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GOODS AND SERVICES TAX (GST) - Collection and remittance - Deemed trust

Thursday, June 04, 2020 @ 9:35 AM  


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Appeal by the bank from a Federal Court decision finding that the deemed trust in s. 222(3) of the Excise Tax Act obliged the bank to remit to the Crown that portion of the sale proceeds of a GST debtor’s property caught by the deemed trust. The bank granted a mortgage and a line of credit to W who owed GST at the time of the loan application. W sold the property that secured the mortgage and line of credit and repaid these loans from the sale proceeds. The bank then discharged the mortgage and line of credit. Subsequently, Canada Revenue asserted a deemed trust claim under s. 222 of the Excise Tax Act against the bank on the basis that the proceeds it received from the sale of W’s property ought to have been paid to the Receiver General up to the amount of the deemed trust claim. When the bank refused to pay the amount claimed, the Crown commenced the present action for payment.

HELD: Appeal dismissed. From the grammatical and ordinary sense of the language of s. 222(1) and s. 221(3), it was evident that Parliament intended to grant priority to the deemed trust in respect of property that was also subject to a security interest, regardless of when the security interest arose in relation to the time the GST was collected. When the bank lent money to the debtor and took its security interests, the debtor’s property to the extent of the tax debt was already deemed to be beneficially owned by the Crown pursuant to s. 222(3). When the debtor’s property was sold, by operation of s. 222(3), the bank was under a statutory obligation to remit the proceeds it received to the Crown. The purpose of the provision was to protect the collection of unremitted GST. This purpose was effected by granting priority to the deemed trust in respect of property that was also subject to a security interest, irrespective of when the security interest arose in relation to the time GST was collected. The deemed trust did not require a triggering event which caused the trust to crystallize around specified assets. The intent of the section was to allow the trust to operate in a continuous manner, attaching to any property which came into the hands of the debtor if the debtor continued to be in default, and extending back in time to the moment of the initial deduction. The language Parliament chose belied the suggestion that the deemed trust only captured property of the tax debtor in existence at some moment in time. Secured creditors could not avail themselves of the bona fide purchaser for value defence. It would be irrational for Parliament, to ensure that collected, unremitted GST was to be recovered in priority to all debts, to intend the bona fide purchaser defence to be available to undo the Crown’s pre-existing beneficial interest in the property of the deemed trust. This would eviscerate the deemed trust provisions. Parliament made a considered policy choice to prioritize protection of the fisc over the interests of secured creditors. Parliament tempered the potential harshness of this choice by providing for prescribed security interests and by waiving the Crown’s deemed trust rights in cases of bankruptcy and arrangements under the Companies’ Creditors Arrangement Act.

Toronto-Dominion Bank v. Canada, [2020] F.C.J. No. 569, Federal Court of Appeal, E.R. Dawson, D.G. Near and M.J.L. Gleason JJ.A., April 29, 2020. Digest No. TLD-June12020007