INNOVATION CREDIT UNION PLAINTIFF - v. -, 2023 SKKB 113

KING’S BENCH FOR SASKATCHEWAN Citation: 2023 SKKB 113 Date: 2023 06 06 Docket: QBG-SC-00125-2020 Judicial Centre : Swift Current BETWEEN: INNOVATION CREDIT UNION PLAINTIFF - and - KESHE HOLDINGS INC., KEVIN SPRINGER, SHERRY LUKE AND HIS MAJESTY THE KING IN RIGHT OF CANADA DEFENDANTS Counsel: Avery D.Layh for the plaintiff Scott K. Allen for Kevin Springr No one appearing for Sherry Luke David J. Smith for Attorney General of Canada JUDGMENT KEENE J. JUNE 6, 2023 I.

INTRODUCTION [ 1 ] On May 1, 2014, the defendant, Keshe Holdings Inc. [Keshe], granted a mortgage [Mortgage] in favour of the plaintiff, Innovation Credit Union [Innovation], in the principle sum of $204,000. The Mortgage was registered in the land titles registry on May 7, 2014 as interest register number119957013 against the following land: Surface parcel #164223705 Lot 45 Blk/Par 3 Plan No 101960434

Extension 0 [Land] [ 2 ] The defendants, Kevin Springer [Kevin], and Sherry Luke [Sherry], provided written guarantees on May 1, 2014 to Innovation to pay, upon demand, all amounts under the Mortgage. [ 3 ] The terms of the Mortgage expired and the full amount owing became due. Keshe defaulted on payment and as of December 7, 2020, $130,783, together with interest at the fixed rate of 5.10% per year was demanded of Keshe and also of the two guarantors – Kevin and Sherry. [ 4 ] The plaintiff sued Keshe, Kevin and Sherry on the Mortgage and all three defendants were noted for default.

It should also be noted that in the same statement of claim the plaintiff sued Kevin and Sherry for a defaulted line of credit. The noting of default against Kevin and Sherry applied to this line of credit as well. The plaintiff then applied for an order nisi for sale by real estate listing which was granted on August 11, 2021. Keshe failed to redeem the Mortgage and in due course the Land was put up for sale. [ 5 ] On February 8, 2022 an order confirming the sale of the Land for $127,500 was granted.

The Land was transferred into the purchasers’ names and after the payment of sale costs, etc. as per the order confirming sale, the balance of the sale proceeds of $69,987.68 [Funds] were placed in the trust account of the plaintiff’s lawyer pending directions of this Court. [ 6 ] An issue has arisen between Innovation and the Canada Revenue Agency [CRA] respecting priority and entitlement to the Funds. [ 7 ] As of March 13, 2023, the Mortgage and the guarantees (Kevin and Sherry as guarantors) remained outstanding in the total amount of $145,892.11. [ 8 ] The lawyer for Innovation advised CRA of the foreclosure litigation.

As a result, CRA put Innovation, Keshe, Kevin and Sherry on notice of CRA’s outstanding claim against Keshe for failing to remit $45,725.11 in GST and payroll source deductions. CRA therefore claims payment of $45,725.11 out of the sale proceeds held in trust. [ 9 ] The plaintiff has now brought an application to have the Funds applied to the Mortgage and then receive a judgment against Kevin and Sherry for the unpaid balance as guarantors. In addition the plaintiff seeks a default judgment against Kevin and Sherry for the line of credit set at $12,392.72 plus interest and costs. II.

THE POSITION OF THE PARTIES A. Innovation’s Position [ 10 ] Innovation takes the position that it has priority over CRA for all of the Funds. The plaintiff wants to be able to apply the entire $69,987.68 to the outstanding Mortgage balance and then receive a judgment against Kevin and Sherry, as guarantors, for the deficiency ($75,907.43) together with costs. B.

CRA’s position [ 11 ] CRA contends it has a “super priority” over the $45,725.11 because these Funds are covered by a deemed trust pursuant to the Income Tax Act, RSC 1985, c 1 (5 th Supp ) [ ITA ] and the Excise Tax Act , RSC 1985, c E-15 [ ETA ] and that any value Innovation may have as a holder of a prescribed security interest ( i.e. the Mortgage) under an exemption to the Crown’s deemed trust should be reduced by the value of the guarantees of Kevin and Sherry.

In short the federal legislation (including the Income Tax Regulations , CRC, c 945 [ Regulation 2201 ] and the Security Interest (GST/HST) Regulations , SOR/2011-55 [ Security Regulations ]) grants the Crown first dibs on $45,725.11 out of the $69,687.68 in trust. C. The Guarantors’ Position [ 12 ] Sherry did not appear. Kevin takes the position CRA’s approach is correct and that CRA should receive $45,725.11 to pay off the unpaid remittances resulting in Innovation receiving a bigger deficiency judgment against the guarantors. III. DECISION [ 13 ] I am persuaded that CRA’s argument is correct.

Therefore CRA shall receive $45,725.11 from the Funds held in trust for the payment of outstanding remittances owed by Keshe. Innovation shall receive the balance of the Funds to apply towards the Mortgage account and a judgment against Kevin and Sherry as guarantors for the balance of the outstanding Mortgage. Innovation will also receive judgment against Kevin and Sherry for the defaulted line of credit in the amount of $12,392.72 plus interest, and costs of $200.

Innovation filed a draft judgment that calculated interest to April 12, 2023 which approximated the original return date in chambers of April 18, 2023. However the application was adjourned to May 16, 2023 and then placed on reserve. Therefore Innovation can recalculate the interest to the date of this judgment and refile a fresh draft for my review. IV. REASONS [ 14 ] There is no dispute that Keshe failed to remit $45,725.11 in GST and payroll source deductions to CRA. As a

result, all of Keshe’s property, subject to a possible exception for a prescribed security interest is deemed to be held in trust for His Majesty the King pursuant to ss. 227(4) and (4.1) of the ITA and s. 222 of the ETA and other related source deduction legislation such as ss. 23(3) and (4) of the Canada Pension Plan , RSC 1985, c C-8 and s. 86(2) and (2.1) of the Employment Insurance Act , SC 1996, c 23 . [ 15 ] The Federal Court of Appeal has confirmed that a creditor, such as Innovation, receiving proceeds from the assets of a debtor, whether as a result of enforcing a security interest or as a result of a sale of assets by the debtor followed by voluntary payments to the creditor, becomes liable to pay these proceeds to the Receiver General of Canada ( Canada (Attorney General) v National Bank of Canada , 2004 FCA 92 , 324 NR 31; Canada (Attorney General) v Caisse populaire Desjardins de Lyster , 2005 FC 949 , [2007] 3 CTC 55, affirmed at 2006 FCA 367, [2007] 3 CTC 65; Canada v Toronto-Dominion Bank , 2018 FC 538 , 60 CBR (6 th ) 173, affirmed at 2020 FCA 80, [2020] 3 FCR 201). [ 16 ] Therefore I find CRA has a direct cause of action against the plaintiff for the $45,725.11 covered by a deemed trust.

Accordingly, subject to any possible prescribed security interest, Innovation must pay $45,725.11 from the proceeds of the sale of Keshe’s assets to the Receiver General of Canada. The questions therefore are: is the Mortgage a prescribed security interest, and what is the effect of the guarantees provided by Kevin and Sherry? [ 17 ] A prescribed security interest under either Regulation 2201 of the ITA or the Security Regulations of the ETA is the only exception to the Crown’s super priority for a deemed trust.

A prescribed interest exempts a loan secured by a mortgage that is given prior to the date that the deemed trust arises. [ 18 ] However, the value of the prescribed security interest is reduced by the value of any rights or guarantees the creditor may have. The value of a prescribed security interest is determined by the calculations set out in Regulation 2201 of the ITA and the Security Regulation of the ETA , which are essentially identical. For example Regulation 2201 at 2201(2)(

a) specifically requires “rights” such as “guarantees” be deducted from the value of a prescribed security interest as follows: 2201(2)(

a) all amounts each of which is the value determined at the time of the failure, having regard to all the circumstances including the existence of any deemed trust for the benefit of Her Majesty pursuant to subsection 227(4) of the Act, of all the rights of the secured creditor securing the obligation, whether granted by the person or not, including guarantees or rights of set-off but not including the mortgage referred to in subsection (1), …[Emphasis added] [ 19 ] The calculation for the amount of a prescribed security interest under Regulation 2201 was set out in Procureur general du Canada c Caisse Desjardins de Limoilou , 2020 QCCA 1612 : [34] The parties agree that the amount of the PSI must be calculated according to the following formula: Balance of the debtor’s obligation towards the creditor holding a hypothec on an immovable at the time of the failure to pay source deductions (subsection 2201(1) of the Regulations ); Minus the total of: (

a) The value of all the other rights of the secured creditor (including guarantees or rights of set-off) securing the obligation of the secured creditor (paragraph 2201(2)(

a) of the Regulations ); and (

b) The amounts applied in reduction of the obligation after the time of the failure to pay source deductions (paragraph 2201(2)(

b) of the Regulations ); V. THE JUDGMENT [ 20 ] Accordingly, Innovation will have to rejig the draft judgment regarding the Mortgage to reflect the payment to the Receiver General for Canada of $45,725.11. I ask that the lawyer for Innovation please submit a draft of this judgment to the lawyer for Kevin and the lawyer for CRA for their approval and then forward to the local registrar the approved draft for my review. I have already commented on the line of credit judgment above and Innovation can forward a draft for my review. VI. COSTS [ 21 ] There shall be no costs awarded regarding this priority dispute.

However the plaintiff shall receive costs as per the draft judgment on the foreclosure action and the draft judgment on the line of credit judgment. J. T.J. KEENE