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T-2304-86
Domenico Vespoli, Precision Mechanics Ltd., 80591 Canada Limited, Paradis Vespoli Ltée and Bruce Verchère, Marc Noël, Ross B. Eddy, Geof- frey Lawson, Guy Du Pont and Simon Tardif, operating as the partnership Verchère, Noël & Eddy (Applicants)
v.
The Queen (Respondent)
INDEXED AS: VESPOLI v. CANADA
Trial Division, Pinard J.—Montréal, October 20; Ottawa, November 16, 1987.
Practice — Costs — Federal Court order to pay costs not including distraction in favour of counsel of party to whom costs awarded within meaning of art. 479 Code of Civil Procedure (Que.) — Federal Court Rules not providing for distraction — Rules awarding costs to party — R. 5 not justifying application of art. 479 — Distraction of costs matter of substantive law — R. 5 applicable to practice matters only.
Civil Code — Federal Court Rules not providing for dis traction of costs in favour of counsel within meaning of art. 479 — R. 5 not justifying application of art. 479 — Distrac tion of costs matter of substantive law — R. 5 concerned with practice only.
Barristers and solicitors — Civil Code permitting distrac tion of costs in favour of solicitor of party to whom costs awarded — No provision for distraction in Federal Court Rules — Distraction matter of substantive law — Distraction judgment in favour of solicitor — Constituting personal title to costs — R. 5 inapplicable as concerning matters of practice only.
Income tax — Practice — No set-off between court costs awarded to taxpayer and tax claimed by M.N.R. until M.N.R. consenting to set-off pursuant to s. 224.1 of Act.
This case concerns the application of Rule 5 of this Court (the gap rule) and article 479 of the Quebec Code of Civil Procedure (C.C.P.). The applicants argue that where a case arises in the Province of Quebec, a Federal Court order to pay costs automatically includes distraction in favour of counsel for the party to whom the costs are awarded. They base their contention on Rule 5 and on the application of article 479 by analogy. There was also an issue as to set-off.
Held, the court costs awarded to the taxpayers cannot be distracted in favour of their solicitors. There can be no set-off as the case now stands.
Rule 5 of this Court cannot be relied upon to justify the application of article 479 C.C.P. It would be wrong to depart from the path followed by the Federal Court in the Bourque, Osborn and Warwick Shipping cases. Those cases stand for the proposition that nothing in the Federal Court Act nor in the Rules of the Court provides for distraction of costs such as exists in article 479. In Warwick Shipping, Walsh J. was of the opinion that the Federal Court Rules provided for costs and that "there was no omission that needed to be covered". That is confirmed by a reading of Rules 344 to 353 inclusively: costs are awarded to the party and there is no provision for their distraction to the party's counsel. In United States v. French Sardine Co., the U.S. Circuit Court of Appeals, 9th Cir., held that the "right to costs ... is a substantive right and not a mere matter of procedure". Rule 5 cannot be applied since its scope is limited to matters of procedure while distraction is a matter of substantial law.
There can be no set-off at this time between the duly taxed court costs awarded to the applicant taxpayers and those awarded to the respondent. Set-off cannot operate until the court costs awarded to the respondent are taxed and the consent of the appropriate Minister responsible for the payment of duly taxed court costs to the applicant taxpayers is indicated to the latter, pursuant to section 156 of the Financial Adminis tration Act. Furthermore, there can be no set-off between the amount of court costs taxed and awarded to the applicant Precision Mechanics Ltd. and the amount of tax claimed from it by the Minister of National Revenue, so long as the latter has not indicated to the former his intent to require such a set-off for a specific amount within the meaning of section 224.1 of the Income Tax Act.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Code of Civil Procedure, art. 479.
Federal Court Rules, C.R.C., c. 663, RR. 5, 344-353, 475.
Financial Administration Act, R.S.C. 1970, c. F-10, s. 156 (as am. by S.C. 1980-81-82-83, c. 170, s. 21; 1984, c. 31,s. 12).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 224.1 (as am. by S.C. 1980-81-82-83, c. 48, s. 104), 225.1 (as added by S.C. 1985, c. 45, s. 116).
CASES JUDICIALLY CONSIDERED
FOLLOWED:
National Capital Commission v. Bourque (No. 2), [1971] F.C. 133 (T.D.); Osborn Refrigeration Sales and Service Inc. v. The "Atlantean I", [1979] 2 F.C. 661 (T.D.); Warwick Shipping Ltd. v. R., [1981] 2 F.C. 57 (T.D.); Lariveau v. Minister of Manpower and Immigration, [1971] F.C. 390 (C.A.); Magrath v. National Parole Board of Canada, [1979] 2 F.C. 757 (T.D.); Colet v. R., [1980] 1 F.C. 132 (T.D.).
APPLIED:
Pelletier v. Simard & al. (1940), 44 R.P. 129 (Que. S.C.); Fortier v. Brault et Rouleau, [1942] B. R. 175 (Que.); United States v. French Sardine Co., 80 F.(2d) 325 (9th Cir., 1935).
CONSIDERED:
Jim Russel International Racing Drivers School (Canada) Ltd. c. Hite et Flite, [1986] R.D.J. 160 (Que. C.A.); Hall v. Campbellford Cloth Company Limited, [1944] O.W.N. 202 (H.C.).
NOT FOLLOWED:
Weight Watchers International Inc. v. Burns, [1976] 1 F.C. 237 (T.D.).
COUNSEL:
Basile Angelopoulos and Patrice Marceau for
applicants.
Normand Lemyre for respondent.
SOL IC (TORS:
Verchère, Noël & Eddy, Montréal, for applicants.
Deputy Attorney General of Canada for respondent.
The following is the English version of the reasons for judgment rendered by
PINARD J.: The Court having given leave to set down for argument the special case submitted by the parties in lieu of trial, pursuant to Rule 475 of this Court [Federal Court Rules, C.R.C., c. 663], and the said argument having been presented, the Court must now rule on the points stated in that case, consisting of a document in the record titled "Re-amended Agreed Statement of Facts and Issues", which it would be too long to set out here but which of course must be borne clearly in mind.
The first point to be decided concerns applica tion of Rule 5 of this Court and article 479 of the Quebec Code of Civil Procedure [C.C.P.]. These provisions state:
Rule 5. In any proceeding in the Court where any matter arises not otherwise provided for by any provision in any Act of the Parliament of Canada or by any general rule or order of the Court (except this Rule), the practice and procedure shall be determined by the Court (either on a preliminary motion for
directions, or after the event if no such motion has been made) for the particular matter by analogy
(a) to the other provisions of these Rules, or
(b) to the practice and procedure in force for similar pro ceedings in the courts of that province to which the subject matter of the proceedings most particularly relates,
whichever is, in the opinion of the Court, most appropriate in the circumstances.
479. Every condemnation to costs involves, by operation of law, distraction in favour of the attorney of the party to whom they are awarded. Nevertheless the party himself may execute for the costs if the consent of his attorney appears on the writ of execution.
The applicants argued that in a case in the Federal Court of Canada an order to pay costs automatically includes distraction in favour of counsel for the party to whom they are awarded, provided that the case arose in the province of Quebec, and they based this on Rule 5 of this Court and the application of article 479 C.C.P. by analogy.
Three relevant judgments of the Federal Court of Canada have referred specifically to article 479 C.C.P. In the first case, National Capital Com mission v. Bourque (No. 2), [1971] F.C. 133 (T.D.), the plaintiff applied to the Court for direc tions under paragraph 17(3)(c) of the Federal Court Act [R.S.C. 1970 (2nd Supp.), c. 10] that defendants' solicitor and client costs should be taxed and paid directly to the defendants' solicitor. Noël A.C.J. considered that paragraph 17(3)(c) did not apply in the circumstances, since the plain tiff was not the Crown but merely an agency of the Crown. He went on, at page 135:
There is also a further obstacle to granting applicants' request in that in so far as l, can see, costs in a trial are party costs and belong to the party and not the solicitor. There is indeed nothing in the Federal Court Act, or in our Rules, which states that a condemnation to costs involves distraction in favour of the solicitor or attorney of the party to whom they are awarded, such as exists in art. 479 of the Quebec Code of Civil Procedure....
In a second case, Osborn Refrigeration Sales and Service Inc. v. The "Atlantean I", [1979] 2 F.C. 661 (T.D.), Walsh J. dealing with the matter of distraction said strictly the following, at page 691:
In the case of National Capital Commission v. Bourque [No. 21 ([1971] F.C. 133) Associate Chief Justice Noël held at page 135 that:
There is indeed nothing in the Federal Court Act, or in our Rules, which states that a condemnation to costs involves distraction in favour of the solicitor or attorney of the party to whom they are awarded, such as exists in art. 479 of the Quebec Code of Civil Procedure, which reads as follows:
It is Mr. Caron therefore who should be collocated for these costs.
Finally, in Warwick Shipping Ltd. v. R., [1981] 2 F.C. 57 (T.D.), Walsh J. again considered the point, discussed it at somewhat greater length and said the following at pages 65 and 66:
There is a serious procedural objection to the present motions however, which prevents them from being granted. After the death of the late Mr. Fearon no steps were taken pursuant to Rules 1724 and 1725 for the proceedings to be carried on by the personal representatives of the deceased. The Federal Court Rules make no provision for distraction of costs in favour of the attorneys of the party to whom they are awarded unlike article 479 of the Quebec Code of Civil Procedure. This was pointed out by Associate Chief Justice Noël in the case of National Capital Commission v. Bourque [No. 2] ([1971] F.C. 133) and reiterated in the case of Osborn Refrigeration Sales and Ser vice Inc. v. The "Atlantean I" ([1979] 2 F.C. 661 at page 691). Applicants contend that Rule 2(2) or Rule 5 (the gap rule) of the Rules of this Court might be applied so as to adopt the Quebec practice, but this argument must be rejected. Federal Court Rules provide for costs and there is no omission which needs to be covered resulting from the failure to provide for distraction of costs in favour of the attorneys of a party. The late Mr. Fearon's attorneys therefore who present these motions are not the parties entitled to collect the costs.
The applicants submitted that these precedents are not conclusive because, first, in Bourque Noël A.C.J. does not refer expressly to Rule 5 of this Court or the earlier and similar Rule 2 of the Exchequer Court, and that therefore he must not have considered their application. They also dis missed Osborn because it was strictly based on Bourque, without further comment. Finally, they said they disagreed with Walsh J.'s opinion in Warwick Shipping Ltd., citing in opposition to this judgment that of Kerr J. in Weight Watchers International Inc. v. Burns, [1976] 1 F.C. 237 (T.D.). In the latter case, Kerr J. applied by analogy Rule 696 of the Ontario Supreme Court, which conferred on the Court a discretionary power to award to a solicitor a charge upon prop erty recovered or preserved through the instrumen-
tality of the solicitor for his costs, charges and expenses of or in reference to the cause, matter or proceeding in question.
I do not think I should depart from the path followed by Noël A.C.J. and Walsh J. in Bourque, Osborn and Warwick Shipping Ltd. above, in which article 479 C.C.P. is nevertheless specifical ly considered. It is true that in Bourque Noël A.C.J. does not expressly refer to Rule 5 of this Court or Rule 2 of the Exchequer Court, but that does not necessarily mean they were ignored; in dealing with a case that arose in Quebec and in which a party expressly asked that the costs to be taxed be paid directly to the solicitor, Noël A.C.J. did consider the distraction mentioned in article 479 C.C.P. in light of the Federal Court Act and "our Rules". It is also clear that Bourque strongly influenced the judgments of Walsh J. in Osborn and Warwick Shipping Ltd., where in the latter case he expressly considered Rule 5 of this Court and article 479 C.C.P. together.
In my view, it would be wrong to dismiss the latter judgments and apply another (Weight Watchers International Inc.) dealing with Rule 5 in relation to a rule of practice and procedure of the Ontario Supreme Court, which gives a solicitor "a charge upon the property recovered or pre served through the instrumentality of such solici tor" to guarantee payment of his costs, but is not a pure distraction of costs to him. Further, the ques tion arises whether the foregoing cases relating to Rule 5 of this Court and article 479 C.C.P. were drawn to the attention of Kerr J., since he said at page 240:
No decision of this Court dealing directly with the matter has been drawn to my attention.
I would add in clarification that I consider the distraction of costs mentioned in article 479 C.C.P. as a matter of substantive law and not a simple matter of practice and procedure covered by Rule 5 of this Court.
The nature of the right to distraction has been considered by the Quebec courts and it seems quite clear that such distraction is nothing more or less than a judgment in favour of the solicitor and constitutes a purely personal title to costs, as the solicitor's debt is essentially separate from that of his client. In Pelletier v. Simard & al. (1940), 44 R.P. 129, at page 131, Trahan J. of the Quebec Superior Court said the following:
[TRANSLATION] Whereas distraction is a judgment in favour of the attorney and constitutes a purely personal title to his costs;
Whereas accordingly the attorney's debt is essentially sepa rate from that of the client, in this case the objector;
Whereas the effect of distraction is also to transfer directly to the attorney the benefit of the order to pay costs, and the benefit is deemed never to have resided in the person of the client; (3 R. de J. 371; 11 C.S. 232;)
Then, in 1942 the Court of King's Bench said the following in Fortier v. Brault et Rouleau, [1942] B. R. 175, at page 179:
[TRANSLATION] Distraction of costs is nothing more than a charge imposed by law, enabling a solicitor who is owed costs which he has advanced to bring an action for repayment directly against his client's opponent who has been ordered to pay the client his costs; (Dalloz, Répertoire pratique (1941) t. 6, Verbis, Frais et dépens, n. 80, p. 616).
In my opinion this charge does not in any way alter the legal debtor-creditor relationship of the losing party to the winning party; it does make a solicitor who has obtained distraction of costs a direct creditor of the losing party, but it is still the same debt owed by the loser to the winner and the only purpose of such distraction is to protect a solicitor by giving him a priority over his client for the recovery of this debt, so much so that a simple consent by the solicitor given to his client will suffice to allow the latter to enforce the order to pay costs on his behalf, without the solicitor having to accompany the consent with a transfer of his debt.
In Scheffer v. Demers, ((1897) 3 R. J. 371), de Lorimier J. said:
Distraction of costs awarded to the solicitor ad litem is to protect against any arrangement the parties may make to his detriment; it gives the solicitor a right to a personal debt against the losing party, and the solicitor's client, who remains liable to him for this debt, as his client, is simply an indirect creditor of the losing party; [My emphasis.]
These precedents do not appear to have been subsequently overruled. More recently, in 1986, the Quebec Court of Appeal even held that the right to distraction could not exist for solicitors
who are not on the record: in Jim Russel Interna tional Racing Drivers School (Canada) Ltd. c. Hite et Flite, [1986] R.D.J. 160, the Court of Appeal said the following at page 163:
[TRANSLATION] Whereas moreover, under the provisions of Art. 479 C.C.P., the intervenors are no longer solicitors of record, they are not entitled to distraction of their costs against the appellant but have only a claim for them against their own client;
Finally, the U.S. precedents submitted by coun sel for the respondent must be considered in the manner described by Chevrier J. in Hall v. Camp- bellford Cloth Company Limited, [1944] O.W.N. 202 (H.C.), at page 206:
American decisions ... might be considered, not as binding authority, but as "intrinsically entitled to the highest respect", as said by Parker J. in Doe d. DesBarres v. White (1842), 3 N.B.R. 595 (quoted by Ritchie C.J. in Sherren v. Pearson, (1887), 14 SCR 581 at 587).
Counsel for the respondent referred to several judgments from various U.S. States which all rely directly or indirectly on the following landmark decision by the Circuit Court of Appeals, Ninth Circuit, on December 2, 1935, in United States v. French Sardine Co., 80 F.(2d) 325. In that case Wilbur J. said the following, at page 326 of his judgment:
While the right to costs is ancillary to the judgment, it is a substantive right and not a mere matter of procedure. As stated in Erwin v. United States (D.C.) 37 F. 470, 488, 2 L.R.A. 229: "'In its general acceptation "proceeding" means the form in which actions are to be brought and defended, the manner of intervening in suits, of conducting them, the mode of deciding them, of opposing judgments, and of executing.' 'Ordinary proceedings intend the regular and usual mode of carrying on a suit by due course of common law.' " People v. White, 14 How.Prac. (N.Y.) 498.
The distinction between a right to costs and the procedure for the enforcement of that and other rights is pointed out in Fargo v. Helmer, 43 Hun (N.Y.) 17, 19, where the court, quoting Judge Duer in Rich v. Husson, 8 N.Y.Super.Ct. (1 Duer) 617, said: "The rules by which proceedings are governed are rules of procedure; those by which rights are established and defined, rules of law. It is the law which gives a right to costs and fixes their amount. It is procedure which declares when and by whom the costs, to which a party has a previous title, shall be adjusted or taxed, and when and by whose direction a judgment
in his favor shall be entered." The right to costs is not a question of procedure but is a substantive right.
Two things are clear from reading the Rules of this Court on costs, in particular Rules 344-353 inclusive: costs are awarded to the party and there is no provision for their distraction to the party's counsel. As I said earlier, Rule 5 of this Court could only be applied to pure matters of practice and procedure, not to matters of substantive law. I think that is fully confirmed by the following three judgments of the Federal Court of Canada.
In Lariveau v. Minister of Manpower and Immigration, an Appeal Division judgment report ed at [1971] F.C. 390, Jackett C.J. first said the following at pages 390-391:
Firstly, in view of the fact that the meaning of Rule 5 is a matter of general interest, I shall explain in my own words my reason for holding that this Rule does not apply to a matter such as that before the Court. As I understand it, this Rule authorizes the Court to determine the "practice" and "proce- dure" to be followed in a "proceeding in the Court" concerning which there is a gap in the Rules. We are not concerned here with a question concerning the "practice" or "procedure" to be followed in a proceeding in this Court. In fact, the Court is being asked to grant at this time, on a temporary basis, a remedy which it may only grant after an appeal is heard.
Later in the same case Pratte J. explained, at pages 393-394:
According to appellant, as the Rules do not provide, in a case such as this, that the execution of the order from which he intends to appeal be stayed, the Court, in accordance with Rule 5, should compensate for this deficiency and, by analogy to the first paragraph of art. 497 of the Quebec Code of Civil Procedure, order a stay of execution. This paragraph of art. 497 reads as follows:
497. Saving the cases where provisional execution is ordered, an appeal regularly brought suspends the execution of judgment.
In fact, this is not a motion which may be allowed under Rule 5. A motion for directions may be made under this Rule only in cases where the Rules present a deficiency, that is, do not specify the manner of exercising a right or means of defence. The fact that the Rules do not provide for a stay of execution in a case such as the present is not a deficiency: it can be concluded, from the absence of a rule of practice on this point, simply that unless other legislative provisions state the contrary the decisions of the Immigration Appeal Board are to
be enforced notwithstanding an appeal. This solution is perhaps open to criticism, but this is not a deficiency which can be the basis for submitting a motion under Rule 5. [My emphasis.]
Subsequently, in Magrath v. National Parole Board of Canada, [1979] 2 F.C. 757 (T.D.), at pages 761-762, Walsh J. said:
Applicant invokes the gap rule of this Court, Rule 5, which reads as follows:
but I do not consider it is applicable in the present circum stances. The absence of any provision in the Rules applying for proceedings in forma pauperis was not, I believe, a result of any oversight and is more likely to be a conclusion that after due consideration it was not deemed necessary. Moreover, applicant himself contends that this is not a question of proce dure but of substantive law, in which event it should be dealt with by statute and not by a Rule of the Court. In England it was dealt with by statute and not by a Rule of the Court, and the British Columbia Courts have decided that the right to proceed in forma pauperis is a substantive and not a mere procedural right.
Finally, in Colet v. R., [1980] 1 F.C. 132 (T.D.), Collier J. said at page 135:
Counsel again goes to the gap rule and section 84 of the Supreme Court Act of British Columbia. I do not subscribe to the submission that section 84 is "practice and procedure in force for similar proceedings" in B.C. The section is, to my mind, not a matter of practice and procedure. It is a matter of substantive law.
For all these reasons I must rule on the first point that it is not possible in the circumstances to properly rely on Rule 5 of this Court as a justifica tion for applying article 479 C.C.P. Accordingly, the court costs already awarded to the taxpayers who are parties to the case at bar cannot be distracted in favour of the applicant solicitors.
In view of this conclusion, I must now decide the points raised in paragraphs 13 and 14 of the special case submitted by the parties regarding a set-off.
First, as regards the set-off between the duly taxed court costs awarded to the applicant taxpay ers and the court costs awarded to the respondent, which have not yet been taxed, the Court must consider the following applicable provisions of sec tion 156 of the Financial Administration Act, R.S.C. 1970, c. F-10, as amended [by S.C. 1980-
81-82-83, c. 170, s. 21; 1984, c. 31, s. 12], which provides:
156. (1) Where any person is indebted to (a) Her Majesty in right of Canada, or
the appropriate Minister responsible for the recovery or collec tion of the amount of the indebtedness may authorize the retention of the amount of the indebtedness by way of deduc tion from or set-off against any sum of money that may be due or payable by Her Majesty in right of Canada to the person or the estate of that person.
(4) No amount may be retained under subsection (1) with out the consent of the appropriate Minister under whose responsibility the payment of the sum of money due or payable referred to in that subsection would but for that subsection be made.
In the case at bar the court costs awarded to the respondent have not yet been taxed and her coun sel admitted that the formality required in subsec tion 156(4) above, regarding consent by the appro priate Minister, has not yet been completed.
Accordingly, as things stand at present the Court must rule that there is no set-off and that it cannot take place before the court costs awarded to the respondent are taxed and the consent of the appropriate Minister responsible for the payment of duly taxed court costs to the applicant taxpayers is clearly indicated to the latter.
Secondly, and lastly, as regards the set-off be tween the amount of the court costs awarded to the applicant Precision Mechanics Ltd. and taxed and the amount of tax claimed from it by the Minister of National Revenue, the Court has to consider the following applicable provisions of sec tion 224.1 of the Income Tax Act, S.C. 1970-71- 72, c. 63, as amended [by S.C. 1980-81-82-83, c. 48, s. 104], which provides:
224.1 Where a person is indebted to Her Majesty under this Act or under an act of a province with which the Minister of Finance has entered into an agreement for the collection of the taxes payable to the province under that act, the Minister may require the retention by way of deduction or set-off of such amount as the Minister may specify out of any amount that may be or become payable to such person by Her Majesty in right of Canada.
In the case at bar although an objection was made by the applicant Precision Mechanics Ltd. to the amount of tax claimed and the Minister of National Revenue has not yet affirmed or varied the original assessment, the fact remains that sec tion 224.1 of the Income Tax Act, above, gives the latter the right to require a set-off up to a specific amount which, of course, must not exceed that of the debt owed to Her Majesty.
Since as things stand at present there is no indication that the Minister of National Revenue has required a set-off of any amount owed to Her Majesty, there can be no set-off in the meantime. I must therefore rule that there can be no set-off between the amount of court costs taxed and awarded to the applicant Precision Mechanics Ltd. and the amount of tax claimed from it by the Minister of National Revenue, so long as the latter has not indicated to the former his intent to require such a set-off for a specific amount within the meaning of section 224.1 of the Income Tax Act.
In concluding, it should be emphasized that the effect of section 224.1 of the Income Tax Act, above, is in no way altered by the provisions of section 225.1 of the same Act [as added by S.C. 1985, c. 45, s. 116], which was not in effect when the notice of assessment was served by the Minis ter of National Revenue on the applicant Precision Mechanics Ltd., that is before 1985.
Judgment is rendered accordingly on the points stated in the special case submitted by the parties. I am prepared to hear the parties, if one of them requests, on the court costs associated with the application at bar made pursuant to Rule 475.
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