Secured Creditor Trumps CRA in HST Deemed Trust Case

HST Deemed Trust and Secured Creditors

Section 222(3) of the Excise Tax Act, R.S.C. 1985, c. E-15 (“ETA”) creates a statutory deemed trust on all property of the debtor ranking in priority to all security interests in such property for collected but unremitted HST.  The deemed trust ceases to have any effect upon bankruptcy of the debtor or in restructuring proceedings commenced by the debtor under the Bankruptcy and Insolvency Act  or the Companies’ Creditors Arrangement Act.  Where there has been any realization from a debtor’s property outside of bankruptcy proceedings, distribution to secured creditors is often delayed until after the debtor makes an assignment in bankruptcy or a bankruptcy order has been issued, as there is concern that the Canada Revenue Agency (“CRA”) might claim the deemed trust continued to extend to the proceeds distributed to the secured creditor pre-bankruptcy and the secured creditor would have to disgorge the proceeds to the Crown.

In a recently released decision of the Federal Court of Canada in Her Majesty the Queen in Right of Canada v. Callidus Capital Corporation, the debtor owed approximately $180,000 in HST to the CRA.  Callidus, which had provided the debtor with various credit facilities, received net sale proceeds of a real estate sale, and deposits into a blocked account for rent, prior to the debtor making an assignment in bankruptcy.  Callidus was aware of the potential deemed trust claim against the debtor at the time the deposits were made and applied by Callidus against the outstanding loan balance.  Following the bankruptcy, CRA commenced an action against Callidus claiming payment of the $180,000 based on the concluding language in paragraph 222(3) of the ETA “…and the proceeds of the property shall be paid to the Receiver General in priority to all security interests”.  CRA argued that the debtor’s subsequent bankruptcy did not affect CRA’s claim that Callidus was required to disgorge the amounts received by Callidus prior to bankruptcy.

On a motion to determine a question of law, the Federal Court was asked to determine whether the bankruptcy of a debtor rendered the deemed trust ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the property of the debtor that were subject to the deemed trust under s. 222(3) of the ETA.

The Federal Court, in a decision released on August 17, 2015, concluded that the debtor’s bankruptcy did render the deemed trust ineffective against the proceeds of the debtor’s property received by Callidus prior to the bankruptcy of the tax debtor.

The case is an important decision for asset based lenders and other secured creditors, as it is a clear statement that a secured creditor will not be required to disgorge to the Crown proceeds it received subject to a deemed trust prior to the debtor’s bankruptcy on account of unpaid HST.

For further information on the case, please do not hesitate to contact the lawyers for Callidus in this matter,  Harvey Chaiton ( or (416) 218-1129) or  Sam Rappos ( or (416) 218-1137).