TD Bank – Federal Court finds that s. 227(4.1) attaches to proceeds of the deemed trust property when paid to an unsecured creditor, which lacks a purchaser for value defence

TD Bank received all of the net proceeds of the sale of the business of its customer (the “Debtor”) in repayment of the Debtor’s unsecured overdraft with the Bank. Regarding CRA’s subsequent claim for the amount of unremitted source deductions of the Debtor at the time of the overdraft repayments, the Bank took the position that the s. 227 deemed trust ceased to apply once the money was conveyed by the Debtor to it, and noted that the s. 227(4) and (4.1) language referred explicitly only to secured, not unsecured, creditors.

Southcott J found that where a tax debtor conveys money that has been subject to a s. 227 deemed trust to an unsecured creditor, such money represents proceeds of trust property so as to engage the application of s. 227(4.1), by whose terms “the proceeds of such property shall be paid to the Receiver General…”.

The Bank also took the position that it could rely on the bona fide purchaser for value defence to defend against the deemed trust claim. Southcott J accepted that it was sufficient to come within the referenced equitable doctrine that the Bank, although not literally a “purchaser,” had provided value to the Debtor through the overdraft reduction. However, he stated that “it would be inconsistent with Parliament’s intent in enacting the deemed trust provisions to afford unsecured creditors recourse to the bona fide purchaser defence” so that this defence was excluded as a matter of statutory interpretation.

Neal Armstrong. Summary of Canada v. The Toronto-Dominion Bank (TD Canada Trust), 2024 FC 441 under s. 227(4.1).