Docket: T-1940-13
Citation:
2015 FC 977
Ottawa, Ontario, August 17, 2015
PRESENT: The Honourable Madam Justice McVeigh
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BETWEEN:
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HER MAJESTY THE
QUEEN IN RIGHT OF CANADA
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Plaintiff
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and
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CALLIDUS
CAPITAL CORPORATION
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Defendant
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ORDER AND REASONS
[1]
The Defendant in the underlying action, Callidus
Capital Corporation (“Callidus”), has brought a motion for this Court to
determine a question of law, pursuant to Rule 220 of the Federal Courts
Rules, SOR/98-106.
[2]
The Plaintiff, Her Majesty the Queen (the
“Crown”), and Callidus agree to the Statement of Facts set out below solely for
the purposes of this motion:
Background
1. Cheese
Factory Road Holdings Inc. (“Cheese Factory”) is a privately-held Ontario
corporation that carried on business as a real estate investment company.
Cheese Factory is or was the registered owner of properties municipally known
as 680 Bishop Street, Cambridge, Ontario (the “Bishop Property”) and 181
Pinebush Road, Cambridge, Ontario (the “Pinebush Property”).
2. At all material times, Callidus
was a privately-held Ontario corporation that carried on business throughout
Canada as a lender of monies to commercial enterprises on a secured basis.
Failure to remit GST and HST
3. The Crown claims that between
2010 and 2013, Cheese Factory collected but failed to remit GST and HST to the
Receiver General for a total amount of $177, 299.70.
BMO Credit Facilities
4. Pursuant to a commitment letter
dated September 22, 2004, Cheese Factory obtained a credit facility in the
principal amount of $1,950,000 from the Bank of Montreal (“BMO”). Cheese
Factory also granted guarantee and security documents in favour of BMO to
secure its direct and indirect obligations to BMO (collectively, the “Security”).
5. As of December 2, 2011:
a) Cheese Factor was in default under the credit facility extended
to it by BMO in the principal amount of $1,950,000;
b) Cheese Factory was indebted to BMO as borrower under the
commitment letter in the amount of $1,416,418.61 (inclusive of principal and
interest but exclusive of fees);
c) Cheese Factory was in default under the guarantees granted to
it by BMO; and
d) Cheese Factory was indebted to BMO as guarantor in the amounts
of $3,387,658.53 and US$81,233.28, which amounts include principal and interest
but do not include fees.
Assignment of Debt and Obligation to
Callidus
6. Pursuant to an Assignment of Debt
and Security agreement dated December 2, 2011, BMO assigned to Callidus all of
its right, title and interest in and to the direct and indirect indebtedness
and obligations owed to it by Cheese Factory, along with the Security.
7. Pursuant to a Forbearance
Agreement dated December 2, 2011, Callidus agreed to forbear from enforcing the
BMO agreements, subject to and in accordance with the terms and conditions of that
Forbearance Agreement. Pursuant to the Forbearance Agreement, Callidus also
agreed to extend to Cheese Factory (and other debtors) certain demand credit
facilities, which amended the credit facilities granted by BMO.
Sale Proceeds from the Bishop Property
8. Pursuant to the terms of the
Forbearance Agreement, Cheese Factory agreed to market the Bishop Property,
among other properties, for sale and to deliver the net sales proceeds to
Callidus to partially repay the amounts owed to Callidus under the credit
facilities.
9. On or about April 5, 2012, Cheese
Factory sold the Bishop Property to Poladian Holdings Inc. for a purchase price
of $790,000.
10. On or about April 9, 2012,
Callidus received $590,956.62 from the sale of the Bishop Property (the “Sale
Proceeds”).
11. Callidus has applied the Sale
Proceeds to partially reduce the outstanding indebtedness and obligations owed
to it by Cheese Factory.
Rent Proceeds from the Pinebush
Property
12. Pursuant to the terms of the
Forbearance Agreement and a Blocked Accounts Agreement dated November 9, 2011
(the “Blocked Accounts Agreement”), Cheese Factory also agreed to open
blocked accounts (the “Blocked Accounts”) at Royal Bank of Canada (“RBC”)
and to deposit all funds received from all sources into the blocked accounts.
13. The
Blocked Accounts Agreement provides that:
a) Cheese Factory shall hold all cash and Cheques(as defined
therein) received by it in trust for Callidus, segregated from all other funds
and property of Cheese Factory, until such time as the cash and Cheques are
delivered to RBC for deposit in the Blocked Accounts; and
b) RBC shall
transfer, prior to the end of each Business Day, all amounts on deposit in the
Blocked Accounts to Callidus’ account or accounts.
14. All rent proceeds received from
Cheese Factory or from the tenant of the Pinebush Property since December, 2011
have been deposited into the Blocked Accounts.
15. Since the date that Callidus
received an assignment of the BMO credit facilities and security on December 2,
2011 up to and including July 31, 2014, the sum of $780,387.62 in gross rent
has been deposited into the Blocked Accounts.
16. Callidus has applied all amounts
deposited into these accounts to partially reduce the outstanding debt and
obligations owed to it by Cheese Factory.
Deemed Trust Asserted by the Crown
17. On or about April 2, 2012, the
Plaintiff, by way of a letter to Callidus, claimed an amount of $90,844.33 on
the basis of the deemed trust mechanism of the Excise Tax Act, RSC 1985,
c B-3, as amended (the “ETA”).
Bankruptcy of Cheese Factory
18. On or about November 7, 2013, at
the request of Callidus, Cheese Factory made an assignment in bankruptcy under
the Bankruptcy and Insolvency Act, RSC, 1985, c B-3, as amended.
Action Commenced by the Crown
19. The Plaintiff commenced this
proceeding against Callidus pursuant to a statement of claim dated November 25,
2013.
20. The Plaintiff claims the total
amount of $177,299.70 plus interest from Callidus on the basis of the deemed
trust mechanism governed by section 222 of the ETA on account of GST and HST
that Cheese Factory collected but failed to remit for the reporting periods
commencing on October 31, 2010 up to and including January 31, 2013.
21. The Plaintiff contends that as a
result of Cheese Factory’s failure to remit GST and HST to the Receiver
General:
a) All of Cheese
Factory’s assets were deemed to be held in trust in favour of the Plaintiff in
priority to the claims of Callidus pursuant to section 222 of the ETA; and,
b) All proceeds
of Cheese Factory’s property received by Callidus, up to the amount secured by
the deemed trust, should have been paid to the Receiver General of Canada as a
result of the deemed trust mechanism under section 222 of the ETA.
22. Callidus served and filed a
statement of defence.
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?
I.
Applicable Legislation
[3]
The applicable legislation is attached as Annex
“A”.
II.
Parties’ Submissions
A.
Callidus – Defendant
[4]
Callidus interprets sections 222(1.1) and 222(3)
of the ETA to mean that the deemed trust does not apply once the tax debtor
becomes bankrupt. This means that the Receiver General of Canada’s (“Receiver
General”) deemed trust claim for collected but unremitted GST and HST is
ineffective on bankruptcy and ranks as an ordinary unsecured claim.
[5]
Callidus submits that the deemed trust
established under section 222(3) is like a “floating charge” and does not
attach to any specific property. Thus the tax debtor may deal with its property
free of the deemed trust. Further, section 222(3) does not allow for the deemed
trust to continue to attach to the property of the tax debtor following payment
to a creditor, whether or not the tax debtor has subsequently become bankrupt.
Callidus proposes that had Parliament intended for the deemed trust to continue
to attach to the property, clear and unambiguous language would have been used.
The fact that section 222(3) does not include such language is reflective of
Parliament’s clear legislative intent.
[6]
Meanwhile, section 222(1.1) does not distinguish
between property collected and disbursed by the tax debtor and property that
continues to be in the possession of the tax debtor at the time of bankruptcy.
[7]
Callidus submits that if the Crown were
permitted to recover amounts paid by a tax debtor to its creditors
notwithstanding subsequent bankruptcy, creditors would have no incentive to try
to work with their debtors to avoid bankruptcy. Callidus argues that creditors
would attempt to immediately place debtors in bankruptcy rather than reaching
an out-of-court solution, which would aggravate the social and economic losses
of insolvency.
[8]
Callidus analogizes the facts in this case to
those presented in Bank of Nova Scotia v Huronia Precision Plastics Inc,
2009 OJ No 312 (“Huronia”). In Huronia, where the assets of
the tax debtor had been sold prior to the tax debtor becoming bankrupt and were
being held by the receiver subject to the claims of the bank and the Receiver
General. In that decision, Justice Morawetz, formerly of the Ontario Superior
Court of Justice (Commercial List), held that the operation of section 222(1.1)
of the ETA means that any priority granted to a deemed trust under section
222(1) does not apply to amounts that were collected or became collectable at
or after the time a person becomes bankrupt within the meaning of the Bankruptcy
Insolvency Act, RSC, 1985, c B-3 (“BIA”).
[9]
Callidus further drew comparisons to Re
Gold's Gym and Total Fitness Inc (Bankrupt), 2005 ABQB 716, where the bank
seized and sold the tax debtor’s equipment to pay a portion of the debt owed.
There, in obiter, the Court noted that the tax debtor’s property that
was subject to a deemed trust pre-bankruptcy ceases to be subject to that trust
upon bankruptcy.
[10]
Finally, Callidus argues that it is entitled to
apply for an assignment in bankruptcy in order to reverse priorities and that
it is a legitimate reason to bring such an application (Re Ivanco Inc,
[2006] OJ No 4152 (ONCA); CIBC Mortgages Inc (Firstline Mortgages) v
Chartrand, 2010 ONCA 456 at para 8).
B.
Crown - Plaintiff
[11]
The Crown’s primary submission is that the
deemed trust pursuant to section 222(3) provides two layers of protection in
respect of GST and HST remittances. Firstly, the assets of the tax debtor are
deemed to be held in trust for, and beneficially owned by, the Crown despite a
security interest. Secondly, and most importantly for the issue at hand, the
Crown argues that the deemed trust is a personal and independent liability
imposed on secured creditors who do not pay Crown proceeds that they have
received from the sale of assets “imprinted” with a deemed trust.
[12]
The Crown submits that the language of section
222(3) imposes a positive obligation which mandates that proceeds of assets
“imprinted” with a deemed trust shall be paid:
222(3) […] and the proceeds of the property
shall be paid to the Receiver General in priority to all security interests
[13]
The Crown submits that the word “shall” confers
no residual discretion and that where a secured creditor fails to comply with
the obligation to pay the deemed trust proceeds, they become personally liable
for the unpaid amounts. The Crown submits that the Crown then has an
independent cause of action against the secured creditor.
[14]
In support, the Crown cites Banque National v
Canada, 2004 FCA 92 (“Banque National”), where the Federal Court of Appeal
wrote:
[40] It seems
obvious to me that a secured creditor who does not comply with his statutory
obligation to "pay" the Receiver General the proceeds of property
subject to the deemed trust in priority over his security interest is
personally liable and thereby becomes liable for the unpaid amount.
[15]
The Crown submits that the effect of section
222(1.1) is to release all assets from the deemed trust that are owned by the
tax debtor at the time of bankruptcy. However, this section of the ETA does not
alter the personal liability, as described above, of creditors who received
proceeds pre-bankruptcy from the sale of deemed trust assets. The Crown submits
that the secured creditor’s liability originates, and the cause of action crystalizes,
prior to the bankruptcy. Specifically, the liability of the creditor and
separate cause of action is not dependent on whether the deemed trust continues
to operate.
[16]
The Crown characterizes this as a pre-existing
and fully engaged cause of action for pre-bankruptcy misapplication of
proceeds. The Crown’s position is that section 325 of the ETA results in
personal liability for a third party who receives property from a person for
less than fair market value. The transferee under that section then becomes
liable for the tax debt. The Crown argues that the secured creditor’s liability
has a “life of its own” and the eventual bankruptcy is irrelevant.
[17]
Particularly, the Crown cites Caisse
populaire Desjardins de l'Est de Drummond v Canada, 2009 SCC 29 (“Caisse”)
in support of its position that the deemed trust does not operate exclusively
in relation to source deductions. The Crown submits that the ETA provides other
examples of collection tools where the liability of a third party is not
affected by subsequent bankruptcy. The Crown analogizes to the garnishment
provisions in section 317(3) of the ETA where the Crown has priority over all
competing creditors. The Crown submits that despite the clause excluding the
BIA, where a requirement to pay (“RTP”) has been served before bankruptcy, the
tax debtors subsequent bankruptcy does not erase the liability of the third
party who did not pay.
[18]
In support of their position the Crown cites TD
Bank Bank v Canada, 2010 FCA 174 (“TD Bank”), aff’d 2012 SCC 1. In that case
the Federal Court of Appeal found that upon receipt of the requirement to pay,
the secured creditor had a statutory obligation to pay the amount required and
if not paid, then personal liability attached despite the bankruptcy of the tax
debtor. The Crown submits that the same logic applies to deem trust assets
received prior to bankruptcy, as it ensures consistency among statutory
collection tools.
[19]
Finally, the Crown attacks the cases relied on
by Callidus and argue that they do not involve a “pre-existing personal and
independent liability” of secured creditors. The Crown argues that the
legislative intent of the 1992 BIA reforms was not to diminish the Crown
ability to recover from secured creditors before bankruptcy, but to bolster
recovery for unsecured creditors in a bankruptcy context.
III.
Analysis
[20]
In my view, the question of law should be
answered in the affirmative. A plain reading of the legislation and an
examination of the relevant jurisprudence establish that upon the bankruptcy of
Cheese Factory, the deemed trust under section 222(1) of the ETA was rendered
ineffective against Callidus for collected but unremitted GST and HST.
[21]
The issues in this case are similar to those
considered by the Supreme Court in Century Services Inc v Canada (Attorney
General), 2010 SCC 60 (“Century”). I employ the same reasoning used by the
Supreme Court of Canada in that case to the question of law at issue here,
keeping in mind that in this case we are not dealing with source
deductions and there was never a Requirement To Pay or garnishment served.
[22]
Section 222(1) of the ETA explicitly provides
that GST or HST collected is deemed held in trust for the Crown and it is not
the property of the collector. The deemed trust mechanism applies also to third
parties and for all purposes.
[23]
Section 222(3) of the ETA is an extension of the
deemed trust: if the collected GST and or HST are not paid, the equivalent
funds or property of the tax debtor are deemed to be property of the Crown,
despite any security interest. The extension of the trust gives the Receiver
General greatest priority over all other claims and security interests. This
absolute priority of claims contrasts sharply with the ordinary creditor status
of the Crown in bankruptcy as seen in section 222(1.1).
[24]
Section 222(1.1) of the ETA, provides that the
deemed trust is extinguished upon bankruptcy of the tax debtor. Sections 67(2)
and 67(3) of the BIA work in conjunction with the provision by reinforcing with
strong language that the deemed trust does not exist following bankruptcy
unless the amounts deducted are considered source deductions, i.e. income tax,
Canada Pension Plan deductions or Employment Insurance deductions.
[25]
In Century, the Supreme Court of Canada
outlined the legislative history that led to the enactment of section 222(1.1)
in 1992 (“the 1992 amendments”). The Court wrote that prior to these
amendments, Crown claims had priority; however, legislative reform proposals at
the time recommended that Crown claims should not receive preferential
treatment.
[26]
Madam Justice Deschamps writing for the majority
in Century discussed priorities when dealing with the BIA and Companies
Creditors Arrangement Act, RSC, c C-36 (“CCAA”) in the context of deemed
trusts. She covered the history of the priority scheme in insolvency and the
policy backdrop for the development of the law. The Court noted that Parliament
appeared to move away from asserting priority for Crown claims in insolvency
law and more specifically, found that:
[45] …Where Parliament has sought to protect
certain Crown claims through statutory deemed trusts and intended that these
deemed trusts continue in insolvency, it has legislated so explicitly and
elaborately. For example, s. 18.3(2) of the CCAA and s. 67(3) of the BIA
expressly provide that deemed trusts for source deductions remain effective in
insolvency. Parliament has, therefore, clearly carved out exceptions from the
general rule that deemed trusts are ineffective in insolvency. The CCAA
and BIA are in harmony, preserving deemed trusts and asserting Crown
priority only in respect of source deductions. Meanwhile, there is no express
statutory basis for concluding that GST claims enjoy a preferred treatment
under the CCAA or the BIA. Unlike source deductions, which are
clearly and expressly dealt with under both these insolvency statutes, no
such clear and express language exists in those Acts carving out an exception
for GST claims.
Emphasis added
[27]
However, Justice Deschamps also recognized a
potential inconsistency in the Crown’s position in relation to the CCAA:
[47] Moreover,
a strange asymmetry would arise if the interpretation giving the ETA
priority over the CCAA urged by the Crown is adopted here: the Crown
would retain priority over GST claims during CCAA proceedings but not in
bankruptcy. As courts have reflected, this can only encourage statute
shopping by secured creditors in cases such as this one where the debtor’s
assets cannot satisfy both the secured creditors’ and the Crown’s claims (Gauntlet,
at para. 21). If creditors’ claims were better protected by liquidation under
the BIA, creditors’ incentives would lie overwhelmingly with avoiding
proceedings under the CCAA and not risking a failed reorganization.
Giving a key player in any insolvency such skewed incentives against
reorganizing under the CCAA can only undermine that statute’s remedial
objectives and risk inviting the very social ills that it was enacted to avert.
[49] Evidence that Parliament intended
different treatments for GST claims in reorganization and bankruptcy is scant,
if it exists at all. ….. Indeed, the summary for deemed trusts states only that
amendments to existing provisions are aimed at “ensuring that employment
insurance premiums and Canada Pension Plan contributions that are required to
be remitted by an employer are fully recoverable by the Crown in the case of
the bankruptcy of the employer” (Summary to S.C. 2000, c. 30, at p. 4a). The
wording of GST deemed trusts resembles that of statutory deemed trusts for
source deductions and incorporates the same overriding language and reference
to the BIA. However, as noted above, Parliament’s express intent is
that only source deductions deemed trusts remain operative. An exception for
the BIA in the statutory language establishing the source deductions
deemed trusts accomplishes very little, because the explicit language of the BIA
itself (and the CCAA) carves out these source deductions deemed trusts
and maintains their effect. It is however noteworthy that no equivalent
language maintaining GST deemed trusts exists under either the BIA or
the CCAA.
Emphasis added
[28]
Ultimately, the Supreme Court in Century
stated that there is little evidence that the CCAA and the BIA were intended to
be treated differently by Parliament. Accordingly, the result in Century
is that a deemed trust for GST remitted does not survive a CCAA reorganization and
that same result can be analogized to what occurs in the BIA. The extension of
the deemed trust created by section 222(3) of the ETA does not operate in
bankruptcy when section 67(2) of the BIA governs.
[29]
Mr. Justice Fish, who concurred with the
majority, wrote his own reasons regarding the interaction between the CCAA and
the ETA. His reasons add support to those written by Madam Justice Deschamps in
that they shared the conclusion that there was no deemed trust for GST after
bankruptcy, save, of course, source deductions.
[30]
Mr. Justice Fish noted that Parliament had given
“detailed” consideration to Canada’s insolvency scheme and it is the role of
the Court “to treat Parliament’s preservation of the
relevant provisions as a deliberate exercise of the legislative discretion that
is Parliament’s alone” (Century at para 95). He continued at
paragraph 105:
[105] …Although Parliament creates a deemed trust in favour of the Crown to
hold unremitted GST monies, and although it purports to maintain this trust
notwithstanding any contrary federal or provincial legislation, it does not
confirm the trust — or expressly provide for its continued operation — in
either the BIA or the CCAA.
[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.
[34]
In Caisse, both the Quebec Court of
Appeal and the Supreme Court of Canada described the 1992 amendments as clearly
enacted to limit the Crown’s priority in order to create a better balance
between creditors during bankruptcy. The Supreme Court found that Parliament’s
intent was clear and had explicit wording governing what happens during
bankruptcy and that the provisions also had express exceptions, such as for
source deductions.
[35]
As in Century and Caisse, here the
Crown seeks to maintain the deemed trust without express legislative language
to do so. As I stated above, the Supreme Court in Century states that
where the Crown wishes to protect claims, it does so through explicit and
elaborate legislation. However, section 222(1.1) is neither explicit nor
elaborate to the degree that the Crown wishes to characterize it. The Crown’s
interpretation of section 222(3) is correct in the sense that the words “shall
be paid” is the imperative, however, the exact function of section 222(1.1) is
to remove this imperative. Neither section 222(1.1) nor section 222(3) specify
which assets remain imprinted and which do not. Had Parliament intended to
distinguish between assets in the possession of the tax debtor or those that
had already been sold, it was open to specify as such. Furthermore, the Crown’s
argument at paragraph 46 of their memorandum that the net effect of section
222(1.1) is to release assets owned by the tax debtor is not supported by any
jurisprudence and is not reflected in the language of the statute.
[36]
The Crown’s argument that the 2000 amendments to
the ITA strengthened the deemed trust under section 222(3) overlooks the fact
that the amendments were specific to source deductions, not GST remittance. The
Crown argues that the statutory obligation of Callidus is supported by Banque
National, however, that case was also in relation to source deductions that
were collected by the tax debtor but not remitted. The same is true of the
decisions in Royal Bank v Sparrow Electric Corp, [1997] 1 S.C.R. 411 and First
Vancouver Finance v Minister of National Revenue, 2002 SCC 49 (“First
Vancouver”). The decision in First Vancouver is also distinguishable
on the basis that an Enhanced Requirement To Pay Notice (RTP) was served.
[37]
It appears that the Crown’s analogy to section
317 and section 325 of the ETA further highlights that Parliament has not
enacted a provision that explicitly attaches liability pre-bankruptcy to the
proceeds of sale without a crystalizing event. Sections 317 and 325 specify
that they operate notwithstanding bankruptcy. In section 317, it is receipt of
an RTP and in section 325 it is the moment that the transfer of property for
less than fair market value occurs. In this case, the Crown has not identified
any crystalizing moment that immunizes the deemed trust from the operation of the
BIA and section 222(1.1) of the ETA.
[38]
These collections tools may be distinguished
because, as described in TD Bank, there was a RTP or “notice of
garnishment” received prior to seeking bankruptcy. The Crown analogizes TD
Bank to the case at bar, however, the issue may be distinguished because
the Agreed Statement of Facts did not disclose that a notice of garnishment or
RTP was issued to Callidus. In this case, the Agreed Statement of Facts
describes that a notice by letter was provided, not an official RTP notice.
[39]
The Crown argues that the same logic applies to
this case, however, it is very different. In TD Bank, the RTP was
issued, and the moneys became immediately subject to the RTP, which endured
when bankruptcy was sought in that case. Had Callidus received such a notice,
it would have created the obligation for Callidus to pay the unremitted GST
despite seeking bankruptcy. The Crown’s contention that collection tools should
be harmonious and that independent liability continues notwithstanding subsequent
bankruptcy would make the BIA and CCAA at odds with each other, which is what
the Supreme Court majority decision attempted to prevent in Century.
[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.
IV.
Costs
[43]
The parties were asked at the end of the hearing
if they could reach an agreement as to the amount of costs that should be
awarded to the successful party. The Court thanks the parties for providing an
agreed figure in the amount of $2,600.00 inclusive of HST and disbursements.
[44]
I am awarding costs payable forthwith in the
amount of $2,600.00 to Callidus Capital Corporation by the Receiver General for
Canada on behalf of the Plaintiff, Her Majesty the Queen.
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