Mutter (Re), 2010 ABQB 312

Court of Queen ’ s Bench of Alberta Citation: Mutter (Re), 2010 ABQB 312 Date: 20100506 Docket: BK01 089252 Registry: Calgary Between: In the Matter of the Bankruptcy of Darren Michael Mutter _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Sal J. LoVecchio _______________________________________________________ Introduction [ 1 ] This is an appeal by the Minister on behalf of Her Majesty the Queen in Right of Canada of a decision of the Registrar in Bankruptcy which favoured the Bankrupt Darren Michael Mutter. Background [ 2 ] Mr.

Mutter is an undischarged bankrupt. His principal residence was sold pursuant to an Order of the Court of Queen’s

Bench (Sitting in Bankruptcy). The Order is dated May 15, 2008. Upon completion of the sale, the proceeds from the sale were delivered to the Trustee, Meyers Norris Penny Limited (as represented by the licenced Trustee, George Lomas) and they form part of the estate. [ 3 ] A Court Order dated September 4, 2008 required $40,000 to be retained by the Trustee pending a further Court Order or an agreement between Mr. Mutter and officials from Canada Revenue Agency as the Minister and Mr. Mutter each asserted a right to the proceeds. [ 4 ] No agreement was reached.

On November 6, 2008, an Application was brought by the Trustee before the Registrar seeking advice and directions respecting the distribution of the $40,000 retained from the proceeds of sale.

The Registrar’s Decision [ 5 ] The Registrar considered the purpose for and the technical aspects of the various Acts in question and concluded that the personal residence exemption contemplated by the incorporation of the Civil Enforcement Act [1] into the Bankruptcy Insolvency Act [2] was not to be vitiated by the garnishment provisions in the Income Tax Act [3] and the Excise Tax Act . [4] As a result, he directed the Trustee to pay the $40,000 to Mr. Mutter. Issues [ 6 ] There are two issue on this appeal. First, how should the funds derived from the sale of the principal residence of Mr. Mutter be viewed?

The second is a matter of statutory

interpretation. Position of the Parties [ 7 ] Mr. Mutter says the $40,000 is the proceeds of the sale of his principal residence and as such should be seen as his exempt property under the BIA, simply held by the Trustee until it is delivered to him. Logically flowing from this position is the assertion that the Trustee should not be seen as a debtor of Mr. Mutter in respect of an obligation to deliver these funds to him and he should not be seen as a creditor of the Trustee for this amount.

In addition, he says the ITA provision in question should not be interpreted in such a manner as to vitiate the effect of an important provision of the BIA . [ 8 ] The position of the Minister is not so simple so some background is necessary. [ 9 ] As is often the case, while his estate was being administered by his Trustee, Mr. Mutter continued to work as a drywaller. In so doing, he incurred post bankruptcy rights and obligations.

One of those obligations was for income taxes totalling $120,587.07 (as of November 13, 2008) on his post bankruptcy income. [ 10 ] The Minister seeks to recover a maximum of $52,344.20 of that post bankruptcy tax debt. The Minister wants to recover a part of this tax debt owed by garnishing the $40,000 held by the Trustee. The Minister asserts that these funds may be attached by issuing a “Requirement To Pay” under s. 224(1) of the ITA and s. 317(3) of the ETA to the Trustee. [ 11 ] These sections would permit the Minster to attach by means of an RTP, any amounts owed to Mr. Mutter post bankruptcy.

The Minster says the obligation of the Trustee to deliver the exempt portion (being the $40,000) of the proceeds of sale should be seen as a payment due to Mr. Mutter by the Trustee. In essence, the Minister wants the Trustee and Mr. Mutter to be seen as in a debtor/creditor relationship in respect of the delivery of these funds to Mr. Mutter.

[12] Why is the Minister taking this position? Because there is a legislative gap and this gap gives rise to a statutory

interpretationissue. Law [13] The provisions we are dealing with are s. 224(1) of the ITA, s. 317(3) of the ETA and s. 67(1)(

b) the BIA which incorporates s. 88(

g) of the CEA. The precise wording of each provision is set forth in an attached annex. [14] In short, s. 67(1)(

b) of the BIA provides that certain property of a bankrupt is exempt. To determine what property is exempt,one must look to the CEA. It states that $40,000 of the proceeds from the sale of the principal residence of a bankrupt is exempt property.The ITA and ETA permit the Minister to garnishee any payment owing to a taxpayer. The problem is, as will be seen below, one of theseprovisions is not like the other. [15] Because of this discrepancy, the characterization of the relationship between the Trustee and Mr.

Mutter in respect of thesefunds and the characterization of the funds themselves is critical to the resolution of this matter. Discussion and Analysis [16] The Registrar concluded that the obligation of the Trustee to deliver the proceeds from the sale to Mr. Mutter should not beseen as a “payment” as contemplated by the federal tax provisions at issue. In particular, the Registrar found that although Mr. Mutterhad lost his ability to deal with his property, the property still remained his, even when in the hands of the Trustee. As the exemptionamount was always the property of Mr.

Mutter, once this amount was severed from those amounts payable to Mr. Mutter’s creditors, Mr.Mutter regained the ability to deal with this property. Therefore, although the Trustee must transfer the funds to give complete controlover the property back to Mr. Mutter, this was not the type of “payment” contemplated by the federal tax provisions. As such, there wasno legal foundation for the RTP. [17] While I agree with the Registrar’s analysis in that regard, I believe the issue may also be decided on another basis and that isthe second issue.

More specifically, focussing on the bankruptcy process, as regulated by the BIA, and the purpose of the bankruptcyexemptions another independent justification for the decision may be found. The BIA and the bankruptcy process [18] In order to consider how the federal Acts at issue relate to one another, an understanding of the purpose and policy behind theBIA is necessary. The BIA is a federal statute that regulates the bankruptcy process. As part of that process, a trustee is seized of theproperty held by the bankrupt at the time of the bankruptcy.

The trustee then liquidates most, if not all, of the bankrupt’s assets and thenmakes a distribution of the proceeds from the liquidation in order to satisfy as many of the bankrupt’s financial obligations as possible.However, not all of the property of the bankrupt may be liquidated for distribution. [19] Section 67(1)(

b) of the BIA provides that certain property is exempt. In order to determine precisely what property is exempt,one must look to provincial legislation as the BIA says that it is property that is exempt from execution under provincial laws that isexempt from being distributed amoung a debtor’s creditors, including a Crown creditor (Re Harris (1984), (AB KB),55 A.R. 6 [Q.B. (In Bankruptcy]). [Emphasis added by me] [20] In this case, the relevant provincial legislation is s. 88(

g) of the CEA. As noted in the annex, $40,000 of the proceeds from thesale of a debtor’s property is exempt from seizure.

[ 21 ] The purpose of the exemption is to permit a bankrupt to retain some small portion of their assets in order to give them a minimal financial stake in life when they emerge from the bankruptcy process. Hopefully, this minimal financial stake permits the bankrupt to attempt to rebuild their life, relying on their own resources. [ 22 ] The Saskatchewan Court of Appeal in Investors Group Trust v. Eckhoff , 2008 SKCA 18 noted the importance of leaving a bankrupt with some form of ‘nest egg’ or asset base in order for a bankrupt to maintain some level of economic viability.

Jackson J.A. for the Court quoted passages from Dunlop’s text, Creditor-Debtor Law in Canada , which explained the justification for personal exemptions legislation, stating at para. 43 of the decision: The justification is expressed in similar terms today: The obvious justification of exemptions statutes today is that they prevent judgment debtors from being stripped of all the means to support themselves and their families. It is not acceptable that creditors, no matter how just the debt, should have the power to take from debtors the basic necessities of life.

Another aim often advanced to support exemptions laws is that they preserve to debtors the means to survive and to earn a living, thus contributing to their rehabilitation as citizens and to their capacity to repay their debts. It would be possible to permit creditors to take all of their debtors' assets, thus forcing the debtors to rely on welfare, but this would appear to be a needlessly destructive and costly solution.

The philosophy of the exemptions laws is to encourage debtors to survive and to carry on their lives as economic and social elements in society. [Dunlop at p. 454] [ 23 ] Jackson J.A. concluded that the purpose of exemptions legislation is to ensure a minimum asset base for execution debtors so as to keep them from having to seek social assistance.

Jackson J.A. then applied the relevant provincial exemption, so as to entitle the Debtor in that case to assert an exemption in priority to the Minster’s RTPs with respect to the funds flowing from the forced sale of the Debtor’s home. [ 24 ] The Registrar considered the societal benefit in ensuring that debtors are able to remain a viable economic unit, outlining that this not only benefits the debtor personally, but also prevents the debtor’s care from falling to the state.

The Registrar acknowledged that although taxation serves a general public purpose, the “specifically defined and beneficial purposes of Debtor’s exemptions should not be disturbed lightly” (para. 50). [ 25 ] Texts and case law alike explain the policy and importance behind the bankruptcy exemptions encompassed in our federal and provincial legislation. As the Registrar put it, these exemptions are “specifically defined” and are narrow in providing some form of financial assistance or ‘nest egg’ for a bankrupt.

To disturb these exemptions, would cause undue economic hardship on a person who has already relinquished full control over their financial affairs, and should not be done lightly. The conundrum. The ITA and ETA [ 26 ] Section 224(1) of the ITA is silent with respect to being subject to the BIA . Counsel for both sides offered examples of federal legislation worded so as to take a deferential or, conversely, an overriding stance with respect to other legislation. In these instances, interpreting both sets of legislation in light of each other is straight forward. This is not the case here.

Rather, s. 224(1) of the ITA does not state whether it is to be subject to or override other federal legislation. It is simply silent on the point. [ 27 ] On the other hand, s. 317(3) of the ETA is worded slightly differently than s. 224(1) of the ITA. Its application is specifically stated to be subject to the BIA . [ 28 ] Parliament knows how to refer to other federal legislation, and how to make one act subject to another act or override another act, if it chooses to do so. [ 29 ] The BIA is federal legislation and it is from this federal legislation that the notion of an exemption derives.

The exemption in question is found in s. 67(1)(

b) of the BIA. You simply look to the provincial legislation to determine what is exempt, so, as a matter of

statutory

interpretation, this is not a case about paramountcy between federal and provincial legislation. Rather it is about interpreting two federal acts when some of the provisions have words in them that others do not. [ 30 ] As s. 317(3) of the ETA states that it is subject to the BIA , that means that it is also subject to the exemption provided for in s. 67(1)(

b) of the BIA . So the RTP issued by the Minister under s. 317(3) of the ETA cannot stand. [ 31 ] The more difficult issue in the present case relates to s. 224(1) of the ITA . As Parliament has not referred to the BIA in s. 224(1) of the ITA , this provision is not consistent with other provisions of the ITA and ETA where Parliament has explicitly done so. [ 32 ] For example, s. 224(1.2) of the ITA states that it operates “[n]otwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act ...”.

Conversely, s. 317(3) of the ETA discussed above states that it operates “[d]espite any other provision of this Part, any other enactment of Canada other than the Bankruptcy and Insolvency Act ...”.

These are two examples of federal provisions where Parliament’s intention on making one provision “subject to” or operate “notwithstanding” another federal provision is clear. [ 33 ] Section 224(1) of the ITA has neither set of words. [ 34 ] The question then becomes, should the absence of “subject to the BIA ” or “notwithstanding the BIA ” language mean that Parliament meant to override the BIA exemptions and take away the benefit of the financial stake provided for in the exemptions when an RTP under s. 224(1) of the ITA is issued or leave them in place?

Obviously, the Minister wants me to find that the absence of any words means the provision should be interpreted as not subject to. By implication, one could argue this effectively reads in the notwithstanding words. [ 35 ] There is authority for such an

interpretation. In Marcoux v. Canada (Attorney General) , 2001 FCA 92 , the Federal Court of Appeal found that Parliament had the relevant exemptions from seizure in mind when creating the methods of seizure mentioned in s. 224 and s. 225 of the ITA as Parliament chose to take them into account in s. 225 and not to take them into account in s. 224. The Court found that the silence in s. 224 in not referring to the seizure exemptions or other legislation meant that Parliament intended to exclude the exemptions, effectively reading in notwithstanding language. [ 36 ] Similarly, in Betrand Bouchard v.

Attorney General , 2009 FCA 115 , the Federal Court of Appeal considered s. 224.1 of the ITA , which also does not use notwithstanding or subject to language, and concluded that this silence meant that it was not “necessary” to refer to provincial exemptions legislation to interpret the collection provision, thereby excluding the exemption in interpreting s. 224.1. [ 37 ] As noted above, the Eckhoff case went the other way.

This issue has not been decided in Alberta and the authorities noted are not binding on me one way or the other. [ 38 ] Reading the “notwithstanding the BIA ” language into the provision or finding, as the Minister wants me to, that its absence should effectively give rise to the same result would lead to overriding the exemption provisions of the BIA . [ 39 ] I have no difficulty in accepting the proposition that the Minister should be zealous in ensuring tax debts are collected. But this is not simply about collecting taxes.

If the Minister’s position is accepted, that minimal financial stake given to a bankrupt would be taken away leaving an already destitute person even further behind. [ 40 ] Reading “subject to the BIA ” into s. 224(1) of the ITA makes this provision more consistent with other exemption provisions and the policy behind the exemption itself and in my view is what Parliament intended. Conclusion [ 41 ] The determination of the Registrar is confirmed and the Trustee is directed to pay to Mr. Mutter the $40,000 retained by the Trustee from the proceeds of the sale of the principal residence of Mr.

Mutter and I further declare that the RTPs issued to the Trustee by

the Minister are quashed. Costs [ 42 ] If the matter of costs cannot be settled between the Trustee, Amicus Counsel and the Minister, the parties may address that matter with me in the next 30 days. Heard on the 23 rd day of March, 2010. Dated at the City of Calgary, Alberta this 6 th day of May, 2010. Sal J. LoVecchio J.C.Q.B.A. Appearances: George F. Body (Department of Justice Canada) for the Crown Douglas R. Lint, Q.C., Amicus Counsel for the Bankrupt Darren Michael Mutter Annex ITA 224.

(1) Garnishment

Where the Minister has knowledge or suspects that a person is, or will be within one year, liable to make a payment to another person who is liable to make a payment under this Act (in this subsection and subsections (1.1) and (3) referred to as the "tax debtor"), the Minister may in writing require the person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor's liability under this Act. ETA 317.

(3) Garnishment Despite any other provision of this Part, any other enactment of Canada other than the Bankruptcy and Insolvency Act , any enactment of a province or any law, if the Minister has knowledge or suspects that a particular person is, or will become within one year, liable to make a payment (

a) to a tax debtor, or (

b) to a secured creditor who has a right to receive the payment that, but for a security interest in favour of the secured creditor, would be payable to the tax debtor, the Minister may, by notice in writing, require the particular person to pay without delay, if the moneys are payable immediately, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor or the secured creditor in whole or in part to the Receiver General on account of the tax debtor's liability under this Part, and on receipt of that notice by the particular person, the amount of those moneys that is so required to be paid to the Receiver General shall, despite any security interest in those moneys, become the property of Her Majesty in right of Canada to the extent of that liability as assessed by the Minister and shall be paid to the Receiver General in priority to any such security interest.

BIA 67.

(1) Property of bankrupt The property of a bankrupt divisible among his creditors shall not comprise [...] (

b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides; [...] CEA Exempted property 88 Subject to

section 89, the interest of an enforcement debtor in the following is exempt from writ proceedings: [...] (

g) the principal residence of an enforcement debtor, including a residence that is a mobile home, up to the value prescribed by the regulations for that residence but if the enforcement debtor is a co-owner of the residence, the amount of the exemption allowed under this provision is reduced to an amount that is proportionate to the enforcement debtor’s ownership interest in the residence;

[...]. Subsection 37(1) (

e) of the Civil Enforcement Regulation, Alta. Reg. 276/1995 provides that $40,000 is the principal residence exemption. [1] R.S.A. 2000, c. C-15 [ CEA ]. [2] R.S.C. 1985, c. B-3 [ BIA ]. [3] R.S.C. 1985, c. 1 (5 th Supp .) [ ITA ]. [4] R.S.C. 1985, c. E-15 [ ETA ].