introduction

Earlier this year in Toronto-Dominion Bank v Canada1 ("TD"), the Supreme Court of Canada (the "SCC") provided much needed guidance regarding the validity of a requirement to pay (or notice of garnishment) (a "Requirement"), which was issued to the Toronto-Dominion Bank (the "TD Bank") on behalf of the federal Minister of National of Revenue (the "Minister") under subsections 317(1) and (3) of the Excise Tax Act2 (the "ETA") to recover moneys owed by a tax debtor, but which was neither settled nor executed, before the tax debtor entered into bankruptcy.

In a one-paragraph decision, the Supreme Court affirmed Federal Court of Appeal's (the "FCA")'s decision.3 The FCA concluded that the funds subject to the Requirement became the Crown's property at that time that the TD Bank received the Requirement and, therefore, the subsequent filing of the notice of stay in the tax debtor's bankruptcy under the Bankruptcy and Insolvency Act4 (the "BIA") did not affect the Crown's property interest in the funds (i.e., the Crown had effectively garnished or seized the funds prior to the bankruptcy).

interaction between the ETA and BIA

The TD case arose as a result of a dispute over the interaction between subsection 317(3) of the ETA and section 70 of the BIA.

Where the Minister believes that a person is, or will become within a year, liable to pay an amount to either

  1. a tax debtor, or
  2. a secured creditor of the tax debtor that, but for the creditor's security interest, would become payable to the tax debtor,

the Minister may issue a Requirement to that person, to require that such amount be paid to the Crown on account of the tax debtor's GST/HST liability pursuant to subsection 317(3) of the ETA.

Section 70 of the BIA provides that a bankruptcy order takes precedence over any garnishment (such as a Requirement), except to the extent the garnishment has been completely executed prior to bankruptcy. While subsection 317(3) of the ETA explicitly acknowledges that a Requirement issued under this subsection is subject to the BIA, it also provides that, where the moneys are immediately payable by the recipient of the Requirement to the tax debtor or the tax debtor's secured creditor, such garnished moneys "shall… become the property of her Majesty in right of Canada" upon receipt of the Requirement.

Under the interpretation advanced by TD Bank, section 70 of the BIA would take precedence over subsection 317(3) of the ETA, preventing the Crown from enforcing the Requirement, because the Requirement remains unexecuted at the time of bankruptcy. Under a competing interpretation asserted by the Minister, the moneys intended to be garnished under the Requirement became the Crown's property when TD received the Requirement prior to the bankruptcy, and thus were not subject to section 70 of the BIA.

In resolving this issue, a conflict had arisen between the case law in the Québec Court of Appeal (the "QCA") and certain courts in the common law provinces, particularly the Ontario Court of Appeal. In particular, in the QCA's 2009 decision in Sous-ministre du Revenu du Québec v. De Courval,5 dealing with the analogous provisions to subsection 317(3) of the ETA under the An Act respecting the ministère du Revenu (Québec) (the "QST Act"), the QCA had ruled that there was a conflict between the language of the QST Act and section 70 of the BIA, such that the latter took precedence. In contrast, the common law courts had decided similar cases in favour of the Crown based on the competing interpretation that there was no such conflict and the Requirement took precedence. The TD decision resolves this uncertainty in favour of the Crown, siding with the common law courts.

facts in TD case

A Quebec corporation ("Debtor Co") owed approximately $12,000 on account of GST to the federal government. On December 11, 2007, the Quebec Minister of Revenue (the "Quebec Minister"), on behalf of his federal counterpart, sent a Requirement to TD Bank under subsections 317(1) and (3) of the ETA. TD Bank held $8,868 belonging to Debtor Co. On December 24, 2007, Debtor Co filed a Notice of Intention to make a proposal under the BIA and Debtor Co's trustee in bankruptcy sent a notice to TD Bank to stay the Requirement.

TD Bank did not comply with the Requirement, either before or after receiving the notice to stay from the trustee, even though TD Bank held either Debtor Co's funds, or funds garnished by the Minister, at all relevant times. The Quebec Minister issued an assessment against TD Bank to enforce the Requirement under subsection 317(9) of the ETA, to which TD Bank objected, but the objection was dismissed, subject to a reduction in the amount assessed (for a reason unrelated to the substantive issue about the interaction between section 70 of the BIA and subsection 317(3) of the ETA).6

Both the Tax Court of Canada and the FCA Decision dismissed TD Bank's appeal of the re-assessment. The SCC agreed with the FCA's reasoning.

analysis

Applying the reasoning in the decisions issued by the common law courts, and rejecting that of the QCA in De Courval, the Tax Court concluded that funds held by TD Bank on behalf of Debtor Co became the Crown's property at the time that TD Bank received the Requirement. Since TD Bank received the Requirement prior to the bankruptcy proposal, the garnished amount was no longer part of Debtor Co's property at the time of the proposal. Since section 70 of the BIA only applies to property belonging to the bankrupt, section 70 of the BIA had no application and no conflict arose with subsection 317(3) of the ETA.7

TD Bank also relied on the SCC's 2009 decision in Québec (Revenue)v Caisse populaire Desjardins de Montmagny,8 which held that GST and QST deemed trusts in favour of the Crown cease to exist at the time of the GST/QST debtor's bankruptcy because the deemed trusts arising under the ETA and the QST Act are unwound by provisions under the BIA that have paramountcy.

The FCA distinguished Caisse Montmagny from the current case. In Caisse Montmagny, the ownership of the property subject to the deemed trusts had not transferred absolutely from the tax debtor to the federal and Quebec governments before the tax debtor's bankruptcy, therefore setting up the conflict between the ETA (along with the QST Act) and the BIA at the time of bankruptcy. In the current dispute, there was no conflict between the ETA and BIA to resolve. Since TD Bank received the Requirement at a time before the bankruptcy occurred and the moneys transferred absolutely from Debtor Co to the Crown at that time, TD Bank had an obligation to pay the required amount to the Crown as of that time (i.e., as the money belonged to the Crown as of that time).9

practical implications

As a result of the SCC's guidance, the SCC has eliminated the doubt created by the conflicting jurisprudence in lower courts about whether a Requirement issued and unexecuted before bankruptcy can take precedence over the distribution scheme established under the BIA. Once the Requirement is received, any moneys immediately payable that are subject to the Requirement become the Crown's property absolutely and are, therefore, excluded from the bankrupt's estate. (However, a Requirement issued after the filing for bankruptcy would be invalid by virtue of section 70 of the BIA).  

This decision sets a precedent that goes beyond a Requirement issued under subsection 317(3) of the ETA. The guidance in this decision should equally apply to subsection 224(1.2) of the Income Tax Act (Canada) (the "ITA") and other similarly worded garnishment provisions to recover liabilities owed to the Crown (notably the provisions of the QST Act that were at issue in De Courval). In the Supreme Court of Canada's earlier decision in Alberta (Treasury Branches) v MNR,10 the Supreme Court found that both subsection 224(1.2) of the ITA and subsection 317(3) of the ETA had the effect of transferring ownership of moneys outright to the Crown.

However, had the moneys in the TD case not become payable until after the tax debtor's bankruptcy, we believe that there would have been a different result. In our view, subsection 317(3) only deems moneys subject to a Requirement to become property of the Crown when they become payable to the tax debtor (or to a secured creditor thereof). In TD, the moneys subject to the Requirement were immediately payable to Debtor Co at the time the Requirement was received, such that ownership was transferred to the Crown at that time. It is unlikely, however, that a Requirement issued under subsection 317(3) of the ETA before the tax debtor's bankruptcy would have the effect of garnishing moneys that only become payable after the bankruptcy. In that case, the Crown would not take ownership of such moneys prior to the filing for bankruptcy. Accordingly, the Requirement would not survive the bankruptcy as a result of section 70 of the BIA.

In addition, the legal principles settled by the SCC in TD do not specifically address a Requirement issued under subsection 317(2) of the ETA (or the parallel provision in subsection 224(1.1) of the ITA), where different legal considerations might apply.