January 30, 2012 Supreme Court decision in Toronto-Dominion Bank v. Her Majesty the Queen: Garnishment notices regarding unpaid GST remain valid after bankruptcy Jean-Guillaume Shooner In a succinct decision rendered on January 12, the same day as the hearing, the Supreme Court of Canada finally settled the question of whether requirements to pay, issued pursuant to section 317 of the Excise Tax Act ("ETA") prior to the bankruptcy of a tax debtor, but not paid before such time, remain valid against the garnishee.1 Supreme Court Justice LeBel, speaking on behalf of the Court, simply stated that the Court agreed with the reasons of Noël J.A. of the Federal Court of Appeal. In that decision, the Federal Court of Appeal ruled that amounts due and payable to a tax debtor by the garnishee and subject to a garnishment notice become the property of the Crown immediately upon issue of the notice to pay and are excluded from the tax debtor's patrimony upon subsequent bankruptcy. The decision will likely bring to an end a resilient strain of Québec jurisprudence to the contrary. Background and context Subsection 317(3) of the ETA allows the Crown to collect a taxpayer's debt arising from unremitted Goods and Services Tax ("GST") directly in the hands of a third party debtor owing money to the taxpayer. This is accomplished through the use of what is commonly referred to as a garnishment notice or a requirement to pay. This subsection provides that, upon receipt of a garnishment notice, amounts owed to the taxpayer by the garnishee immediately "become the property of Her Majesty in right of Canada." This language is particularly important in the event that the tax debtor becomes bankrupt. Section 70 of the Bankruptcy and Insolvency Act ("BIA") explicitly gives that statute and the assignment of the bankrupt's property to a receiver precedence over garnishments not fully executed by payment. This precedence is potentially reinforced by subsection 317(3) of the ETA itself, which applies "despite" other laws, but "other than" the BIA. In the context of a garnishment notice received before the bankruptcy of the tax debtor, which has not been settled, an apparent conflict arises between the BIA (which supersedes the garnishment) and the ETA (which provides for the transfer of ownership of the debtor's property to the Crown). In such circumstances, there has been considerable confusion as to whether the bankrupt tax debtor's property held by the third party garnishee should be delivered to the receiver for distribution to creditors or paid to the Crown in accordance with the garnishment notice. In the case now decided by the Supreme Court of Canada, the Québec Minister of Revenue (the "QMR") had sent a subsection 317(3) ETA garnishment notice to the Toronto-Dominion Bank ("TD") compelling TD to pay amounts that were held for a company indebted to the QMR for unpaid GST. A few days later, the company filed a notice of intention to make a proposal under the BIA and the appointed trustee sent a notice to TD to stay the garnishment notice. TD did not comply with the garnishment notice and the QMR assessed TD for the unpaid amount pursuant to subsection 317(7) of the ETA. TD filed a notice of objection on the basis that the garnishment notice was not settled or paid at the time of filing of the notice of intention, and, accordingly, the BIA and the resulting stay of proceedings trumped the effects of the garnishment. The QMR contended that ownership of the amounts was transferred to the QMR upon receipt of the garnishment notice. Since the amounts were not part of the tax debtor's patrimony when the notice of intention was filed, the stay could not apply to them. The Tax Court of Canada reviewed an extensive list of decisions supporting the position that the garnishment notice gives absolute ownership to the QMR, as well as a series of Québec decisions affirming that the BIA prevails in the event of a conflict between it and the ETA. The Tax Court ruled that was no such conflict, as the amounts in question were no longer the tax debtor's property at the time the notice of intention was filed. The Federal Court of Appeal dismissed TD's appeal for reasons the Supreme Court of Canada have now adopted. Reasons for decision Québec practitioners will not be surprised to learn that TD relied heavily on the 2009 Québec Court of Appeal decision in Sous-ministre du Revenu du Québec v. De Courval2. That decision arose out of circumstances similar to TD's, except that the tax debt was for Québec Sales Tax ("QST"). In its judgment, the Court relied on the distinction between subsection 224(1.2) of the Income Tax Act ("ITA") which provides similar garnishment rights in respect of debts relating to unpaid source deductions "notwithstanding any other provision of. the [BIA]," and subsection 317(3) of the ETA, which provides no such priority over the BIA, to conclude that subsection 317(3) ceases to apply at the time of bankruptcy if the amounts claimed are not settled in full prior to bankruptcy. Noël J.A., writing for the Federal Court of Appeal in the TD case, called into question the assumption in De Courval that the phrase "other that the [BIA]" in subsection 317(3) of the ETA means that the BIA must prevail where a conflict exists. The issue, he stated, is the determination of the meaning to be given to the words "other than the [BIA]." In interpreting the phrase "other than the [BIA]," heavy emphasis was placed on the historical context in which subsection 317(3) of the ETA was adopted in 1990. According to the Supreme Court of Canada in Alberta (Treasury Branches) v. M.N.R.3, the legislative intent behind the adoption of that provision and the concurrent modification of subsection 224(1.2) of the ITA was to "give the Crown right of ownership having priority over all competing claims." The distinction between subsections 224(1.2) of the ITA and 317(3) of the ETA was created so that garnishment rights would exist for unpaid source deductions regardless of bankruptcy, whereas those same rights pertaining to unpaid GST could only be exercised before bankruptcy. This position is supported by the fact that at the time these provisions were enacted, deemed trusts for source deductions and GST survived bankruptcy. As a result, collected but unremitted GST and source deductions never entered the tax debtor's patrimony. Noël J.A. concluded that "there was no conflict possible between the BIA and the right of ownership conferred upon the Crown under subsection 317(3) of the ETA.4" Contrary to the position taken in De Courval, subsection 317(3) of the ETA could never have been adopted with the legislative intention of creating a hierarchy of laws in the event of a conflict, as no conflict was possible at the time. The purpose of adding the words "other than the [BIA]" must, therefore, have been to prevent the Crown from exercising its garnishment rights pursuant to subsection 317(3) of the ETA after bankruptcy had occurred. The result is that these garnishment rights may be exercised at any time preceding bankruptcy and, having been so exercised, remain valid thereafter. An important caveat to the Supreme Court's conclusions, and implicit in them, is that a very different result would have likely occurred if the amounts claimed under subsection 317(3) of the ETA had only become due and payable by the garnishee after the filing of the notice of intention. Indeed, one could argue that garnishment rights remain valid as long as amounts were actually due and payable by the garnishee to the tax debtor between the issuance of the garnishment notice and the bankruptcy of the tax debtor or the filing of a notice of intention under the BIA, as the case may be. Conclusion As a result of this ruling, it is now clear that with respect to garnishment rights exercised pursuant to subsection 317(3) of the ETA for GST purposes (and, in all likelihood, with respect to garnishment rights exercised for QST purposes under the Tax Administration Act), the BIA takes priority only in situations where the bankruptcy occurred before the garnishment notice was issued. While subsection 317(3) of the ETA allows for issuance of a garnishment notice with respect to amounts not yet payable to the tax debtor, those amounts cannot become the property of the Crown until they are actually due and payable because they are not otherwise the property of the tax debtor. As such, if bankruptcy occurs before the sums become due and payable, the Crown cannot then claim to have taken ownership of them. The garnishment rights, in that case, would not survive bankruptcy. This decision reflects a common sense approach that avoids some of the more problematic outcomes arising from the conclusions in De Courval. For example, the approach by which survival of the Crown's garnishment rights is dependent on payment of the amounts subject to a garnishment notice places the garnishee in a position to withhold payment knowing that a bankruptcy or stay of proceedings is imminent. By affirming the ruling of Noël J.A., the Supreme Court of Canada has shut that door. It is likely that the tax authorities will now use the "improved" garnishment rights in a more forceful manner every time GST or QST amounts remain unpaid by a tax debtor. Put simply, with garnishment notices properly served before bankruptcy, the tax authorities could end up in exactly the same position as they had been when deemed trusts for sales tax purposes survived bankruptcy. 1 2012 SCC 1, affirming Banque Toronto-Dominion c. R., 2010 FCA 174 [TD]. 2 [2009] R.J.Q. 597 [De Courval]. 3 [1996] 1 SCR 963. 4 TD, paragraph 49. Return to Top

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