No Deemed Trust for Unremitted GST and HST Post-Bankruptcy

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In a unanimous decision issued November 8, 2018, the Supreme Court of Canada granted the appeal of the decision of the Federal Court of Appeal in Canada v Callidus Capital Corp, 2017 FCA 162. Secured creditors who receive proceeds of secured assets prior to the bankruptcy of a debtor are no longer held personally liable after the bankruptcy of the debtor for deemed trust claims of Canada Revenue Agency for unremitted GST and HST. The Supreme Court answered "yes" to the question before it, assuming the existence of a pre-bankruptcy liability for unremitted GST and HST under section 222 of the Excise Tax Act, RSC 1985 c E-15 (ETA):

Does the bankruptcy of a tax debtor and section 222(1.1) of the ETA as amended render the deemed trust under section 22 of the ETA ineffective as against a secured creditor who received, prior to bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust for the plaintiff?

The Supreme Court of Canada's decision overturns the majority decision of the Federal Court of Appeal, which held that secured creditors were required to pay proceeds derived from a section 222 deemed trust and were personally liable to the Crown, regardless of the subsequent bankruptcy of the debtor. The Supreme Court allowed the appeal, for the reasons of the dissenting judge at the Federal Court of Appeal, Justice Pelletier. 

Justice Pelletier's dissenting reasons found that the trust created by subsection 222(3) of the ETA lapsed due to lack of subject matter by operation of subsection 222(1.1) of the ETA following the bankruptcy of the debtor. Justice Pelletier held that if no amounts were deemed to be held in trust pursuant to subsection (1), then no subsection (3) trust arises. Pursuant to subsection 222(1.1), at or after the time of bankruptcy, subsection 222(1) does not apply to any amounts that were collected on account of tax prior to that time, with the result that after bankruptcy, there is no amount deemed to be held in trust pursuant to subsection (1) for amounts collected as tax but not remitted pre-bankruptcy. As of the date of the bankruptcy, there were no amounts subject to the subsection 222(1) trust and therefore no property of the debtor subject to a deemed trust pursuant to subsection 222(3) of the ETA. As a result, no proceeds of that property were payable to the Crown by Callidus Capital Corporation, a secured creditor of the debtor.

The Supreme Court did not, however, determine whether subsection 222(3) of the ETA can create a personal liability for secured creditors where there is no bankruptcy. In a relatively recent decision of the Federal Court in Canada v Toronto-Dominion Bank delivered on May 25, 2018, the Federal Court held that funds which the bank had received from a mortgage debtor upon repayment of the mortgage were subject to a deemed trust under section 222 of the ETA, as they were proceeds of property (a house) that were subject to the deemed trust in respect of unremitted GST owing from the debtor's landscaping business.

Interestingly, in the Toronto-Dominion Bank case, the bank was not aware of the GST debt at the time it received the funds, and the payment to the bank was not related to the debtor's landscaping business under which the GST debt had accrued but was instead a repayment of the debtor's personal line of credit and mortgage on his home. Nonetheless, the Federal Court held that debtor's house was impressed with a deemed trust under section 222 and the bank, being the recipient of proceeds from the sale of that home, was obligated to pay those proceeds to the Receiver General under section 222 of the ETA and section 227 of the Income Tax Act, RSC 1985 c 1 (5th Supp.). The Federal Court relied in part on the Federal Court of Appeal's majority decision in Callidus in its reasons.

Since the debtor in the Toronto-Dominion Bank case was not bankrupt, and since the Supreme Court of Canada did not determine, in Callidus, whether subsection 222(3) of the ETA can create a personal liability for secured creditors where there is no bankruptcy of the debtor, lenders should be aware that they could still have personal liability for repayment of property or proceeds impressed with a GST/HST deemed trust where the debtor has not become bankrupt.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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