Section 227

A general security interest (and a charge under s. 427 of the Bank Act) in favour of the respondent represented a fixed and specific charge on the inventory of the debtor, thereby giving priority to the respondent over the statutory trust created under s. 227(4) with respect to subsequent failures to remit source deductions. Although the security interest of the respondent was limited by the licence accorded to the debtor to deal with inventory in the ordinary course of business, this limitation applied only to the extent that there was a sale of inventory and an application of proceeds to an obligation of a third party, and did not apply here, where there is no such sale of inventory in the ordinary course of business.

The defendant (the “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. Over two years later, the Bank received a CRA claim for a portion of such proceeds regarding the unremitted source deductions of the Debtor at the time of the overdraft repayments. In the context of a Rule 220 question as to whether s. 227 applied to unsecured creditors (such as the Bank), 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 second Rule 220 question posed was whether an unsecured creditor can rely on the bona fide purchaser for value defence to defend against a 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, this doctrine was not intended by Parliament to apply for s. 227(4.1) purposes. After referring (at para. 88) to “Parliament’s intention to afford the Crown priority access to the value of the tax debtor’s assets,” 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” (para. 88).

At the conclusion of the sale process for the assets of two debtors who had filed a proposal under the Bankruptcy and Insolvency Act (“BIA”), the net sale proceeds were less than both the amount of interim financing from CIBC that the Quebec Superior Court had ordered to have a super-priority, and the total amount of unremitted federal and Quebec source deductions.

In finding that the Superior Court had the jurisdiction to provide that the super-priority charge ranked ahead of the deemed trust for the federal source deductions under ITA s. 227(4.1) (as well as the Quebec equivalent), Schrager JA noted:

• Canada North decided that CCAA courts could grant super-priority charges ranking in priority to s. 227(4.1) deemed trusts
• Callidus indicated that the “proposal provisions in the BIA serve … the same remedial purpose as those in the CCCA – i.e., the financial rehabilitation of an insolvent corporate debtor” and “to the extent possible, the two statutes should be treated in a harmonized fashion” (para. 46).
• Regarding the Attorney General’s argument - that BIA s. 50.6(3), which provided that the “court may order that the … charge rank in priority over the claim of any secured creditor,” did not apply because s. 227(4.1) did not create a security interest - “it would seem nonsensical in the overall scheme of the BIA that a court could order that the interim lending charge take priority over the claim of any hypothecary or mortgage creditor but not over the claim of an unsecured creditor benefiting from a sui generis non-proprietary right akin to a floating charge, that is, the ITA Deemed Trust” (para. 51).
• If the above interpretation of s. 50.6(3) was incorrect, the Superior Court nonetheless had the inherent jurisdiction to order the super-priority: “Judgments of this Court have acknowledged the existence of this inherent jurisdiction under the BIA” (para. 57).

The Crown challenged an order of the Alberta judge in proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) regarding the Canada North group of companies that “priming charges” pursuant to s. 11 of the CCAA for counsel fees, costs of the monitor and financing charges would rank in priority to all other security interests and charges, arguing that this priority was contrary to ITA s. 227(4.1). The Crown argued that (1) s. 227(4.1) created a proprietary interest in the debtors’ assets and a court could not attach a super-priority charge to assets that were not the debtors’ property, and (2) in any event, s. 227(4.1) created a security interest that had statutory priority over all other security interests, including super-priority charges.

Before rejecting both arguments in detail, Côté J, writing for herself and two other Justices, stated (at para. 4):

In all cases where a supervising court is faced with a deemed trust, the court must assess the nature of the interest established by the empowering enactment, and not simply rely on the title of deemed trust. In this case, when the relevant provisions of the ITA are examined in their entirety, it is clear that the ITA does not establish a proprietary interest because Her Majesty’s claim does not attach to any specific asset. Further, there is no conflict between the CCAA order and the ITA , as the deemed trust created by the ITA has priority only over a defined set of security interests. A super-priority charge ordered under s. 11 of the CCAA does not fall within that definition.

In elaborating on her first ground, she noted that, in addition to the “indeterminacy” of which specific assets were covered by the deemed trust (para. 44), “the fact that assets subject to the deemed trust are indeterminate makes the trustee’s role effectively impossible to play” (para. 45), so that there was no trust under Quebec Civil Law concepts. Similar considerations indicated that’s. 227(4.1) did not create a trust that accorded with common law concepts.

In In elaborating on her second ground, she stated (at para. 60):

If Parliament had intended that the deemed trust have absolute priority, it would not have enacted s. 227(4.2) at the same time. … [S]. 227(4.2) provides that “a security interest does not include a prescribed security interest”, and thus specifically envisions that the deemed trust will not have absolute priority. In my view, by using the words “in priority to all such security interests” in s. 227(4.1), Parliament intended that the priority be absolute not over all possible interests, but only over security interests as defined in s. 224(1.3). What must therefore be determined is whether a court-ordered super-priority charge under the CCAA falls within that definition. …

After noting the definition of security interest in s. 224(1.3) (referenced in s. 227(4.1),) she further stated (at para. 62):

… [T]he list of illustrative security interests makes it clear that a super-priority charge created under the CCAA cannot fall within its meaning. Court-ordered super-priority charges are utterly different from any of the interests listed. These super-priority charges are granted, not for the sole benefit of the holder of the charge, but to facilitate restructuring in furtherance of the interests of all stakeholders. In this way, they benefit the creditors as a group. The fact that Parliament chose to provide a list of examples whose nature is so unlike that of a court-ordered super-priority charge demonstrates that it must have had a very different type of interest in mind when drafting s. 224(1.3) …

She also stated (at para. 72):

[C]ourts should still recognize the distinct nature of Her Majesty’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. …

In the concurring reasons of Karakatsanis J (writing for herself and another Justice), she agreed that s. 227(4.1) does not satisfy the requirements for a trust, and then stated (at paras. 172-173):

First, given my conclusion about the content of the Crown’s right under s. 227(4.1) of the ITA for the purposes of the CCAA (requiring that it at least be paid in full under a plan of compromise), ranking a priming charge ahead of the Crown’s deemed trust does not conflict with the ITA provision. So long as the Crown is paid in full under a plan of compromise, the Crown’s right under s. 227(4.1) remains intact “notwithstanding any security interest” in the amount of the unremitted source deductions. For this reason, it is irrelevant whether a priming charge under ss. 11, 11.2, 11.51 or 11.52 of the CCAA is a “security interest” within the meaning of s. 227(4) and (4.1) of the ITA. The analysis above does not depend on finding that a priming charge is not captured within the ITA definition.

In addition, depending on the circumstances, such an order may further the remedial objectives of the CCAA.

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 (under ETA s. 222(4) – similar to ITA s. 227(4.2)) 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 (at para. 85):

[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 (para. 44).

The Supreme Court adopted, as its own, the reasons given by Pelletier JA, below, in his dissent, who found that bankruptcy of a tax debtor who had failed to remit GST/HST it had collected effectively had the same result by virtue of ETA s. 222(1.1) as a deemed repayment of the ETA s. 222(1) deemed trust amount for such GST/HST, so that there no longer was any subject matter for the s. 222(3) trust to attach to.

In the course of so finding, he indicated (at paras. 73-73) that s. 67(2) of the Bankruptcy and Insolvency Act reflected 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.”

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….”

Rennie JA 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, and instead were scooped by it. Before so finding, he noted the similarities between ETA s, 222(3) and ITA s. 227(4.1), and stated (at para. 21):

This Court, in Banque Nationale [a.k.a. National Bank] noted that the Crown has absolute priority over proceeds from property subject to a deemed trust, and that “the positive obligation imposed on the secured creditor to pay the Receiver General the proceeds from the property subject to the trust could not be clearer”: Banque Nationale at para 37. The Court went on to note that a secured creditor who does not comply with this obligation “is personally liable,” and the amount is “payable” to the Receiver General and may be enforced as a cause of action under the appropriate Income Tax Act provisions.

In his dissenting reasons, Pelletier JA referred inter alia to s. 67(2) of the Bankruptcy and Insolvency Act, which reflected an intention 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” (paras. 73-74).

Before dismissing the appellant's appeal, the Court noted that s. 227(4.1) only gave the Crown the right to obtain proceeds from a property and did not alter the ownership of the property in question (here, the ownership of a skidder in respect of which the appellant had exercised its hypothecary rights.) under the applicable provincial law.

The respondents, who seized and sold movable property secured by movable hypothecs, were required to comply with a demand made upon them to pay over amounts equal to the unpaid source deductions at the time of such sale given that they should be considered to be secured creditors rather than third party purchasers.

The Appellant, who was the assignee of a conditional sales agreement for the sale of a vehicle to a purchaser ("Mega Pets") was entitled to priority over CCRA with respect to the sales proceeds received by CCRA on a sale of the vehicle after its seizure given that conditional sales agreements were not included in the definition of a security interest in s. 224 of the Act, and under the "but for" test in s. 227(4.1), the vehicle would never have become the property of Mega Pets if the sales agreement had not been entered into.

The appellant ("First Vancouver") purchased accounts receivable from a tax debtor ("Great West") that was in arrears in remitting source deductions.

Requirements to pay that were issued under s. 224(1.2) by the Minister to the person owing the accounts receivable did not attach to the accounts receivable that had been purchased by First Vancouver. The s. 227(4.1) deemed trust was similar in principle to a floating charge over all the tax debtor's assets in favour of Her Majesty. Viewed in this way, property that came into possession of a tax debtor was caught by the trust and became subject to Her Majesty's interest and, similarly, property which the tax debtor disposed of was thereby released from the deemed trust (as occurred here)

The respondent was an assignee of a general security agreement which had been registered prior to a failure of the debtor ("Tuxedo") to remit source deductions. The Court reversed a finding of the chambers judge that only property existing at the time the trust under s. 227(4) is created is subject to the trust and that property of a taxpayer that comes into existence afterwards is not subject to the trust. Donald J.A. stated (at p. 145) that "the chambers judge's interpretation effectively adds words of limitation to 'property' confining that term to that which existed when the trust became operative".

The chambers judge concluded that the deemed trust arising in respect of a failure to make source deduction from August through November 1996 did not apply to property of the taxpayer that subsequently came into existence. The Court of Appeal overturned this finding, indicating (at p. 6504) that "beginning with the date the deductions are made, the trust continues forward in time and attaches to any property of the debtor as it comes into existence".

Given that the respondent had made payments of remuneration to employees as a bare trustee for the employer and that the decision to make payments of the net salaries of the employees was that of the principals of the employer alone, it followed that the respondent was not within the scope of s. 153(1), 153(1.3) or 227(5).

A receiver was appointed to sell the defendant's Motor Carrier Commission licences by way of equitable execution.

Hollinrake J.A. found that the word "receivership" connotes "an intention to refer to all the assets of the person, and ... cannot be read to include the sale of one asset through equitable execution by a receiver".

A statutory deemed trust created by s. 3(4) of the Payment of Wages Act (Manitoba), which provided that "every employer shall be deemed to hold the wages due or accruing due to an employee in trust for the employee ... whether or not the amount of the wages has been kept separate and apart by the employer" had priority over a s. 227(4) trust because it came into effect when the wages were due, whereas a s. 227(4) trust does not come into existence until an event of receivership.

S.227(5) "created a trust fund which is artificial to the extent that trust moneys had been mixed with other assets of the deemed trustee. It obviates the necessity of tracing those funds in order to enforce the trust."

Since S.227(5) does not deem the amounts deducted to have been kept separate and apart, then if the amounts deducted are not kept separate they must be traceable as trust moneys in order to be recovered by the Crown.

The appellant partnership "grossed-up" fees paid by it to non-resident studios on the basis that the fees were subject to Part XIII tax. Later, CRA assessed the partners of the appellant on the basis that the fees were not deductible in computing its income. The effect of this treatment was that, under s. 212(13.1)(a), the fees were not subject to Part XIII tax.

The applicant brought an application against CRA for unjust enrichment (as the non-resident studios did not apply under s. 227(6) for a refund of the Part XIII tax that had been withheld by the appellant on the grossed-up fees). In dismissing this application, Feldman, J.A. stated (at para. 14) that "the Act provides a complete procedural code for the return of non-resident withholding taxes whether paid under mistake or where there was no liability for the tax" and stated (at para. 13):

"It would appear that if the person resident in Canada who was obliged to withhold and remit to CRA wants the ability to claim a refund from CRA in case of an incorrect or overpayment, it must have an assignment or other legal arrangement with the non-resident that allows the resident to assert that non-resident's rights."

In a prior decision, the Tax Court had found that the taxpayer's directors were protected from liability for unremitted source deductions under s. 227.1(1) because they had a due diligence defence under s. 227.1(3). The question in the present case was whether the taxpayer would be liable under s. 227(9)(b). The taxpayer argued that its reassessment should be barred, because the question of source deduction liability on the present facts had already been settled by the prior Tax Court decision.

The Court of Appeal affirmed the Tax Court judge's finding that the reassessment was not barred by the doctrines of res judicata and issue estoppel. Regarding s. 227(9), Noël J. stated (at para. 3):

Like the Tax Court judge, I am prepared to assume for present purposes that a defence may be validly advanced against a failure to remit where the failure is caused by events beyond the employer's control. [In the TCC decision, Bowie J. gave the examples of a failure of the post office to deliver a remittance mailed on time, or an error made by a bank clerk in transferring funds.] However, such a failure cannot possibly be justified by a decision by the employer to appropriate for its own use source deductions in order to keep the business afloat in difficult times as was done here (reasons, paras. 21 and 22). In choosing to act as it did, the appellant ignored the unconditional duty imposed on it by subsection 153(1) and is, as such, liable to the assessed penalties.

An arrangement under which the plaintiff paid the net wage amounts owing to a subcontractor of the plaintiff in financial difficulty after being advised by the subcontractor of the gross salaries of the employees and the amount of applicable source deductions was characterized as the plaintiff having undertaken the obligation of the subcontractor to pay the salary and wages of the subcontractor's employees. Accordingly, the assessment of the Minister under s. 227(9) for the amount of source deductions plus penalty was affirmed.

The receiver-manager of a corporation ("Comanche") decided to pay the employees of Comanche the amounts owing to them net of source deductions, and instructed a corporation ("Comcheg") which previously had prepared the payroll for Comanche to prepare the payroll. Comcheg paid the employees the net amounts, issued them information slips showing the amount of their gross wages and source deductions, and was reimbursed by the receiver-manager. Rouleau, J. held that the source deductions had in fact been deducted, with the result that there was a failure to remit those deductions pursuant to s. 227(9). Unlike the Coopers & Lybrand case, funds were actually available to pay the remittances.

A penalty for failure to remit employee source deductions on the due date of February 15, 1985 was not a claim provable in bankruptcy because the proposal under the Bankruptcy Act was filed on February 6, 1985.

An employer who does not remit source deductions on time is liable to the penalty even if he remits before the time of assessment. "[A] penalty comes into existence the moment the statute is breached."

The payment by a receiver-manager of the net amount of the unpaid wages of the employees of the debtor company, without any deduction or remittance on account of taxes, was characterized as a default under S.227(8) (resulting in a 10% penalty) rather than S.227(9) (under which, prior to its replacement by the present ss.227(9) and (9.4) there in effect was a 110% penalty). Kelly D.J. stated (p. 6287):

"If the person paying fails to deduct, his failure has no effect on the liability of the employee for income tax it being assumed that the taxing authority will recover from the employee the full amount of the income tax; the only liability incurred by the person paying the salary or wages is a penalty calculated as a percentage of the amount he has failed to deduct. On the other hand if a deduction is actually made and the amount deducted not fully remitted ... the liability of the person paying, over and above the 10% penalty which may be assessed on account of his default in remitting, is an amount equal to the deductions he had failed to remit together with interest thereon."

Interest on unremitted source deductions continues to accrue after a s. 227(10) assessment. The Minister need not make a second assessment to recover that interest, given the effective reference to s. 161(1) applying with any changes that the circustances required.

An assessment which a junior collections official had typed up and sent to the taxpayer was found to have been made by the Minister given that the Deputy Minister was an official authorized under Regulation 900, and the assessment was done in accordance with procedures controlled by the Deputy Minister and by officials acting according to his directions. In any event, there was implied authority accorded to the Deputy Minister to subdelegate to the collections official.

The taxpayer (“CGI”) was a Delaware LLC which, in 2007, was subject to 25% withholding tax on a dividend of $142 million from a Nova Scotia ULC (“NSULC”), as the result of a corporate reorganization. The decision in TD Securities, finding that the LLC in that case was eligible for Treaty benefits, was released beyond the expiry of the 2-year limitation period in s. 227(6) to apply for a refund of the withholding tax so as to reduce the effective rate to 5%.

McDonald J found that CGI could not rely on s. 227(10.1) in the alternative to access a refund beyond the two years, stating (at paras 64, 65 and 67):

…[S]ubsection 227(10.1) … gives the Minister discretion and states that the Minister “may” assess at any time.

In Canada (Attorney General) v Abraham, 2012 FCA 266, [Abraham] the FCA … concluded that this provision did not confer a statutory right to an assessment. …

Here … CGI has not demonstrated a refusal on the part of the Minister to exercise her discretion. ... CGI … filed its Notice of Application for Judicial Review… only a few days after the request for an assessment. In the circumstances, CGI did not provide the Minister with a reasonable period of time to consider the assessment request.

A company ("IW") had made an assignment of book debts to the td Bank. After ceasing business operations, it paid salaries to its employees without withholding and paying source deductions. Revenue Canada thereafter issued a requirement to pay pursuant to s. 224(1.2)(b).

The court indicated that Revenue Canada would have had priority over the TD Bank if s. 227(10.2) had been proclaimed in force by the relevant time.