http://decisions.fct-cf.gc.ca/fc-cf/decisions/en/item/119899/index.do
Canada v. Callidus Capital Corporation (August 17, 2015 – 2015 FC 977, McVeigh J.).
Précis: This is a decision on a point of law arising out of an action by the Crown to collect unpaid GST from a secured creditor of a bankrupt taxpayer. Callidus Capital Corporation, the secured creditor, had received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust under the provisions of the Excise Tax Act (“ETA”). The Federal Court held that the deemed trust did not survive the assignment in bankruptcy. Costs of $2,600 were awarded to Callidus on the application.
Decision: This was a decision on a very narrow point of law:
Question of Law
23. Does the bankruptcy of a tax debtor and subsection 222(1.1) of the ETA render the deemed trust under section 222 of the ETA ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust?
There was no jurisprudence directly on point under the ETA but there was a considerable wealth of jurisprudence in analogous situations. After a thorough review of the jurisprudence the Court concluded that the deemed trust under section 222 of the ETA did not survive the assignment in bankruptcy:
[31] In arriving at this conclusion, Mr. Justice Fish developed a simple test for a complex priority scheme concerning insolvency and deemed trusts involving the ITA, ETA and CCAA. He said first look at whether there is a deemed trust created by the statute in question. Then Mr. Justice Fish turned to the question of whether Parliament had confirmed the continued operation of the Crown’s deemed trust under the BIA and CCAA regimes. He determined that absence of either one of these two mandatory elements reflects Parliament's intention to allow the deemed trust to lapse with the commencement of insolvency proceedings.
[32] In applying this test to the case at hand, I find that a deemed trust was properly created. However, upon an examination of the BIA, it becomes clear that the operation of the deemed trust is not confirmed, thereby reflecting Parliament’s intention to allow it to lapse upon insolvency proceedings being commenced.
[33] The reasoning of the Supreme Court in Century is consistent with its earlier decision in Caisse. In Caisse, the Supreme Court heard three cases together. Each case involved a situation where the Crown claimed a deemed trust over GST and Provincial sales tax that had been collected but not remitted at the time of bankruptcy. The banks who were creditors claimed that the Crown was just an ordinary creditor and must be ranked in priority as such. The Supreme Court observed that “Canadian tax authorities are bound by the choice of legislative policy now expressed in the BIA” and found that the deemed trusts that were created to secure the GST and HST were terminated at the time of bankruptcy. It was determined that the trustee in Bankruptcy was responsible for liquidating patrimonies that include the GST and HST amounts that are in issue.
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[40] Most importantly, the Crown does not reconcile how the proposed scenario, where a “pre-existing, fully engaged cause of action” against Callidus reconciles with section 222(1.1). The Crown argues that whether the deemed trust operates or not----does not impact that this separate cause of action has crystalized, but does not reconcile section 222(1.1) with its position that a separate cause of action exists. The Crown is attempting to re-characterize the question of law to be answered. The question was not whether Callidus was independently liable, but whether the trust continues to operate notwithstanding bankruptcy.
[41] The personal liability of a secured creditor is not distinguished or identified as an exception in either section 222(1.1) or 222(3) of the ETA or section 67(3) and 67(3) of the BIA which would justify the Crown’s argument. Furthermore, the authority the Crown submits refers to an explicit “crystallization” moment when the person becomes liable for the tax despite subsequent bankruptcy. This defeats the Crown’s argument that other collection tools available under the ETA, specifically section 317 and 325(1), do not expire on bankruptcy of the tax debtor.
[42] Callidus persuasively argued their interpretation of the purpose of the 1992 amendments; introducing section 222(1.1) was to oust the Crown priority over all other interests in bankruptcy. I disagree with the Crown’s characterization that the legislative intent behind the 1992 amendments reforms was to elevate the claims of unsecured creditors rather than to diminish Crown priority. It is clear from my reading of Caisse and Century that the amendments were intended to reduce the priority of the Crown. I find that the bankruptcy of Cheese Factory engaged section 222(1.1) of the ETA such that the deemed trust under section 222(1) and 222(3) are ineffective.
As a result the question posed was answered in the affirmative, i.e., the deemed trust was ineffective, and costs of $2,600 were awarded to Callidus.