October 2011

You are interested in buying a home and you find one in what appears to be a very attractive district of older (but well kept up) homes in a heavily treed neighbourhood. The particular property you are interested in has all the amenities that you and your young family (three growing children) could ever want. The price and terms are acceptable to you, and you make an offer which is quickly accepted. Before contracting to buy, you had two or three "walk-throughs" on the property and you didn't notice any existing or potential problems. However, after you move in, you discover that behind the recently installed drywall in the basement rec room and underneath the rugs on the rec room floor, there are a number of cracks/fissures. Not only is moisture slowly seeping in, but there is strong evidence (visually and odiferously) of the existence of black mould on the walls and the floors. You consult with foundation experts and are told that there are severe structural (and mould) problems with the home and that it will cost at least $100,000 to remedy the situation. Even then, the "experts" tell you that there are no "guarantees", because an underground river runs directly beneath the property. It is quite clear that your vendor intentionally misled you with respect to these problems by hiding them, utilizing the aforementioned drywall and strategically placed rugs, such rugs having been put underneath extremely heavy furniture which the vendor had in place at the time of your inspections. Most people (lawyers and laypersons) would agree that you have a remedy against your vendor on the basis that the vendor has intentionally deceived you by hiding these defects - which were not easily ascertainable by you when you made your inspections - because these "latent" defects constitute a substantial impediment to your enjoyment of the property, at least without your incurring a very high remediation cost.

            But what if the "defect", also latent in the sense that it would not be ascertainable upon a reasonable inspection of the property, is something external to the property? This very question came before the Ontario Superior Court of Justice (judgment March 11, 2011) in the Dennis v. Gray case (the "Gray Case"). In the Gray Case, the "defect" ascertained by the purchaser after the purchaser had committed to buy was the fact that a convicted child pornographer lived across the street. When the purchaser learned of this fact, the purchaser became concerned for the well being of his children and didn't want to complete the purchase transaction. The hearing was not a full blown trial to decide the merits of the plaintiff's case, but rather the determination of a preliminary motion by the defendant in which the defendant sought to convince the Court to strike out the plaintiff's claim on the basis that there should be no trial because "it is (not) "plain and obvious" that such a fact does . . . in law amount to a "latent defect" of such a nature that it must be disclosed to a purchaser." However, the Court concluded that it was not so plain and obvious and thus, regardless of whether or not the plaintiff would ultimately succeed in its claim, it was appropriate for the claim to at least go forward to trial. The defendant argued that the existence of the convicted child pornographer was generally known in the neighbourhood, but the Court observed that in fact, the criminal record of the neighbour could not be ascertained from any routine inspection, at least not ascertained with certainty. The Court also observed that what has been held by the Courts to be an actionable latent defect has generally expanded somewhat over time, and thus it is not necessary to foreclose completely the possibility of considering as latent defects, elements which are external to the actual property.

            It will be interesting to discover what happens with the Gray Case if it does proceed to a formal trial, perhaps followed by one or more appeals. There are certainly other elements external to certain properties which, if known to a potential purchaser at an early stage, might very well discourage the purchaser from committing himself/herself. Examples might be noises emanating from a manufacturing/processing facility, even though the facility is situated several miles away. Consider odours emanating from such a source, again, notwithstanding that the source is situated several miles away (think of the old sugar beet processing facility in Fort Garry, or a sewage treatment facility). Another possible irritant to a potential purchaser - although this would not be external to the property - is the fact that the home to be purchased is reputed to have been haunted by ghosts for many years. Surely all of these would be expansions - perhaps reasonable expansions, perhaps not - of what the law views as being an actionable latent defect.

October 2019

You are in the business of making real property mortgage secured loans, and you are approached by a person requesting a loan to be secured by a mortgage of such person's title to particular land.  You make what are currently considered to be prudent "credit checking" investigations with respect to the contemplated loan - in particular, you order, obtain and review a search of the proposed borrower's title to the subject land (which confirms that the title is in the name of who the borrower claims to be) and you request and obtain and review at least two pieces of the borrower's identification, including one piece of "photo identification" (which also confirms that the person indicated in such identification is one and the same as the person the borrower purports to be).  You may also make enquiries of the borrower as to how the borrower came to acquire the property, and the borrower advises that he/she acquired it by a previous purchase or acquired it by inheritance.  Although you do not make further inquiries in order to verify the alleged facts behind such acquisition (most lenders would not do so unless they had some reason to be suspicious, and this doesn't appear to be the case here), you have no reason to doubt the accuracy of the borrower's explanation of its acquisition of the land.

You approve the loan, take and register a mortgage of the borrower's land and advance funds. 

Subsequently, you discover that the land was previously in the name of person "A" and that a fraudster (person "X") forged a transfer of title to "X"'s co-fraudster (person "Y"), "Y" being your borrower.  Your borrower has not misrepresented himself/herself to you as someone other than the real person "Y", namely the co-fraudster, but, as noted, you did not believe and had no reason to believe that "Y" was a fraudster and was involved in what amounted to the theft of the land from the original (and proper) owner "A".

Two questions arise here:

(i)               is "A" entitled to have "Y"'s title cancelled and title to the land restored in "A"'s name? and

(ii)              is your mortgage - obtained by you bona fide and for value - also to be cancelled or should your mortgage "follow" the title back from "Y"'s name to "A"'s name, with the result that "A" is now (clearly unfairly) saddled with your mortgage and the obligation to repay "Y"'s mortgage loan?

Two recent (March, 2009) British Columbia Court of Appeal cases (the "Gill Case" and the "Oehlerking Case") deal with these questions.  In both of these cases, the Court held that the innocently deprived landholder ("A") was entitled to a cancellation of the title held by the co-fraudster "Y" and to the restoration of title back in "A"'s name, but that the innocent mortgage lender was not entitled to have its mortgage "follow" title back into the hands of "A".

The Court's holding that the innocently deprived landholder was entitled to get its title back from someone involved in fraud is based on British Columbialand law which appears to be similar to that in other Canadian common law jurisdictions operating under Torrensland title systems.  The holding that the innocent mortgage lender who has advanced value loses its mortgage is based on the current state of British Columbialand law which may - or may not - be the same as the land laws of such other Canadian jurisdictions. 

Most Canadian jurisdictions (including British Columbia) will protect a bona fide and for value purchaser - as opposed to a bona fide and for value mortgage lender - who acquires title (ie. ownership, as opposed to a mortgage security) from a person who has been involved in fraud whereby the original owner is deprived of title, provided that such subsequent bona fide and for value purchaser acquires his/her title before the innocently deprived original owner learns of his/her loss and registers notice his or her claim to reinstatement against the title.  In other words, as long as a subsequent purchaser acquires from a fraudster bona fide and for value before the innocently deprived title holder can act, such purchaser will be able to acquire and keep his/her title to the exclusion of the innocently deprived owner.  But where the subsequently acquiring party acquires an interest bona fide and for value which is less than fee simple ownership, such as a mortgage, such subsequent bona fide and for value interest holder will lose its interest in favour of the innocently deprived owner.  That is the situation in British Columbia under its current legislative scheme and may be the situation in otherTorrens system based Canadian common law jurisdictions, depending on the provisions of such other jurisdictions' legislation.

A reading of the Gill Case and the Oehlerking Case (and related earlier jurisprudence) additionally raises or may suggest these questions:

(1)             what would be the position (inBritish Columbiaand in jurisdictions with legislation similar toBritish Columbia's) of a bona fide and for value purchaser (or mortgagee) who dealt with a fraudster who had arranged for the wrongful transfer of title from an innocently deprived previous owner into the name of a fictitious person (whom the fraudster then impersonates)?; and

(2)             what would be the position (in British Columbia and in jurisdictions with legislation similar to British Columbia's) of a person who has acquired an interest (whether ownership or some lesser interest such as a mortgage) bona fide and for value but who loses his/her interest by virtue of the operation of applicable land law legislation, where such subsequent bona fide and for value person makes a claim against his/her jurisdiction's government operated Assurance Fund?

The second question is complicated somewhat by the fact that whilst it should be relatively easy to remedy the loss sustained by a bona fide and for value mortgagee who loses its interest (ie. the amount of such party's compensation would simply be the balance of its outstanding loan), in the case of a bona fide and for value purchaser who loses his/her ownership interest, quantification of such person's loss may be hard to determine because of the difficulty in valuing the loss.  Where the subsequent bona fide and for value purchaser is entitled by applicable law to keep his/her title to the exclusion of the original innocently deprived owner, then the question becomes how to compensate the original owner.  Valuation of the original owner's loss may be even more difficult to determine.

In British Columbia and in jurisdictions whose legislation is similar to British Columbia's (or is held by the Courts to be of the same effect as British Columbia's), the law appears to place a fairly onerous burden on mortgage lenders.  Even if a lender conducts "due diligence" along the lines of what is described in the first paragraph of this paper, the lender may lose its security and thus fail to recoup, in whole or in part, its loan.  Of course, where a jurisdiction permits an innocently deprived mortgage lender to recoup itself out of an Assurance Fund, the lender's situation will be substantially alleviated.

InManitoba, the Real Property Act Sections 59(1), 62(1)(c) and 182(1) deal with these matters.  Using the above hypothetical example, is the writer's view that:

(i)               person "A" is clearly entitled to get title to "A"'s land back from person "Y";

(ii)              perhaps the bona fide and for value mortgagee's mortgage will follow the land back from "Y"'s name to "A"'s name in which case the Assurance Fund would be available to pay out the mortgage thereby having it discharged, but it may also be arguable that the mortgage was a nullity from the beginning, and thus is not capable of following title back into "A"'s name, and if the mortgage is considered to be a nullity, then Section 182(1) may not apply so as to enable the mortgagee to make a claim.

Some lenders, wishing to protect themselves from the risk of loss due to land fraud and/or wishing to minimize the necessity of having to make a formal claim for reimbursement against the Assurance Fund, may attempt to shift the burden of ensuring the absence of land fraud in a mortgage transaction to the lawyer providing the legal services in connection with the transaction.  This would be done by the lender's instructions to the lawyer specifying that it is the lawyer's responsibility to ensure that the person or persons purporting to be the mortgagor(s) are who they claim to be and/or that the mortgagor(s) have acquired the mortgaged real estate, in effect, honestly and for value.  A lawyer will be hard-pressed to fulfill this obligation where - as is the case in many if not most mortgage lending transactions - the lawyer does not know the borrower(s) until he or she meets with them for the first time in connection with the real estate transaction.  Where the lender's requirement of the lawyer is as aforementioned, no amount of due diligence on the part of the lawyer in identifying and/or verifying the identification of the borrower(s) will suffice, because what the lender is asking the lawyer to do, is, in effect, "guarantee" the identity of the borrower(s) and the validity of their underlying acquisition of the mortgaged realty.

December 2003

A recent (April, 2003) New Brunswick Court of Appeal decision (the "Stevenson Case") makes it clear that when a secured party is taking a security interest in serial numbered goods, in order to ensure priority over other competing claims, the secured party must ensure accuracy in its financing statement both with respect to the name of the debtor and with respect to the serial number or numbers of the serial numbered goods.  The provisions of the New Brunswick Personal Property Security Act upon which the Court based its decision are substantially the same as those in the Manitoba Personal Property Security Act.

            In the Stevenson Case, the secured party had included correct particulars of the goods' serial number and related information, but had included an incorrect spelling of the debtor's name.  The secured party argued that anyone interested in acquiring an interest in the goods in question should be obliged to search both the debtor's name and the serial number of the goods, with the result that if there was an error in part of the registration (the name or the serial number particulars), but not in the other part of the registration, the party searching would be put on notice of the secured party's security interest by virtue of the presence of the correct information in the registry.

            The Court pointed out that the legislation makes it clear that a registration is invalidated if there is a seriously misleading error or omission in either the debtor's name or the serial number.  The Court also noted that in considering whether or not a seriously misleading error has been made, it is not appropriate to determine whether or not a third party was actually mislead (a subjective test), because the legislation makes it clear that the test is an objective one.  So even if a third party was not mislead by the error - because, for example, the secured party had searched both the name and the serial number and noted the secured party's security interest - the registration would be invalid.

            Thus it would appear that if you are anticipating inquiring an interest in someone's serial numbered goods, it is not necessary for you to search both the serial number and the person's name.  While this appears to be a logical conclusion from the Stevenson Case, it is the writer's "gut" instinct that a person conducting a search with respect to serial numbered goods should in fact search the owner's name and the serial numbers of the goods.  The costs of making the additional search are not substantial.  Also, the jurisprudence in other provinces also suggest that a person searching with respect to serial numbered goods is obliged to search both the owner's name and the serial numbers, so that an error in one will not invalidate an earlier registration provided that the earlier registration is correct in the other.  Searching both the name and the serial number completely eliminates any possible subsequent argument (which might be based on a change in how the Court's view the legislation) that a correct name overcomes an incorrect serial number or vice versa.

2020

After entering into a contract - which is otherwise binding on the parties to it - one of the parties may have a change of mind or, having for the first time thought out the consequences of the contractual commitment, decides that release of that person from their commitment would be in their own best interests.  Such persons may be able to convince a Court to extricate them from their agreements' obligations, reasons or excuses to so extricate vary from situation to situation, but a number of them are - in essence - that the party wishing to withdraw was misled by the other party, or that the party wishing to withdraw didn't understand the language in the written document or had not had the wording adequately explained to her/him.  A recent illustration of this situation is found in the Ontario Court of Appeal judgement Country Wide Homes Upper Thornhill Estates Inc. v. ge (2020 ONCA 400), judgement issued June 22, 2020 (the "Country Wide Case").  In the Country Wide Case, the vendor and the purchaser entered into an agreement for a sale to the purchaser of a substantial parcel of land (basic purchase price being $2,800,000.00).

Prior to closing, the purchaser took the position that the agreement was not binding.  The Court noted that "there was no issue with the agreement, its contents or the steps taken after it was signed.".  The purchaser's rationale for requesting confirmation of termination of the agreement included these allocations:

(i)    the agreement was lengthy and was signed by a non-English speaker;

(ii)   the agreement was signed without the purchaser having a solicitor of the purchaser's choosing review the agreement before the purchaser signed;

(iii)  the purchaser simply did not understand the contents of the agreement.

The Court rejected the purchaser's arguments and confirmed that the agreement was binding.  In particular, the Court pointed out:

(a)  Mandarin-English speaking real estate agent with whom he was able to fully communicate;

(b)  the purchaser was not a novice to the real estate market;

(c)  the purchaser had initialed every page of the agreement of purchase and sale and its schedules and had initially deleted the area where a purchaser could fill in the name of the purchaser's own lawyer; and

(d)  each page of the agreement of purchase and sale contained the following prominently displayed statement: "ORAL REPRESENTATIONS DO NOT FORM PART NOR CAN THEY AMEND THIS AGREEMENT".

There are undoubtedly situations where the above "background factors" leading to execution and delivery of the contract may taint the "meeting of the minds" process that a Court will excuse contractual performance.  But people contemplating entering into contracts and the counsel should tread carefully!

February 2017

This paper has to do with a problem (the "Problem").

The Problem arises where a chartered bank (the "Bank") provides credit to an agricultural producer ("Producer") which is utilized, in whole or in part, to facilitate/effect the operation of the Producer's agricultural production business, in particular, the growing and production of crops ("Crops").  Typically, the Bank will take from the Producer to secure the obligations from time to time owed to the Bank by the Producer with respect to such credit, one or both of a security interest in the Producer's Crops governed by The Manitoba Personal Property Security Act (the "MPPSA") (usually in the form of a general security agreement, hereinafter a/the "GSA") plus a security assignment by the Producer to the Bank of the Producer's Crops pursuant to and as governed by Section 427 of the Bank Act (Canada) (hereinafter, the "Bank Act Security").

The Producer uses the value advanced by the Bank to produce the current year's crops, and (presumably) on an ongoing basis, the Bank advances further values year after year to the Producer on the ongoing security against each successive year's crops as created under the GSA and the Bank Act Security.

This paper assumes that the Bank will, in a timely manner, have made all registrations and taken all steps necessary to perfect it's security interests (under its GSA and under its Bank Act security) so as to achieve, at the earliest possible date, the highest possible priority.

The essence of the Problem arises when after the Bank has done all of the foregoing, someone else - typically an agricultural products support business ("Crops Inputter") - additionally provides inputs to assist the Producer to produce its Crops (on credit) and takes a security interest in those Crops.  Crops Inputters will usually provide such items as seed, fertilizer and pesticides.  The security taken by the Crops Inputter is governed by the MPPSA, the Crops Inputter being legally incapable of obtaining security under Section 427 of the Bank Act of Canada. 

Again, assume that the Crops Inputter has made registrations and done all that it can to achieve, as soon as possible, the highest possible priority for its security interest in the Crops.  Is it possible for the Crops Inputter, notwithstanding that it provides value to the producer and takes security after when the Bank has provided value and taken security in the same Crops from the same Producer, can obtain a retroactive priority over the Bank's security in the Crops?

If the Bank's provincially governed security interest could not "fit" within the classification of a "purchase money security interest" under the MPPSA and the Crops Inputter's provincially governed security interest could be so classified (and assuming that the Crops Inputter had done all that it needed to do under the MPPSA in order to achieve a retroactive purchase money security interest priority), then the Crops Inputter would indeed take priority in the Crops over the Bank, notwithstanding that the Bank had registered its provincially governed security interest before the Crops Inputter had registered its provincially governed security interest.  But is this really the case?

If the Bank's security interest could be classified as a "purchase money security interest" under the MPPSA, so that both the Bank's security interest and the Crops Inputter's (provincially governed) security interest would be classified as "purchase money security interests" under the MPPSA, then, depending on how the Crops Inputter advanced value, the Bank's security interest may - or may not - hold priority over the Crops Inputter's security interest.  If the Crops Inputter sold its inputs to the Producer on credit and took security therefor, then the Crops Inputter's security interest would hold its security over the prior the Bank security.  This is because the MPPSA says that where there are two purchase money security interests affecting the same collateral at the same time and one is "vendor credit" and the other is "lender credit", then - regardless of who has registered first - the holder of the security interest representing "vendor credit"  will win the priority contest.  On the other hand, if the Crops Inputter utilizes some subsidiary, affiliate or other financial institution to advance value to the Producer which the Producer then uses to buy inputs from the Crops Inputter, the Crops Inputter's (or more accurately, its subsidiary's affiliate's or connected financial institution's security interest) would - like the Bank - be a purchase money security interest securing "lender credit".  In that case, with the Bank having registered its "lender credit", purchase money security interest first, the Bank's security interest would hold priority over the Crop Inputter's (or its affiliate's) security interest.

But arguably, although the security interests held by each of the Bank and the Crops Inputter appear to be in the nature of purchase money security interests, in fact, they are NOT strictly speaking, "purchase money security interests", but rather a species of security interest which is sometimes colloquially called a "production value security interest" and which is dealt with specifically under Section 34(10) of the MPPSA.  In fact, the Bank's security interest under its GSA will most likely be in part a purchase money security interest, in part a production value security interest governed by Section 34(10) and in part, a security interest securing obligations which do not fall within the concepts of the values secured by purchase money security interests or production value security interests.

The answer to the above question is, in our opinion, "no".  This is essentially for two reasons:

1. As mentioned above, a "production value security interest" is not dealt with in exactly the same way as a "purchase money security interest" under the MPPSA.  Section 34(10) of the MPPSA provides:

"A perfected security interest in crops or their proceeds given for value to enable the debtor to produce the crops and given while the crops are growing crops or during a period of six months immediately before the time the crops become growing crops (and continuing thereafter, until the crops start growing), has priority over any other security interest in the same collateral given by the same debtor." (the underlining is the writer's, for emphasis purposes).

Where the Bank provides value that does in fact enable a Producer "to produce the crops" and the Bank does everything it is supposed to do to achieve priority as required by said Section 34(10), and, a Crops Inputter perfects (registered) after the Bank has registered, then, insofar as the Producer's Crops are concerned (although not necessarily with respect to other collateral covered by the Bank's GSA), priority should go to the Bank.  Note that Section 34(5) of the MPPSA - which, in effect, provides that a vendor credit security interest will take priority over a lender credit security interest, only applies to purchase money security interests, and (again, as stated above), the production value security interest dealt with in Section 34(10) of the MPPSA is not - strictly speaking - a purchase money security interest.  That means that priority, as between the Bank's security interest and the Crops Inputter's security interest must be determined by the MPPSA "residual rule" (Section 35(1)) which provides that the first to register wins a priority contest.  In this example, the Bank has registered first so it "wins".  Obviously, if the Crops Inputter had registered its production value security interest before the Bank had registered, then the Crops Inputter would "win".

There is one question which we still have to resolve.  That is, just how broad is the meaning of the words "to produce the crops" found in Section 34(10)?  Is it restricted to what a Crops Inputter normally provides, such as seed, pesticides and fertilizer, or, is it broader to also include costs paid for (with the Bank's loaned monies) relating to employing farm hands, electricity consumed, costs of servicing and operating farm equipment and machinery, and for that matter, all costs generally of the Producer's agricultural production business?  If "to produce the Crops" is in fact limited to provision of inputs (on credit) such as seed, fertilizer and pesticides, then there may be a need to apportion the use by the Producer of the credit extended by the Bank amongst what are clearly direct production inputs and other inputs (paid for with the Bank's credit) which are less directly connected with the creation of the Crops.

1. Where the Bank has acquired its Bank Act Security on the Producer's Crops and taken all steps required under the Bank Act to establish its priority, and, this occurs before the Crops Inputter perfects its security interests against the Crops, then the priority of the Bank's security in the Crops, as specified in Section 427 of the Bank Act, clearly gives the Bank priority over the provincially governed Crops Inputters security interest.  In this regard note:

(a)          Section 4(k) of the MPPSA provides that the MPPSA does not apply to a security arrangement governed by the Bank Act provided that the Bank Act "deals with the rights of parties to the (security) agreement or the rights of third parties affected by a security interest created by the agreement".  Clearly, Section 427 of the Bank Act (in particular, subsections (2)(d) and (4) so "deal with the rights of (the) parties…and…rights of third parties";

(b)          the Bank Act does not have any rules providing for two or more banks providing value to a Producer on the security of the same Crops, other than that if the Bank's Bank Act Security was competing with another Canadian chartered bank's Section 427 security on the same Crops, the bank which would "win" the priority contest between the two banks would be the bank that filed its Notice of Intention (to grant the Bank Act Security) first.

The foregoing considerations also raise the following issues and conclusions:

1. Where the Bank has taken its security and registered first before a Crops Inputter's MPPSA financing statement registration, the Bank should "win" the priority contest.
2. Where the Bank takes both a provincially governed GSA and a Bank Act Security assignment, the Bank's security would initially, under the GSA, extend to the seeds, fertilizer and pesticides which the Bank has financed the Producer's acquisition of (Section 427 (1)(d) of the Bank Act appears to limit the Bank's security to the Crops themselves), and thereafter, upon the seeds, fertilizer and pesticides being "put" into the soil, would also extend to the Crops commencing to grow therefrom, the Bank's GSA and its Bank Act Security would both extend to the Crops.  That does give a "window of opportunity" to the Crops Inputter, in that during the period of time that the Producer holds seed and/or fertilizer and/or pesticides (before the Producer puts those into the ground), the Crops Inputter's security interest - provided that the Crops Inputter is extending "vendor credit", not "lender credit" - would have priority over the Bank's GSA security interest in the same collateral.
3. Perhaps the best practical advice that can be given in this scenario of competing/overlapping secured creditors with respect to a producer's crops is for all concerned creditors (including chartered banks, Crops Inputters and any other parties advancing or considering advancing credit to an agricultural producer), to get together and work out a reasonable intercreditor agreement.  Such agreement would spell out the types of credit being provided by each creditor and define all creditors' respective priorities with respect to the Producer's crop inputs, crops and proceeds of those crops.

January 2002

Two recent cases (Schwab Construction Ltd. before the Saskatchewan Court of Queen’s Bench, judgment given March 27, 2001 [the “Schwab Case”], and Mega Pets Ltd. before the British Columbia Supreme Court, judgment given December 29, 2000 [the “Mega Case”]), illustrate the different approaches which can be taken by Courts in sorting out priority issues over entitlement to proceeds of disposition of assets held by a common debtor who is indebted to Canada Customs and Revenue Agency (formerly Revenue Canada, hereinafter, “CCRA”) for amounts deducted from employees for income tax, Canada Pension Plan premiums and Employment Insurance Plan premiums, and, indebtedness owed to private creditors.

Under the Income Tax Act (Canada), the CCRA claim to the assets of the common debtor (and in particular to the proceeds of disposition thereof) is given priority over a number of specifically listed commercial arrangements, including a “debenture,” a “mortgage,” a “lien,” a “pledge,” a “charge,” a “deemed” or an “actual trust,” an “assignment” and an “encumbrance” “of any kind whatever.” These are given as species of what that Act refers to as a “security interest.” In the Schwab Case, the Court held that it was not necessary or even appropriate to follow the rules contained in provincial personal property security legislation and in the cases dealing with same for the purpose of determining whether or not a particular commercial arrangement was or was not a “security interest” within the meaning of the Income Tax Act. In the Mega Case, the British Columbia Court came to the opposite conclusion.

Consequently in the Schwab Case the Saskatchewan Court, which had to consider several competing private claims in addition to that of CCRA, held as follows:

1. Where the private creditor’s arrangement was structured in the form of a lease of goods, since the creditor at all times held ownership of the goods (as lessor), the private creditor should prevail.  Whether or not the lease would have been considered a financing lease or a “true” lease under provincial personal property security legislation is irrelevant.
2. Where the private creditor’s arrangement was structured as a conditional sale contract, again with ownership of the goods at all times remaining with the creditor, the creditor’s claim should also prevail.  Again, it was irrelevant that the applicable provincial personal property security legislation would have treated the conditional sale arrangement as a security interest.
3. Where the private creditor’s interest was clearly some other form of an ownership interest, again the private creditor should prevail.

On the other hand, the British Columbia Court in the Mega Case dealt with a conditional sale contract, and since this Court decided that, in categorizing a commercial arrangement as being or not being a “security interest” within the meaning of the Income Tax Act, it was appropriate to apply provincial personal property security legislation principles, the conditional sale contract clearly being a “security interest” under provincial legislation, so this Court held that CCRA should prevail.

Since it appears to be the objective of the federal government taxing authority to simply strip competing claimants of their property claims in the common debtor’s assets without compensation (in other words, expropriation without compensation), we can expect that if the Saskatchewan Court’s view of this matter gains any substantial judicial following, the federal government will - as it has done before - simply get Parliament to change the rules in its favour.  Don’t be surprised if the government does so on a retroactive basis as it did following the disappointing (to the government) result of the Supreme Court of Canada decision in the Royal Bank and Sparrow Case.