Toronto-Dominion Bank – Federal Court finds that the deemed trust for unremitted GST defeated the mortgagee’s priority on a voluntary sale of the mortgaged home

TD Bank made a mortgage loan to an individual who, unbeknownst to it, had unremitted GST collections. A year later the individual sold his home and repaid TD in full. TD found out about the unremitted GST two years later when it received a payment demand from CRA.

Grammond J found that TD was required to comply by virtue of the proposition that the deemed trust under ETA s. 222 for the unremitted GST followed the proceeds of the sale into TD’s hands. Among other arguments, he rejected a submission that (based on attempting to give the word “proceeds” a narrow construction) s. 222(3) did not apply to a voluntary sale as contrasted to a sale under a power of sale, and also rejected the proposition that a secured creditor could benefit from the equitable defence for “purchasers” (including lenders) for value. However, he stated:

I would add that the defence remains available to unsecured creditors, such as suppliers, landlords or public utilities, who receive payments from a tax debtor. In those cases, denying the defence would give rise to the concerns mentioned [in] ... First Vancouver – it “would have a general chilling effect on commercial transactions.”

Similar considerations arise under other statutes, e.g., ITA s. 227(4.1). It may become more common for loan agreements to require the regular provision by borrowers of statements of account with CRA, and for acceleration if this is not done.

Neal Armstrong. Summary of Canada v. Toronto-Dominion Bank, 2018 FC 538 under ETA s. 222(3).