In a recent Federal Court of Appeal decision, a bank was required to remit proceeds from a tax debtor’s property because the debtor owed sales taxes to the CRA, even though the bank was not aware of the debts at the time.
The debtor owned and operated a landscaping business as a sole proprietorship. The debtor was required to collect and remit goods and services tax (“GST”)to the Canada Revenue Agency (the “CRA”).
In 2007 and 2008, before he became a banking customer of the Toronto Dominion Bank (the “Bank”), the debtor collected, but did not remit to the CRA, GST in the amount of $67,854 in relation to his landscaping business.
In 2010, the Bank extended loans to the debtor. In March 2010, the Bank granted a line of credit to the debtor and his wife with a credit limit of $246,000. The line of credit was secured by a charge in favour of the Bank registered against a property owned by the debtor. Later, in April 2010, the Bank extended a loan to the debtor and his wife in the amount of $352,000. This loan was secured by mortgage, also registered against the property.
At the time of both loan applications, the Bank was not aware of any debts owed by the debtor pursuant to the Excise Tax Act (the “Act”).
In October 2011, the debtor sold and transferred the property to third party purchasers for $881,000. The Bank did not enforce its security against the debtor. Rather, the debtor’s lawyer issued two trust cheques to the Bank in the amounts of $245,147 and $334,546 to repay the line of credit and the mortgage and discharge the charges registered against the property.
Subsequently, the Bank discharged the charge and mortgage registered against the property.
On April 18, 2013, and February 2, 2015, the CRA asserted a deemed trust claim under s. 222 of the Act against the Bank on the basis that the proceeds it received from the sale of the property ought to have been paid to the CRA up to the amount deemed to be held in trust. The amount of the deemed trust claim was $67,854.
The Bank refused to pay the amount claimed.
Accordingly, the Crown commenced an action against the Bank seeking $67,854 plus interest and costs. The Bank defended the claim.
Federal Court Decision
The Federal Court found that s. 222(3) of the Act obliged the Bank to remit that portion of the sale proceeds caught by the deemed trust.
The central issue raised on appeal was the correct interpretation of s. 222(1) and (3) of the Act: is a secured creditor who receives proceeds from a tax debtor’s property at a time when the debtor owes GST to the Crown required to pay the proceeds, or a portion thereof equalling the tax debt, to the CRA in priority to all security interests?
Federal Court of Appeal Decision
The court found that from the grammatical and ordinary sense of the language of subsections 222(1) and (3) that Parliament intended to grant priority to the deemed trust in respect of property that is also subject to a security interest, regardless of when the security interest arose in relation to the time the GST was collected, stating:
“The purpose of the provision is to protect the collection of unremitted GST. This purpose is effected by granting priority to the deemed trust in respect of property that is also subject to a security interest, irrespective of when the security interest arose in relation to the time GST was collected (except in respect of a prescribed security interest).”
The court therefore found that when the debtor collected amounts as or for GST, he was deemedto hold the amount in trust separate and apart from his property. When the debtor then failed to properly remit or withdraw amounts in the manner and at the time provided, the debtor’s property was deemed to be property beneficially owned by the government despite any security interest in the property or in the proceeds thereof.
Thus, when the Bank lent money to the debtor and took its security interests, the debtor’s property to the extent of the tax debt was already deemed to be beneficially owned by the CRA. On the sale of the debtor’s property “despite any security interest in the property or in the proceeds thereof … the proceeds of the property shall be paid to the Receiver General in priority to all security interests.”
As a result, the court found that when the debtor’s property was sold, by operation of s. 222(3) of the Act, the Bank was under a statutory obligation to remit the proceeds it received to the CRA.
The appeal was dismissed and the Bank was required to pay the CRA.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.
With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.
If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.