GST/HST Collection Rules – Update on Deemed Trust

Posted By: Bobby B. Solhi on July 31, 2017 at 11:41:55 in All

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GST/HST Collection Rules – Update on Deemed Trust

The CRA has vast powers under the Excise Tax Act (ETA) to enforce upon a GST/HST tax debt.  And unlike the Income Tax Act, a disputed GST/HST assessment is not held in abeyance or credited until the matter is resolved.  The CRA wishes to collect and is entitled to collect as soon as 90 days after the date of the GST/HST assessment.  It could be said that the basis for this power to collect is that the CRA views GST/HST as its money not yours.  In other words, the GST/HST amount that must be remitted is being held by the taxpayer/registrant in trust for the Minister (I.e., the CRA) and the Receiver General has an “absolute priority”.

The law prescribes a “deemed trust” for the benefit of the Minister via s. 222 of the ETA.

Until recently, the deemed trust rule did not operate after the time that a taxpayer/registrant files for bankruptcy.  The Courts had held that the Minister’s absolute priority would be extinguished upon bankruptcy of the debtor such that the CRA becomes an unsecured creditor in respect of unremitted amounts owed pre-bankruptcy.

The Federal Court of Appeal in Canada v. Callidus Capital Corporation has now turned that conclusion on its head and determined that the absolute priority is not extinguished upon bankruptcy and survives.  Even taking precedent over otherwise secured lenders of the debtor.  Even more, the CRA can pursue personal liability against a secured creditor who received funds from the bankrupt debtor.

Rennie, J. stated, in allowing the Minister’s appeal:

“To allow a secured creditor to avoid the priority created by the deemed trust mechanism pre-bankruptcy would render the mechanism, and the priority it creates, effectively useless.”

It should be noted that Pelletier, J. dissented and did not agree with Rennie’s analysis or conclusion and would have held the opposite; that the CRA’s priority does extinguish on a bankruptcy.

This may be a ripe case for appeal to the Supreme Court of Canada.

*Bobby B. Solhi is a GST/HST tax lawyer and partner at TaxChambers LLP


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