Toronto-Dominion Bank – Federal Court of Appeal finds that the deemed trust for unremitted GST defeated the Bank’s security interest 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 the Bank in full. The Bank found out about the unremitted GST two years later when it received a payment demand from CRA.

Dawson JA agreed with Grammond J below that the Bank was required to pay the demanded amount by virtue of the deemed trust for the unremitted GST following the proceeds of the sale into the Bank’s hands by virtue of ETA s. 222(3). She recognized that First Vancouver had found that this deemed trust did not apply to “bona fide purchasers for value” of the tax debtor’s property (so that the trust attached to the sales proceeds rather than following the sold property) – but found that this exception did not apply to the payment of the sales proceeds to the Bank as a secured creditor. The Bank’s mortgage was not excluded as a “prescribed security interest” from the deemed trust rule because it was registered after the deemed trust arose in the tax debtor’s hands.

Respecting the implications of this decision, she stated:

[S]ecured lenders … may identify higher risk borrowers (which might include persons operating sole proprietorships), require borrowers to give evidence of tax compliance, or require borrowers to provide authorization to allow the lender to verify with the Canada Revenue Agency whether there are outstanding GST liabilities then known to the Agency.

She noted that ITA s. 227(4.1) was similar, except that the ITA deemed trust did not disappear in CCAA or bankruptcy proceedings.

Neal Armstrong. Summary of Canada v. Toronto-Dominion Bank, 2020 FCA 80 under ETA s. 222(3).