Is a crystallizing event required to trigger CRA’s deemed trust for unpaid HST?
The debtor owned and operated a landscaping business as a sole proprietorship. The debtor was required to collect and remit GST to the Receiver General. In 2007 and 2008, the debtor collected, but did not remit to the Receiver General, GST in the amount of $67,854 in relation to his landscaping business.
In 2010, the Bank extended loans to the debtor, both of which were secured by charges in favour of the Bank registered against a property owned by the debtor. The debtor subsequently sold and transferred the property to third party purchasers. Following payment of its debts, the Bank discharged the charge and mortgage registered against the property.
The Canada Revenue Agency asserted a deemed trust claim under section 222 of the Excise Tax Act (the “Act“) against the Bank on the basis that the proceeds it received from the sale of the property ought to have been paid to the Receiver General up to the amount deemed to be held in trust. The Bank refused to pay the amount claimed. Accordingly, the Crown commenced an action against the Bank seeking $67,854 plus interest and costs.
The Federal Court found that subsection 222(3) of the Act obliged the Bank to remit that portion of the sale proceeds caught by the deemed trust. The amounts paid by the debtor to the Bank were “proceeds” of the sale of the debtor’s property and were subject to the deemed trust. The debtor was obliged to pay his tax debt out of the sale proceeds of the property, but failed to do so. Instead, he used the proceeds to pay the Bank, a secured creditor. In this circumstance, the Bank had a statutory obligation to pay the tax debt out of the proceeds it received.
The central issue raised on this appeal is the correct interpretation of subsections 222(1) and (3) of the Act: is a secured creditor who receives proceeds from a tax debtor’s property at a time when the debtor owes GST to the Crown required to pay the proceeds, or a portion thereof equalling the tax debt, to the Receiver General in priority to all security interests?
Given the grammatical and ordinary sense of the language of ss. 222(1) and (3), Parliament intended to grant priority to the deemed trust in respect of property that is also subject to a security interest, regardless of when the security interest arose in relation to the time the GST was collected. This flows from Parliament’s use of the phrase “despite any security interest in the amount” in s. 222(1).
When the Bank lent money to the debtor and took its security interests, the debtor’s property to the extent of the tax debt was already deemed to be beneficially owned by the Crown. It follows that when the debtor’s property was sold, by operation of subsection 222(3) of the Act the Bank was under a statutory obligation to remit the proceeds it received to the Crown. The purpose of the provision is to protect the collection of unremitted GST. This purpose is effected by granting priority to the deemed trust in respect of property that is also subject to a security interest, irrespective of when the security interest arose in relation to the time GST was collected.
The Bank argued that the deemed trust required a triggering event to crystallize around satisfied assets. Triggering events would include bankruptcy, the initiation of proceedings by the Crown for the recovery of unpaid taxes, and the exercise of a security interest. Here, the Bank was not a secured creditor at the time the Crown asserted its claim.
The Appellate Court disagreed and held that the deemed trust does not require a triggering event. The Bank’s submission failed to take into account the legislative evolution of the deemed trust provisions. The words that spoke to the triggering events of “liquidation, assignment, receivership or bankruptcy” were found in the prior iteration of the deemed trust provisions but removed from the current version. This reflects Parliament’s intent that no triggering event was to be required to cause the trust to crystallize around specified assets. Instead, the legislation deems property of a tax debtor and property held by a secured creditor to be held in trust once GST is collected but not remitted.
Finally, it would be irrational for Parliament, in an effort to ensure that collected, unremitted GST was to be recovered in priority to all debts, to intend the bona fide purchaser defence to be available so as to undo the Crown’s pre-existing beneficial interest in the property of the deemed trust. This would eviscerate the deemed trust provisions.
The Court dismissed the appeal with costs.
Counsel: Christine Lonsdale and Daniel Goudge of McCarthy Tétrault LLP for the Appellant, Louis L’Heureux and Edward Harrison of the Department of Justice for the Respondent and Harvey Chaiton of Chaitons LLP for the Intervener, the Canadian Bankers’ Association.