Federal Court of Appeal Decisions

Date: 20141127

Docket: A-438-13

Citation: 2014 FCA 279

Heard at Montréal, Quebec, on November 4, 2014.

Judgment delivered at Ottawa, on November 27, 2014.

Date: 20141127

Docket: A-438-13

Citation: 2014 FCA 279

REASONS FOR JUDGMENT

NOËL C.J.

[1]               This is an appeal from a decision by Justice Archambault of the Tax Court of Canada (the TCC judge) allowing the appeal from the Caisse Desjardins du Québec (the Caisse) from an assessment made under subsection 317(3) of the Excise Tax Act, R.S.C. 1985, c. E-15 (the Act).

[2]               This assessment arose from the fact that the Caisse did not comply with a requirement to

pay (requirement) relating to the goods and services tax owing by the tax debtor, Café de la paix (1980) inc. (the tax debtor) and resulted in making the Caisse liable for this tax debt up to the amount owed to the Caisse by the tax debtor.

[3]               Subsection 317(3) of the Act reads as follows:

[4]               The issue is whether the TCC judge was correct in concluding that the amounts payable by the Caisse to the tax debtor had already been subject to legal compensation (set-off) under article 1673 of the Civil Code of Québec (C.C.Q.) at the time the requirement was received meaning that it was not liable for any amount to the tax debtor at the time the requirement was received.

[5]               For the reasons explained below, it is my view that the TCC judge correctly concluded that compensation had already been effected between the amounts payable by the Caisse to the tax debtor and those payable by the tax debtor to the Caisse and that, consequently, the requirement was moot. However, my reasons for this conclusion are not quite the same as those of the TCC judge.

[6]               The facts are undisputed, and I refer in this regard to the summary of the facts provided by the TCC judge at paragraphs 5 to 9 of his reasons. The only issue is whether legal compensation was effected in a timely manner. Paragraphs 4 and 6 of the variable credit contract between the Caisse and the tax debtor are at the heart of the problem:

[translation]

4. REQUEST FOR REPAYMENT

The Caisse reserves the right to demand at any time the immediate repayment of any balance owed in principal, interest, costs and accessories. The Caisse will then have the option to cancel the contract, without prejudice to all its other rights and recourses.

6. DEFAULT

If the Borrower draws a cheque that brings the line of credit balance to an amount higher than the amount authorized hereunder, if it goes bankrupt, if it transfers its property or becomes insolvent or fails to meet any of the conditions and obligations stipulated herein, any balance then owing in principal, interest, costs and accessories shall become immediately exigible.

[Emphasis added.]

[7]               It is also useful to mention clause 2, which provides that as soon as the tax debtor’s current account is supplied with funds over $10,000, the Caisse will debit the account by this amount in payment of the balance of the tax debtor’s variable line of credit.

[8]               As stated by the TCC judge, the following two provisions provide for legal compensation:

Article 1673 of the Civil Code of Québec, LRQ, c C-1991:

Section 69 of the Act Respecting financial Services Cooperatives, CQLR c C‑67.3:

[9]               Of the five conditions required by legal compensation, namely, the reciprocity of two debts, their fungibility, their certainty, their liquidity and their exigibility, only the last one is in dispute. More specifically, the Crown accepts that the sums deposited by the tax debtor in the bank account it held with the Caisse were exigible at any time. It submits, however, that the corresponding amount payable by the tax debtor to the appellant under the variable credit contract was not.

[10]           According to the Crown, clauses 4 and 6 of the variable credit contract have to be harmonized, and the wording of these provisions makes it clear that in situations not anticipated in clause 6, the debt of the Caisse is not exigible unless notice is provided. 

[11]           The TCC judge recognized that these two clauses, when read according to the principles of interpretation set out in the C.C.Q. (that is, according to standard practices), have the effect suggested by the Crown (reasons at paragraph 14). He found, however, that clause 6 was the result of a drafting error (reasons at paragraphs 16 and 20). Disregarding clause 6 and citing clause 4, the TCC judge concluded that the balance owed, that is, the “principal, interest and accessories”, were exigible at any time (reasons at paragraph 15).

[12]           The TCC judge set aside clause 6 of the contract on the ground that the parties had never intended to subscribe to it. He drew this conclusion even though neither party claimed to have suffered as a result of such an error. Indeed, the tax debtor did not appear before the court, and the Caisse maintained before the TCC judge (reasons at paragraph 18), and continues to maintain, that clause 6 is part of the contract. Indeed, counsel for the Caisse confirmed at the hearing that clause 6 was part of a standard contract, which, for all intents and purposes, excludes the idea that clause 6 was the result of an error.

[13]           In these circumstances, the TCC judge could not resolve the contractual interpretation issue before him by disregarding the awkward clause. As submitted by the parties, he had to rely on the principles of interpretation set out in the C.C.Q., specifically article 1428, which provides that a clause is given a meaning that gives it a practical effect rather than one that gives it no effect. He also had to interpret each clause in the light of the others so that each is given the meaning derived from the document as a whole (article 1427 C.C.Q.).

[14]           The interpretation advanced by the Crown applies this principle. According to this interpretation, the amounts described in clause 4 are not exigible unless a requirement for payment is issued, except in the three situations anticipated in clause 6—bankruptcy, insolvency or non-compliance with the contract—which make the amounts exigible without notice.

[15]           In turn, the Caisse bases its interpretation on the relevant case law, such as the decision of the Quebec Court of Appeal in Syndicat d’épargne des épiciers du Québec (In re), (1975) C.A. 599, SOQUIJ AZ-75011180. According to this case, a debt that is payable on demand is exigible at any time and a demand for payment is only needed to require the debtor to pay (to the same effect see Re Hil-A-Don Ltd.: Bank of Montreal c. Kwiat, [1975] C.A. 157). According to the Caisse, it is from this perspective that clauses 4 and 6 of the variable credit contract must be read.

[16]           I recognize that a debt payable on demand is exigible at any time. The fact remains, however, that the parties to a contract can agree to depart from this rule if this is their intention and they express it clearly (Société canadienne des postes c. Morel, [2004] 2 JQ 2405 [Morel]).

[17]           The issue here is whether this is what the parties intended to do in stipulating in clause 6 that the balance referred to in clause 4 “shall become immediately exigible” only in the three cases provided therein. As pointed out by the Crown, some meaning must be given to these words.

[18]           In my opinion, a reading of the contract as a whole and of these two clauses in particular leads to the conclusion that the parties anticipated that the balance in question would be exigible without notice or a requirement in the event of one of the three situations listed in clause 6. It follows that, otherwise (i.e. except in these three situations), notice or a requirement is required in order to make the balance exigible. This is a clear departure as per the doctrine of Morel since the contract cannot be read differently.

[19]           Consequently, the Caisse cannot avoid its liability under subsection 317(3) of the Act solely on the ground that the sums referred to in clause 4 were exigible at any time.

[20]           The TCC judge also offered an alternative reason to justify his conclusion. This time relying on clause 6, he concluded that the tax debtor became insolvent before the service of the requirement on January 24, 2011, thus making the debt to the Caisse exigible before this date under the clause (reasons at paragraphs 21 to 27).  

[21]           The Crown is also challenging this conclusion as part of this appeal. In the Crown’s opinion, the documents on which the TCC judge relied to conclude that the tax debtor was insolvent do not demonstrate this [translation] “clearly” (Crown’s memorandum at paragraph 53). Better evidence would have been required to conclude that the tax debtor was insolvent.

[22]           With respect, the question of whether the tax debtor was insolvent before January 24, 2011, is one of fact. The conclusion drawn by the TCC judge in response to this question cannot be set aside in the absence of a palpable and overriding error. No such error was shown.

[23]           The Crown’s main argument against the conclusion drawn by the TCC judge is based on the fact that the Caisse continued to advance credits after January 24, 2011. However, as pointed out by the TCC judge, under the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3 (subsection 50.4(1)) the Caisse was bound to continue complying with the terms and conditions governing the credit line even though the tax debtor was insolvent as of January 25, 2011, the date on which the tax debtor filed a notice of intention to make a proposal (reasons at paragraph 24).

[24]           Moreover, the reasons set out by the TCC judge, and the supporting evidence, points to the existence of a serious, precise and concordant inference that the tax debtor was insolvent on January 24, 2011. No error has been shown in this respect.

[25]           I would therefore dismiss this appeal with costs.

“Marc Noël”

“I agree

Johanne Gauthier J.A. “

“I agree

Richard Boivin J.A.”

Certified true translation

François Brunet, Revisor

FEDERAL COURT OF APPEAL

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