The Deemed Trust for Unremitted GST

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The Excise Tax Act, RSC 1985, c E-15 (the “ETA”) provides Canada Revenue Agency with a powerful deemed trust remedy to collect unremitted GST, even from the hands of a secured lender without knowledge of a debtor’s tax debt. This deemed trust does not, however, apply to a bankrupt for amounts collected before the person became a bankrupt.  

The power of this remedy is illustrated in Toronto-Dominion Bank v Canada 2020 FCA 80, in which TD Bank lost an appeal from a judgment requiring the Bank to pay $67,854 plus interest to the Federal Government. 

In TD Bank, a sole proprietor operating a landscaping business had collected but failed to remit $67,854 to the Receiver General in 2007 and 2008. In 2010, TD Bank provided the sole proprietor a line of credit and a loan secured, respectively, by a charge and a mortgage registered against his property. TD Bank was unaware of the sole proprietor’s failure to remit GST at the time the line of credit was provided and the loan was extended. 

Around 18 months later, the sole proprietor sold his property and repaid the line of credit and the mortgage from the proceeds. The Bank had not enforced its security before the sale of the property. 

Years later, CRA asserted a deemed trust claim pursuant to section 222 of the ETA and claimed the proceeds the Bank had received from the sale of the property ought to have been paid to the Receiver General. 

The Federal Court of Appeal rejected the Bank’s arguments that the deemed trust required a “triggering event,” that the Bank was a bona fide purchaser protected from the effect of the deemed trust, and that the deemed trust ought not to apply because the Bank had not received proceeds from its debtor’s business. The Court confirmed that the Bank had to pay the Crown $67,854 pursuant to the deemed trust provisions of the ETA.

In response to some of the Bank’s policy arguments, the Court described ways in which secured lenders can manage this risk, such as identifying high risk borrowers, requiring evidence of tax compliance from borrowers, or requiring borrowers to authorize the lender to obtain verification from CRA that a borrower has no GST liability. 

As some of these steps might be impractical and some will not guarantee that secured lenders will avoid finding themselves in a situation like TD Bank, the deemed trust provisions of the ETA ultimately seem likely to encourage secured lenders to avoid their effect by applying for a bankruptcy order against a tax debtor, if such an order is available in the circumstances.

Given the effect of the ETA deemed trust provisions and the potential for CRA claims far larger than the claim made against TD Bank, it is important for any secured lender that discovers a borrower has a tax debt to seek advice from experienced insolvency counsel. 

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