[1] Nancy Jo Wannan appeals the amended judgment of the Tax Court dated January 14, 2003, allowing in part an appeal against an assessment dated February 8, 1999 made pursuant to section 160 of the Income Tax Act, R.S.C. 1985, c. 1 (5^th supp.): Wannan v. Canada, [2002] T.C.J. No. 653 (QL), 2003 D.T.C. 76, [2003] 2 C.T.C. 2303 (T.C.C.).

[2] Section 160 is one of a number of provisions in the Income Tax Act that create vicarious or secondary liability for tax debts. Such provisions permit the Minister to collect a tax debt from someone other than the tax debtor, provided certain statutory conditions are met. The relevant parts of section 160 read as follows:

160(1) Where a person has ... transferred property ... to ... the person's spouse ... the following rules apply: . . .

160(1) Lorsqu'une personne a ... transféré des biens ... à ... son époux ... les règles suivantes s'appliquent: . . .

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

e) le bénéficiaire et l'auteur du transfert sont solidairement responsables du paiement en vertu de la présente loi d'un montant égal au moins élevé des montants suivants:

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at the time of the consideration given for the property, and

(i) l'excédent de la juste valeur marchande des biens au moment du transfert sur la juste valeur marchande à ce moment de la contrepartie donné pour le bien,

(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding year ...

(ii) le total des montants dont chacun représente un montant que l'auteur du transfert doit payer en vertu de la présente loi au cours de l'année d'imposition dans laquelle les biens ont été transférés ou d'une année d'imposition antérieure ou pour une de ces années;

[3] Section 160 of the Income Tax Act is an important tax collection tool, because it thwarts attempts to move money or other property beyond the tax collector's reach by placing it in presumably friendly hands. It is, however, a draconian provision. While not every use of section 160 is unwarranted or unfair, there is always some potential for an unjust result. There is no due diligence defence to the application of section 160. It may apply to a transferee of property who has no intention to assist the primary tax debtor to avoid the payment of tax. Indeed, it may apply to a transferee who has no knowledge of the tax affairs of the primary tax debtor. However, section 160 has been validly enacted as part of the law of Canada. If the Crown seeks to rely on section 160 in a particular case, it must be permitted to do so if the statutory conditions are met.

[4] The facts are not in dispute. During the years 1989 to 1994 Ms. Wannan's spouse, Dr. Barry Wannan, made contributions totalling $50,850 to Ms. Wannan's registered retirement savings plan. He contributed a further $7,500 in 1995. The Tax Court Judge held, correctly in my view, that each of those contributions was a transfer of property to which section 160 could potentially apply. That conclusion is not challenged in this appeal.

[5] On January 10, 1996, Dr. Wannan made a voluntary assignment in bankruptcy. The Crown filed a proof of claim in the amount of $176,940.87 for amounts owed by Dr. Wannan under the Income Tax Act. That amount represented liabilities totalling $26,333.27 in respect of his taxable income for 1988 and 1989, which was assessed in 1993 and 1994, and a further $150,607.50 in respect of his taxable income for 1995, which was assessed on September 16, 1996. Dr. Wannan was discharged from bankruptcy on October 10, 1996.

[6] The Crown received a dividend of $72,013.88 from the trustee in bankruptcy. Of that amount, approximately $45,752.51 was an interim payment and the remainder, $26,261.37, was paid after the conclusion of the bankruptcy proceedings in October of 2002. The record does not disclose when the interim payment was made. Counsel for both parties agreed that in the normal course, the interim payment would have been made before Dr. Wannan was discharged. It was probably made before February 2, 1999 because the record contains a copy of a report by the bankruptcy trustee bearing that date which records the interim payment.

[7] Ms. Wannan was assessed under section 160 of the Income Tax Act on February 8, 1999. The factual basis of the section 160 assessment was that the contributions made by Dr. Wannan to Ms. Wannan's registered retirement savings plan were transfers of property made to her without consideration, in or after a year in respect of which Dr. Wannan had a tax liability. The amount assessed was $39,458.27, determined as follows:

Lesser of

Dr. Wannan's tax liability for 1988 and 1989

$ 26,333.27

RRSP contributions from 1989 to 1994

$ 50,850.00

Lesser of:

Dr. Wannan's tax liability for 1995

$ 150,607.60

RRSP contributions in 1995 *

$ 13,125.00

13125

Total

$ 39,458.27

* Originally, the Crown believed the total RRSP contributions for 1995 to be $13,125.00. However, the Tax Court determined that the total contributions for that year were $7,500.00 (see paragraph 9 below).

[8] Ms. Wannan's section 160 assessment did not reflect any part of the bankruptcy dividend, including the interim payment, $45,752.51, received by the Crown before the date of Ms. Wannan's assessment.

[9] Ms. Wannan appealed the assessment to the Tax Court. Her appeal was successful on only one point. The Tax Court Judge held that in 1995, Dr. Wannan had contributed only $7,500.00 to Ms. Wannan's registered retirement savings plan, not $13,125.00, so that her liability under section 160 in respect of Dr. Wannan's 1995 liability could not exceed $7,500.00. He ordered her section 160 assessment to be reduced by $5,625.00 to $33,833.27. The Crown does not dispute that reduction.

[10] Initially, three principal issues were raised in this appeal, but counsel for Ms. Wannan abandoned one of them at the hearing of the appeal. The first issue deals with the interaction of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and section 160 of the Income Tax Act. The second issue requires consideration of the manner in which the bankruptcy dividend was applied to Dr. Wannan's tax liability.

Section 160 of the Income Tax Act and the Bankruptcy and Insolvency Act

[11] It is argued for Ms. Wannan that Dr. Wannan's bankruptcy precluded the Crown from assessing Ms. Wannan under section 160 of the Income Tax Act. Counsel for Ms. Wannan concedes that he cannot succeed on this point unless the Court is prepared to reverse Heavyside v. Canada, [1996] F.C.J. No. 1608 (QL), 206 N.R. 206, 43 C.B.R. (3d) 128, [1997] 2 C.T.C. 1, 97 D.T.C. 5026, 25 R.F.L. (4th) 334 (F.C.A.).

[12] Heavyside can be taken as authority for at least three propositions. (1) Liability under section 160 of the Income Tax Act arises upon a transfer of property in circumstances that meet the statutory conditions, not on the date on which the liability is assessed. (2) A section 160 liability survives the bankruptcy of the principal tax debtor. (3) A section 160 liability survives the bankruptcy discharge of the principal tax debtor. The statutory basis of the third proposition is that although subsection 178(2) of the Bankruptcy and Insolvency Act provides that a discharge relieves the bankrupt person from liability for a debt proved in the bankruptcy, section 179 of that Act prevents the discharge from giving the same relief to a person who, at the date of the bankruptcy, was jointly liable for the debt.

[13] Ms. Wannan's section 160 liability (assuming it survives this appeal) arose before 1996. If the principles in Heavyside are correct, her liability is unaffected by Dr. Wannan's bankruptcy in January of 1996, by his discharge from bankruptcy in October of 1996, or by the fact that Ms. Wannan was not assessed until February 8, 1999.

[14] This Court may reverse its own prior decisions, but it will not do so lightly. The applicable principle is explained by Justice Rothstein, writing for the Court in Miller v. Canada (Attorney General) (2002), 293 N.R. 391, 220 D.L.R. (4^th) 149 (F.C.A.):

[8] There is no doubt that this Court may overrule its own decisions. However, the values of certainty and consistency lie close to the heart of the orderly administration of justice in a system of law and government based on the rule of law. Accordingly, one panel of this Court ought not to depart from a decision of another panel merely because it considers that the first case was wrongly decided. The Supreme Court of Canada will normally be the appropriate forum for correcting the errors of intermediate courts of appeal.

[9] The jurisprudence on the overruling of prior decisions was reviewed by Urie J.A. in M.E.I. v. Widmont, [1984] 2 F.C. 274 at 278-282 (C.A.), and his comments have been approved in subsequent cases: see, for example, Eli Lilly and Co. v. Novopharm Ltd. (1996), 197 N.R. 291 at 293 (F.C.A.). To summarize, the jurisprudence cited by Urie J.A. holds that, in the interests of certainty and consistency, sound judicial administration requires that, save in exceptional circumstances, a Court of intermediate appellate jurisdiction should follow its prior decisions. The Court is responsible for the stability, consistency and predictability of the law.

[10] The test used for overruling a decision of another panel of this Court is that the previous decision is manifestly wrong, in the sense that the Court overlooked a relevant statutory provision, or a case that ought to have been followed: see, for example, Eli Lilly and Co., and Janssen Pharmaceutica Inc. v. Apotex Inc. (1997), 208 N.R. 395 at 396 (F.C.A.). The same test has been applied by provincial Courts of Appeal: see, for example, R. v. White (1996), 29 O.R. (3d) 577 at 604-05 (C.A.); Bell v. Cessna Aircraft Co. (1983), 149 D.L.R. (3d) 509 at 511 (B.C. C.A.); R. v. Grumbo (1988), 159 D.L.R. (4th) 577 at para. 21 (Sask.C.A.); and Lefebvre c. Québec (Commission des Affaires Sociales) (1991), 39 Q.A.C. 206.

[15] With those principles in mind, I will consider the arguments of counsel for Ms. Wannan that Heavyside should be reversed.

[16] The argument begins with the objectives of the Bankruptcy and Insolvency Act. One of those objectives is to ensure that unsecured creditors share equally (that is, proportionally) in the assets of the bankrupt. Another is to give the bankrupt a fresh start after the conclusion of bankruptcy proceedings. Recent amendments to the Bankruptcy and Insolvency Act removed all special preferences for the Crown so that Crown claims, such as tax debts, are treated simply as unsecured claims, which indicates that Parliament intended the Crown to be in the same position as other unsecured creditors.

[17] It is argued for Ms. Wannan that if Heavyside is correct, the Crown may use section 160 of the Income Tax Act as an additional means of collecting outstanding tax debts of the bankrupt outside the bankruptcy. That would tend to undermine the objectives of the Bankruptcy and Insolvency Act, in at least two ways. First, the Crown would obtain both its proportionate share of the bankrupt's assets and whatever additional amounts it can recover from the person assessed under section 160, which effectively puts the Crown in a better position than other unsecured creditors. Second, the person who is liable under section 160 and who pays that liability after the bankrupt is discharged may make a claim against the bankrupt for reimbursement, potentially ruining what should be the bankrupt's fresh start.

[18] On the basis of that analysis of the scheme of the Bankruptcy and Insolvency Act, counsel for Ms. Wannan argues that, contrary to Heavyside, the Crown should be barred from relying on section 160 to collect any tax debt that is provable in the bankruptcy of the tax debtor. He asserts that the Crown's ability to collect a tax debt from a third party who may have received property from the bankrupt prior to the bankruptcy should be limited to the situations referred to in section 91 of the Bankruptcy and Insolvency Act (settlements of property within one year of the bankruptcy, or five years in certain circumstances, subject to an exception for transactions completed in good faith and for valuable consideration).

[19] Counsel for the Crown argues that counsel for Ms. Wannan has presented an incomplete, and therefore incorrect, analysis of the scheme of the Bankruptcy and Insolvency Act. I agree with counsel for the Crown on this point. I see nothing in the Bankruptcy and Insolvency Act that indicates an intention to provide relief to third parties who are responsible for a debt of the bankrupt. Indeed, section 179 of the Bankruptcy and Insolvency Act seems to suggest the opposite. It says, among other things, that if a creditor is entitled to look to two debtors for a single debt, and one of the debtors becomes bankrupt, the creditor may still look to the other debtor. Thus, the Bankruptcy and Insolvency Act expressly permits an unsecured creditor of a bankrupt to pursue alternative remedies against other parties. Whether that could result in a claim for reimbursement against the bankrupt after discharge is a matter for speculation, but if such a result is possible, it would simply be a further consequence of section 179.

[20] Counsel for Ms. Wannan also suggests that difficulties arise in attempting to challenge a section 160 assessment if the affairs of the primary tax debtor are in the hands of a trustee in bankruptcy. I doubt that there are as many problems as counsel for Ms. Wannan suggests, or that they are as difficult as he suggests. A person who is assessed under section 160 of the Income Tax Act has rights of objection and appeal, and it is now well established that such an objection or appeal may include a challenge to the validity or correctness of the assessment of the tax liability of the primary tax debtor: see Gaucher v. Canada (2000), 264 N.R. 369, 2000 D.T.C. 6678, [2001] 1 C.T.C. 125 (F.C.A.).

[21] There is no evidence that there is any basis for such a challenge in this case. Nor is there any evidence that the bankruptcy of Dr. Wannan would have created any problem for Ms. Wannan in launching such a challenge, if she had the grounds to do so.

[22] Nothing in the argument of counsel for Ms. Wannan casts any doubt on the correctness of Heavyside. On the contrary, I agree with the Crown that Heavyside is correct.

[23] I now turn to the second argument made for Ms. Wannan, which goes to the quantum of her liability.

The application of the bankruptcy dividend to Dr. Wannan's tax liabilities

[24] The debate about the application of the bankruptcy dividend was not raised in Ms. Wannan's notice of appeal, but it was raised in argument in the Tax Court. As a result, there is not much evidence on the point.

[25] Counsel for Ms. Wannan argues that the bankruptcy dividend received by the Crown should have been applied first against Dr. Wannan's 1988 and 1989 liability, and then against his 1995 liability. He argues that if the bankruptcy dividend had been applied that way, Dr. Wannan's 1988 and 1989 tax liability would have been paid in full from the dividend, so that Ms. Wannan would have no liability under section 160 for 1988 and 1989. This is illustrated by the following table:

Date

Taxation Year

Assessments

($)

Payments

($)

Balance

($)

34198

1988

25544.98

34533

1989

788.29

26333.27

35323

1995

150607.6

176940.87

February 2, 1999 ^{(Note 1)}

-45752.51

131188.36

After October 2, 2002 ^{(Note 2)}

-26261.37

104926.99

Total

176940.87

-71013.88

104926.99

Note 1: This represents the interim payment on account of the bankruptcy dividend. As explained above, the record does not disclose the date on which that payment was made, but it could not have been after February 2, 1999.

Note 2: This represents the final payment on account of the bankruptcy dividend.

[26] According to counsel for Ms. Wannan, the application of the bankruptcy dividend to the oldest liability of Dr. Wannan would leave Ms. Wannan liable for the remaining amount of Dr. Wannan's 1995 tax liability, but only to the extent of $7,500 (the lesser of Dr. Wannan's remaining 1995 tax liability and the contributions he made in 1995 to her registered retirement savings plan).

[27] The argument that the bankruptcy dividend should have been applied first to the oldest of Dr. Wannan's tax debts is based on Devaynes v. Noble (Clayton's Case) (1816), 1 Mer. 572, 35 E.R. 781. Among other things, Clayton's Case confirms the existence of a common law rule (said to have been borrowed from the civil law) that if a debtor owes more than one debt to a creditor, any payment the debtor makes must be applied against the debt of the debtor's choice, but if the debtor makes no choice, then the creditor may choose how to apply the payment. The issue in Clayton's Case was whether that choice principle applies in the case of a bank account. A deposit to a bank account is a debt owed by the bank to the depositor. However, deposits to and withdrawals from a bank account are blended and tracked by means of a "running account". It was determined in Clayton's Case that each withdrawal is presumed to be a return of all or part of the oldest deposit. The result is that the oldest deposit is withdrawn first, or the oldest debt is paid first. This is sometimes referred to as the "first in, first out rule"; its rationale is explained as follows at page 798 (E.R.) (my emphasis):

But this is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. Neither banker nor customer ever thinks of saying, this draft is to be placed to the account of the £ 500 paid in on Monday, and this other to the account of the £ 500 paid in on Tuesday. There is a fund of £ 1000 to draw upon, and that is enough. In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. . . .

. . .

If appropriation be required, here is appropriation in the only way that the nature of the thing admits. Here are payments, so placed in opposition to debts, that, on the ordinary principles on which accounts are settled, this debt is extinguished.

[28] It is not clear whether the first in, first out rule in Clayton's Case is an application of the common law choice principle (i.e., an attempt to express the presumed intention of the debtor in the case of blended debts that are maintained as a running account), or whether it is an exception to the choice principle that applies in the case of debts of that kind. It is clear, however, that the Court adopted the first in, first out rule to avoid the manifest unfairness of permitting the creditor to simply reconstruct the state of the debtor's obligation after the fact, as the depositor attempted to do inClayton's Case after the bank became bankrupt. Such an ex post facto reconstruction would be inconsistent with the normal manner in which a bank and its customers deal with each other and, in the case of a bankruptcy, would operate to the prejudice of all other depositors and unsecured creditors of the bank.

[29] The question raised for Ms. Wannan in this case is whether the first in, first out principle should be applied to Dr. Wannan's tax liability. There is no provision in the Income Tax Act that answers the question. However, it is common ground that in the ordinary course, the Crown will recognize the right of a taxpayer paying his or her own tax liability to direct how the payment should be applied. It has also been established that if a tax payment has initially been applied in a particular way, the Crown and the taxpayer may agree that it will be applied in a different way: Canada v. Union Gas (1990), 116 N.R. 220, [1991] 1 C.T.C. 1, 90 D.T.C. 6659 (F.C.A.). However, I am aware of no case in which the Crown was compelled to apply a tax payment to a particular tax debt if the payment is not directed to that debt, and there is no agreement between the payer and the Crown as to how the payment is to be applied.

[30] The case that appears to come closest to addressing the point is 464734 Ontario Inc. v. Canada (1990), 32 F.T.R. 225, [1990] 1 C.T.C. 296, 90 D.T.C. 6206 (F.C.T.D.). In that case, a dispute arose between the Crown and 464734 Ontario Inc., a tax debtor, as to how the Crown would apply a payment of $41,000 received pursuant to a third party requirement to pay. The company was in default of its obligation to remit employee source deductions for federal income tax, provincial income tax, Canada Pension Plan contributions, and unemployment insurance premiums. A third party requirement was issued, apparently in respect of all of those obligations. The Crown applied the payment in accordance with its normal practice at the time: first to amounts withheld for provincial income tax (because of federal provincial collection agreements), and then to Canada Pension Plan contributions and unemployment insurance premiums, and finally to amounts withheld for federal income tax. 464734 wished to have the payments redirected, so that they would be applied first to the amounts held for federal income tax. Apparently, that was the only liability for which the directors of the tax debtor could be held vicariously liable. The Court held that 464734 could not compel the Crown to redirect the payment because it had been made by a third party pursuant to a requirement to pay, and so 464734 had never been in control of the funds.

[31] The Crown cites 464734 as authority for the proposition that the first in, first out rule cannot apply to a payment made by a third party (such as a bankruptcy trustee) out of a fund over which the debtor has no legal control (such as the assets of the bankruptcy). In my view, that proposition is not supported by 464734. The potential application of the first in, first out rule from Clayton's Case did not arise in that case; there was no suggestion that anything turned on the age of the different tax debts.

[32] The record in this case does not include a copy of Dr. Wannan's tax account. However, I am prepared to take judicial notice of the fact that the Crown normally records the tax liabilities of a tax debtor in a single running account, the balance of which increases to reflect assessments and the accrual of interest, and decreases to reflect payments. Counsel for the Crown could suggest no reason why the bankruptcy dividend in this case would not have been accounted for in the normal fashion when it was received so that, if the record had included a copy of Dr. Wannan's tax account as it stood immediately after the payment of the bankruptcy dividend, it would have shown that the bankruptcy dividend had reduced the oldest of Dr. Wannan's tax liabilities.

[33] However, there is no evidence that Dr. or Ms. Wannan ever asked about the state of Dr. Wannan's account, or relied to their detriment upon any information the Crown may have disclosed about his account.

[34] When the Crown assessed Ms. Wannan under section 160 after receiving the bankruptcy dividend, Dr. Wannan's tax account was changed, in effect, so that the bankruptcy dividend was applied against the newest of Dr. Wannan's tax liabilities. The question is whether the Crown should be precluded from changing Dr. Wannan's tax account in that fashion.

[35] The argument for Ms. Wannan is that the Crown should be bound by its normal first in, first out practice. Just as the Court in Clayton's Case found it unfair to the bank (or its unsecured creditors) for a single depositor to be able to reconstruct the application of payments after the fact, counsel for Ms. Wannan argues that, when the Crown is determining the amount to be assessed against Ms. Wannan under section 160, the Crown should not be able to make unilateral retroactive adjustments to Mr. Wannan's tax account.

[36] The argument for Ms. Wannan rests on a single fact, which is that the Crown normally maintains a single running account for each tax debtor. Counsel for Ms. Wannan referred to no statutory requirement for such an accounting method. Nor is there any evidence as to why the Crown keeps its accounts as it does; I assume it is a matter of convenience. The practice of the Crown in keeping track of a tax debt as a running account seems to me to be an insubstantial basis for extending the first in, first out rule in Clayton's Case to all tax debts. For that reason, I am not persuaded that in this case, there is any reason to preclude the Crown from applying the bankruptcy dividend as it did, to the newest of Dr. Wannan's tax liabilities.

Conclusion

[37] For these reasons, this appeal should be dismissed with costs.

(s) "K. Sharlow"

J.A.

I concur

Alice Desjardins J.A.

I agree

M. Nadon J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-37-03

STYLE OF CAUSE: Nancy Jo Wannan v. Her Majesty the Queen

PLACE OF HEARING: Ottawa, Ontario

DATE OF HEARING: October 15, 2003

REASONS FOR JUDGMENT BY: Sharlow J.A.

CONCURRED IN BY: Desjardins J.A.

Nadon J.A.

DATED: November 12, 2003

APPEARANCES:

Mr. Emilio S. Binavince FOR THE APPELLANT

Mr. Roger Leclaire

Ms. Marlyse Dumel FOR THE RESPONDENT

SOLICITORS OF RECORD:

Binavince Smith

Ottawa, Ontario FOR THE APPELLANT

Mr. Morris A. Rosenberg

Deputy Attorney General of Canada

Ottawa, Ontario FOR THE RESPONDENT

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