Crown loses bid to claw back funds from TD Bank

Toronto-Dominion Bank (TD Canada Trust) v. Canada, 2026 FCA 25
Can an unsecured creditor who receives sale proceeds from a tax debtor rely on the bona fide purchaser defence to defeat the Crown’s deemed trust claim?

Summary: In this case, the Federal Court of Appeal has held that an unsecured creditor who receives sale proceeds from a debtor that failed to remit source deductions may rely on the bona fide purchaser for value defence against the Crown’s deemed trust claim under section 227 of the Income Tax Act. The case arose after a company sold its restaurant assets for $100,000 and used part of the proceeds to repay an unsecured overdraft to the bank, despite having unremitted payroll deductions. The CRA later sought to recover those funds directly from the bank under subsection 227(4.1). The Federal Court concluded that an unsecured creditor who received proceeds from the sale of a debtor’s property could not invoke the bona fide purchaser for value defence against the Crown’s claim for unremitted source deductions. The Federal Court of Appeal disagreed, finding that the defence is also available to unsecured creditors. Parliament intended bona fide recipients without notice, including employees and other unsecured creditors, not to be required to disgorge payments received in good faith, while preserving the Crown’s priority over secured creditors and undisbursed proceeds. As a result, the Court allowed the appeal.

The Debtor, H.N.J. Enterprises Ltd., operated a restaurant business from June 2000 to October 2015. For the years 2013 to 2015, the Debtor withheld certain amounts from the wages paid to its employees. The Debtor remitted some of the amounts so deducted from wages paid to employees but failed to remit all the withheld amounts to the Receiver General as required by the Income Tax Act.

In October 2015, the Debtor ceased carrying on business and sold the assets of the business for $100,000. Instead of paying the unremitted source deductions, the Debtor used the proceeds from that sale to pay $37,595.07 owing to The Toronto-Dominion Bank, an unsecured creditor who did not have any notice of the failure of the employer to remit the required source deductions. The TD Bank was an unsecured creditor of the Debtor as a result of various overdrafts in the Debtor’s account with the TD Bank. The amount of the proceeds paid to the unsecured creditor exceeded the amount of the unremitted source deductions.

Canada Revenue Agency notified the TD Bank on January 8, 2018 that it was claiming $36,250.86 plus interest for the unremitted source deductions of the Debtor. The Crown moved before the Federal Court under Rule 220 of the Federal Courts Rules. The Crown relied on the obligation to pay the proceeds arising from a sale of property to the Receiver General found in the closing words of subsection 227(4.1) of the ITA. When an employer pays salary, wages or other remuneration to employees, the employer is required to deduct certain amounts from the amounts paid to employees and remit such amounts to the Receiver General. Subsection 227(4) of the ITA deems the amounts so deducted to be held in trust for the Crown. The Rule 220 question arises in a situation where an employer who has failed to remit the amounts deducted from employees to the Receiver General sells its property and uses the proceeds to pay a debt owing to an unsecured creditor.

The Federal Court Judge found that the deemed trust provisions in section 227 of the ITA did apply to unsecured creditors, and unsecured creditors could not rely on the bona fide purchaser for value defence to defend against a deemed trust claim, finding that there was no reason to distinguish between secured and unsecured creditors. On appeal, the Court considered whether the bona fide purchaser defence is available to an unsecured creditor who has received proceeds from a person who has failed to remit the required source deductions under the ITA.

Traditionally, the fact that a party is a bona fide purchaser for value without notice has been an equitable defence. The Crown argued that because the bona fide purchaser defence was only available as a defence against an equitable claim, it was not applicable in this appeal since the Crown’s claim was under the deemed trust provisions of the ITA. The Court held that even though the deemed trust arising under subsections 227(4) and (4.1) of the ITA may not be a “true” trust at common law, the question of whether the bona fide purchaser defence will nonetheless be available to unsecured creditors will depend on the interpretation of the relevant provisions of the ITA.

The obligation to pay at subsection 227(4.1) of the ITA is part of the deemed statutory trust as the proceeds are part of the property of the deemed statutory trust. While the language of subsection 227(4.1) of the ITA identifies what is to be paid to the Receiver General, the words do not indicate who is required to pay the proceeds arising from the sale of the property of the tax debtor to the Receiver General. If an employer has sufficient funds and pays all its debts, including amounts owing to the Crown, there is no issue concerning the application of the deemed trust provisions. An employer who is in financial difficulty may have employees who are owed remuneration by the tax debtor and therefore would be unsecured creditors. How the deemed trust provisions would apply to amounts paid to such employees from the proceeds arising from the sale of the tax debtor’s property is particularly relevant in determining whether Parliament intended the bona fide purchaser defence to be available to unsecured creditors.

In the Court’s view, the condition in subsection 227(4.1) of the ITA creates an obligation on the tax debtor (or whoever is selling the tax debtor’s property) to pay the proceeds arising from the sale of the tax debtor’s property to the Receiver General. If, instead of paying such proceeds to the Receiver General, the tax debtor uses the proceeds to pay outstanding salary or wages to employees, even though this payment is in breach of the obligation to pay the proceeds to the Receiver General, the employees who receive the amounts have nonetheless received the amounts as salary or wages. Parliament intended that unsecured creditors could rely on the bona fide purchaser defence so that amounts that are paid by an employer who is in default of remitting source deductions could not be recovered from employees who, as bona fide purchasers, receive payment of salary or wages owed to them.

There is no distinction drawn between some unsecured creditors and other unsecured creditors nor is there any basis to find that some unsecured creditors would not be subject to subsection 227(4.1) but others would be subject to this provision. In those situations where the funds arising from the sale of property of the tax debtor are paid to unsecured creditors who do not have knowledge of the unremitted source deductions, the text and context would not require such unsecured creditors to forfeit such amounts so received, even though such unsecured creditors would not have received the amounts if the determination of the priorities of the parties would have been made before the payments were dispersed. The bona fide purchaser defence would be available to unsecured creditors.

Allowing the defence of bona fide purchaser to be available to unsecured creditors still allows the Crown to claim priority over the claims of secured creditors and priority over the proceeds arising from a sale of property while the proceeds are still held by the tax debtor. For large enterprises with a significant number of employees (and perhaps a significant amount of unremitted source deductions) there would generally be secured creditors, and the assets would usually be liquated by a receiver or trustee in bankruptcy. In disbursing the proceeds arising from a liquidation of assets, the Crown’s priority would result in the unremitted source deductions being paid in priority to all other claims (except those permitted by subsection 227(4.1) of the ITA). Presumably having priority over the claims of secured creditors and priority with respect to undisbursed proceeds arising from the sale of a tax debtor’s property would generally be sufficient to satisfy the claims of the Crown for unremitted source deductions and it would only be a rare occasion when the proceeds arising from the sale of a tax debtor’s property are paid to an unsecured creditor who can rely on the bona fide purchaser defence.

The Court allowed the appeal and set aside the motion judge’s Order.

.Judges: Webb J.A., Locke J.A., and Mactavish J.A.

Professionals involved:

• Anu Koshal and Almut MacDonald of McCarthy Tétrault for TD Bank

• Aminollah Sabzevari of the Department of Justice and Marie-Josée Hogue of the Deputy Attorney General of Canada for the Crown