Where a supplier has failed to remit GST to the Crown, ETA subsection 222(3) extends a deemed trust over the unremitted GST in favour of the Crown to cover the supplier's property equal in value to the unremitted GST. Moreover, a creditor that receives sale proceeds of property subject to this deemed trust may be liable to pay such proceeds to the Crown. This deemed trust is extinguished on the supplier's bankruptcy (ETA subsection 222(1.1); Century Services Inc. v. Canada (Attorney General), 2010 SCC 60), so the Crown ceases at that time to have priority over other creditors. However, uncertainty remained concerning the continuing liability of a creditor, following the supplier's bankruptcy, to pay to the Crown proceeds that it received from the supplier prior to bankruptcy. This has now been resolved: in Callidus Capital Corp. v. Canada ( 2018 SCC 47), the SCC ruled that the creditor's obligation to pay such proceeds to the Crown also ceases on the supplier's bankruptcy.
In contrast, a majority of the FCA panel ( 2017 FCA 162) had concluded that the creditor's personal liability under subsection 222(3) survived the supplier's bankruptcy. In dissent at the FCA, Pelletier JA rejected the majority's conclusion that the creditor's liability "crystallized" as a personal liability independent of the deemed trust over the unremitted GST. He found instead that this liability was entirely dependent on the amount of unremitted GST subject to the deemed trust, noting that any remittances of GST by the supplier prior to its bankruptcy would have reduced the creditor's liability under subsection 222(3). Since subsection 222(1.1) reduced to nil the amount subject to the deemed trust over unremitted GST, Pelletier JA concluded that the creditor's liability to remit the proceeds was also reduced to nil and extinguished.
The creditor appealed to the SCC with the support of several associations of insolvency professionals. The intervenors characterized the FCA majority's decision as effectively preserving the subsection 222(3) deemed trust after bankruptcy. In addition, the Canadian Bankers' Association submitted that the FCA had created "a general regime of personal liability of the secured lender for the unpaid sales taxes of its borrower on the sole basis that said lender received a voluntary repayment of the debt of its borrower." This submission suggested that the creditor would not have been liable under subsection 222(3) to pay the proceeds to the Crown, regardless of any bankruptcy of the supplier.
In an exceptional outcome, the SCC delivered an oral judgment allowing the creditor's appeal and adopting the reasons of Pelletier JA. However, the SCC specifically noted that it was unnecessary to decide "the scope of the deemed trust or any liability under s. 222 of the ETA prior to bankruptcy." The SCC therefore declined to deal with what types of transfers by the supplier to its creditor would have engaged subsection 222(3).
The SCC's decision is welcome news to lenders and insolvency professionals. At both the FCA and the SCC, the parties and intervenors were quite concerned with the practical consequences of the decisions. Both the majority and the dissent at the FCA took great pains to deal with the consequences of allowing the creditor to soak up remaining assets before having the supplier assigned into bankruptcy. At the SCC, the central focus was the effect of the FCA majority's decision on bankruptcy trustees and lenders. Bankruptcy will now provide more comfort to secured lenders in that they will not be liable for any unremitted GST of their insolvent debtors. The decision reached by the SCC has been tailored to be limited in its scope. It may, however, still result in a legislative amendment.
Originally published by Canadian Tax Focus.
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