TD Bank – Federal Court of Appeal finds that s. 227(4.1) does not apply to sales proceeds paid by the tax debtor to an unsecured creditor

An employer, a restaurant company, which had failed to remit employee source deductions, sold a property and, instead of paying the unremitted source deductions, used the proceeds from the sale to pay an amount owing to an unsecured creditor, namely the TD Bank, with whom it had run up various overdrafts.

In response to a Rule 220 question posed to this effect, Webb J.A. concluded that:

An unsecured creditor can rely on the bona fide purchaser for value defence to defend against a claim by the Crown [under s. 227(4.1)] for the unremitted source deductions of an employer who paid proceeds from the sale of their property to the unsecured creditor.

In this regard, he found that:

• the authorities supported the view that the rules of equity, including the bona fide purchaser defence (including for an unsecured creditor receiving payment of a debt), can apply to a statutory trust such as that under s. 227(4.1).
• the opposite conclusion would imply that, where a tax debtor, rather than paying the proceeds of sale to satisfy the unremitted source deductions, paid such amounts as wages to employees, such amounts would be income to the employees under s. 5(1), without any deduction (by virtue of the prohibition in s. 8) for the requirement under the Crown’s interpretation to repay the wages pursuant to s. 227(4.1).
• the availability of the bona fide purchaser defence to unsecured creditors was not inconsistent with its unavailability under s. 227(4.1) to secured creditors given “that secured creditors are in a better position to manage the risk of being exposed to a claim for unremitted source deductions than unsecured creditors would be”.

Neal Armstrong. Summaries of Toronto-Dominion Bank (TD Canada Trust) v. Canada, 2026 FCA 25 under s. 227(4.1), s. 5(1) and Statutory Interpretation - Presumption of knowledge of legal context.