Federal Tax Garnishment
Provincial laws allow a creditor to enforce a debt by seizing assets or by garnishing third-party debts owed to the judgment debtor, but exemptions for some of the debtor's property limit the pace and scope of collection. For example, Ontario's Execution Act protects trade tools and basic furnishings from seizure; its Pension Benefits Act exempts money payable under a pension plan; its Insurance Act exempts life insurance and death benefits under an accident and sickness policy; and its Wages Act exempts 80 percent or more of wages and disability payments (net of source deductions). In Quebec (Attorney General) v. Canada (Human Resources and Social Development) (2011 SCC 60), the SCC concluded that a Quebec enforcement exemption for pension payments does not limit federal garnishment powers in the Employment Insurance Act (EIA).
Exemptions recognize that a seizure or garnishment of too much of the debtor's property is of no social value because it destroys the debtor's ability to work and live and thus his continuing ability to pay his debts and contribute to society. (See, for example, Mutter (Re), 2009 ABQB 28.) The underlying purpose of enforcement laws is to collect debts, not to punish the debtor by afflicting him with poverty. Nonetheless, garnishment rules in federal tax laws offer no enforcement exemption: the CRA and other revenue authorities can collect without limit, starving a business of funds to pay suppliers and staff or leaving an employee without money to pay rent or other living expenses. (See ITA subsection 224(1), ETA subsection 317(1), Canada Pension Plan Act section 23(2), and EIA section 126(4).)
The SCC might have opened its analysis with an examination of Crown immunity and sidestepped a determination of whether the federal law was paramount to the provincial law. But (1) the common-law rule "has been eroded somewhat"; (2) "the exceptions to the Crown immunity rule are now so numerous that the current law in this field is considered to be exceedingly complex"; and (3) "the immunity rule has tended to benefit the federal Crown asymmetrically." Instead, the SCC turned to the doctrine of federal paramountcy, which it said applied to two forms of conflict.The first is operational conflict between federal and provincial laws, where one enactment says "yes" and the other says "no," such that "compliance with one is defiance of the other": . . . In Bank of Montreal v. Hall,  1 SCR 121, at p. 155, La Forest J. identified a second branch of paramountcy, in which dual compliance is possible, but the provincial law is incompatible with the purpose of federal legislation. . . . Federal paramountcy may thus arise from either the impossibility of dual compliance or the frustration of a federal purpose.
The court concluded easily that there was no operational conflict because the employment insurance commission could comply with the provincial exemption and still collect its debt at a reduced pace. (Theoretically, because pension benefits were exempt provincially, debt collection was impossible if the EI beneficiary had no other seizable source of income or asset.) After reviewing four earlier SCC decisions, the court concluded that to determine whether a conflict of purposes existed between the EIA garnishment power and the Quebec exemption, "it is necessary to consider each of the provisions in issue in its context and to review its legislative purpose in order to clarify its scope."
The court began by saying that "it is apparent from the purpose and scope of the federal measure that Parliament did not consent to the restriction imposed by the provincial provision." It then examined the EIA and related tax rules to show that Parliament is explicit when it wishes to subordinate tax collection rules to provincial exemptions. The SCC considered EIA section 126(1), which allows the commission to certify an amount payable and file a certificate with the Federal Court that "has the same force and effect, and all proceedings may be taken, as if the certificate were a judgment obtained in the [Federal] Court." (See also ITA subsection 223(3) and ETA subsection 316(2).) Federal Courts Rules 448 and 452 apply the provincial exemptions to seizures of assets and garnishment of wages under an FC judgment, and thus the certificate process is subject to provincial exemptions.
However, the CRA and the EI commission can instead use garnishment powers to collect assessed amounts by issuing a requirement to pay and never filing a certificate in the FC or any other court. Looking to the ITA rules for clearer proof of Parliament's intent, the SCC noted that under ITA subsection 225(1) the CRA can seize and sell a tax debtor's goods and chattels on 30 days' notice and exercise its power without resort to any federal or provincial court. However, an explicit rule in ITA subsection 225(5) renders these seizures subject to provincial exemptions. Thus, the SCC concluded that Parliament must be understood to have intended the EIA garnishment to be free of provincial exemptions due to the lack of an explicit rule such as that in ITA subsection 225(5). (Like the EIA provisions, the ITA subsection 224(1) and ETA subsection 317(1) garnishment rules are not subject to provincial exemptions.)Parliament has, in enacting s. 126(4) EIA, chosen to give the Commission a freestanding positive right to require a third party to pay to the Receiver General any amount the third party owes a person who is liable to make a payment under the EIA, on account of that person's liability. The purpose of this measure is to ensure the integrity of the employment insurance [or the Income Tax, CPP, and Excise Tax] system by making it possible to recover amounts owed under the EIA, including benefit overpayments, in a simple and summary fashion, without regard for the provincial rules respecting exemption from seizure. This purpose would be frustrated if the Commission were to comply with the provincial provision creating an exemption from seizure.
Under section 91 of the Constitution Act, 1867, Parliament has "the exclusive Legislative Authority" to make laws within the "subjects" of "Unemployment insurance" and "The raising of Money by any Mode or System of Taxation." To give effect to those powers, Parliament must have the authority to make necessary and incidental laws, including laws to enforce the collection of tax. The SCC's decision thus seems sound: it is within Parliament's constitutional authority to legislate tax garnishment rules that are not subject to provincial exemptions.
One legislative means of softening the federal tax collection rules is to add tax garnishment exemptions. Another approach is to grant the CRA the power to compromise tax debts and collect less than the assessed amount: for example, taxpayer relief rules could be expanded to include a waiver of part of the tax debt itself. Currently, that remedy is available only through an elaborate remission order process.
However, a taxpayer for whom the provincial exemptions are intended is likely eligible to make a consumer proposal under division II of part III of the Bankruptcy and Insolvency Act (BIA). A proposal can stop collection action within a few days--quicker and more certain relief than that offered by the objection and appeal process for challenging assessments. Under a proposal, a debtor may offer a lump-sum payment or periodic payments for up to five years. The CRA may reject a consumer proposal, especially if it holds the majority of the debt, but in practice the CRA often seems to agree to a proposal that offers a reasonable amount of recovery, even if it is far less than the assessed amount. The proposal process allows a tax authority to agree to compromise the debt, a power otherwise unavailable to it. Even if the CRA rejects a proposal, the tax debtor may declare bankruptcy, and Directive no. 11R, "Surplus Income" (Office of the Superintendent of Bankruptcy Canada, October 3, 2000), protects monthly income below "the Low Income Cutoffs (LICO) released by Statistics Canada." Furthermore, BIA section 67(1)(b) is expressly subject to provincial exemptions in the determination of the "property of a bankrupt divisible among his creditors." Effectively, the BIA--a federal law that is constitutionally on a par with federal tax laws--allows a taxpayer the exemptions from seizures that "preserve to debtors the means to survive and to earn a living, thus contributing to their rehabilitation as citizens and to their capacity to repay their debts" (Mutter).
Payne Law, Toronto
Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation
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Saturday, January 21, 2012
Posted by Daniel Katev at 3:53 AM