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CRA Deemed Trusts for GST/HST and Bankruptcy

The Supreme Court of Canada in Callidus Capital Corp. v Canada, 2018 SCC 47, recently held that the dissent ruling of Pelletier J.A. of the Federal Court of Appeal in Canada v Callidus Capital Corporation, 2017 CAF 162, was the correct interpretation of s. 222(3) of the Excise Tax Act, R.S.C. 1985, c. C-36 confirming that CRA loses its right to priority payment over all creditors, even secured creditors, for unremitted GST and HST when the debtor becomes bankrupt.

The facts in this case weren't complicated, Callidus had taken an assignment of the debt and security held by the Bank of Montreal over the assets of Cheese Factory Road Holdings Inc. ("Cheese Factory"). At the time that Callidus took the assignment, Cheese Factory was in default of its obligations and Callidus agreed to forbear from enforcing its rights to execute against Cheese Factory's assets. As part of the forbearance, Cheese Factory later sold one of its properties and paid the proceeds of sale over to Callidus, who applied them to reduce the indebtedness owing to it. Cheese Factory also paid collected rents from its other properties into blocked accounts that were then paid over the Callidus. Days before Callidus received the proceeds of sale, CRA had sent to Callidus a letter claiming a deemed trust on account of unpaid GST and HST and demanding payment. Despite the demand made by CRA, Callidus did not pay to CRA the amount it claimed. Approximately a year and a half later, at the request of Callidus, Cheese Factory made an assignment into bankruptcy. Notwithstanding the bankruptcy, CRA maintained its claim for a deemed trust. Callidus took the position that the deemed trust had been rendered ineffective by the bankruptcy.

The Federal Court held that, given the bankruptcy, CRA's deemed trust was ineffective in regard to amounts that Callidus had recovered pre-bankruptcy. The Federal Court judge found that this was in line with parliament's intent to move away from asserting priority for Crown claims in insolvency law, noting that deemed trusts for unremitted source deductions remained effective post-bankruptcy.

The Federal Court of Appeal overturned the Federal Court's decision and allowed CRA's appeal holding that while the deemed trust was rendered ineffective against the assets of the debtor, CRA maintained an independent cause of action against a secured creditor who received proceeds of sale from the debtor's assets and could pursue that secured creditor for payment. The Federal Court of Appeal's dissent written by Pelletier, J.A. found that, upon bankruptcy, the deemed trust had ceased to be ineffective as against the debtor's assets. Accordingly any obligation of a secured creditor was dependent on that trust and the deemed trust was no longer effective. Callidus appealed and the Supreme Court of Canada agreed, simply holding that the decision of Pelletier J.A. was correct.

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