Canada Trustco Mortgage Co v Canada, is a significant case of the Supreme Court of Canada on the intersection of the Income Tax Act and the Bills of Exchange Act and the ability to seize funds that have been deposited by a debtor into an account held at a financial institution in Canada.
The facts
McLeod, a practising member of the Law Society of British Columbia, maintained a trust account with Canada Trustco for the purposes of his law practice. In addition, he and another lawyer held a joint account at the same branch. Each of the accounts was governed by an agreement. McLeod owed tax to the federal government. The Minister became aware that cheques payable to McLeod were being drawn on the trust account and deposited in the joint account. Each of the cheques during the period in question was drawn on the trust account, was payable to McLeod and was delivered to Trustco with an instruction to deposit the funds in the joint account. This instruction was given by writing "Dep to" and the account number on the back of the cheque.
As the Minister did not have the ability to seize funds from either the trust account or the joint account (because the tax debt was solely in McLeod's name), he therefore focused on the cheques that had been issued, and issued three requirements to pay to Trustco. According to these requirements, Trustco was to pay to the Receiver General moneys otherwise payable to McLeod. In response to the requirements to pay, Trustco disputed its liability on the ground that it was "not indebted to the [taxpayer] alone". The Minister assessed Trustco for the amounts of the cheques for failing to comply with the three requirements to pay. Trustco filed notices of objection. After they were rejected, it appealed to the Tax Court of Canada.
The courts below
The Tax Court of Canada dismissed the Bank's appeal. Little J. held that the proceeds of the cheques were "payable" to McLeod because the debtor-creditor relationship between Trustco and Mr. McLeod required the former to repay the funds deposited in the trust account to the account holder on demand. In his view, Trustco's liability arose when Mr. McLeod "presented the bank with the cheques". This led Little J. to conclude that he did not need to examine the fact that the moneys had actually been transferred from the trust account to the joint account. Therefore, the Minister's requirement to pay had effect.
The Federal Court of Appeal found that no "palpable or overriding error" had been made and unanimously upheld Little J.'s decision.
Appeal to the Supreme Court
On a 4-3 majority, the appeal was allowed and the assessments vacated.
At the hearing, Trustco argued that the trial judge failed to differentiate between a demand for repayment of funds deposited in an account and the delivery of a cheque for deposit. In its view, it was liable only — as drawee — to pay funds out of the trust account upon proper presentment for payment by the holder of the cheque. At no point was it liable to make a payment to McLeod, the tax debtor. For its part, Canada contended that there was no distinction between presentment of a cheque to the drawee for the payment of cash to McLeod and presentment of a cheque for deposit to the joint account. Its position is that when McLeod delivered the cheques to Trustco and instructed it to pay the amounts into the joint account, he acted as payee, creditor, drawer, and depositor, but that his role as depositor was irrelevant.
The majority judgment
The Bank was at no point liable to pay M the proceeds of the cheques. The fact that a person is designated as payee on the face of a cheque does not on its own mean that a bank is liable to make a payment to the person. A drawee is answerable to the drawer. The question is to whom the drawee may make the payment. What is on the back of the cheque — the instructions or the endorsement — is crucial to this question. In this case, the instructions were to deposit the cheques into the joint account. The Bank's liability to pay monies to M personally cannot be confused with its liability to pay monies to the holders of the joint account. There were no instructions that made the monies payable to M.