Federal Appeal


Goods and Services Tax

Special rules

Bankruptcy of tax debtor and s. 222(1.1) ETA not rendering deemed trust ineffective

Pursuant to forbearance agreement, tax debtor paid sales proceeds of property to defendant secured creditor C Corp.. Crown claimed deemed trust pursuant to s. 222 Excise Tax Act (ETA) because of previously unremitted GST and HST. Debtor made assignment in bankruptcy. Crown brought action against creditor for recovery of dispositions made before bankruptcy on basis of deemed trust mechanism. Creditor brought motion for determination of question of law, namely, whether bankruptcy of tax debtor and s. 222(1.1) of ETA render deemed trust under s. 222 of ETA ineffective as against secured creditor who received, prior to bankruptcy, proceeds from assets of tax debtor that were deemed to be held in trust for Crown. Federal Court judge granted creditor’s motion and answered question in affirmative. Crown appealed. Appeal allowed. Question was answered in negative. Reasoning in prior case dealing with near-identical provisions under Income Tax Act (ITA) was dispositive of appeal. In this case, proceeds from sale of debtor’s property were paid to creditor, and subsequently, debtor made assignment into bankruptcy. Pursuant to s. 222(3) of ETA, any proceeds should have been paid to Crown in priority to any security interest pre-bankruptcy. Proceeds were paid out of priority, which created obligation on creditor, independent of existence of deemed trust, to pay. There was no need for crystallizing event, as legislation established obligation to pay. Creditor’s interpretation would dilute absolute priority of Crown and undermine purpose of legislation.

Canada v. Callidus Capital Corporation (2017), 2017 CarswellNat 3599, 2017 FCA 162, J.D. Denis Pelletier J.A., D.G. Near J.A., and Donald J. Rennie J.A. (F.C.A.); reversed (2015), 2015 CarswellNat 4410, 2015 CarswellNat 8223, 2015 FC 977, 2015 CF 977, Glennys L. McVeigh J. (F.C.).


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