Secured Creditor’s Priority Over Unremitted GST/HST: SCC Grants Callidus Capital Corporation Leave to Appeal

April 3, 2018 | Jane Loyer, Colleen Ma

On March 22, 2018, the Supreme Court of Canada granted Callidus Capital Corporation (the “Secured Creditor”) leave to appeal the Federal Court of Appeal decision that interpreted subsection 222(3) of the Excise Tax Act (Canada) (the “ETA”) as giving the Crown super priority to property received by a secured creditor from a tax debtor before bankruptcy.

In Canada v Callidus Capital Corporation, 2015 FC 977, 2017 FCA 162 (“Callidus”), a request was made for a debtor to make an assignment into bankruptcy. At the time, the tax debtor was indebted to the Canada Revenue Agency and the Secured Creditor had received a letter from the Canada Revenue Agency claiming an amount of $90,844.33 on the basis of the deemed trust mechanism in subsection 222(3) of the ETA.

Subsection 222(1) of the ETA provides that GST/HST collected is deemed to be held in trust for the Crown and therefore is not the property of the collector. Subsection 222(3) allows the Crown to trace the funds and provides that GST/HST collected but not remitted is still deemed to be held in trust for the Crown, irrespective of any pre-existing security interest. However, subsection 222(1.1) states that the deemed trust that arises pursuant to subsection 222(1) is extinguished upon bankruptcy, unless the amounts are considered to be source deductions. The question raised in Callidus was whether subsection 222(1.1) defeats a deemed trust that arises pursuant to subsection 222(3) of the ETA prior to a tax debtor’s bankruptcy.

The Federal Court (2015 FC 977) held that the bankruptcy of the tax debtor rendered the deemed trust under subsection 222(1) of the ETA ineffective for collected but unremitted GST/HST. It found that the absence of an express confirmation that the deemed trust survived bankruptcy reflected Parliament’s intention that the deemed trust lapses when insolvency proceedings are commenced. The Federal Court concluded that the introduction of subsection 222(1.1) to the ETA defeated the deemed trust held by the Crown upon the bankruptcy of a tax debtor. Any liability that arises under subsection 222(3) is also extinguished upon bankruptcy by the operation of subsection 222(1.1) of the ETA.

On appeal, the Federal Court of Appeal (2017 FCA 162) overturned the Federal Court’s decision. It found that the Secured Creditor’s liability to the Crown arose when it received funds from the tax debtor and that the subsequent bankruptcy did not affect this obligation. It interpreted subsection 222(1.1) of the ETA as rendering the deemed trust ineffective as to the tax debtor’s property at the time of bankruptcy but not defeating a claim the Crown had against a secured creditor prior to the bankruptcy.

Undoubtedly, the decision of the Supreme Court will have a major impact on the priority of secured creditors in deemed trust situations under the ETA. The willingness of the highest court in the land to hear this appeal points to the importance of the issue on hand and is welcome news for secured creditors whose ability to monitor actions of debtors with respect to collection and remittance of GST/HST is limited at best. The Sales Tax, Customs & International Trade group of Miller Thomson LLP will continue to monitor developments and proceedings in this matter.


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