SCC to Consider Garnishment under the Federal Income Tax Act in Canada Trustco v The Queen

As many readers are likely aware, the Minister of National Revenue (“Minister”) has very significant tax collection powers and employs them often. A quick look at the more recent convictions in the province of Ontario makes that clear. In fact, under certain circumstances, the Minister has the power to garnish a person’s paycheque or bank account to satisfy outstanding tax debts.

But what happens when the garnished account is a trust account belonging to a lawyer who has an outstanding personal tax debt of over $300,000? Well, things get complicated as we have found out after the SCC granted leave to appeal of the decision of the Federal Court of Appeal in Canada Trustco Mortgage Company v Canada, 2009 FCA 267. Without providing reasons, the appeal court upheld the tax Court of Canada’s ruling in Canada Trustco Mortgage Company v The Queen, 2008 TCC 482, which essentially approved the Minister’s garnishment. The appeal is scheduled to be heard by Canada’s top court in early December.

Garnishment Pursuant to the Federal Income Tax Act

Under ss. 224(1) of the Income Tax Act, RSC, 1985, c 1 (5th Supp) [ITA], the Minister has the authority to compel a person “liable to make a payment” to the tax debtor to pay the Minister instead. Subsection 224(1) states:

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. [emphasis added]

Under ss. 224(4) a penalty is imposed for non-compliance with the requirement to pay dictated by s. 224(1).

In Canada v National Trust Co, [1998] 4 CTC 26 [National Trust], it was ruled that the following conditions must be met in order for the Minister to have the authority to issue a requirement to pay:

(a) the Minister has knowledge or a suspicion,

(b) a person is or will be within 90 days liable to make a payment to a tax debtor, and

(c) the amount must be payable immediately or in the future.

In the same decision, the Federal Court of Appeal concluded that the word “liable” denoted “the fact that a person is responsible at law…” and also rejected the lower court’s limitation of “the phrase ‘liable to make a payment’ only to situations where a debtor creditor relationship exists.” (In National Trust, the Minister was successful in garnishing an investment account belonging to an indebted taxpayer.)

At issue in the present case was whether Canada Trust was “liable to make a payment” to the lawyer, Mr. McLeod, and “if money was payable to Mr. McLeod in the relevant period.”

Is Withdrawing and then Depositing an Amount by Cheque a Demand for Payment?

The indebted lawyer, Mr. McLeod, withdrew funds from a trust account by cheque and deposited them into another of his accounts at Canada Trust. The issue before the courts was whether this transaction meant that Canada Trust was liable to pay Mr. McLeod. The Tax Court of Canada said yes. According to Justice L.M. Little, “because there was money deposited in the Trust Account, the obligation associated with a deposit makes the money payable on demand to the tax debtor.” As a result Canada Trust was required to remit those funds to the Minister.

At first, the resolution to this dispute appears pretty straightforward. When Mr. McLeod withdrew funds from the trust account by cheque, Canada Trust was liable to pay him that amount. However, Canada Trust is arguing that “[d]elivering a cheque for deposit…” into another account “is not a demand for payment”; only when Mr. McLeod cashed the cheque would a “demand for payment” have come into existence.

Canada Trust is relying on the technical procedure through which the bank processes a cheque. According to the appellant:

The Tax Debtor was not demanding repayment of the funds on deposit in the Trust Account when he delivered the Cheques for deposit into the Joint Account. In holding otherwise, the Tax Court departed from over 150 years of banking and bills of exchange law developed in the common law and under the Bills of Exchange Act.

For the purposes of ss. 224 the distinction between receiving the funds directly (in cash for instance), versus immediately depositing the cheque into another account, is not immediately clear to me. In fact, I agree with the Tax Court that the analysis should end at the moment the cheque was issued to Mr. McLeod. At that point the bank was “liable to make a payment” to him.

In actuality, the funds moved from the trust account to the joint account. The Tax Court concluded that this was not relevant. It did not matter where the money eventually went; it only mattered that the cheque represented a demand for payment. The description put forward by counsel for Canada Trust was that the funds moved from the trust account, to a Canada Trust account, and then to the joint account. And because the cheques were never cashed, Mr. McLeod was never paid, Canada Trust was never “liable to make a payment” to Mr. McLeod, and the garnishment provision of the ITA was never triggered. A very clever argument to be sure.


The SCC will have to decide if there is a distinction between Mr. McLeod being paid in cash versus him making a withdrawal by cheque from one account and then a deposit by the same cheque into another account. Will the SCC honor the technicality of the transaction or its effect?

Ultimately, the Minister appears to have a stronger case. Section 224 is triggered when “another person…is liable to make a payment” to Mr. McLeod. Certainly the bank was liable to pay Mr. McLeod the amount of the cheque once he withdrew from the trust account. I doubt the technical argument submitted by Canada Trust will succeed.

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