In the course of business a person, in compliance with various statutory obligations, may collect tax or withhold monies that are payable to federal or provincial governments. Examples of such collection or withholding are for provincial sales tax, goods and services tax and employee source deductions for income tax, employment insurance and Canada Pension Plan amounts.
Pursuant to the relevant statute, the funds, when they are collected or held, will be "deemed" to be held in trust, separate and apart from the other property of the obligant who has collected or withheld the funds, whether or not such separate holding in fact occurs. The funds will be remitted to the appropriate statutory authority; for example, the provincial government for provincial sales tax or to Canada Revenue Agency for GST and source deductions, in accordance with the reporting and remittance requirements applicable to the obligant.
The consequences for failing to remit the funds held in a deemed trust in the amount and at the time required can be severe. In addition to the requirement to pay the full amount owing, interest and penalties may also be incurred. Statutes can provide for liens to be filed in respect of the property of the obligant who fails to remit the funds when required; and, in the case of corporate obligants, the directors of the company may also be liable for the unremitted taxes or source deductions.
CRA in particular under the Income Tax Act, the Excise Tax Act¸ the Employment Insurance Act and the Canada Pension Plan Act has extraordinary rights for collecting unremitted amounts. In addition to direct rights against the obligant, to seize and sell the obligant's assets, CRA can:
- Garnishing monies payable to the obligant by third parties pursuant to a Requirement to Pay that is in force for one year;
- Give notice to secured creditors pursuant to an Enhanced Requirement to Pay that will give CRA priority not just for deemed trust amounts, but for penalties and interest as well in respect of the obligant's property;
- Pursue the directors of corporate obligants by seizing their assets.
CRA generally will have priority over other creditors, including secured creditors, of the obligant, with some exceptions. For example, creditors who may have priority over CRA include:
- A secured creditor who holds a mortgage over real property before the deemed trust obligation was incurred;
- Lessors or conditional sellers of personal property to the obligant in respect of the personal property;
- Fishers, farmers and aqua culturists who supplied products to the obligant 15 days before the obligant's receivership or bankruptcy on inventory of the obligant as described in the Bankruptcy and Insolvency Act (BIA);
- Unpaid suppliers to the obligant who supplied goods 30 days before the obligant's receivership or bankruptcy in respect of the goods supplied in accordance with the BIA.
While provincial deemed trusts and the deemed trust for GST may lose priority in a bankruptcy and rank as unsecured claims; the BIA provides under section 86 for such claims in appropriate cases to be considered secured claims if, prior to the bankruptcy, there is the required filing by the governmental authority pursuant to a prescribed system of registration.
Persons in financial difficulty with outstanding deemed trust obligations may require an experienced lawyer to advise them with respect to their options in relation to these and other obligations.