BETWEEN:
THE CAISSE POPULAIRE DESJARDINS DE L'EST DE DRUMMOND,
in right of the Caisse Populaire du Bon Conseil
and
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
Hearing held at Montréal, Quebec, on November 7 and 8, 2006.
Judgment delivered from the bench at Montréal, Quebec, on November 8, 2006.
REASONS FOR JUDGMENT OF THE COURT BY: LÉTOURNEAU J.A.
Docket: A-624-05
Citation: 2006 FCA 366
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
PELLETIER J.A.
BETWEEN:
THE CAISSE POPULAIRE DESJARDINS DE L'EST DE DRUMMOND,
in right of the Caisse Populaire du Bon Conseil
Appellant
and
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the bench at Montréal, Quebec, on November 8, 2006)
[1] This is an appeal from a decision of Mr. Justice Pinard of the Federal Court (judge). In his decision, the judge dismissed an appeal brought by the appellant challenging the recovery process of a constructive trust specified in subsections 227(4) and (4.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement) as amended (ITA) and subsections 86(2) and (2.1) of the Employment Insurance Act, S.C. 1996, c. 23 as amended (EIA).
[2] The facts which give rise to this dispute are quite straightforward and are the subject of the following agreement between the parties:
[translation]
1. From May 2000 to January 2001, Les Entreprises Camvrac Inc. (hereafter the “debtor”) failed to remit to Her Majesty payroll deductions totalling $26,863.53, detailed as follows:
Payroll Payroll
deduction deduction Date of
Month (ITA) (EIA) assessment
May to October 2000 $2,608.64 $2,950.08 Dec. 5, 2000
November 2000 $2,703.45 $549.65 Feb. 15, 2001
December 2000 $11,583.13 $2,010.87 Feb. 15 and
May 1, 2001
January 2001 $3,686.58 $771.13 Feb. 15 and
May 1, 2001
TOTAL $20,581.80 $6,281.73
2. On September 19, 2000, the defendant loaned the debtor an amount of $277,000.00;
3. On September 25, 2000, the debtor deposited $200,000.00 with the defendant, who then issued on October 16, 2000 a certificate of deposit maturing on October 16, 2005;
4. When issued, the certificate of deposit was given as security for the loan of $277,000 granted to the debtor. The most relevant excerpts from the security agreement between the defendant and the debtor are as follows:
1. Right of retention and compensation. To guarantee the repayment in principal, interest, costs and incidental fees of all sums that are or may be payable to the Caisse by the depositor under a line of credit agreement for $277,000 which was granted to it on September 18, 2000, under all debts or obligations present or future, direct or indirect, of the depositor, the depositor undertakes to maintain and agrees that the Caisse shall retain, in the account(s) or on the certificate(s) of deposit referred to hereinafter, the sum of $200,000.
. . .
7. Default. The depositor shall be in default in the following situations:
(a) if any of the obligations provided in the credit agreement or herein are not complied with;
(b) if the depositor or borrower becomes insolvent or bankrupt, or if they make a proposal and it is rejected or cancelled;
. . .
In case of default:
(a) all sums owing under the credit agreements will forthwith become due and payable;
b) there will be compensation between the credit agreement(s) and the deposit certificate or sum of money indicated above, irrespective of whether they have or have not matured;
. . .
5. On November 25, 2000, the debtor defaulted on the interest portion of its debt to the defendant;
6. On February 7, 2001, the debtor made an assignment of its property;
7. On February 21, 2001, the defendant noted the compensation between the proceeds of the certificate of deposit for $200,000.00 and the amount of $277,000.00 owing to it by the debtor.
Note: The plaintiff submits that compensation was effected on that date, that is, February 21, 2001, while the defendant submits that compensation was effected automatically on November 25, 2000, the date of the debtor’s default;
8. On June 12, 2001, Her Majesty gave the defendant formal notice to pay the amounts owing by the debtor as the proceeds of the property covered by the deemed trust;
9. To this day, the amount of $26,863.53 is still unpaid.
[Emphasis added.]
[3] The appellant submitted the following three questions for adjudication:
[translation]
Question 1: Did the trial judge err in law in holding that the redemption of the certificate of deposit by the appellant following the operation of compensation constituted “proceeds thereof” within the meaning of subsection 227(4.1) of the ITA?
Accordingly, considering the current wording of subsections 227(4.1) of the ITA and 86(2) of the EIA, did the trial judge err in law in concluding that these provisions allowed the respondent to exercise directly and personally against the appellant its beneficial right to the amounts that were subject to a compensation effected by it?
Question 2: Did the trial judge correctly apply the legal rules of compensation when he refused to consider the date of compensation to be November 25, 2000 instead of February 21, 2001?
Question 3: Considering the current wording of subsections 36(2) and 37(2) of the Federal Courts Act, did the trial judge err in law in calculating the interest assessed against the appellant?
[4] In answer to the first question, we are satisfied that the judge did not make any error in the interpretation of the provisions of subsections 227(4) and (4.1) of the ITA. The definition of “security” in subsection 224(1.3) is sufficiently broad to include the right of retention and setoff which the appellant had in connection with the tax debtor’s certificate of deposit. To use the exact terms of the definition in subsection 224(1.3), the appellant had “any interest in property that secures payment of performance of an obligation” (in French a “droit sur un bien qui garantit l’exécution d’une obligation, notamment un paiement”).
[5] Moreover, the appellant had a contractual right of retention and compensation. This right was specified in a [translation] “Security Agreement Secured by Savings”. Contrary to the appellant’s claims, the judge correctly concluded that this was not a case of legal compensation, but rather one of conventional compensation, i.e. a contractual right, and pursuant to this security agreement, the appellant could and had to invoke this right for compensation to be effected.
[6] Accordingly, the judge did not err in applying the provisions of subsections 227(4.1) of the ITA and 86(2.1) of the EIA to the appellant to recover the amounts due.
[7] The judge also correctly concluded that the appellant exercised its right to compensation on February 21, 2001 and not on November 25, 2000, as the appellant submitted. The appeal record shows that after November 25, 2000, the amount loaned was still $277,000, and the interest owing was calculated on that amount: see appeal record, pages 138 and 141. This would not have been the case if there had been compensation for $200,000 on November 25, 2000 on the loan of $277,000.
[8] Finally, as far as the third question is concerned, we are not satisfied that the judge erred in quantifying the amount of interest according to subsections 36(2) and 37(2) of the Federal Courts Act, R.S.Q. 1985, c. F-7. The appellant’s tax debt was the cause of action in the proceedings for recovery instituted against it, and this cause of action arose otherwise than in a province: see Markevitch v. Canada, [2003] 1 S.C.R. 94, as well as Canada (Minister of National Revenue – M.N.R.) v. National Bank of Canada, 2004 FCA 92.
[9] Likewise, no intervention is warranted concerning the date used by the judge for the calculation of interest.
[10] For these reasons, the appeal will be dismissed, with costs limited to one set of costs for the appeal, since there was a joint hearing in dockets A-624-05 and A-426-05.
“Gilles Létourneau”
Certified true translation
Michael Palles
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-624-05
APPEAL FROM AN ORDER OF THE HONOURABLE MR. JUSTICE PINARD OF THE FEDERAL COURT, DATED NOVEMBER 22, 2005, DOCKET NO. T-1253-02.
STYLE OF CAUSE: CAISSE POPULAIRE DESJARDINS DE
L’EST DE DRUMMOND v. HER
MAJESTY THE QUEEN IN RIGHT OF
CANADA
PLACE OF HEARING: Montréal, Quebec
DATES OF HEARING: November 7 and 8, 2006
REASONS FOR JUDGMENT BY: DESJARDINS J.A.
LÉTOURNEAU J.A.
PELLETIER J.A.
DELIVERED FROM THE BENCH BY: LÉTOURNEAU J.A.
APPEARANCES:
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FOR THE APPELLANT
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FOR THE RESPONDENT
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SOLICITORS OF RECORD:
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Lévis, Quebec
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FOR THE APPELLANT
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Deputy Attorney General of Canada |
FOR THE RESPONDENT
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