Jason Bryk 

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Income Tax Claims for Employee Withholdings

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.


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