The case of Her Majesty the Queen and Callidus Capital Corporation can be viewed here. We have also highlighted some of the more relevant factors considered in the case.
Essentially the case outlines the Court’s perspective on whether the bankruptcy of a tax debtor and subsection 222(1.1) of the Excise Tax Act R.S.C. 1986 c.E15, as amended (the “ETA”) renders the deemed trust under S.222 of the ETA ineffective as against a secured creditor who received, prior to a bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust for the Crown.
The answer according to the court in a 2 to 1 ruling is that funds are deemed to be held in trust for the Crown and a secured creditor has exposure to the Crown should an event of bankruptcy take place where funds have been paid to the secured creditor in priority to the Crown. In the Crown v. Callidus, all proceeds of the Cheese Factory’s property received by Callidus (pre bankruptcy), 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 . The bankruptcy did not absolve this obligation to pay nor relegate the deemed trust to an unsecured claim. Callidus was ordered to pay the Receiver General $177,299.70 plus interest in unremitted GST/HST by operation of the deemed trust mechanism.
This case is currently under appeal, but your clients should be vigilant and consider the potential HST exposure when paying down secured lenders or any creditor in priority to HST which may be outstanding at any given time. For a secured lender who is being paid down under its security, they should caution whether there is any Crown exposure at the time of payment.
The case focuses on a secured lender but one can only assume that should this case be upheld then the natural assumption is that it could be expanded to consider all creditors who may get paid in priority to funds held in trust for CRA where a bankruptcy ensues.
If you have any questions or with to discuss further, please do not hesitate to contact us.