Callidus Capital – Supreme Court of Canada finds that the deemed Crown statutory trust for unremitted GST/HST lapses on a bankruptcy of the tax debtor

ETA s. 222(3) provides that payments received by a secured creditor out of property that is subject to the deemed statutory trust under s. 222(1) for collected but unremitted GSTHST is itself subject to a deemed trust in favour of the Crown. However, s. 222(1.1) provides that s. 222(1) “does not apply, at or after the time [the debtor] becomes a bankrupt…to any amounts that, before that time, were collected…by the [debtor] as or on account of tax….”

In the Federal Court of Appeal, the majority 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.”

The Supreme Court has now adopted, as its own, the reasons given by Pelletier JA in his dissent. Pelletier JA found that the bankruptcy effectively had the same result as a deemed repayment of the s. 222(1) deemed trust amount, so that there no longer was any subject matter for the s. 222(3) trust to attach to.

In addition to more textual and technical reasons for this conclusion, he referred to s. 67(2) of the Bankruptcy and Insolvency Act as reflecting 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.”

Neal Armstrong. Summary of Callidus Capital Corp. v. Canada, 2018 SCC 47 under ETA s. 222(1.1).