Legal Blog

Disappointment

 A creditor spends from two months to two years, and the accompanying legal costs, to obtain a judgment against a debtor. The creditor then tracks down the debtor’s only significant asset, seizes or garnishes it, and collects in full. Is the creditor home free? It ain’t necessarily so – as the creditor discovered in Attorney General Canada v. GlassCell Isofab Inc., a 2011 decision of the Ontario Superior Court of Justice.

 Debts

 The creditor obtained a judgment against the debtor in September 2008 for $220,000. Unfortunately, not only could the creditor not pay its debts, it also did not remit to CRA its employee source deductions (i.e. tax, CPP, and EI premiums) for the 2006-2009 tax years.

 Pursuant to federal legislation, as soon as an employer deducts these monies from an employee at source, the employer holds these monies by way of a deemed trust for CRA. Further, CRA has a super priority for employee source deductions notwithstanding any security that a creditor might hold or any other legislation, provincial or federal.

 Money

 The creditor obtained a writ of seizure and sale and issued three garnishments. By February 2010, the sheriff received $131,000 pursuant to the garnishments. The sheriff issued a notice of proposed distribution under the Ontario Creditor’s Relief Act (the “Act”). CRA got wind of the distribution and filed with the sheriff an Enhanced Requirement to Pay to notify the sheriff and the creditors that the money the sheriff was proposing to distribute was trust money that was property of the Queen.

 Ultimately, the sheriff rejected CRA’s objections, claiming that CRA made them out of time. CRA brought a motion to extend the time to contest the distribution, but the court ruled that CRA had failed to comply with the conditions of the Act and that its objections were deemed to have been withdrawn. The sheriff then distributed the money to the creditor.

 CRA, however, did not give up. It brought an application against the creditor claiming the return of the money that the sheriff had paid to it.

 Arguments

The creditor acknowledged the provisions in the federal statutes creating the super priority – it had no choice. However, it analogised its situation to the facts and decision in a previous case. In that case, the court stated that the Crown’s priority is released against specified property once the debtor sells that property to a third party. The creditor argued that a sale of assets was similar to the seizure of assets. The creditor also argued that, because CRA had attempted to contest the distribution under the Act, it was bound by the decision regarding that distribution.

 The judge distinguished the prior case. He decided that an attempt by a creditor to seize or garnish the debtor’s assets is not equivalent to the debtor’s sale of those assets. The creditor could not seize the assets as the property of the debtor because, under the federal statutes, the assets were subject to the deemed trust in favour of Her Majesty the Queen and she did not want to release that trust.

 As to the argument that CRA was attempting to re-litigate the distribution under the Act, the judge, in effect, indicated that he did not care what had happened under the Act. Under the doctrine of paramountcy, federal legislation that is validly enacted under powers constitutionally allocated to the federal government, has paramountcy over any provincial legislation.

 The Interpretation Act of Canada states that the Crown in right of Canada is not bound by provincial legislation unless the provincial statute states otherwise (and the Act does not). Further, the federal statutes state that they apply regardless of any federal or provincial statutes to the contrary. Accordingly, the Act did not bind CRA and any decision as to a distribution under it did not bind CRA.

 Result

 CRA was successful and the creditor had to return the money it had obtained from the debtor. All of the time and expense that the creditor had incurred to obtain that money were for naught.

 When we perform our due diligence and know of a CRA claim, we investigate whether CRA’s claim has priority; if it does, then we back off. There is no point in performing the collection work if CRA will simply jump in when all is done and pluck the fruits of that work from our client’s grasp. Accordingly, since CRA usually does precious little to collect debts due to it, CRA’s super priority often allows the debtor a free pass to keep assets that creditors would normally attack.

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