Date: 19990507
Docket: ITA-4268-98
Between:
IN RE THE INCOME TAX ACT
- and -
IN RE ONE OR MORE ASSESSMENTS BY THE
MINISTER OF NATIONAL REVENUE PURSUANT
TO ONE OR MORE OF THE FOLLOWING STATUTES;
THE INCOME TAX ACT, THE CANADA PENSION PLAN AND
THE EMPLOYMENT INSURANCE ACT,
V.
2959-4660 QUÉBEC INC.
(doing business from time to time under the name and trade name
"ALARME LA PROVIDENCE"),
Judgment debtor,
AND:
HONEYWELL LIMITED,
Garnishee.
REASONS FOR ORDER
DENAULT J.
[1] The garnishee is appealing a decision of the prothonotary Morneau which ordered that all monies due or to become due by the garnishee to the judgment debtor for services rendered and goods sold and delivered in the amount of $35,407.02 be finally seized, assigned and transferred to Her Majesty the Queen to satisfy a claim pursuant to s. 223 of the Income Tax Act, namely the sum of $28,812.61 plus interest and costs.
[2] The issue in the case at bar turns essentially on the scope of the adoption in the new Civil Code of Quebec of the second paragraph of art. 1673. That article reads as follows:
| 1673. Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the object of both of which is a sum of money or a certain quantity of fungible property identical in kind. |
| A person may apply for judicial liquidation of a debt in order to set it up for compensation. |
[3] The question essentially is whether this second paragraph of art. 16731 had the effect, as the garnishee argues, of creating a new right formerly exercised by a counterclaim, which is no longer any impediment to the retroactivity of judicial compensation to the date of the claim for compensation rather than to its liquidation by judgment.
[4] Counsel for Her Majesty the Queen argued, for his part, that the seizure served on the garnishee before the latter's debt against the judgment creditor became certain, liquid and exigible must prevail and makes the amount seized not subject to compensation. In law, he argued, the addition of the second paragraph of art. 1673 did not overturn the well-settled precedents on the absence of retroactivity in judicial compensation, as the legislature only codified the practice followed by the courts of authorizing a party to raise judicial compensation through a counterclaim. He argued that in any case the rule that compensation cannot adversely affect rights acquired by a third party still exists (art. 1681 C.C.Q.) as it did formerly (art. 1196 C.C.L.C.) and is an impediment to the application of judicial compensation.
[5] The prothonotary, Mr. Morneau, dismissed the argument made by the garnishee and in fact, after acknowledging that the rule that judicial compensation is not retroactive should continue to be applied despite the statutory amendment, he refused to set up against the judgment creditor compensation which was only conceptual in nature.
[6] With respect, I cannot share this view of the prothonotary and thus dismiss this appeal from his decision.
[7] Judicial precedent and theoretical commentary in Quebec have long recognized that judicial compensation should not be made retroactive to the judgment granting it. In 1924, in Peacock v. The Mile End Milling Co. Ltd., [1924] 37 K.B. 221, the Court of King's Bench considered whether judicial compensation granted by the court in the exercise of its discretionary authority only existed by virtue of a judgment or whether it should be retroactive to the date of the principal claim or of the counterclaim. The Court clearly stated that [TRANSLATION] "it is the judgment which creates a right, that did not previously exist". Bernier J. added (at 228):
| [TRANSLATION] |
| Accordingly, in a case of judicial compensation the rule that the judgment is retroactive to the date the action was filed must be rejected: this rule can only apply in the case of legal compensation or in the case of compensation by exception. |
[8] This judgment has been followed and respected by our courts and legal commentary in
Quebec.2 In 1985, in Labrèche v. Bergeron,3 though well aware of the controversy on the point existing primarily in French legal commentary,4 the Court of Appeal ruled on the point:
[TRANSLATION]
| Even pleaded in due form, judicial compensation is not retroactive to the date the two debts coexisted: it can only be effective as of the date of the judgment granting it and liquidating the two debts. |
[9] However, did paragraph 2 of art. 1673 of the Civil Code of Quebec create a new right the effect of which was to supersede earlier precedents holding that judicial compensation is not retroactive? I do not think so. I feel that the most the new provision does is to codify the rule that existed before the legislative amendment, namely that judicial compensation can be claimed provided there is a sufficient nexus between the debts, which is generally encountered in the event of misfeasance or contractual failure of performance.5
[10] The issue in the case at bar between the garnishee/applicant (Honeywell) and the judgment debtor (Alarme La Providence) has not yet been resolved by a judgment which, even if it were favourable to Honeywell, might allow it to set off the debts between the parties. However, since I feel that judicial compensation cannot be retroactive to the date of the claim and a third party will already have exercised its rights before the judicial compensation can operate " that is the case here " the latter can only take priority over the garnishee/applicant. It thus becomes unnecessary to discuss the question of the nexus between the debts raised by counsel for Honeywell, or that of art. 1681 C.C.Q., namely that compensation does not occur to the detriment of rights acquired by a third party.
[11] For these reasons the appeal by the garnishee/applicant is dismissed with costs.
| Pierre Denault Judge |
MONTRÉAL, QUEBEC
May 7, 1999
Certified true translation
Bernard Olivier, LL. B.
| Federal Court of Canada Trial Division Date: 19990507 Docket: ITA-4268-98 Between: IN RE THE INCOME TAX ACT - and - IN RE ONE OR MORE ASSESSMENTS BY THE MINISTER OF NATIONAL REVENUE PURSUANT TO ONE OR MORE OF THE FOLLOWING STATUTES; THE INCOME TAX ACT, THE CANADA PENSION PLAN AND THE EMPLOYMENT INSURANCE ACT, V. 2959-4660 QUÉBEC INC. (doing business from time to time under the name and trade name "ALARME LA PROVIDENCE"), Judgment debtor, AND: HONEYWELL LIMITED, Garnishee. REASONS FOR ORDER |
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE No.: ITA-4268-98
STYLE OF CAUSE: IN RE THE INCOME TAX ACT
| - and - |
| IN RE ONE OR MORE ASSESSMENTS BY THE MINISTER OF NATIONAL REVENUE PURSUANT TO ONE OR MORE OF THE FOLLOWING STATUTES; THE INCOME TAX ACT, THE CANADA PENSION PLAN, AND THE EMPLOYMENT INSURANCE ACT, |
V.
| 2959-4660 QUÉBEC INC. |
| (doing business from time to time under the name and trade name "ALARME LA PROVIDENCE"), |
Judgment debtor,
AND:
| HONEYWELL LIMITED, |
Garnishee.
PLACE OF HEARING: MONTRÉAL, QUEBEC
DATE OF HEARING: May 5, 1999
| REASONS FOR ORDER BY: DENAULT J. |
DATED: May 7, 1999
APPEARANCES:
Pierre Lamothe for the judgment creditor
Sébastien Grammond for the garnishee
SOLICITORS OF RECORD:
Morris Rosenberg for the judgment creditor
Deputy Attorney General of Canada
Montréal, Quebec
Byers Casgrain for the garnishee
Montréal, Quebec
__________________1 The first paragraph of art. 1673 more or less reproduces art. 1188 of the Civil Code of Lower Canada.
2 See Gélinas v. Commercial Alcohols Ltd., [1953] R.P. 182; Lauzier Électrique v. Place Dupuis [1977] C.S. 196; Léon Faribault, Traité de droit civil du Québec, vol. Huis-Bis, Ed. Wilson & Lafleur, Montréal, 1959, pp. 610 et seq.; Jean-Louis Baudoin, Les Obligations, 4th ed., Ed. Yvon Blais Inc., Cowansville, 1993, p. 566.
3 C.A. Montréal, 500-09-000822-825, J.E. 85-563, commented on in Investissements Salias Inc. v. Brunelle (C.A.), [1988] R.J.Q. 1780.
4 Plagnol and Ripert, Traité pratique de droit civil français, vol. vii (1931 ed.), No. 1297, p. 629; H.L. and J. Mazeaud, Leçon de droit civil, vol. 2, No. 1151, p. 1143.
5 See precedents on this point cited in Vincent Karim, Commentaire sur les obligations, vol. 2, Ed. Yvon Blais Inc., Cowansville, 1997, p. 498.