Callidus Capital Corp. v. Canada, 2018 SCC 47

The respondent (“Callidus”) was the assignee of a bank loan and related security respecting the assets of the debtor (“Cheese Factory”), which was a real estate investment company that had defaulted under the bank loan. Pursuant to an agreement that Callidus entered into with Cheese Factory at the time of the assignment, Callidus applied the net proceeds from the sale of a real estate property by Cheese Factory and various rent receipts of Cheese Factory to reduce the amount owing to it notwithstanding that there was unremitted GST/HST to which the deemed ETA s. 222(1) trust applied, which remained unpaid. Cheese Factory then made an assignment in bankruptcy at the request of Callidus.

The majority in the Federal Court of Appeal had found that, although s. 222(1.1) causes the deemed trust to disappear on bankruptcy, it does not eliminate the liability of a creditor for having received payments prior to bankruptcy that should have been subject to the Crown’s (at that point, still extant) priority under the s. 222(1) deemed trust so that such “personal liability … can be pursued by the Crown in a cause of action independent of any subsequent bankruptcy proceedings” (para. 26).

On this appeal to the Supreme Court, it reversed the decision below for the reasons given by Pelletier JA in his dissenting reasons. Pelletier JA first found (at paras. 60-61) that the s. 222(1) deemed trust was reduced to nil by payments so that, for example, a deemed trust for $20,000 which created a liability for that amount of a mortgage lender who had received sales proceeds of a secured property of the tax debtor, would be reduced to $10,000 if the tax debtor made a $10,000 payment to the Receiver General on account of collected but unremitted GST/HST. He then stated (at paras 62, 63, 64, 73 and 76):

… [A] demand for payment by the Crown does not “crystallize” the amount of the debtor’s or the secured creditor’s liability to the Crown. That liability is determined by the amount deemed to be held in the subsection (1) trust which in turn determines the extent to which property of the debtor is deemed to be held pursuant to the subsection (3) trust.

… Subsection (1.1) provides that at or after the time of bankruptcy, subsection (1) does not apply to any amounts that were collected on account of tax prior to that time. The result is that after bankruptcy, there is no amount deemed to be held in trust pursuant to subsection (1) for amounts collected as tax but not remitted pre-bankruptcy. The subsection (3) trust which arose prior to bankruptcy no longer has any subject matter because the trust only attaches to property of the tax debtor to the extent of the subsection (1) trust which no longer exists. This is true for the tax debtor as well as for the tax debtor’s secured creditors.

I can see no difference in principle between the reduction of the subsection (1) trust to nil by payment or by operation of law. In either case, the subsection (3) trust whose operation depends upon the existence of an amount deemed to held in trust pursuant to subsection (1), is at an end. ...

Subsection 67(2) makes it clear that Parliament intended to do away with the deemed trusts in bankruptcy. … By eliminating these trusts in bankruptcy, Parliament put the Crown on the same footing as unsecured creditors.

Accordingly, the Crown’s s. 22(3) trust lapsed on the bankruptcy.

The Supreme Court adopted, as its own, the reasons given by Pelletier JA, below, in his dissent, who found that bankruptcy of a tax debtor who had failed to remit GST/HST it had collected effectively had the same result by virtue of ETA s. 222(1.1) as a deemed repayment of the ETA s. 222(1) deemed trust amount for such GST/HST, so that there no longer was any subject matter for the s. 222(3) trust to attach to.

In the course of so finding, he indicated (at paras. 73-73) that s. 67(2) of the Bankruptcy and Insolvency Act reflected that “Parliament put the Crown on the same footing as unsecured creditors” in a bankruptcy – with an exception for employee source deductions, which “is explained by the fact that source deductions are amounts which belong to the employee in question … [and] this money does not belong to the employer anymore.”