Pre-receivership HST property of the estate?

Portage Capital Nominee Corp. v. R & B Properties (2011) Inc., 2026 ONSC 1826 
Does HST collected pre-receivership belong to the receiver or the CRA?

Summary: The Ontario Superior Court has found that $143,000 in HST paid to a debtor in connection with a $1 million lease termination settlement formed part of the debtor’s “property” under the receivership order and had to be turned over to the receiver, notwithstanding arguments that the funds were subject to a deemed trust in favour of CRA. The Court emphasized that the HST arose directly from the debtor’s real property and was in its possession at the time of the receivership, making it subject to the receiver’s control, with any priority disputes, including CRA’s claim, to be determined later through the ordinary distribution process rather than by allowing the debtor or its principal to prefer a single creditor or mitigate potential personal liability.

The Receiver sought an order requiring the debtor, R&B, and its principal, Mr. Daniel Rumack, to pay to the Receiver $143,000 that was in the possession of the debtor when the receivership order was made and served upon them. The $143,000 was paid to the debtor by its tenant, the Beer Store, as part of a settlement to allow the tenant to terminate its lease. The settlement was for $1,000,000 plus HST of $143,000. The funds were in the possession of the debtor or Mr. Rumack for the debtor at the commencement of the receivership. Mr. Rumack paid over the $1,000,000 to the Receiver. The HST payment on the lease settlement amount was the $143,000 in issue on this motion.

The Receivership Order provided that the Receiver was entitled to possession of all personal property of the debtor acquired in connection with or arising from or out of its building on Queen St. West. If the $143,000 were personal property that was “acquired in connection with or arising from or out of” the debtor’s building, then the Receiver would be entitled to it. Among other things, the debtor argued that since the Canada Revenue Agency had a statutory deemed trust over HST payments in the hands of the debtor, the funds were not personal property of the debtor that fell within the definition of “Property”. Mr. Rumack was concerned that if he paid the HST money to the Receiver, the Receiver may not pay it to the Canada Revenue Agency. Mr. Rumack was aware that corporate directors can have personal liability for unpaid HST, and, therefore, wanted the HST to be paid to CRA to avoid the possibility that the CRA comes after him for a shortfall.

The Court found that these funds were plainly funds arising from or out of the debtor’s real property. The funds were tax exigible on a payment arising from the tenant’s obligations in respect of a unit in the building and, accordingly, fell within the definition of “Property”. The reach of the Receivership Order includes Property in the possession of the debtor on the day when the Receivership Order is granted. It does not matter how the money or goods came into the possession of the debtor.

The fact that the debtor and Mr. Rumack paid the $1,000,000 to the Receiver was telling, as that money came to the debtor in the same transaction and presumably the same cheque as the HST amount of $143,000. It was property in the possession or control of the debtor or Mr. Rumack on the granting of the receivership order. Therefore, the Receivership Order required it to be paid to the Receiver and the debtor did so. Even if the debtor’s interest in the funds were merely limited to bare legal title as trustee, that is an interest in personal property arising from or out of the debtor’s building. The Receiver was entitled to take possession of whatever title the debtor had in its Property.

The $143,000 was “Property” as defined in the receivership order and was to be paid to the Receiver. The Receiver is entitled to hold all Property and will pay out Property or proceeds thereof in due course. The payments will be made in accordance with legal priorities. The determination of those priorities will be made on notice to all interested parties at the appropriate time. The Court held it was premature to determine priorities before the assets that made up the receivership estate had been liquidated or realized upon.

The debtor submitted that the debtor should pay the funds to CRA and then the Receiver would be able to seek a refund if the debtor were entitled to one in due course. The Court held that if that were to happen, the CRA would have been paid funds to which it was not entitled, which would prejudice the Receiver and the creditor that was entitled to the funds. Moreover, if repayment to the Receiver left the CRA with a shortfall, Mr. Rumack could find himself in CRA’s crosshairs in any event. Insolvency proceedings are not run to benefit one creditor over another. Mr. Rumack was trying to take steps to limit the possibility that he will have liability to CRA, which, while understandable, was not consistent with the statutory processes. It was not open to Mr. Rumack to try to frustrate the fair application of the insolvency laws to benefit himself.

The Court declared that the sum of $143,000 paid to the debtor by The Beer Store as HST on its lease termination settlement fell within the definition of “Property” set out in the preamble to the Receivership Order.

Judge: FL Myers J

• Maria Konyukhova and Brittany Ketwaroo of Stikeman Elliott for KSV as receiver

• Chris Burr of Blakes for Portage Capital

• Peter-Paul Du Vernet of Glaholt Bowles for R & B Properties