bills of Exchange Act to determine whether a drawee bank owes a duty to the payee, and held that a cheque “imposes no obligation on a drawee bank to the payee”.6 It is the drawer of the cheque that promises payment upon presentment of the cheque, and the drawee bank’s obligation to pay the cheque is to the drawer.
In addition, the majority rejected the minority’s position that “there may be a contract between the payee and the drawee bank”7 where the payee is also a customer at the same bank as the drawer.
According to the minority, the scope of section 224 is broad, and covers situations where the tax debtor can legally enforce payment from the party served with a Requirement.
While agreeing with the majority that a drawee bank generally has no liability to pay the payee of a cheque, the minority held that a drawee bank is liable to the payee upon presentment of a cheque, when the payee and drawer are the same person. The dissenting justices based this conclusion on the fact that a “bank has a duty to repay its customer the funds on deposit when the customer makes a demand”.8 Thus, when a bank’s customer writes a cheque to himself or herself, the bank has a contractual duty to pay the cheque upon presentment, and after ensuring that the cheque is payable.
Furthermore, the dissenting justices argued that a “bank that collects the funds from a deposited cheque receives the funds as agent for the” payee”.9 Thus, the minority held that a deposited cheque is payable to the payee. In contrast, the majority accepted the Appellant’s argument that a collecting bank becomes a holder in due course of the deposited cheque, and any payment on the cheque is made to the bank alone.
Finally, the minority disagreed with the majority’s position that funds deposited into a joint account are only payable to both account holders, rather than payable to the payee. The dissenting justices argued that, while the funds are in transit to being deposited into the joint account, the drawee bank is only liable to the payee. Before the funds are deposited into the joint account, the other joint account holder has no right to the funds. Therefore, even though the Minister is not allowed to garnish funds in the joint account, the minority held that the Minister is allowed to garnish the funds that are in transit to being deposited into the joint account.
The dissenting justices expressed concern about the negative ramifications of the majority’s decision on other areas of law. For example, the presence of a joint account may thwart the collection of child or spousal support given the majority’s restrictive interpretation of garnishment powers. Thus, if the negative consequences are as wide ranging as feared, it may not be long before legislators revisit the issue.