2017 QCCQ 1129, 2017 QCCQ 1129

Padulo c. TD Canada 2017 QCCQ 1129 COURT OF QUEBEC Small Claims Division CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL Civil Division No: 500-32-147343-158 DATE: February 24, 2017 ______________________________________________________________________ BY THE HONOURABLE JEFFREY EDWARDS, J.C.Q. ______________________________________________________________________ LAURA PADULO -and- WILLIAM REFFCA Plaintiffs v.

TD CANADA Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Plaintiffs Laura Padulo and William Reffca, acting in their capacity as tutors of their minor child, Catherine Reffca, are suing TD Canada Trust ( TD ) for $11,903.68 due to the improper disposal of amounts held at TD in a Registered Education Savings Plan ( RESP ) opened for the benefit of Catherine Reffca. [ 2 ] Six years after setting up the RESP, both Plaintiffs filed for voluntary bankruptcy.

At the request of the trustee in bankruptcy, TD collapsed the RESP and remitted the available amounts held in the account to the trustee. The trustee then proceeded to distribute the funds to the unpaid creditors under the bankruptcy. [ 3 ] Plaintiffs take the position that TD acted wrongfully since the RESP funds really belonged to Catherine Reffca as the beneficiary and should not have been transferred to the trustee in bankruptcy for distribution to their creditors.

Question in issue Did TD commit a fault in transferring the funds in the RESP, created for the benefit of Catherine Reffca, for distribution by the trustee in the bankruptcy of the Plaintiffs for distribution to their unpaid creditors? Context [ 4 ] Catherine Reffca was born in 2007. On February 27, 2008, Plaintiff Laura Padulo opened a RESP for the benefit of Catherine at TD [1] . [ 5 ] A Registered Education Savings Plan is a financial instrument created by the federal government to promote savings by parents for the costs of post-secondary education for their children.

General guidelines of this type of instrument include:

1) The parents have to make certain deposits; 2) The federal government matches those amounts up to certain prescribed limits; 3) The monies are invested by a plan manager; 4) The increases in value of the funds invested are not subject to income tax; 5) If the beneficiary does attend post-secondary education and withdraws funds at that time, the amounts withdrawn will be taxed in the hand of the beneficiary only. [ 6 ] Plaintiffs state that the money held in the RESP belonged to Catherine. As such, they submit that it should not have been affected by their bankruptcy.

Plaintiffs testify that they had also opened a bank account at TD in their daughter’s name, and the amounts deposited in the TD bank account were not transferred to the trustee upon their bankruptcy. [ 7 ] TD submits that, in law, the funds held in the RESP belonged to Laura Padulo. [ 8 ] TD therefore submits that it had no choice and acted properly by transferring the RESP funds to the trustee in bankruptcy since the trustee took control of all of Laura Padulo’s assets. [ 9 ] At the time, the amount held in the RESP account was $9,480.

When Plaintiffs instituted the present legal proceedings, they state that the amount held in the RESP, had it not been prematurely collapsed, would have had a value of $11,903.68. They claim that amount from TD. Analysis and Decision [ 10 ] The general rule of our civil law is that the property of a debtor constitutes the common pledge (“ gage commun ”) of his or her creditors. [ 11 ] Articles 2644 and 2645 of the Civil Code of Quebec ( C.C.Q. ) read as follows: 2644. Les biens du débiteur sont affectés à l’exécution de ses obligations et constituent le gage commun de ses créanciers. 2644.

The property of a debtor is charged with the performance of his obligations and is the common pledge of his creditors. 2645. Quiconque est obligé personnellement est tenu de remplir son engagement sur tous ses biens meubles et immeubles, présents et à venir, à l’exception de ceux qui sont insaisissables et de ceux qui font l’objet d’une division de patrimoine permise par la loi. Toutefois, le débiteur peut convenir avec son créancier qu’il ne sera tenu de remplir son engagement que sur les biens qu’ils désignent. 2645.

Any person under a personal obligation charges, for its performance, all his property, movable and immovable, present and future, except property which is exempt from seizure or property which is the subject of a division of patrimony permitted by law. However, the debtor may agree with his creditor to be bound to fulfil his obligation only from the property they designate.

[ 12 ] For property to be exempt from that general rule, the law must clearly specify the exemption. The Supreme Court, in reference to the seizability of sums held in a Registered Retirement Savings Plan (RRSP), stated: [18] […] These articles set out the principle that seizability is the rule and unseizability the exception. Provisions that depart from this principle must be narrowly construed: see Caise populaire de Lévis v. Maranda , [1950] B.R. 249, at pp. 259 (Galipeault C.J.) and 262 (Bissonnette J.).

In addition, given that all declarations that property is unseizable affect the rights of the creditors, they may be expected to be worded clearly and precisely. […] [37] When the Quebec legislature intended to extend the unseizability of certain sums derived from a retirement plan to the RRSP into which they had been transferred, it did so expressly and clearly. […] [2] [ 13 ] The Bankruptcy and Insolvency Act [3] ( BIA ) defines property as follows: bien Bien de toute nature, qu’il soit situé au Canada ou ailleurs.

Sont compris parmi les biens les biens personnels et réels, en droit ou en equity , les sommes d’argent, marchandises, choses non possessoires et terres, ainsi que les obligations, servitudes et toute espèce de domaines, d’intérêts ou de profits, présents ou futurs, acquis ou éventuels, sur des biens, ou en provenant ou s’y rattachant. property means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or person​al, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property. [4] [ 14 ] Doctrine has noted that this wide definition includes property of almost all types and kinds [5] . [ 15 ] It is to be noted that the definition of property under the BIA includes an obligation which is “contingent, in, arising out of or incident to property”. [ 16 ] However, the BIA specifically provides for certain exceptions of what may be seized by the trustee in bankruptcy. [ 17 ] Section 67(1) of the BIA reads as follows:

(1) Les biens d’un failli, constituant le patrimoine attribué à ses créanciers, ne comprennent pas les biens suivants :

a) Les biens détenus par le failli en fiducie pour toute autre personne;

b) les biens qui, selon le droit applicable dans la province dans laquelle ils sont situés et où réside le failli, ne peuvent faire l’objet d’une mesure d’exécution ou de saisie contre celui- ci; b.1) dans les circonstances prescrites, les paiements qui sont faits au failli au

titre de crédits de taxe sur les produits et services et qui ne sont pas des biens visés aux alinéas

a) ou b); b.2) dans les circonstances prescrites, les paiements prescrits qui sont faits au failli relativement aux besoins essentiels de personnes physiques et qui ne sont pas des biens visés aux alinéas

a) ou b); b.3) sans restreindre la portée générale de l’alinéa b), les biens détenus dans un régime enregistré d’épargne-retraite ou un fonds enregistré de revenu de retraite , au sens de la Loi de l’impôt sur le revenu , ou dans tout régime prescrit, à l’exception des cotisations au régime ou au fonds effectuées au cours des douze mois précédant la date de la faillite. [ Emphase ajoutée] 67

(1) The property of a bankrupt divisible among his creditors shall not comprise

a) property held by the bankrupt in trust for any other person;

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; b.1) goods and services tax credit payments that are made in prescribed circumstances to the bankrupt and that are not property referred to in paragraph (

a) or (b); b.2) prescribed payments relating to the essential needs of an individual that are made in prescribed circumstances to the bankrupt and that are not property referred to in paragraph (

a) or (b); or b.3) without restricting the generality of paragraph (b), property in a registered retirement savings plan or a registered retirement income fund , as those expressions are defined in the Income Tax Act , or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy. [ Emphasis added] [ 18 ] It is to be noted that a RESP is not included in the stated exceptions. [ 19 ] In Re (Payne) , the Alberta Court of Queen’s Bench described a Registered Education Savings Plan account as follows: These plans may consist of monies paid in by a parent, interest earned on the plan and government grants.

R.E.S.P.’s are given special tax treatment under the Income Tax Act . The principal contributed by the parent is not tax deductible but the interest earned on the investment is not taxable in the hands of the contributing parent in the year the interest is earned. After the child completes high school and attends a qualifying post-secondary education institution the fund is paid to the child. Interest earned during the life of the plan and the government grant portion becomes taxable in the hands of the child.

If the child does not attend a qualified institution, the fund is collapsed and the principal and interest is paid to the parent while the government grant money is returned. A parent may collapse the plan earlier and retain the principal and interest (with the grant money being returned to the government). In the latter situation the interest becomes taxable in the hands of the parent . [6] [Emphasis added] [ 20 ] In that case, the Alberta Court of Queen’s Bench held that a Registered Education Savings Plan did not constitute a trust and therefore did not fall within the exception provided at Section 67(1)

a) of the BIA . The Alberta Court held that the Registered Education

Savings Plan was not completely divested from the patrimony of the subscriber of the account. The subscriber maintained the right to collapse the fund at any time. [ 21 ] Furthermore, the Alberta Court stated that if the beneficiary of the Registered Education Savings Plan did not attend a post- secondary institution, the monies invested, as well as its increase in value and interest, would be refunded to the subscriber. [ 22 ] In particular, the Alberta Court held: “ 13 The bankrupt did not hold the USC plan exclusively for the benefit of her sons.

The monies would only benefit the sons if the bankrupt did not collapse the plan prior to maturity and if her sons became eligible students as defined under the agreement. 14 Therefore the trustee is entitled to claim as estate property the after tax value of the contributions and interest earned in the plan as of the date of bankruptcy.” [ 23 ] In 2007, in MacKinnon v. Deloitte & Touche Inc. , the Saskatchewan Court of Queen’s Bench came to the same conclusion.

The Saskatchewan Court concluded as follows: “To my knowledge, neither Parliament nor any Provincial or Territorial Legislature has passed legislation exempting registered education savings plan from enforcement. For this reason, I find that the funds in question are not exempt and are property of the bankrupt divisible among her creditors.” [7] [ 24 ] In 2007, In Re Vienneau , the New Brunswick Queen’s Bench arrived at that conclusion. The New Brunswick Court held as follows: “ 6.

Détenir la propriété d’un avoir signifie détenir un droit exclusif de possession, de jouissance et d’aliénation de ce bien et le droit d’action lorsqu’il est porté atteinte au droit de possession par une autre personne. Le contrat entre les faillis et le promoteur des REEE permettait aux faillis de retirer tous leurs fonds ou une

partie de leurs fonds avant l’expiration du contrat et leur donnait des options à l’expiration qu’ils pouvaient exercer sans qu’il soit tenu compte des souhaits des enfants. Les enfants n’avaient aucun droit légal sur les sommes investies. 11. […] Les enfants n’en étaient bénéficiaires que si le titulaire du régime ne retirait pas les fonds de celui-ci et qu’une fois que les enfants commenceraient leurs études aux termes du contrat.

On ne peut pas donner en fiducie et conserver le droit d’aliénation; la disposition doit lier le disposant.” [8] [ 25 ] It should be noted that clause 11 of the terms and conditions [9] of the RESP in issue signed by Laura Padulo as the “subscriber” specify that the subscriber is entitled, upon request, to a refund of all contributions deposited into the account. Legislative Reform and Proposals For Reform [ 26 ] In 2003, the Standing Senate Committee on Banking, Trade and Commerce recommended that the BIA be amended to add Registered Education Savings Plans as unseizable property.

The Committee’s report reads as follows: “We believe, as we did with RRSPs, that the funds should be locked in as a means of ensuring that they are used for the intended purpose – education – and that contributions in the year prior to bankruptcy should be available to satisfy creditors claims, since those contributions could reasonably have been available to pay debts. Consequently, the Committee recommends that:

The Bankruptcy and Insolvency Act be amended to exempt funds in a Registered Education Savings Plan from seizure in bankruptcy, provided that two conditions are met: the Registered Education Savings Plan is locked in; and contributions made to the Registered Education Savings Plan in the one-year period prior to bankruptcy are paid to the trustee for distribution to creditors.” [10] [ 27 ] However, the Canadian Parliament has declined thus far to enact such an amendment [11] , although such an amendment has been made for Registered Retirement Savings Plans (RRSP) [12] . [ 28 ] The Plaintiffs brought to this Court’s attention that in 2013, the Legislature of Alberta modified its provincial legislation to provide that Registered Education Savings Plans are not seizable for payment of creditors’ claims [13] .

This is important given that, in accordance with Section 67(1)

b) BIA , such a modification to provincial legislation has the effect of excluding Registered Education Savings Plans from the property claimable by the trustee in bankruptcy under the BIA. [ 29 ] However, under the recently enacted Code of Civil Procedure , the Quebec Legislature did not include Registered Education Savings Plans as unseizable property under Articles 694 to 696. [ 30 ] It is to be noted however that capital of a Registered Retirement Savings Plan (RRSP) is declared unseizable [14] under the Code of Civil Procedure . [ 31 ] Plaintiffs argue that for reasons of equity, their child’s RESP should not have been included in the property transferred to the trustee in their bankruptcy.

They state their intention was for the funds in the RESP to be used exclusively for the child’s future education. They also submit that it is unfair that their child’s future post-secondary education be lost or compromised as a result of their financial difficulties. [ 32 ] Those reasons were amongst those stated by the Standing Senate Committee on Banking, Trade and Commerce when it recommended amendments to the BIA with respect to the Registered Education Savings Plans.

They also prompted the Legislature of Alberta to amend its provincial legislation. [ 33 ] However, to date, neither Parliament nor the National Assembly of Quebec have adopted that legislative change with regard to the law of Quebec. Whether that is a legislative choice by intent or omission, this does not change the fact that the Court is obliged to apply the law.

Conclusion [ 34 ] Although the question in issue does not appear to have been the object of a judgment rendered in Quebec, the state of the law in Quebec is accurately summarized in the book The 2016 Annoted Bankruptcy and Insolvency Act as follows: “Since a Registered Education Savings Plan is not held exclusively for the benefit of a child but may be collapsed by the parent at any time prior to maturity, it is not a trust, and the trustee in bankruptcy of the parent can collapse the plan and claim as property of the bankrupt the after-tax value of the contributions and interest earned in the plan at the date of bankruptcy.

Any Government money in the plan is lost on the collapse of the plan. The bankrupt is entitled to any contribution to the plan after the date of bankruptcy and any interest earned after bankruptcy.” [15] This applies to the present instance. [ 35 ] Plaintiffs’ Judicial Demand will be dismissed, but in the circumstances, without legal costs. FOR THESE REASONS, THE COURT:

DISMISSES Plaintiffs’ Judicial Demand; WITHOUT LEGAL COSTS. __________________________________ Jeffrey Edwards, J.C.Q. For the Plaintiffs: Ms. Laura Padulo Mr. William Reffca For TD Canada Trust: Mr. John Long Senior Manager Regulatory and Policy Governance Date of hearing: October 25, 2016