A recent decision by the Manitoba Court of Queen’s Bench, expanding on the Ontario Court of Appeal’s decision in Whaling (Re) (1998), 117 O.A.C. 51 (C.A.) (“Whaling”), has raised many questions regarding the right of lenders in Ontario to take security on a debtor’s Registered Retirement Savings Plan (“RRSP”).
The appeal, brought by Canada Revenue Agency (“CRA”) in Canada (Attorney General) v. Keith G. Collins Ltd. (2008), M.B.Q.B. 64, 65 C.C.P.B. 208, 2008 D.T.C. 6224,  3 C.T.C. 273 (Man. Q.B.) (“Keith G. Collins”), turned on the interpretation of subsections 223(5), (6) and (11.1) and subsections 146(2)(c.3), (12) and (13) of the Income Tax Act, R.S.C. 1985, c. I5 (“ITA”) in determining whether the deemed security provisions of the ITA operated to create a security interest in favour of CRA in the proceeds of a debtor’s RRSP.
At the time of Deborah Anne Marie McGregor’s (“McGregor”) assignment in bankruptcy in December 2005, she was indebted to CRA pursuant to four assessments under section 160 of the ITA. In March 2006, CRA filed a proof of claim in the bankruptcy and specifically identified the net proceeds that were realized from the collapse of McGregor’s RRSP by the trustee as being subject to its secured claim. In November 2006, however, the trustee responded with a Notice of Disallowance of Claim.
The trustee’s position was that since McGregor had not explicitly pledged her RRSP as security, CRA could not declare that the proceeds were subject to its secured claim. The trustee relied on Whaling, where the court held that subsection 146(2) of the ITA does not prohibit the pledging of an RRSP as security, as was initially found to be the case in Bank of Nova Scotia v. Phenix (1989), 74 Sask.R. 143 (Sask. C.A.). Rather, the Court of Appeal held that an RRSP can be pledged as security when a consensual agreement is reached between the debtor and creditor. Such a pledge results in the RRSP being immediately deregistered and therefore the funds are calculated as income for the then current tax year. As McGregor had not consented to the pledging of her RRSP as collateral, the trustee argued that CRA’s appeal should be dismissed.
Moreover, the trustee maintained that specific consent is required to pledge an RRSP as security even where a deemed security interest has arisen pursuant to section 223 of the ITA. This is because (1) Parliament did not indicate that it specifically intended the deemed security provisions to apply to RRSPs, and (2) the consequence of immediate deregistration of the plan with the additional tax debt to CRA is not good policy and requires consent.
In contrast, CRA argued that pursuant to subsections 223(5)(b), (6) and (11.1) of the ITA, CRA had a deemed security interest in the proceeds of McGregor’s RRSP. Therefore, the debtor’s consent is not required. Paragraph 223(5)(b) permits CRA to register a tax claim in a provincial personal property security registration system, and CRA made a registration against McGregor in the Manitoba Personal Property Registry (“PPR”). According to subsection 223(6), such a registration creates a charge on property in the province or any interest in such property held by the debtor in the same manner and to the same extent as an amount payable by a person in the province in respect of a debt owing to Her Majesty in right of the province. Subsection 223(11.1) provides that a security interest created pursuant to subsection 223(6) and registered in accordance with subsection 87(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), as amended, is deemed to be a secured claim that ranks as a secured creditor under the BIA. Therefore, as a deemed security is by its very nature non-consensual, Parliament could not have intended that CRA obtain the debtor’s consent to pledge an RRSP.
Furthermore, CRA argued that even if consent is required to create a security interest under section 223 of the ITA, that consent is deemed to have been given pursuant to paragraph 66(2)(b) of the Tax Administration and Miscellaneous Taxes Act, C.C.S.M., c. T2 (the “TAMTA”). This Act provides that, upon registration of a government lien in the PPR, a tax debtor is deemed to have signed a security agreement on all present and after-acquired personal property. With respect to the effect of deregistration of the RRSP, CRA argued that subsection 146(12), which provides for deregistration of RRSPs at the occurrence of certain events, does not apply to deemed security, but only to consensual security transactions. Therefore, the creation of CRA’s deemed security interest in an RRSP does not result in deregis-tration of that RRSP when the interest is created. Instead, deregistration occurs if and when CRA takes steps to realize on its security, or upon bankruptcy or retirement.
The court agreed with CRA and held that the issue was not an issue of consent, as consent is not applicable in a case where the very nature of CRA’s deemed security interest is non-consensual. Instead, it is an issue of whether section 223 of the ITA provides that RRSPs are the subject of CRA’s deemed security. The court held that the word “property” in section 223 is broad enough to cover an interest in an RRSP and therefore RRSPs are subject to the deemed security interests. Moreover, the court held that subsection 146(12) does not operate to deregister an RRSP upon the creation of CRA’s deemed security. CRA was thus permitted, in the capacity of a secured creditor, to access taxpayer assets in order to satisfy a tax debt, in accordance with the objective of section 223 of the ITA.
The question then arises, by deviating from the consent requirement established in Whaling and allowing CRA’s appeal, did the Manitoba Court of Queen’s Bench create a new precedent regarding the right of lenders to take security on a debtor’s RRSP, regardless of the debtor’s consent? Furthermore, what is the effect, if any, of the Keith G. Collins decision in Ontario?
The Ontario government has the right to register notices of certain tax debts under the Ontario Personal Property Security Act, R.S.O. 1990, c. P.10, as amended, and a right to proceed under section 223 of the ITA pursuant to subsection 31(4) of the Income Tax Act, R.S.O. 1990, c. I.2., as amended. Nevertheless, the province of Ontario does not have a comparable statute to the Manitoba TAMTA. Accordingly, it is arguable that without provincial legislation in Ontario similarly providing that a debtor is deemed to have signed a security agreement on all present and afteracquired property, a debtor’s explicit consent is required to pledge an RRSP in conformity with the Whaling decision.
The Keith G. Collins decision, in permitting CRA to rely on McGregor’s RRSP as security, thus deviates from the established law in Ontario. It will be interesting to see whether future decisions in Ontario, in the absence of explicit consent, take the Keith G. Collins decision by the Manitoba Court of Queen’s Bench into consideration when determining the right of lenders to take RRSPs as security, or continue to rely on the Whaling precedent.
This article originally appeared in the June 2008 issue of Collateral Matters.
Sandra Vitorovich is an associate with the A&B Financial Services Group. Karen D. Levin, who co-authored this article, is a summer student.