In the recent decision of Ministre du Revenue national c. Caisse populaire du bon Counseil, 2009 SCC 29 (“Caisse populaire”), the Supreme Court of Canada (the “SCC”) considered whether a lender's contractual rights in respect of its customer's term deposit account may be defeated by a deemed statutory trust in favour of the Crown.

Any property of a taxpayer that is subject to a “security interest” within the meaning of the term in s. 224(1.3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (“ITA”), is, to the extent of any unremitted source deductions by the taxpayer, deemed to be held in trust for the Crown pursuant to the operation of s. 227(4.1) ITA and s. 86(2.1) of the Employment Insurance Act, S.C. 1996, c. 23 (“EIA”).

The issue in this case was whether Caisse populaire du bon Counseil (the “Caisse”), by virtue of its contractual arrangements with its customer, Camvrac Enterprises Inc. (“Camvrac”), held a “security interest” over the proceeds of Camvrac’s deposit account with the Caisse that would be defeated by the deemed trust in favour of the Crown created by s. 227(4.1) ITA and s. 86(2.1) EIA.  

BACKGROUND

In September 2000, Caisse granted Camvrac a $277,000 line of credit. Soon thereafter, the parties entered into a “Term Savings Agreement”, whereby Camvrac deposited $200,000 with the Caisse. The Term Savings Agreement placed encumbrances on the deposit such that it could not be negotiated or transferred, not be withdrawn before maturity and could be given in security only in favour of Caisse. A further agreement was entered into (the “Security Given Through Savings Agreement”), which stipulated that “to secure the repayment” of the line of credit, Caisse was entitled to set-off amounts owed to it by Camvrac against the amount of the deposit account, coupled with a right of retention over the deposit account.

Following Camvrac’s assignment into bankruptcy in February 2001, the Caisse closed the deposit account and set-off the proceeds against the debt outstanding under the line of credit. In June 2001, the Crown gave the Caisse notice to pay $26,863.53 from the proceeds of the deposit account for unremitted employment insurance premiums and income tax deducted at source by Camvrac – it was the Crown’s assertion that such amounts were subject to its deemed trust under s. 227(4.1) ITA and s. 86(2.1) EIA.

DECISION

In a 5-2 decision, the SCC held that the agreements between Caisse and Camvrac respecting the term deposit did indeed constitute a “security interest”, and, therefore, as a result of the deemed trust created by s. 227(4.1) ITA and s. 86(2.1) EIA, the Crown was the beneficial owner of Camvrac’s term deposit to the extent of the unremitted source deductions.

Parliament has defined “security interest” in s. 224(1.3) ITA to include “any interest in property that secures payment or performance of an obligation”. Rothstien J. in writing for the majority made note that Parliament has intentionally chosen an expansive definition of “security interest”, and that while Parliament has provided a list of “included” specific examples, these examples do not diminish the broad scope of the words “any interest in property”. It was further held that the creation of a “security interest” does not require any particular form, although the majority went on later in the decision to consider particular words used by the parties in its characterization of the agreements (the majority made note of the use of the word "security" in the title of the “Security Given Through Savings Agreement”, and that this agreement expressly stipulated that the term deposit was “to secure the repayment” of the line of credit).

The Caisse argued that its contractual rights to set-off with Camvrac is not a “security interest”, as this contractual right did not confer on it an inertest in Camvrac’s property with the intention of securing the line of credit. Rather, the Caisse asserted that the contractual right to set-off simply allowed it to extinguish its own indebtedness to Camvrac.

The majority decision rebutted the argument of the Caisse by emphasizing that while the mechanism by which the Caisse would realize on its security was a contractual right to set-off, the deposit itself was encumbered by the conditions agreed to by Camvrac and imposed by the Caisse in order to ensure that the remedy of set-off would be effective; the fact that the Caisse could realize on its security by way of a book entry did not diminish the fact that the purpose of the deposit was to secure Camvrac’s obligation to Cassie.

The majority holding in Caisse populaire makes clear that, in determining if a “security interest” exists as defined in s. 224(1.3) ITA, the court will look to the purpose and effect of the overall contractual relationship between the parties in respect of the property under consideration, as opposed to focussing on the nature of the particular remedy (set-off) purported to be exercised by the creditor.

The dissenting opinion, on the other hand, focused on the remedy of set-off to conclude it is not a “security interest”, as creditors who exercise their right to set-off are merely extinguishing mutual obligations, and not enforcing a security by realizing on the debtor’s property.

CONCLUSION

The decision in Caisee populaire shows that a lenders’ contractual right to set-off amounts owed to it by a creditor against the creditor’s (encumbered) term deposit account will be defeated by a deemed trust in favour of the Crown over such property. Also, the majority holding in Caisse populaire makes clear that, in determining if a “security interest” exists as defined in s. 224(1.3) ITA, the court will look to the overall contractual relationship between the parties in respect of the property under consideration, as opposed to focussing on the nature of the particular remedy (set-off) purported to be exercised by the creditor.

What remains to be seen is whether this decision will be used by analogy in PPSA cases to expand the definition of “security interest”, such that lenders’ rights under other types of agreements where cash is posted as credit (and the lender enjoys a right to set-off against the debtor) will be considered a “security interest”, thus requiring the lender to perfect such rights by registration under the applicable PPSA.