Tax Court of Canada Judgments

Date: 20021018

Docket: 2000-3607-GST-G

BETWEEN:

ABSOLUTE BAILIFFS INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hershfield, J.T.C.C.

[1]            On March 13, 1995 Revenue Canada issued and delivered to the Appellant a Requirement to Pay pursuant to subsection 317(3) of the Excise Tax Act (the "Act") in the amount of $84,177.39. That subsection permits the Minister of National Revenue (the "Minister") to require the holder of funds, who the Minister believes is liable to make a payment to a tax debtor or to a secured credit of a tax debtor, to pay the funds to the Receiver General on account of the tax debtor's liability under the Act. The Requirement to Pay issued under that provision named the tax debtor as Star Furniture Ltd. ("Star").

[2]            Prior to the receipt of the Requirement to Pay, the Appellant, retained by a landlord, MacIntosh Estates Ltd. ("MacIntosh"), had seized assets belonging to its tenant, Star, pursuant to the terms of the Rent Distress Act of British Columbia (the "RDA"). On March 14, 1995 a company related to the Appellant, Absolute Equipment and Vehicle Sales Inc. ("ASI"), disposed of such seized assets and on the same day received the proceeds of such sale in the amount of $43,000.00. On the same day, March 14, 1995, ASI paid $34,000.00 of such proceeds to MacIntosh. The Respondent asserts that MacIntosh was a secured creditor of the Appellant and that the funds on hand on March 14th were caught by the Requirement to Pay delivered on March 13th.

[3]            Adding some complexity to the matter, Star made an assignment into bankruptcy on the same day as the proceeds of sale of Star's seized assets were realized, March 14, 1995, and the Trustee in Bankruptcy (the "Trustee") subsequently sought an order declaring the sale of the seized Star assets invalid. Few particulars were provided as to the outcome of the Trustee's action except that Revenue Canada notified the Trustee of its claim but took no action to pursue it further with the Trustee and that the Appellant made a payment to the Trustee (in the order of $9,000.00) in settlement of the Trustee's claim to Star's seized assets. The Appellant's principal Terry Bohn (the president and sole shareholder of both the Appellant and ASI) testified that it took several years to settle the matter.

[4]            Notwithstanding the bankruptcy of the tax debtor, the Minister issued a Notice of Assessment to the Appellant on May 17, 1995 pursuant to subsection 317(7) in the amount of $43,960.02 for its failure to comply with the Requirement to Pay. The amount assessed includes $960.02 for interest and penalties. If the Requirement to Pay served on the Appellant is effective, subsection 317(7) makes the Appellant liable for moneys paid or payable to MacIntosh. This is a penalizing provision designed to ensure compliance with the Requirement to Pay.

[5]            In brief, the Appellant brings into question:

                (A)           Whether the Minister named and served the right party in that the Appellant was not possessed of moneys paid to MacIntosh. ASI was possessed of the proceeds of the sale of the seized assets and it, ASI, made the payment to MacIntosh, not the Appellant;

(B)            Whether the Minister's failure to pursue a claim under the bankruptcy proceedings has a bearing on this appeal. The Appellant argues the doctrine of estoppel. This issue requires consideration of the impact of Star's assignment into bankruptcy on the same day as moneys were received and distributed.

                (C)            Whether in general terms subsection 317(3) which gives Revenue a super priority on funds payable to a secured creditor of a tax debtor was intended to apply to effect a priority over landlords who have distressed for rent. It is argued that a distinction must be made where moneys are paid to a person who might, for some purposes, be a secured creditor but who is entitled to receive funds in its own right; and

(D)                 Whether the exacting requirements of subsection 317(3) of the Act have been met in the circumstances of this appeal. That subsection only authorizes and invokes a requirement to pay where the person named and served is liable to make a payment to a "tax debtor" or to a "secured creditor" of the tax debtor in circumstances prescribed in that subsection. The Appellant argues that the preconditions to invoking liability under the Requirement to Pay have not been met.

[6]            The following facts and chronology of events were either agreed to by the parties or were put in evidence in the course of the trial:

1.              Star is a GST registrant with GST Registration No. 128434016.

2.              Star was assessed by the Minister on December 22, 1994 for $54,330.96 net tax, $8,110.24 interest, and $21,918.19 penalties with respect to the period January 1, 1991 to April 30, 1994.

3.                     On March 8, 1995 the Appellant acted on behalf of the landlord, MacIntosh, to seize assets of Star pursuant to a distress warrant issued for rent in arrears totalling $41,160.04 plus costs.

4.                     On March 9, 1995 the Appellant notified the Revenue Canada that "we have been involved with the following tenant under the RDA" and named Star as the tenant. The notice requested immediate advice if there were any funds owing. This was a voluntary act that was the practice of the Appellant in respect of its asset seizures as a bailiff.

5.                     On March 13, 1995 the Appellant received a Requirement to Pay $84, 177.39 pursuant to subsection 317(3) of the Excise Tax Act.

6.                     Star's seized assets were sold by ASI on March 14, 1995 for the sum of $43,000 plus applicable taxes for a total of $46,010. ASI's general ledger shows a deposit of this amount on the same day. On the same day ASI paid MacIntosh $34,000 being the proceeds of sale net of bailiff fees, sales fees and provincial levies.

7.                     On March 14, 1995, subsequent to the sale of Star's seized assets, Star made an assignment into bankruptcy.

8.                     Mr. Bohn was advised by the Trustee by telephone of Star's assignment into bankruptcy after funds were transferred from ASI to MacIntosh. Mr. Bohn advised the Trustee of the sale on being advised of the assignment.

9.              The Trustee in Bankruptcy subsequently commenced proceedings to declare the sale of the Tenant's assets invalid.

10.            A proof of claim was filed by Revenue Canada with the Trustee in April 1995.

11.            Revenue Canada had notice of the proceedings and the bankruptcy as a whole. Revenue Canada elected not to take part in the proceedings to decide the fate of the funds raised from the distressed sale.

12.            The active parties in the proceedings commenced by the Trustee subsequently consented to settle the dispute. The Appellant contributed a sum in the settlement (approximately $9,000) and the funds at issue were directed through the Estate in Bankruptcy. It does not appear that Revenue Canada received any funds from the Trustee inspite of having served a proof of claim.

13.            At all material times ASI and the Appellant conducted business out of the same office and had the same officers and shareholder. The Appellant and ASI routinely treated the seizure of goods and the sale of seized goods as separate businesses (or as separate arms of a business) conducted separately by each of them. There were no documents supporting this practice or setting out the terms of the arrangement.

14.            There was no documentation for the transfer of the seized Star assets from the Appellant to ASI or for the retention of ASI to conduct the sale.

[7]            The relevant sections of the Act, subsections 317(3), (4) and (7) read as follows:

317. (3) Notwithstanding any other provision of this Part, any other enactment of Canada other than the Bankruptcy and Insolvency Act, any enactment of a province or any law, where the Minister has knowledge or suspects that a particular person is or will become, within ninety days, liable to make a payment

(a)            to a tax debtor, or

(b)            to a secured creditor who has a right to receive the payment that, but for a security interest favour of the secured creditor, would be payable to the tax debtor,

the Minister may, by a letter served personally or by registered mail, 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 moneys 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 this Part, and on receipt of that letter by the particular person, the amount of those moneys that is required by that letter to be paid to the Receiver General shall, notwithstanding any security interest in those moneys, become the property of Her Majesty in right of Canada 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.

(4) "secured creditor" means a particular person who has a security interest in the property of another person or who acts for or on behalf of the particular 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 and 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, hypothec, 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.

. . .

(7) Every person who fails to comply with a requirement under subsection (1), (3) or (6) is liable to pay to Her Majesty in right of Canada an amount equal to the amount that the person was required under subsection (1), (3) or (6), as the case may be, to pay to the Receiver General.

Issue A: Whether the Requirement to Pay was served on the right person

[8]            On the evidence before me I can only conclude that MacIntosh dealt with no other party than the Appellant. ASI's involvement was as a subcontractor retained by the Appellant to perform the sales side of the package of services that a bailiff's business might entail. There is no evidence, nor did the Appellant suggest, that MacIntosh had a contractual arrangement with ASI. There is no evidence, nor did the Appellant suggest, that the contract between the Appellant and MacIntosh contemplated that MacIntosh would have a contractual relationship with ASI such as might have resulted had the contract expressly contemplated the assignment of a part of it to ASI. No documentation was produced, no one from MacIntosh was called and I am left with the fairly clear impression that ASI contracted with the Appellant to perform a service for the Appellant and was holding funds for the Appellant having performed those services. On the deposit of the sales proceeds of Star's seized assets, the funds were held for the Appellant's account. The Appellant in furtherance of its contract with MacIntosh caused ASI to pay the net amount payable to MacIntosh. ASI paid MacIntosh as the Appellant's agent. ASI had a legal interest in the funds, having same in its bank account, but such interest, derived from possession, was subject to the direction and control of the Appellant. The acts of ASI in respect of the funds were the acts of the Appellant.

[9]            I also note that subsection 317(3) directs that the person who is required to make a payment to the tax debtor (or to a secured creditor of the tax debtor) is the person to be served with the Requirement to Pay. On receipt of the Requirement those moneys payable by the recipient are required to be paid to the Receiver General. The provision does not expressly say that the recipient of the Requirement to Pay has to be in possession of the moneys nor do I think that such precondition is to be necessarily implied in all circumstances. Serving the party with the liability to pay the tax debtor is sufficient. For example, the Minister does not have to serve that party's bank where its moneys are kept. Serving the party liable to make the payment is sufficient.

[10]          Accordingly, I will, with respect to the application of subsections 317(3), (4) and (7), regard the Appellant as having received the proceeds from the sale of the Star seized assets and as having paid MacIntosh.

Issue B: Estoppel and the Impact of Star's Assignment into Bankruptcy

[11]          The Appellant asserts prejudice resulting from Revenue Canada not pursuing a claim against the Trustee. I can only speculate as to the outcome of such claim had it been pursued. I have no particulars as to the Trustee's position in respect of such a claim. Settlement was apparently reached without the Appellant's insistence on resolving, or imposing contingencies regarding Revenue Canada's claim.

[12]          Based on my limited understanding of these matters, it seems to me that the Appellant acted to its own detriment. What was the basis for the Trustee's action to set aside the sale of the seized assets if, as admitted, moneys were paid to MacIntosh prior to notice of Star's bankruptcy? Subsection 73(4) of the Bankruptcy and Insolvency Act (BIA)[1] suggests that distressed property is required to be turned over to the Trustee only if the Trustee produces a certified copy of the assignment. We know the Appellant did not receive such notice. Further, if subsection 73(4) applied to catch the seized assets, why did the Appellant pay an amount to the Trustee equivalent to its holdback from MacIntosh for fees? Subsection 73(4) provides that the costs of distress are a first charge on the assets turned over to the Trustee. Did the Trustee return funds to the Appellant? I am somewhat confounded by these questions.

[13]          While the settlement confounds me, the interaction between the BIA and the Act is, in my view, clear on the facts as admitted.

[14]          Subsection 71(1) of the BIA provides that a bankruptcy is deemed to occur at the time of filing of a petition. It is not disputed that the bankruptcy occurred on March 14, subsequent to the issuance of the Requirement to Pay. Further, on the facts admitted, the bankruptcy occurred subsequent to the sale of the seized assets and subsequent to the receipt of the proceeds of sale so that the Requirement to Pay was in place when moneys, which become the property of Her Majesty if subsection 317(3) otherwise applies, were held by the Appellant. That proprietary interest (arising if subsection 317(3) otherwise applies) keeps the moneys from the Trustee where the requirement to pay precedes the bankruptcy.[2]

[15]          Accordingly, for the purpose of the Act, I am satisfied that section 317 applies notwithstanding the bankruptcy.That being the case, the Requirement to Pay served on the Appellant is the Crown's best protection to ensure payment of funds owed by the tax debtor. Revenue Canada seized upon a priority given by Parliament on the facts of this case as they perceived them. To pursue the Trustee might have assisted the Appellant in its defence of the action brought by the Trustee to set aside the sale if it could be demonstrated to the Trustee's satisfaction that the Crown had a priority in any event (if in fact it did) but I do not think it can be said that Revenue Canada had an obligation to try to assist the Appellant in this manner. Perhaps the real complaint is that the Appellant having objected to the assessment under subsection 317(7) was not afforded the benefit of Revenue Canada's response for some five years. This delay might suggest that Revenue Canada itself was not certain as to its position in respect of the objection. While this delay might have had some prejudicial affect in terms of the Appellant's dealing with the Trustee's action, the Appellant acknowledged that such delay could have been rectified. The Appellant could have launched an appeal without waiting for the Confirmation. Instead, the Appellant accepted the risk in settling with the Trustee prior to knowing Revenue Canada's position. Indeed that risk was accepted by the Appellant when it paid the amounts to MacIntosh after receiving the Requirement to Pay. Regardless, Revenue Canada is entitled to rely on section 317.

[16]          Since I see no prejudice in the non-pursuit by Revenue Canada of its claim against the Trustee, I do not have to consider further the application of the doctrine of estoppel.

Issue C: Whether Subsection 317(3) was intended to effect a priority

in favour of the Crown over landlords who have distressed for rent

[17]          It is helpful at this point to consider in general terms whether the priority of the Crown is meant to apply to the subject case. Starting the analysis from this prospective might assist in the construction of the express language of the section in the event if suffers from any ambiguity.

[18]          The Appellant asserts that the landlord, MacIntosh, never extended credit to the tenant Star and that in considering the definition of a "secured creditor" in the Act, the application of the subject provision should be limited to true debtor-creditor relationships. The Appellant cites the case of Piggott Project Management Ltd. v. Land-Rock Resources,[3] as authority for its position. In that case Cory J. stated that "Basically, security is something which is given to ensure repayment of a loan".[4] However, this quotation must be taken in the context of that case which dealt with security for a loan. Prefaced by the word "basically", it was clearly not meant to provide a definition of a security let alone an exhaustive one. Indeed, a broader definition of a "security interest" consistent with the definition in the Act is cited with approval in the same paragraph of his judgment.[5] A person having any interest in property that secures "payment or performance" of an "obligation" and that includes an interest "created or arising out of a ... lien ... or encumbrance of any kind ... however created ... or ... provided for" is a secured creditor for the purposes of subsection 317(3). This affords the Appellant no basis for asserting that in general terms the Act intends to limit the definition of "secured creditors" to "secured lenders".

[19]          There is however another aspect to the Appellant's argument that subsection 317(3) was not intended to apply to the subject case that is not as readily dismissed. The Appellant has referred me to Revenue Canada's administrative practice as set out in an internal Verification and Collection Directive dated March 3, 1988 (CA-88-13) issued following the introduction of amendments to the corresponding garnishment provisions of the Income Tax Act. The following is included in the Directive:

One of the diverse interpretations that could be incorrectly applied to the new garnishment provisions is that the Department would now be permitted to intercept the monies payable to a mortgagee in order to collect unpaid source deductions of an employer assessed under subsection 227(10.1), where the monies payable to the mortgagee were as a result of a sale of the mortgaged property by the mortgagee in order to realize upon his security. Such an interpretation should not be applied as it would be contrary to the purpose of the legislation, as outlined in the Technical Notes, which have been reproduced earlier in this directive.

If the proceeds realized from such a sale are in excess of the amount required to satisfy the liability of the mortgagee, such excess may become payable to the tax debtor and thereby subject to garnishment.

[20]          The Directive sets out the purpose of the amendment as per the Technical Notes as follows:

Subsection 224(1) provides for garnishment action where a person is liable to make a payment to a tax debtor. The amendment ensures that garnishment action can be taken where, as a result of an assignment of property or other security interest, payments are redirected to a secured creditor of the tax debtor. Subsections 224(1.2) and (1.3) provide that where a payment is redirected to a secured creditor of the tax debtor, the Minister of National Revenue may, notwithstanding the claim or security interest of the secured creditor, intercept the payment and apply it to the tax debtor's liability for any source deductions - such as tax withheld from remuneration paid to employees and the non-resident withholding tax - he has failed to remit as required under the Act. These subsections effectively confer a priority on the Crown over the rights of certain secured creditors that benefit from an assignment of the property of the tax debtor in respect of payments to be made after notification to the person liable to make the payments.

[21]          There is no doubt that this passage from the Technical Notes advocates a limitation on the application of the subject provisions. It advocates the priority of the Crown only over certain secured creditors; namely, secured creditors "that benefit from an assignment of the property of the tax debtor in respect of payments to be made". The "redirection" of "payments to be made" is the focus of the type of security interest over which the Crown is to have a priority under the subject provisions. This contemplates a payable to the tax debtor by a third party prior to the assignment of it to the person who is to hold a security interest in it. In the context of the "but for" wording of paragraph 317(3)(b) there must be a "payable" to which the tax debtor has a right from a third party and that right must be "redirected" to the secured creditor as security for an amount payable to that creditor. Where a person is owed money by a tax debtor (say, for services rendered) the right to collect moneys from the tax debtor does not arise from or by virtue of an assignment or redirection of a right of a tax debtor.

[22]          Based on the Technical Notes I agree that there is a distinction between redirected payments, owed to the tax debtor by a third party garnishee, that have been pledged to a creditor to secure an obligation of that tax debtor to that creditor versus payments arising in the course of remedying a default of an obligation of the tax debtor to pay moneys to a party to whom the tax debtor is indebted such as the tax debtor's landlord. Drawing that distinction from the plain language of the provisions is more difficult, although, keeping in mind that the Appellant is MacIntosh's agent in a collection exercise is helpful. I will deal further with this point in my analysis of Issue D below.

[23]          Before turning to the next issue which considers the express terms of the subject provisions of the Act, I note that counsel for the Respondent made no effort to assist me in this part of the analysis concerning their intended scope. Indeed, she moved that I not allow the Directive to be admitted in evidence even though the Appellant's copy of it had been provided by her. Such motion was denied.

Issue D: Whether the terms of subsection 317(3) effect a priority in favour

of Revenue Canada and a liability on the Appellant under subsection 317(7)

[24]          I now turn the analysis to the express requirements of subsection 317(3). What is required is consideration of two questions: firstly, whether MacIntosh was a "secured creditor" as defined in subsection 317(4); and secondly, whether the amount paid to MacIntosh would have been payable to the Appellant but for MacIntosh's right to receive it as required by paragraph 317(3)(b). The first question requires consideration of the further question of whether MacIntosh had a "security interest" in the property of another person which in turn requires finding both that MacIntosh had such interest and that it "secures" payment or performance of an obligation.

[25]          MacIntosh will be a secured creditor for the purposes of subsection 317(3) if pursuant to the definition of "secured creditor" in subsection 317(4) it is "a person who has a security interest in the property of another person" (Star). "Security interest" is defined in subsection (4) to mean "any interest in property that secures payment or performance of an obligation" (emphasis added) and includes interests created by various security instruments such as a debenture, mortgage, hypothecation and assignment which seem to be interests created by agreement and, as well, includes interests that might be created at law such as liens. That the interest that secures payment or performance of an obligation includes an "encumbrance of any kind whatever, however ... created ..." underlines that the securing interest, by definition, includes contractual encumbrances, statutory encumbrances and encumbrances created at common law. This is an extraordinarily wide definition.

[26]          The Respondent argues that the RDA creates a lien on a tenant's property in favour of the landlord and that such lien gives the landlord, MacIntosh, a security interest in the tenant's (Star) property seized by the Appellant. The Respondent also argues that the RDA creates a statutory lien on the proceeds of sale in favour of the landlord, MacIntosh. As such, the Respondent argues that it follows that MacIntosh is a secured creditor. It is noted that the RDA does not expressly create a lien in favour of the landlord but rather acknowledges a landlord's right to distrain personal property of a tenant for unpaid rent. The RDA sets out a statutory framework within which a landlord's distress right operates. It does not seem to create the distress right itself.

[27]          Section 7 of the RDA provides as follows:

7. (1) This section applies if

                (a) personal property has been distrained for rent due, and

                (b) the tenant or owner of the property distrained does not, within 5 days after distress is taken and notice of it is left at the dwelling house or other place on the premises charged with the rent distrained for, commence an action for recovery of the property and serve notice of the action on the person distraining.

(2) After distress, notice and the expiration of the 5 days, the person distraining must have the distrained property appraised by 2 appraisers, who must be sworn before a justice or commissioner for taking affidavits.

(3) After appraisal the person distraining may sell the property distrained.

(4) The person distraining must

                (a) apply the sale proceeds to satisfy the rent in arrears, the charges of distress, appraisement and sale, and

                (b) pay the surplus, if any, to the sheriff for the owner's use.

[28]          The Respondent relies on paragraph 7(4)(b) of the RDA to satisfy the requirement of paragraph 317(3)(b) of the Act that the sale proceeds be payable to the tax debtor but for MacIntosh's security interest in the seized assets.

[29]          The Respondent also relies on the case of Active Bailiff Service Ltd. v. Broadway Plaza Properties Ltd. (1986), 70 B.C.L.R. 117 (B.C.S.C.) as authority for the propositions that a possessory lien is created in favour of the landlord once he distrains the chattels of a debtor tenant and once the chattels are sold, that a statutory lien is created in favour of the landlord.[6] The Respondent cites Hinds J. at page 123 as follows:

The landlord's right of distrain does not create a lien. But upon a landlord distraining for rent and taking possession of a tenant's chattels, he is entitled to retain those chattels until the arrears of rent are paid. The landlord has a possessory lien within the definition [of lien] above quoted. Upon a landlord selling the tenant's chattels under s. 8(2) of the Rent Distress Act, he has a charge upon the proceeds of the sale for the payment of rent in arrears. The landlord has a statutory lien upon the proceeds of sale within the first part of the definition above quoted.

The definition referred to is as follows:

A lien, therefore, is 'any charge of a payment of debt or duty upon either real or personal property', whilst a possessory lien is 'a right in one man to retain that which is in his possession belonging to another, till certain demands of him, the person in possession, are satisfied.' [7]

[30]          Hinds J. went on to consider several other cases on the question of whether or not a lien arises in respect of a landlord's right of distress. He considered Commercial Credit Corp. v. Harry D. Shields Ltd.[8] which confirmed that while the right of distress is not a lien, a lien occurs when there is actual or constructive taking of possession by the party with a right of distress. That case sets out several definitions of the term "lien" including one set out in Royal Trust Co. v. Molsons Bank[9] which defined the term as "the right of a person having possession of the property of another to retain it until some charge upon it or some demand due him is satisfied". It is noted that the decision in Commercial Credit Corp. was upheld on appeal. Hinds J. notes that in giving judgment for the Court of Appeal, Weatherston J.A. stated:

Section 3(1)(a) of the Personal Property Security Act exempts from the application of that Act "a lien given by statute or rule of law". A distress is the right of a landlord to take and hold possession until rent is paid, plus the statutory right to sell the distrained goods. We agree with the trial Judge that a distress, when made, confers on the landlord a lien within the meaning of s. 3(1)(a) of the Personal Property Security Act notwithstanding that it has other legal incidents.[10]

[31]          Hinds J. also considered the case of Bank of Montreal v. Int. Polyurethane Co.[11] which held that a landlord's distress was not an assignment by way of security or lien. Hinds J. points out that the Court relied in Polyurethane on Re Newmarket Lumber Co.[12] which he found was not appropriate in that the Newmarket case dealt with the landlord's right to distrain as opposed to the landlord's right to the chattels in his possession pursuant to its right of distress. He pointed out that Commercial Credit Corp. correctly made this distinction in determining the application of the Newmarket case.

[32]          A case not referred to by Hinds J. (but included in the Respondent's Book of Authorities) is Re Gingras Automobile Ltée[13]. That Supreme Court of Canada decision concluded that a landlord's distress right did not create a lien on seized chattels. Although an older case, I note this decision of the Supreme Court of Canada is still referred to in Houlden & C.H. Morowetz, Bankruptcy Law in Canada[14] as authority for the principle that the landlord has no lien on property seized and must surrender it to the Trustee pursuant to the provisions of the BIA. I would note, however, that the rationale for the Supreme Court's finding in the Gingras case is in the context of the provisions of the BIA that set out what the priorities of the landlord are. Those provisions (similar to subsection 136(f) of the current BIA) clearly set out the preferential distribution to which a landlord is entitled. The principle of law adopted by the Supreme Court in Gingras was that in the context of the bankruptcy provisions, the landlord must be taken to have given up his right of lien. The majority decision of five of the panel of seven was given by Abbott J. who adopted the following statement of Gordon J.A. of the Saskatchewan Court of Appeal:

With every deference I do not think a landlord with a claim for arrears of rent falls within the definition of a "secured creditor". He has no lien on the property seized but must give it up to the trustee and file his claim in the usual way. He has no security to value within the provisions of ss. 87-92 of The Bankruptcy Act. Further, I do not think that any such inference should be drawn in the face of the explicit directions contained in s. 95 of the Act. So far as I can see the Act deprives the landlord of his right of lien and merely uses the value of the property seized as a gauge to fix the amount for which he is allowed a preferred claim but does not make him a "secured creditor".

[33]          While the opening sentence in this passage favours a finding that the Appellant in this case is not a "secured creditor", I do not think, taken in context, that it is sufficient as a definitive statement of law. In context, the statement suggests that it is the BIA that deprives the landlord of the rank of secured creditor that would otherwise attach. Further, in Gingras it does not appear that the distress right had been exercised prior to the bankruptcy. In Absolute Bailiffs it is acknowledged that a lien only arises on the exercise of the right of distress. Accordingly, I do not find the principle in the Gingras case to be in conflict with the Absolute Bailiff Services case. There is nothing in the Act to deprive MacIntosh of its right of lien in respect of property seized.

[34]          I accept that once a landlord exercises its right to distrain, the property thereby in its possession gives rise to a lien in favour of the landlord by operation of law. This appears to be sufficient for the purposes of finding that MacIntosh had a security interest in the seized property. It is, at least until sold, an interest in the property of another person (Star). However, I note two qualifications. Firstly, that a lien is created is not to say that it exists to "secure" payment of an obligation. The Appellant argues that the RDA and the common law right of distress is not a security regime but rather is an enforcement regime. Secondly, while there was a lien on the seized assets, I do not agree that there was a lien on the proceeds of sale. A statutory lien on the proceeds of sale, as opposed to a possessory lien on the seized chattels, is a lien on money due to the person holding it. I have reservations as to such a notion. A landlord has a statutory right to the proceeds subject to a statutory direction as to the application of any excess of proceeds over rents owing. To describe this right as a "lien" on the funds is not supported by the authorities cited by Hinds J. My second qualification then raises the issue as to whether it is sufficient that MacIntosh had a lien on the seized property.

[35]          As to the first qualification it is necessary, in determining whether MacIntosh has a security interest, to find that MacIntosh's interest in the seized assets, its distress lien, "secures" payment or performance of an obligation. The word "secures" in this context invites a construction that would place the interest ahead, in time, of the payment due date or ahead of the date the obligation is required to be satisfied, i.e., it secures a promise to do something at a later time. When the Appellant as agent for MacIntosh sells the seized assets, payment of Star's obligation to MacIntosh is satisfied. This two-step process (seizure and sale) effects payment of a past due amount as opposed to securing an upcoming obligation. It is possible then to find that the security interest that MacIntosh held in the seized assets (the possessory lien) was not an interest that "secures" payment in the sense required to identify MacIntosh as a "secured creditor" for the purposes of subsection 317(3) of the Act. Such finding would be consistent with the administrative practice set out in the Directive referred to above. Indeed, even further support for that practice and for distinguishing a security interest that "secures" an obligation and one that derives from a collection exercise is found in the express language of paragraph 317(3)(b). That paragraph taken with its prefix requires that the Appellant be "liable to make a payment ... to a secured creditor ...". That this requirement is not met can best be illustrated by ignoring the interposition of the Appellant as MacIntosh's agent. If MacIntosh seizes the property directly, it holds the proceeds of sale for itself. It owes nothing to Star except excess proceeds over the amount owing. While such excess is garnishable under paragraph 317(3)(a), there is no creditor to whom a payment is liable to be made in respect of which paragraph 317(3)(b) can apply. As Appellant's counsel would say, MacIntosh holds moneys at this point in its own right. The debt owed is satisfied. Indeed, this expression of the distinction between realizations remedying defaults and the assignment of payables to secure an obligation seems to parrot the administrative practice set out in the Directive in respect of mortgages. With respect to mortgages the Directive provides that the subject garnishment provisions would be incorrectly applied "where the monies payable to the mortgagee were as a result of a sale of the mortgaged property by the mortgagee in order to realize upon his security". That is, even where the security interest is created to secure an obligation, the administrative practice, in respect of mortgages at least, is that the "sale" of the property in the course of realizing on the security interest breaks the connection between the proceeds of sale and the entitlement of the mortgagor. Breaking the connection between the proceeds and sale and the entitlement of the tax debtor not only means that the requirements of paragraph 317(1)(b) are thereby not met but underlines that they are not a source of funds securing payment of the obligation. They are the payment.

[36]          This construction of the subject provisions would mean that the only reason mortgages are expressly referred to in the definition of "security interests" is to cover the case where the tax debtor has assigned its interest as mortgagee of a mortgage given by a third party mortgagor. That is the inference of the Directive supported by the Technical Notes. Unless there is something about the nature of mortgages that sets them apart from other encumbrances, then liens and other encumbrances expressly included as "security interests" would similarly cease to fall within the scope of the subject provisions on the sale of the property to which the encumbrance attaches. I do not believe there is anything in the nature of mortgages that warrants treating them differently from liens and other encumbrances listed in the definition of "security interests" in subsection 317(4).[15]

[37]          The foregoing can be expressed in another way. The lien that attaches to the seized assets is a lien on the property of the tax debtor. The sale of that property ends the lien and effects payment. Once the requirements of section 7 of the RDA have been met, as to time elapsed for the Appellant to file an action for recovery of seized property and the landlord having received appraisals (in this case that would be at the earliest March 13), the sale was permitted and the tenant's interest in the seized property ceased on the sale. The sale is the point when the interest in the property (then moneys) transfers to the creditor in its own right. At this point the transfer is complete. The relevance of this finding is that, as stated, subsection 317(3) requires there be a liability "to make a payment ... to a secured creditor". The requirement is not that there be a secured creditor when the Requirement to Pay is issued but that there be a liability to pay moneys to a person that is a secured creditor at the time when the liability to make the payment arises which is when the moneys are available for payment. In this case when the money materializes it materializes for the account of the creditor. The moneys are the property of MacIntosh at the point of sale of the seized assets. There has been a "transfer" in the course of the conversion. Applying the reasoning in Piggott,[16] the point in time when the transfer to the creditor is complete, is the point in time when subsection 317(3) ceases to apply. After that point in time the money is property in the possession of the creditor held for its own account.

[38]          The analysis in the preceding paragraph does not falter, in my view, even when considering that the suffix to subsection 317(3) invites an argument that once the Requirement to Pay is delivered, an amount of money is then fixed and possessed of by the Crown so that the Appellant owes such moneys on receipt of the Requirement to Pay. Such construction of the subject provisions would impose a liability on MacIntosh regardless that it was not a secured creditor once the seized assets were sold. In my view, such an argument cannot prevail. Liability to pay the Receiver General occurs "as and when the moneys become payable ... to the secured creditor". If no money ever became payable to a person that was a secured creditor at the time the liability arose, as is my finding in this case, no liability can arise under subsection 317(7) of the Act. If the provision suffers any ambiguity on this point, I would resolve it in favour of a construction consistent with administrative practices which assist taxpayers who may have relied on them. In fact, I do not believe that there is any ambiguity on the point, and in any event, on the facts of the case at bar, I have found that MacIntosh was not a secured creditor, even at the time the Requirement to Pay was issued. The lien on the seized property was to effect collection of a debt past due before the lien arose and cannot be said to be an interest that secures payment of the obligation. As such the lien that existed at the time the Requirement to Pay was delivered was not a security interest as defined in subsection 317(4) of the Act. The property was seized for sale not for security. The sale provides the proceeds that satisfy the obligation to MacIntosh. It is at that point MacIntosh's money. The Requirement to Pay affords the Minister no right to the funds.

[39]          While these findings are sufficient to dispose of the matter I note that an analysis of the "but for" requirement in subsection 317(3) gives the same result. The Respondent's position in respect of the "but for" requirement is grounded in section 7 of the RDA. It is argued that the Appellant, as bailiff, is accountable to the tenant Star pursuant to paragraph 7(4)(b) of the RDA and, as such, "but for" MacIntosh's interest in the funds held by the Appellant, the proceeds of sale would be payable by the Appellant to Star. I point out, however, that section 7 of the RDA seems to address itself to the landlord, not a bailiff who might be retained by the landlord to carry out the seizure and sale on the landlord's behalf. The right to distress is that of the landlord. The action for recovery of property seized under paragraph 7(1)(b) of the RDA is an action to be brought against the landlord and the person distraining as referred to in subsections 7(2), (3) and (4) is the landlord. That is, the requirement to account for excess proceeds is a requirement imposed by the RDA on the landlord. The Appellant in this case is the agent of the landlord. It holds money for the landlord. The Appellant has no liability to pay anything to the tax debtor except on the landlord's behalf. To say that the Appellant would be "liable" to pay the tenant anything "but for" the interest of the landlord, even excess proceeds, would be to attach some relationship between the Appellant and the tenant that does not exist. The tenant has a statutory right to any excess but that claim is against the landlord. If the Appellant is required to pay anything (as MacIntosh's agent) it would be limited to an "excess" amount that does not exist in the case at bar. Even that liability, when it exists, would be to satisfy the liability of the principal, MacIntosh. MacIntosh would be the more appropriate garnishee in that case. Accordingly, aside from my finding that MacIntosh was not a secured creditor of Star, I conclude that the "but for" requirement of paragraph 317(3)(b) has not been met in the circumstances of this case. Once again, I note that such conclusion is consistent with the administrative practice as set out in the Directive discussed above.

[40]          Lastly, I note that I requested Appellant's counsel to provide me with an analysis of a number of cases that I referred to him.[17] On a review of those cases I am satisfied that none are inconsistent with my findings in the case at bar. None of those cases (or any other cases brought to my attention) deal with security interests created in the course of remedying a default in the performance of an obligation or with interests that have been sold and converted to moneys in satisfaction of an obligation. Accordingly, they make no findings as to the application of subsection 317(3) of the Act that bear to the facts of the case at bar. That said, I am satisfied, for the reasons set out above, that subsection 317(3) of the Act does not apply in cases such as the one at bar.

[41]          Accordingly, the appeal is allowed, with costs.

Signed at Ottawa, Canada, this 18th day of October 2002.

"J.E. Hershfield"

J.T.C.C.

COURT FILE NO.:                                                 2000-3607(GST)G

STYLE OF CAUSE:                                               Absolute Bailiffs Inc. and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           April 11, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge J.E. Hershfield

DATE OF JUDGMENT:                                       October 18, 2002

APPEARANCES:

Counsel for the Appellant: Jonathan Corbett

Counsel for the Respondent:              Margaret E.T. Clare

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Jonathan Corbett

Firm:                  Harper Grey Easton

                                                                                                Vancouver, British Columbia

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-3607(GST)G

BETWEEN:

ABSOLUTE BAILIFFS INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on April 11, 2002 at Vancouver, British Columbia, by

the Honourable Judge J.E. Hershfield

Appearances

Counsel for the Appellant:                  Jonathan Corbett

Counsel for the Respondent:                              Margaret E.T. Clare

JUDGMENT

                The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated May 17, 1995 and bears number 31128, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment for the reasons set out in the attached Reasons for Judgment.

                The Appellant is entitled to no further relief.

Signed at Ottawa, Canada, this 18th day of October 2002.

"J.E. Hershfield"

J.T.C.C.