GST/HST Debt and CRA’s Super Priority: Secured Creditors Beware

Posted By: Bobby B. Solhi on June 14, 2018 at 10:23:37 in All , Articles

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GST/HST Debt and CRA’s Super Priority: Secured Creditors Beware

The Federal Court in Canada v. Toronto-Dominion Bank held that Toronto-Dominion Bank (“TD Bank”) must pay the CRA the amount of $67,854, plus interest, on account of a customer’s outstanding GST/HST debt.

The Crown, on behalf of the CRA, sued TD Bank to recover money that it received from one of its customers.  TD had provided the customer, Mr. Weisflock, with a mortgage and home equity line of credit (“LOC”) but was unaware that he was a GST debtor at that time.

In 2011, the customer sold his home and used the proceeds to clear the outstanding mortgage and LOC provided by TD Bank.

In April 2013, the CRA issued a demand letter to TD Bank. No prior notice was ever provided to TD Bank. The CRA revised its demand letter and issued a new demand again in 2015. TD Bank disputed the CRA’s claim.

Section 222 – GST/HST Deemed Trust

The CRA claimed that proceeds received by TD Bank, on the repayment of its loans, were amounts that were subject to a deemed trust pursuant to section 222 of the ETA and, particularly, subsection (3) which states that:

(3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust, is deemed

(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and

(b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest

and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.

TD Defences

No triggering event

TD Bank made a number of arguments in its defence, one of which was that there was no triggering or crystallizing event to bring the deemed trust into operation.  In other words, TD Bank argued that it had already been repaid on their loans before receiving any notice of the GST debt from the CRA.

The FC rejected this argument and stated that no triggering event is required, and that the deemed trust operates in a continuous manner.

Bona fide purchaser for value

TD Bank also argued that it was a good faith bona fide purchaser for value and that the money it received from the tax debtor was its money, not the debtors.  The Court agreed that TD Bank was the purchaser of the money repaid by the tax debtor but stated that the case law deprived TD of this defence.

FC concluded that a secured creditor could not be a bona fide purchaser for value in the context of the deemed trust of the ETA and ITA.

Interestingly, the Court held that this defence would remain available to an unsecured creditor such as a supplier, landlord or public utility who received payment from a tax debtor.

The FC pointed out that the case law has drawn a sharp distinction between secured creditors and bona fide purchasers for value so that the two categories are mutually exclusive.

GST/HST floating deemed trust

FC held that the Crown has, effectively, a floating deemed trust with an absolute priority over secured creditors subject to the Security Interest (GST/HST) Regulations, SOR/2011-55, which provides that a certain portion of a mortgage or hypothec on land or on a building is a prescribed security interest, provided the mortgage or hypothec is registered before the deemed trust arises.


It is worth noting that the Court relied upon the FCA decision in Canada v Callidus Capital Corporation, 2017 FCA 162.  Callidus was recently granted leave to appeal to SCC.

That case dealt more directly with the priorities between the deemed trust versus bankruptcy under 222(1.1) rather than (3) but addressed the question of proceeds received by a secured creditor, and whether there was a distinction for purposes of the deemed trust if it was received voluntarily or by enforcement of the secured interest.   It also addressed the question of a whether there must be a triggering or crystallizing event in order to start the operation of the deemed trust.

It remains open for TD Bank to appeal this decision, partly with a view to the upcoming SCC decision in Callidus.

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

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