Recent regulations confirm that the GST/HST deemed trust has
priority over all security interests and charges except for land or
building charges. That exception has its own limitations. It is
limited to the amount owing to the secured creditor at the time the
tax debtor failed to remit the GST/HST. It also forces the secured
creditor to look first to its other security; a kind of forced
On March 16, 2011, the Security Interest (GST/HST) Regulations
(the Regulations) were published in the Canada Gazette, Part II.
The Regulations define a "prescribed security interest"
for the purposes of the deemed trust provisions of the Excise Tax
Act (the ETA), confirming Canada Revenue Agency's longstanding
administrative policy in this area. The Regulations also bring the
ETA in line with the Income Tax Act, the Canada Pension Plan, and
the Employment Insurance Act. The Regulations apply retroactively
from October 20, 2000.
Under section 222 of the ETA, an amount collected by a person as
or on account of GST/HST, or property of the person equal in value
to that amount, is deemed to be held in trust for the Crown until
remitted or withdrawn in accordance with the ETA. The ETA grants
the Crown's interest in the deemed trust priority over any
other interest of a secured creditor in the amount, except for a
"prescribed security interest" defined by regulation.
In general, the Regulations define a "prescribed security
interest" as a mortgage or hypothec in land or a building
where the mortgage or hypothec is registered before the GST/HST is
collected. This includes the amount of any insurance or
expropriation proceeds relating to the mortgaged land or building,
but does not include a lien, a priority or any other security
interest created by statute, an assignment of leases, or a mortgage
interest in any equipment or fixtures that any person has the right
to remove or dispose of separately from the land or building.
Furthermore, the Regulations limit the value of the
"prescribed security interest" to the outstanding amount
of the debt obligation secured by the mortgage at the time of the
failure to remit GST/HST, less (a) the value of the rights of the
secured creditor securing the debt obligation (e.g., the value of
other collateral); and (b) all amounts subsequently applied to
reduce the debt obligation. As such, any potential or actual
realizations on the part of the secured creditor will reduce the
amount of the "prescribed security interest" and increase
the value in the land or building available to satisfy the deemed
It is important to note that GST/HST deemed trusts are not
effective in bankruptcies or proposals under the Bankruptcy and
Insolvency Act or compromises or arrangements under the
Companies' Creditors Arrangement Act.
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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