Federal Security Interests Research Study and Report 2000


There are a number of statutes that govern the ability of an individual or corporation to take security in federal property.; Both creditors and debtors must be aware of this legislation in order to ensure that any transfer, assignment or dealings with federal property is effective and enforceable.; A summary of the relevant legislative and regulatory provisions is provided in Appendix F.

A.. The Federal Real Property Act

The Federal Real Property Act (FRPA) governs the powers of the Federal Government in relation to federal real property.; The FRPA defines “real property” as land either within or outside of Canada, including mines, minerals, and buildings, structures, improvements and fixtures on, above or below the surface of the land and any interest therein.

Section 16 of the FRPA grants the Governor in Council authority to deal with federal property.; Thus, the Governor in Council is permitted to sell, lease, or dispose of any federal real property.; As well, section 16(1)(k) permits the Governor in Council to accept, release or discharge any security, by way of mortgage or otherwise, in connection with any transaction authorized under the FRPA.; Section 16(2)(h) also authorizes the creation of regulations dealing with the activities covered in section 16(1).

Federal real property possesses a unique status that must be fully understood in order to effectively deal with any security in the property.;

Section 91(a) of the Constitution Act, 1867 authorizes Parliament to legislate exclusively in relation to “public debt and property”.; Thus, case law has confirmed that provincial laws, regulations and municipal by-laws which govern property use do not apply to federal real property.; While this authority has occasionally caused friction between the federal and provincial governments, the fact remains that the federal government is still authorized to deal with federal property, and may even legally construct buildings that violate provincial laws, municipal by-laws, and construction laws on these federal lands.;

The FRPA has created a comprehensive property regime, complete with extensive regulatory powers, to effectively handle all forms of transactions with federal real property.; Section 16(1) in particular, serves two functions.; First, it provides the Governor in Council with a broad range of powers that overlap and override the regulatory powers created under section 16(2).; The authority created under section 16(1) enables the Governor in Council to handle transactions which may be particularly sensitive.; Second, section 16(1) grants the Governor in Council authority to handle transactions which may not be contained in section 16(2).

Parliament has not enacted any regulation with respect to section 16(2)(h), regarding the granting of mortgages or another type of security when the purchase price is not received at or before the closing of the transaction.; Commentators have suggested that the power to approve these kinds of transactions is left with the Governor in Council because the Federal Government does not wish to “make a habit”, so to speak, of lending money to purchasers of its property.

The FRPA clearly establishes a structure to provide for the grant, transfer, license and lease of federal real property.; In contrast, the legislation suggests that the Federal Government is less inclined to loan money to the purchasers of its property (and thereby take a mortgage to secure its interest).; Indeed, the power to accept, discharge and release any mortgage or security interest where the total purchase price is not paid on or before closing, is not delegated under regulation.; Instead, the Governor in Council is required to approve such transactions.; While purchasers of federal property may find this approval requirement difficult to overcome, the policy rationale behind the requirement is obvious. In order to avoid the trouble of defaulting mortgagors, the Crown wishes to carefully consider the qualifications of the purchaser before granting mortgages for federal real property.

B. Assignment of Crown Debt Under The Financial Administration Act

The Financial Administration Act (FAA) legislates activity, and security interests, relating to federal financial property.; The FAA was created to provide for the financial administration of the Canadian Government and establishes and maintains Canada’s accounts and the country’s Crown corporations.

Sections 66 to 70 of the FAA govern the assignment of Crown debts.; A Crown debt is defined in section 66 as follows:

“Crown debt” means any existing or future debt or becoming due by the Crown, and any other chose in action in respect of which there is a right of recovery enforceable by action against the Crown.

Section 67 of the FAA further provides that, except as provided for in the FAA, or in any other act of Parliament, a Crown debt is not assignable and any transaction purporting to assign such debt will not confer any rights or remedies on any person in respect of the debt.

Section 68(1), however, offers an exception to the limitations prescribed by section 67.; Section 68 of the FAA specifically states that an assignment may be made of a Crown debt that is an amount due or becoming due under a contract and any other Crown debt of a prescribed class.; Section 68(2) further describes the assignment of the Crown debt: the assignment must be absolute, and made by the assignor; the assignment cannot be by a charge only; and notice of the assignment must be made in accordance with section 69.

Section 69 of the FAA, together with the Assignment of Crown Debt Regulations, creates a specific process by which notice of an assignment of Crown debt is to given.; The following requirements apply: the notice must be sent to the Crown by registered mail; the notice must be in the proper form (as specified by the Regulations); and an original or notarial copy of the assignment contract must be included, together with copies of the specific invoice, the first page of the standing offer, and the contract issued under the standing offer.

This legislative scheme may create some difficulties in taking security in Crown debt.; For example, is a debtor permitted to assign his or her income tax refund to a creditor?; To what extent must the notice requirements be followed in order to obtain priority over other assignments of Crown debt?;; Case law has attempted to answer these questions.

Case law has examined whether or not the assignment of an income tax refund is permitted under the FAA.; In Marzetti v. Marzetti, the Supreme Court of Canada found that an income tax refund is classified as a “Crown debt” under the FAA.; Thus, as section 67 of the FAA prohibits the assignment of a Crown debt, the debtor’s attempt to assign the income tax refund was unsuccessful.; Furthermore, there was no section in the FAA or any other statute authorizing the assignment of income tax refunds.; Thus, in the case of bankruptcy, the tax refund would be applied to the general pool of assets, and would not be directed to the assignee.; This decision was followed by the Quebec Superior Court in the case of Arthur Anderson Inc. (Re).

The British Columbia Supreme Court in Bank of Montreal v. Guarantee Co. of North America considered the requirements of notice in relation to the assignment of Crown debt.; In this case, two creditors claimed priority in book debts assigned by the debtor.; One creditor failed to deliver notice to the Crown in strict compliance with the regulations.; Justice Skipp decided that even though one party failed to comply with the regulations relating to notice, equity principles would determine the question of priority.; Thus, the dates of the Crown’s receipt of notice of the assignment would determine the dates of priority.; This case was later reversed by the British Columbia Court of Appeal on the grounds that the specific clause in the indemnity document did not create an unqualified assignment (as required by the FAA) but instead provided for rights of subrogation.; However, the Court of Appeal made no comment on the trial judge’s statements relating to when notice is deemed to be given.; Nevertheless, the trial judge’s opinion has been cited with approval in Commercial Union Assurance Co. of Canada v. Surrey (City) when Justice Huddart stated (in reference to Bank of Montreal v. Guarantee Co. of North America):

This assignment [meaning the indemnity executed by the contractor that operates as an assignment of a specific contract debt] will have priority over general assignments of receivables held by a bank, provided that notice of such is provided to the owner prior to notice being provided by the bank.

Thus, it appears that the trial judge’s opinion with respect to the determination of notice under the FAA is good law.;

C. Assignment of Payment Bond Debt Due to the Crown under the FAA

Sections 72 to 75 of the FAA also permit the assignment of a Crown right under a payment bond.; For example, under section 73:

(1) Where an amount is due to the Crown under the provisions of a payment bond, a person who

(a) performed labour or services or supplied material in connection with the contract in respect of which the payment bond is held,

(b); is within a class of persons for the payment of which the payment bond is held as security, and

(c); has not been paid in full for the labour or services performed or material supplied by him in connection with the contract within the time provided in the payment bond for payment to the class of persons of which that person is a member,

is, without any act or notice by or to the Crown, an assignee of the right of the Crown to recover an amount under the payment bond determine pursuant to subsection (2). [emphasis added]

Thus, any person who fulfils the requirements as set out in (a) to (c) of section 73, is deemed to be an assignee of the Crown’s right to recover any amount due under the payment bonds.; These sections of the FAA have not been extensively considered by case law.; Thus, it appears that this method of assignment of Crown receivables operates effectively.

D. Analysis and Conclusion

There is very little case law surrounding the security provisions of the Federal Real Property Act.; Thus, it appears that the current scheme adequately meets the needs of the parties concerned.

Likewise, there are few cases considering the assignment of Crown debt under the FAA.; Future changes to the legislation might incorporate additions to the definition of “Crown debt” or changes to the notice requirements.; The legislation may also benefit from a declaration of the consequences of failing to comply with the notice requirements, as specified under the Regulations.; Indeed, the parties to an assignment of Crown debt should be able to easily identify the priority of positions, based on the parties’ compliance with the notice requirements.; This would bring greater certainty to the question of priority, as between creditors.

As well, the Assignment of Crown Debt Regulations under the FAA specify the technicalities surrounding the giving of notice of an assignment of Crown debt.; Notices of assignments must be mailed to a central Ottawa location.; There is no provision within this scheme to co-ordinate notice with provincial PPSA registration systems.; As well, there is no requirement that the creditor register its interest under provincial legislation.; This lack of co-ordination may cause uncertainty and confusion.; Thus, any future changes should attempt to provide notice under the provincial system.

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2020 Annual Meeting

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August 9 – 13, 2020