Is a crystallizing event required to trigger CRA’s deemed trust for unpaid HST?
The tax debtor (the “Debtor”) carried on a landscaping business as a sole proprietor. In 2007 and 2008, he collected but failed to remit goods and services tax in the amount of $67,854 (the “Tax Debt”) to the Receiver General. In 2010, Toronto-Dominion Bank (“TD”) granted the Debtor a Home Equity Line of Credit and a mortgage, both of which were secured upon his house. In 2011, the Debtor sold his house and used the proceeds of the sale to fully repay the outstanding debt to TD. In 2015, the Canada Revenue Agency issued a demand letter to TD seeking payment of the Tax Debt. TD refused to pay the amount, and the Crown sought to recover the Tax Debt pursuant to s. 222 of the Excise Tax Act (“ETA”).
In order to adjudicate the Crown’s claim, the Court engaged in a four-part analysis. First, the Court considered whether s. 222 of the ETA imposed on TD an obligation to repay the amount received from the Debtor. Second, the Court determined whether TD could assert, in defence, that it was a bona fidepurchaser for value of the money received from the Debtor. Third, it considered whether TD was a secured creditor at the time when the obligation to pay was “triggered”. Finally, the Court addressed the various policy considerations that TD raised in its arguments.
The Court held that the phrase “the proceeds of the property shall be paid to the Receiver General” in s. 222(3) encompassed proceeds flowing from the voluntary sale of a tax debtor’s property. Upon such a sale, a tax debtor has an obligation to pay the proceeds to the Receiver General. If he fails to do so and pays a secured creditor instead, that creditor has an obligation to repay the money to the Crown. The Court concluded that the money obtained by the Debtor in consideration for the transfer of his house to a third party constituted “proceeds” of property that was the subject matter of the deemed trust. The Debtor had an obligation to pay his Tax Debt with that money but, instead, he used that money to repay TD. Therefore, TD had a statutory obligation to repay the Tax Debt to the Crown.
Next, the Court addressed, among other things, TD’s argument that the deemed trust only comes into operation upon a “triggering event”, which could be the bankruptcy of the debtor, the realization of the creditor’s security or a requirement to pay made by the Crown. TD argued that when the trigger was pulled in this case—which is when the Crown made its first demand to pay—TD was no longer a secured creditor of the Debtor. This idea has been unanimously rejected by all decisions made subsequent to the amendments of the Income Tax Act (“ITA”) and ETA in 1998 and 2000. In First Vancouver, the Supreme Court of Canada explained that the intent of the ETA and ITA deemed trust provisions is to allow the trust to operate in a continuous manner, attaching to any property which comes into the hands of the debtor as long as the debtor continues to be in default, and extending back in time to the moment of the initial deduction. The deemed trust does not only capture property of the tax debtor in existence at some particular moment in time.
The search for a crystallizing event or something analogous to that is not quite apt, given that the deemed trust mechanism is not located within the section of the legislation dealing with assessments, and, in any event, there is no legislative requirement for, or mechanism by which, such a notice could issue. There is no need for a crystallizing event, as the legislation establishes the obligation to pay. The obligation has no temporal limitation and is not contingent on crystallizing events.
The Court allowed the Crown’s claim in full and ordered TD to pay the sum of $67,854, pre-judgment interest and costs.
Counsel: Louis L’Heureux and Edward Harrison of the Attorney General of Canada for the Plaintiff and Christine Lonsdale and Jacqueline Coleof McCarthy Tétrault for the Defendant.