In Canada Trustco Mortgage Company v. The Queen, 2008 TCC 482, aff’d 2009 FCA 267, the Tax Court held that a financial institution must comply with a requirement to pay even where the the funds sought to be seized from the institution were held in a lawyer’s trust account.
The lawyer kept a trust account with Canada Trust, but he also owed money to the fisc for unpaid taxes. The lawyer began paying amounts by cheques (the “Cheques”) payable to him that were drawn on the trust account and that were deposited into another Canada Trust account that the lawyer held jointly with another individual.
The Crown conceded that Canada Trust was not liable in respect of the amounts held in the trust account or the joint account. Instead, the Crown argued that the Cheques indebted the bank to the lawyer alone and that Canada Trust should have diverted that money to the CRA.
The Tax Court agreed, on the basis that a bank is a debtor of a depositor because the “bank [is] responsible to repay the funds on deposit when asked for it” (¶23) and that the Cheques represented an amount payable to the lawyer when they were presented (¶30). The judge appears to have concluded that it didn’t matter that the payments might have been intended for use for the benefit of the lawyer’s clients. The judge wrote:
[31] I believe that counsel for the Appellant is correct when he said that writing a cheque is not by itself a withdrawal, but just the creation of an instrument. Nevertheless, a cheque is an instrument by which a drawer directs a drawee to pay on the instrument. As soon as the cheque is presented to the bank, it is different. We should not only look at Mr. McLeod as the payee of the cheque, but also as the drawer of the cheque. As the holder of the account, Mr. McLeod was in a position to enforce the payment because of the debtor-creditor relationship that existed; via the cheque he was demanding for the repayment of a portion of a previous deposit. I again emphasize that there was no evidence produced that Mr. McLeod was not the person who presented the cheques to the bank.
But didn’t the trust funds belong to the lawyer’s clients? Justice Little responded as follows:
[37] The Law Society of British Columbia has produced Law Society Rules that govern the practice of law in British Columbia. Rule 3-56(1.3) of the Law Society Rules provides for the withdrawal by cheque of funds from a lawyer’s trust account. Rules 3-56(3) provide expressively that withdrawal of trust funds for the payment of fees must be made by cheque payable to the lawyer’s general account. A lawyer who does not follow those rules is responsible to the Law Society for his failure to follow the rules. Nevertheless, the Appellant is not concerned by those rules. Mr. McLeod could have closed the account and taken all the funds out or transferred them to another account and the Appellant would have had nothing to say. Before releasing money from the account, the Appellant did not have to call the clients to see if there was a problem. There was no limit to the access of the account, and the Appellant was not required to police or monitor the use of the trust account, as provided by the Bank Act, at subsection 437(3).
Appeal dismissed.
