Canada v. Callidus Capital Corporation

Canada v. Callidus Capital Corporation
Court (s) Database
Federal Court of Appeal Decisions
Date
2017-07-27
Neutral citation
2017 FCA 162
File numbers
A-400-15
Notes
A correction was made on April 19, 2018.
Reported Decision
Decision Content
Date: 20170727
Docket: A-400-15
Citation: 2017 FCA 162
CORAM:
PELLETIER J.A.
NEAR J.A.
RENNIE J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CALLIDUS CAPITAL CORPORATION
Respondent
Heard at Toronto, Ontario, on January 19, 2017.
Judgment delivered at Ottawa, Ontario, on July 27, 2017.
REASONS FOR JUDGMENT BY:
RENNIE J.A.
CONCURRED IN BY:
NEAR J.A.
DISSENTING REASONS BY:
PELLETIER J.A.
Date: 20170727
Docket: A-400-15
Citation: 2017 FCA 162
CORAM:
PELLETIER J.A.
NEAR J.A.
RENNIE J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CALLIDUS CAPITAL CORPORATION
Respondent
REASONS FOR JUDGMENT
RENNIE J.A.
I. Introduction
[1] The Crown appeals from the Order of the Federal Court (per McVeigh J.), dated August 17, 2015 (2015 FC 977), in which the Court answered the following question in the affirmative and awarded costs to Callidus Capital Corporation (Callidus):
Does the bankruptcy of a tax debtor and subsection 222(1.1) of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the Excise Tax Act) render the deemed trust under section 222 of the Excise Tax Act ineffective as against a secured creditor who received, prior to bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust for the Plaintiff?
[2] The Crown claimed it was owed $177,299.70 plus interest in unremitted GST and HST by the operation of the deemed trust mechanism in section 222 of the Excise Tax Act, as amended. It commenced an action in the Federal Court to recover the debt. Callidus defended, and the parties agreed to set down a question of law for determination. For the purposes of determining the question of law the parties submitted an agreed statement of facts, which is reproduced below:
Background
1. Cheese Factory Road Holdings Inc. (“Cheese Factory”) is a privately-held Ontario corporation that carried on business as a real estate investment company. Cheese Factory is or was the registered owner of properties municipally known as 680 Bishop Street, Cambridge, Ontario (the “Bishop Property”) and 181 Pinebush Road, Cambridge, Ontario (the “Pinebush Property”).
2. At all material times Callidus was a privately-held Ontario corporation that carried on business throughout Canada as a lender of monies to commercial enterprises on a secured basis.
Failures to remit GST and HST
3. The Plaintiff [Her Majesty the Queen, or the appellant] claims that between 2010 and 2013, Cheese Factory collected but failed to remit GST and HST to the Receiver General for a total amount of $177,299.70.
BMO credit facilities
4. Pursuant to a commitment letter dated September 22, 2004, Cheese Factory obtained a credit facility in the principal amount of $1,950,000 from the Bank of Montreal (“BMO”). Cheese Factory also granted the guarantee and security documents listed on Schedule “A” attached hereto [not attached, can be found at AB, Tab 4, page 35] in favour of BMO to secure its direct and indirect obligations to BMO (collectively, the “Security”).
5. As of December 2, 2011:
(a) Cheese Factory was in default under the credit facility extended to it by BMO in the principal amount of $1,950,000;
(b) Cheese Factory was indebted to BMO as borrower under the commitment letter in the amount of $1,416,418.61 (inclusive of principal and interest but exclusive of fees;
(c) Cheese Factory was in default under the guarantees granted by it to BMO; and
(d) Cheese Factory was indebted to BMO as guarantor in the amounts of $3,387,658.53 and US$81,233,28, which amounts include principal and interest but do not include fees.
Assignment of debt and obligations to Callidus
6. Pursuant to an Assignment of Debt and Security agreement dated December 2, 2011, BMO assigned to Callidus all of its right, title and interest in and to the direct and indirect indebtedness and obligations owed to it by Cheese Factory, along with the Security.
7. Pursuant to a Forbearance Agreement dated December 2, 2011, Callidus agreed to forbear from enforcing the BMO agreements, subject to and in accordance with the terms and conditions of the Forbearance Agreement. Pursuant to the Forbearance Agreement, Callidus also agreed to extend to Cheese Factory (and other debtors) certain demand credit facilities, which amended the credit facilities granted by BMO.
Sale Proceeds from the Bishop Property
8. Pursuant to the terms of the Forbearance Agreement, Cheese Factory agreed to market the Bishop Property, among other properties, for sale and to deliver the net sales proceeds to Callidus to partially repay the amounts owed to Callidus under the credit facilities.
9. On or about April 5, 2012, Cheese Factory sold the Bishop Property to Poladian Holdings Inc. for a purchase price of $790,000.
10. On or about April 9, 2012, Callidus received the sum of $590,956.62 from the sale of the Bishop Property (the “Sale Proceeds”).
11. Callidus has applied the Sale Proceeds to partially reduce the outstanding indebtedness and obligations owed to it by Cheese Factory.
Rent Proceeds from the Pinebush Property
12. Pursuant to the terms of the Forbearance Agreement and a Blocked Accounts Agreement dated November 9, 2011 (the “Blocked Accounts Agreement”), Cheese Factory also agreed to open blocked accounts (the “Blocked Accounts”) at a Royal Bank of Canada (“RBC”) and to deposit all funds received from all sources into the blocked accounts.
13. The Blocked Accounts Agreement provides that:
(a) Cheese Factory shall hold all cash and Cheques (as defined therein) received by it in trust for Callidus, segregated from all other funds and other property of Cheese Factory, until such time as the cash and Cheques are delivered to RBC for deposit in the Blocked Accounts; and
(b) RBC shall transfer, prior to the end of each Business Day, all amounts on deposit in the Blocked Accounts to Callidus’ account or accounts.
14. All rent proceeds received from Cheese Factory or from the tenant of the Pinebush Property since December 2011 have been deposited into the Blocked Accounts.
15. Since the date that Callidus received an assignment of the BMO credit facilities and security on December 2, 2011 up to and including July 31, 2014, the sum of $780,387.62 in gross rent has been deposited into the Blocked Accounts.
16. Callidus has applied all amounts deposited into the Blocked Accounts to partially reduce the outstanding indebtedness and obligations owed to it by Cheese Factory.
Deemed Trust Asserted by the Plaintiff
17. On or about April 2, 2012, the Plaintiff, by way of a letter to Callidus, claimed an amount of $90,844.33 on the basis of the deemed trust mechanism of the Excise Tax Act, R.S.C. 1985, c. E.15, as amended (the “ETA”)
Bankruptcy of Cheese Factory
18. On or about November 7, 2013, at the request of Callidus, Cheese Factory made an assignment in bankruptcy under the Bankruptcy or Insolvency Act, R.S.C. 1985, c. B-3, as amended.
Action Commenced by the Plaintiff
19. The Plaintiff commenced this proceeding against Callidus pursuant to a statement of claim dated November 25, 2013.
20. The Plaintiff claims the total amount of $177,299.70 plus interest from Callidus on the basis of the deemed trust mechanism governed by section 222 of the ETA on account of GST and HST that Cheese Factory collected but failed to remit for reporting periods commencing on October 31, 2010 up to and including January 31, 2013.
21. The Plaintiff contends that as a result of Cheese Factory’s failures to remit GST and HST to the Receiver General:
(a) all of Cheese Factory’s assets were deemed to be held in trust in favour of the Plaintiff in priority to the claims of Callidus pursuant to section 222 of the ETA; and,
(b) all proceeds of Cheese Factory’s property received by Callidus, up to the amount secured by the deemed trust, should have been paid to the Receiver General of Canada as a result of the deemed trust mechanism under section 222 of the ETA.
22. Callidus served and filed a statement of defence.
Question of Law
23. Does the bankruptcy of a tax debtor and subsection 222(1.1) of the ETA render the deemed trust under section 222 of the ETA ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust?
II. Legislation
[3] The relevant provisions of the Excise Tax Act provide:
Excise Tax Act, R.S.C., 1985, c. E-15
Loi sur la taxe d’accise, L.R.C. (1985), ch. E-15
Trust for amounts collected
Montants perçus détenus en fiducie
222 (1) Subject to subsection (1.1), every person who collects an amount as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from property held by any secured creditor of the person that, but for a security interest, would be property of the person, until the amount is remitted to the Receiver General or withdrawn under subsection (2).
222 (1) La personne qui perçoit un montant au titre de la taxe prévue à la section II est réputée, à toutes fins utiles et malgré tout droit en garantie le concernant, le détenir en fiducie pour Sa Majesté du chef du Canada, séparé de ses propres biens et des biens détenus par ses créanciers garantis qui, en l’absence du droit en garantie, seraient ceux de la personne, jusqu’à ce qu’il soit versé au receveur général ou retiré en application du paragraphe (2).
Amounts collected before bankruptcy
Montants perçus avant la faillite
(1.1) Subsection (1) does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II.
(1.1) Le paragraphe (1) ne s’applique pas, à compter du moment de la faillite d’un failli, au sens de la Loi sur la faillite et l’insolvabilité, aux montants perçus ou devenus percevables par lui avant la faillite au titre de la taxe prévue à la section II.
Withdrawal from trust
Retraits de montants en fiducie
(2) A person who holds tax or amounts in trust by reason of subsection (1) may withdraw from the aggregate of the moneys so held in trust
(2) La personne qui détient une taxe ou des montants en fiducie en application du paragraphe (1) peut retirer les montants suivants du total des fonds ainsi détenus :
(a) the amount of any input tax credit claimed by the person in a return under this Division filed by the person in respect of a reporting period of the person, and
a) le crédit de taxe sur les intrants qu’elle demande dans une déclaration produite aux termes de la présente section pour sa période de déclaration;
(b) any amount that may be deducted by the person in determining the net tax of the person for a reporting period of the person,
b) le montant qu’elle peut déduire dans le calcul de sa taxe nette pour sa période de déclaration.
as and when the return under this Division for the reporting period in which the input tax credit is claimed or the deduction is made is filed with the Minister.
Ce retrait se fait lors de la présentation au ministre de la déclaration aux termes de la présente section pour la période de déclaration au cours de laquelle le crédit est demandé ou le montant déduit.
Extension of trust
Non-versement ou non-retrait
(3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust, is deemed
(3) Malgré les autres dispositions de la présente loi (sauf le paragraphe (4) du présent article), tout autre texte législatif fédéral (sauf la Loi sur la faillite et l’insolvabilité), tout texte législatif provincial ou toute autre règle de droit, lorsqu’un montant qu’une personne est réputée par le paragraphe (1) détenir en fiducie pour Sa Majesté du chef du Canada n’est pas versé au receveur général ni retiré selon les modalités et dans le délai prévus par la présente partie, les biens de la personne — y compris les biens détenus par ses créanciers garantis qui, en l’absence du droit en garantie, seraient ses biens — d’une valeur égale à ce montant sont réputés :
(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and
a) être détenus en fiducie pour Sa Majesté du chef du Canada, à compter du moment où le montant est perçu par la personne, séparés des propres biens de la personne, qu’ils soient ou non assujettis à un droit en garantie;
(b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest
b) ne pas faire partie du patrimoine ou des biens de la personne à compter du moment où le montant est perçu, que ces biens aient été ou non tenus séparés de ses propres biens ou de son patrimoine et qu’ils soient ou non assujettis à un droit en garantie.
and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.
Ces biens sont des biens dans lesquels Sa Majesté du chef du Canada a un droit de bénéficiaire malgré tout autre droit en garantie sur ces biens ou sur le produit en découlant, et le produit découlant de ces biens est payé au receveur général par priorité sur tout droit en garantie.
[Emphasis added]
[Soulignement ajouté]
III. Federal Court decision
[4] The Court answered the question in the affirmative.
[5] The Court found that the deemed trust mechanism under section 222 of the Excise Tax Act operates to grant the Receiver General “absolute priority”, but that the deemed trust, and the accompanying priority, are extinguished upon bankruptcy of the debtor such that the Crown becomes an unsecured creditor in respect of unremitted amounts. The Court determined that any liability that arises under subsection (3) to disgorge proceeds is extinguished upon bankruptcy by the operation of subsection (1.1). Subsection (3) operates to extend the deemed trust created pursuant to subsection (1) to the debtor’s property, and any liability arising from it is dependent on the continuing existence of the deemed trust.
[6] The Court reviewed the legislative history and priority schemes of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the BIA), the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (the CCAA) and the reasoning of the Supreme Court of Canada in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379 (Century Services), and observed that the enactment of subsection 222(1.1) appeared to align with Parliament’s intent to “move away from asserting priority for Crown claims in insolvency law”. While deemed trusts in relation to source deductions, such as Canada Pension Plan contributions, “remain operative” in bankruptcy, deemed trusts over GST/HST do not.
[7] Applying the reasoning in Century Services and the earlier decision of Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94 (Caisse), the judge held that the absence of express confirmation of the trust upon bankruptcy in the BIA reflected “Parliament’s intention to allow it to lapse upon insolvency proceedings being commenced”. The judge found that, similar to the factual scenarios in both Supreme Court of Canada cases, “the Crown seeks to maintain the deemed trust without express legislative language to do so,” and further, that subsection 222(1.1) operates to “remove [the] imperative” language in subsection 222(3) of “shall be paid”. The judge was not persuaded by the Crown’s reference to legislative amendments in the year 2000 (the 2000 amendments) to the deemed trust mechanism in the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (Income Tax Act) because they were specific to source deductions, and distinguished the cases on which the Crown relied for the same reason. The judge favoured Callidus’ argument that the amendments made to the Excise Tax Act in 1992 demonstrated Parliamentary intent to “oust the Crown priority over all other interests in bankruptcy,” and that this interpretation was evident in the jurisprudence.
[8] The judge dismissed the Crown’s analogy to other collection tools in the Excise Tax Act, noting that those provisions did not assist the Crown’s position. Both sections 317 (garnishment) and 325 (non-arms’ length transfers) require a “crystallizing event” before liability will attach prior to bankruptcy, and the Crown had not demonstrated how to reconcile a “pre-existing, fully engaged cause of action” with subsection (1.1). In the case of a non-arms’ length transfer, the event is the transfer of property for less than fair market value, while in the garnishment context the crystallizing event is service of a “requirement to pay” (RTP) notice. The judge stated that, had an RTP notice been issued in this case, Callidus’ obligation to pay would have survived bankruptcy of the debtor.
[9] The judge ultimately held that the tax debtor’s bankruptcy engaged subsection 222(1.1) of the Excise Tax Act, which rendered the deemed trust, and any independent liability arising from operation of the deemed trust, ineffective in regard to the pre-bankruptcy amounts Callidus had received.
IV. Issues
[10] Before this Court, Callidus submits that, on a proper reading of the statutory language, the deemed trust under subsection (1) and the extension under subsection (3) are both extinguished upon bankruptcy. As the Crown relies on subsection (3) to establish the personal liability of the secured creditor, Callidus argues it should follow that any personal liability must be extinguished upon bankruptcy as well.
[11] The Crown concedes that, upon the bankruptcy of a tax debtor, subsection 222(1.1) of the Excise Tax Act renders the deemed trust under subsection 222(3) of the Excise Tax Act ineffective with respect to the debtor’s property at the time of bankruptcy. The Crown assert, however, that the contested question on appeal is whether subsection 222(1.1) of the Excise Tax Act also extinguishes the distinct and personal liability of the secured creditor that may arise prior to bankruptcy by virtue of subsection 222(3) of the Excise Tax Act.
[12] The respondent urges that the judge correctly found that subsection (1.1) reflects Parliament’s intent to move away from Crown priority in insolvency law, in particular with respect to GST/HST. It is conceded by the Crown that the deemed trust ceases to operate upon the debtor’s bankruptcy, specifically in relation to GST/HST amounts collected but not remitted prior to bankruptcy. I agree with the judge that Parliament has drawn a clear distinction post-bankruptcy between source deductions under the Income Tax Act and GST/HST amounts under the Excise Tax Act by virtue of subsection 222(1.1) and subsections 67(2) and (3) of the BIA.
[13] The issue here however, is the priority that may have existed prior to any insolvency or bankruptcy proceedings. Determination of the question of law turns on the interpretation of the effect of bankruptcy on the prior operation of the deemed trust mechanism as against a secured creditor who received proceeds from deemed trust assets of the tax debtor prior to bankruptcy.
V. Analysis
[14] The answer to the question on appeal turns on the application of the governing principles of statutory interpretation. Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27 (Rizzo) instructs at para. 21, quoting E.A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87 that “[t]oday there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. Put otherwise, the intention of Parliament is to be gleaned from the text, read in its context and in light of its purpose. Applying these principles, it is my view that the question should be answered in the negative.
[15] Support for this conclusion is found in the language of section 222, to which I turn. Section 222 of the Excise Tax Act provides a mechanism whereby the Crown can recover collected, but unremitted, GST or HST.
[16] Subsection 222(3) operates to deem all of a tax debtor’s property to be held in trust for the benefit of the Crown where GST/HST is collected but not remitted. It is undisputed that subsection 222(1.1) renders the deemed trust ineffective with respect to the property of the tax debtor at the time of bankruptcy. The issue in this appeal concerns the Crown’s recovery mechanisms for dispositions made prior to bankruptcy.
[17] The importance of timing is reflected in the text of subsection 222(3). Assets sold by the tax debtor, or realized upon by the secured creditor prior to bankruptcy are no longer “property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person” at the time of bankruptcy, and as a result, are not available to all creditors upon bankruptcy. First Vancouver Finance v. Minister of National Revenue, 2002 SCC 49, para. 42, [2002] 2 S.C.R. 720 (First Vancouver) confirms that “when an asset is sold by the tax debtor, the deemed trust ceases to operate over that asset”. The subsequent extinction of the deemed trust on bankruptcy is irrelevant with respect to assets that have already been sold – it has already disappeared. This interpretation is supported by the legislative evolution of subsection (1.1).
[18] Amendments in the year 2000 to the deemed trust mechanism in both the Income Tax Act and the Excise Tax Act imposed an obligation on secured creditors to pay proceeds derived from trust assets to the Crown (subsection 222(3)). This amendment, including wording that proceeds “shall be paid to the Receiver General in priority to all security interests” was prompted by the decision in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (Sparrow). In Sparrow, the Court held that analogous deemed trust provisions for source deductions did not oust a secured creditor’s security interest in a debtor’s inventory. In Sparrow, the Supreme Court of Canada suggested this wording as the language that Parliament could add if it wished to confirm the priority of the Crown’s deemed trust.
[19] The first test of the amended provisions arose in First Vancouver. The Court held that the enhanced trust provisions confirmed Crown priority over secured creditors.
[20] The amended trust provisions in the ITA came before this Court in Canada (Procureure generale) c. Banque Nationale du Canada, 2004 FCA 92, [2004] F.C.J. No. 371 (Banque Nationale) where, at paragraph 40, the Court held:
[40] It seems obvious to me that a secured creditor who does not comply with his statutory obligation to “pay” the Receiver General the proceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable for the unpaid amount. The amount is “payable” out of the proceeds flowing from the property and, as we have seen, section 222 of the ITA provides that “All... amounts payable under this Act are debts due to Her Majesty and recoverable as such....” (Emphasis added). In light of these provisions, and since the respondents concede that they received the proceeds from the sale of the property subject to their security interest, without making the remittance that was payable, the appellant has a cause of action to recover these amounts.
[Emphasis in original]
[21] This Court, in Banque Nationale 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.
[22] Similarly, I note that a “tax debt” in the “Collection” section of the Excise Tax Act is defined as “any amount payable or remittable by a person under this Part,” and tax debts are recoverable by the Crown in Federal Court: Excise Tax Act subsections 313(1) and (1.1). The Court in Banque Nationale held that the cause of action arises “when the Minister becomes aware of the failure by the secured creditor to pay”: at para. 44. On this Court’s reasoning in Banque Nationale, the Crown has a cause of action to enforce the personal liability of a secured creditor who does not comply with its statutory obligation to pay under the Excise Tax Act.
[23] Given the near-identical language of the two provisions, it is my view that the reasoning in Banque Nationale is dispositive of this appeal. Secured creditors who do not comply with the obligation to pay proceeds derived from deemed trust assets are personally liable to the Crown, which has a separate cause of action against them, irrespective of the subsequent bankruptcy of the debtor.
[24] I note that the use of the imperative “shall” in subsection 222(3) “confers no residual discretion”: Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed. (Canada: LexisNexis, 2014), at 91-92. The protection offered the Crown by the provision is not passive – it creates a mandatory obligation: see Banque Nationale at paras. 37, 40. While the judge was correct to note that Sparrow, First Vancouver and Banque Nationale pertained to the deemed trust mechanism specific to source deductions under the Income Tax Act, the salient point, from a statutory interpretation perspective, is that the 2000 amendments are materially identical to those made contemporaneous to the amendments to the Excise Tax Act and operate analogously prior to bankruptcy.
[25] Given this similarity, both mechanisms render a secured creditor who receives funds out of the deemed trust personally liable for the amount owed to the Crown under an independent cause of action: Banque Nationale, at para. 40. The distinction urged by Callidus, namely that Banque Nationale concerned payroll deductions and not GST, is of no consequence. Prior to bankruptcy, the recovery mechanisms in subsection 227(4.1) of the Income Tax Act and subsection 222(3) of the Excise Tax Act operate, for present purposes, identically, and the related jurisprudence is equally applicable.
[26] While subsection 222(1.1) releases a tax debtor’s assets from the deemed trust upon bankruptcy, the subsection does not extinguish the pre-existing personal liability of a secured creditor who received proceeds from the deemed trust. The personal liability is fully engaged, the debt is due and can be pursued by the Crown in a cause of action independent of any subsequent bankruptcy proceedings. The continued existence of the cause of action is not dependent on the debtor’s other assets that may or may not remain in trust, as it arises because of the secured creditor’s breach of a statutory obligation to remit. To find otherwise would effectively neutralize the deemed trust mechanism with respect to GST/HST amounts.
[27] I note that Callidus relies heavily on Caisse and Century Services to support its argument with respect to liability. These cases are of limited assistance. Caisse did not concern either the issue of a deemed trust or the independent liability of a secured creditor, rather, the issue was the extent of the Crown’s interest in GST collected by a trustee in bankruptcy. Century Services concerned whether the deemed trust provisions of the Excise Tax Act continued under CCAA proceedings, which are not at issue.
[28] Callidus points further to the case of The Bank of Nova Scotia v. Huronia Precision Plastics Inc. (2009), 50 C.B.R. (5th) 58 (Ont. S.C.J. - Commercial List) (Huronia), in which a receiver was appointed, some of the debtor’s assets were sold, and the bank made a motion to lift the stay in order to bring a bankruptcy application against the debtor. The Crown moved for an order directing the receiver to pay unremitted GST immediately. The motion judge held that the bank had the ability to reverse the priority of the deemed trust by bringing an application for bankruptcy, and denied the Crown’s motion. Callidus argues that, on the appellant’s reading of the statute, the receiver in Huronia would have had a duty to remit GST to the Crown notwithstanding the subsequent bankruptcy of the debtor. Callidus argues that this was exactly what the motion judge in Huronia specifically rejected.
[29] It is difficult to glean much from the very brief Huronia decision, which focused on the particular wording of a court order. There was also a receiver and a stay of proceedings in place in Huronia, such that it is not clear whether insolvency proceedings had already commenced. As well, the factual matrix in this appeal does not invoke the reversal of priority post-bankruptcy; rather this appeal addresses the effect of bankruptcy on the liability of a secured creditor that may arise as a result of pre-bankruptcy priority.
[30] Again, continuing with the plain language of section 222, subsection (1.1) does not say that, upon the debtor’s bankruptcy, all rights that arose as a result of the deemed trust are extinguished. Nor is there language in section 222 to the effect that the deemed trust evaporates retroactively so as to extinguish liability arising before bankruptcy. Subsequent bankruptcy simply operates to release the debtor’s assets from the deemed trust. The argument that the evaporation of the trust on bankruptcy works retroactively, and undoes or unwinds legal obligations that are already engaged, has no support in the text, and, as we will see, undermines the purpose of the 1992 amendment.
[31] In the present case, proceeds from a sale of the tax debtor’s property were paid to the secured creditor. The debtor subsequently made an assignment into bankruptcy. Pursuant to the language of subsection (3), any proceeds should have been paid to the Crown in priority to any security interest pre-bankruptcy. Callidus has conceded that the deemed trust mechanisms in both the Income Tax Act and the Excise Tax Act operate in the same manner prior to bankruptcy. Proceeds were paid out of priority in contradiction to the express wording of subsection (3), which created an obligation, independent of the existence of the deemed trust, to pay.
[32] I turn next to context, which includes analogous collection tools within the Excise Tax Act that impose obligations on third parties. For example, the garnishment provisions in section 317 of the Excise Tax Act use the same language regarding paramountcy over all statutes except the BIA. In this context, the courts have accepted that, where an RTP notice is served pre-bankruptcy, subsequent bankruptcy does not extinguish liability of a third party who fails to abide by the notice: Toronto Dominion Bank v. Canada, 2010 FCA 174, 325 D.L.R. (4th) 174, affirmed 2012 SCC 1, [2012] 1 S.C.R. 3 (Toronto Dominion).
[33] Further, section 325 of the Excise Tax Act establishes liability for a non-arms’ length third party who has been transferred property. The liability of the third party is not affected by the debtor’s subsequent bankruptcy: Heavyside v. Canada, [1996] F.C.J. No. 1608. Absent language suggesting otherwise, statutes should be read so as to achieve consistency and harmony across like provisions.
[34] Referencing other collection tools available to the Crown, the judge stated that there must be a “crystallizing event” in order to ground an independent cause of action. Had an RTP issued, Callidus’ obligation to pay would have survived bankruptcy. In my view, the search for a crystallizing event or something analogous to that is not quite apt, given that the deemed trust mechanism is not located within the section of the legislation dealing with assessments, and, in any event, there is no legislative requirement for, or mechanism by which, such a notice could issue. There is no need for a crystallizing event, as the legislation establishes the obligation to pay. The words “if at any time” make clear that the obligation has no temporal limitation, nor is it contingent on crystallizing events.
[35] It has been held by this Court, and affirmed by the Supreme Court of Canada, that section 317 (garnishment) transfers ownership of amounts otherwise owing to a tax debtor, on receipt by the garnishee of an RTP notice: Toronto Dominion at para. 52. In Toronto Dominion, this Court held that the words establishing the supremacy of the Excise Tax Act over legislation except the BIA was simply intended to limit the Crown’s power to issue an RTP post-bankruptcy.
[36] Although the circumstances are not entirely analogous, under section 317 the Minister “may issue” an RTP and the amount similarly “shall be paid”. It appears that amounts owing to the tax debtor by a third party may require notice in order to “crystallize,” in the words of the judge, the Crown’s cause of action in garnishment proceedings. Where the Crown seeks to garnish, it is not necessarily clear who the cause of action is against, and for what amount. The present circumstance is the opposite. Here, the trust operates over the amounts already in the debtor’s possession, and the circumstances are such that an amount has left the trust. Both the amount and the party in receipt are known.
[37] I note further that the subsequent bankruptcy of a tax debtor does not extinguish the Crown’s right to amounts owing where an RTP issued pre-bankruptcy. It would be inconsistent if the Crown could prevent funds from entering the debtor’s estate, but it could not recover amounts that were removed from the deemed trust out of priority to it and which have not since been returned to the debtor’s estate.
[38] To conclude, I turn to the purpose of the provision in question.
[39] Callidus argues that Parliament’s intent was that the Crown becomes an unsecured creditor upon the bankruptcy of the debtor in relation to amounts owed pre-bankruptcy, and that allowing this appeal would allow the Crown to recover indirectly what it cannot recover directly.
[40] Callidus contends that, upon bankruptcy, subsection (1.1) operates to extinguish both the deemed trust and to remove the imperative in subsection (3) such that the personal liability of a secured creditor who received funds is also extinguished. I have explained why this interpretation is not supported by the language of the statute, but it would also undermine the purpose of the provision. The interpretation urged by Callidus would allow a secured creditor to manipulate both pre- and post-bankruptcy priority. Callidus agrees that the Crown has priority pre-bankruptcy, and it admits that it did not abide by that priority. Yet it asks this Court to enforce post-bankruptcy priority to the opposite effect or, put otherwise, to enforce post-bankruptcy priority to defeat priorities related to pre-bankruptcy distributions.
[41] Callidus’ interpretation effectively defeats the purpose of the addition of subsection 222(3), and would create perverse incentives on the part of the secured creditors to not abide by the deemed trust. This was the very mischief to which the amendments were directed:
Thus, the amendment will ensure that tax revenue losses are minimised and that delinquent taxpayers and their secured creditors do not benefit from failures to remit source deductions and GST at the expense of the Crown.
The deemed trust provisions will not, however, override a prescribed security interest such as a mortgage interest in real estate or other exceptions that may be provided by regulation, where the failure to remit source deductions or net GST cannot benefit the secured creditor.
[Department of Finance, Press Release, 1997-030, “Unremitted Source Deductions and Unpaid GST” (7 April 1997), online: Media Room – Press Releases www.fin.gc.ca, p.2; Appellant`s Memorandum of Fact and Law, at para. 75]
[42] A finding that the secured creditor’s obligation to pay Crown proceeds from the deemed trust disappears on bankruptcy would allow the secured creditor to benefit from the debtor’s failure to remit, as noted by the Supreme Court of Canada in Sparrow. As happened here, a secured creditor could choose the timing of bankruptcy and liquidate the deemed trust assets so as to satisfy their interests at the expense of the Crown. Even if the Crown sends a demand letter or commences an action, the secured creditor could, at any time, simply trigger the bankruptcy of the tax debtor and avoid all consequences of the deemed trust priority.
[43] Callidus’ interpretation would significantly dilute the absolute priority of the Crown confirmed by both Parliament and the courts in this context. This cannot be what Parliament intended. Part of the broader context is the fact that the Crown does not have knowledge of the state of affairs between the tax debtor and its creditors; hence the provision, in statute, of the ability to enforce the duty to collect and remit by third parties: First Vancouver, at para. 22. To allow a secured creditor to avoid the priority created by the deemed trust mechanism pre-bankruptcy would render the mechanism, and the priority it creates, effectively useless. If Parliament had intended, as it did post-bankruptcy, for the deemed trust to have no discernable effect on priorities pre-bankruptcy, it simply could have removed the provision altogether.
[44] I would allow the appeal with costs and answer the question in the negative to the extent outlined above.
“Donald J. Rennie”
J.A.
“I agree
D. G. Near J.A.”
PELLETIER J.A. (Dissenting reasons)
[45] I have read the reasons of my colleague. I come to a different conclusion for the following reasons.
[46] In brief, I am of the view that the trust created by subsection 222(3) of the Excise Tax Act, R.S.C. 1985 c. E-15 (the Act) lapsed due to lack of subject matter by operation of subsection 222(1.1) of the Act following Cheese Factory Road Holdings Inc.’s (Cheese Factory) bankruptcy. As of the date of bankruptcy, there were no amounts subject to the subsection 222(1) trust and therefore no property of Cheese Factory subject to a deemed trust pursuant to subsection 222(3) of the Act. As a result, no proceeds of that property were payable to the Crown by Callidus Capital Corporation (Callidus). The fact that, prior to the bankruptcy, a demand for payment was made on Callidus is irrelevant.
[47] This is an appeal from a decision of the Federal Court in which it decided a question of law. As a result, the standard of review is the appellate standard set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235: cor