Limitations On Garnishment Powers Under Section 224 Of The Income Tax Act

Section 224 of the Income Tax Act grants relatively broad powers to the Minister of National Revenue (the "Minister") to compel a person who is liable to make a payment to a tax debtor to instead pay the amount to the Minister. The recent judgment by the Supreme Court of Canada ("SCC") in Canada Trustco Mortgage Co. v. R 1examined the reach of section 224 in the context of the banking system, and whether a drawee bank is liable to make payment to a payee of a cheque.

Background

The Appellant, Canada Trustco, is a deposit-taking financial institution. The tax debtor, Cameron McLeod, had a lawyer's trust account and a joint account with the Appellant. Pursuant to subsection 224(1), Canada Revenue Agency ("CRA") issued three Requirements to Pay ("Requirements") to the Appellant. During the time period covered by each of the Requirements, cheques payable to Mr. McLeod, and drawn on the trust account were delivered to the Appellant. Each cheque contained written instructions directing the Appellant to deposit the cheques into the joint account.

Despite the Requirements, upon receipt of the cheques, the Appellant credited the joint account before sending the cheques for collection, processing and settlement. The trust account was debited the following day. In response, CRA assessed the Appellant for the amount of the cheques. The Appellant filed notices of objection which were rejected by CRA. Thereafter, the Appellant appealed to the Tax Court of Canada ("TCC"), which ruled against the Appellant. The judgment of the TCC was upheld in the Federal Court of Appeal. A divided SCC allowed the appeal and overturned the decisions in the lower courts.

Issue to be Decided

At the onset, the Minister conceded that section 224 did not obligate the Appellant to remit funds on deposit in both the trust account and joint account. Thus, the main issue to be decided was whether the Appellant "was liable to make payments to the tax debtor, Mr. McLeod, because of the fact that he was named as the payee of the cheques".2 The majority decision addressed the issue by examining the Appellant's obligations as the collecting bank, and as drawee of the cheques.

Obligations of the Collecting Bank

The majority of the SCC rejected the Minister's argument that "notional payments were made to Mr. McLeod before the funds were deposited into the joint account".3 This argument is predicated on breaking down the relevant transactions into two steps: The first step involved Mr...