The era when financial institutions were compelled, upon mere
receipt of a notice to pay, to remit to the government any amount
of money they held on behalf of an insolvent tax debtor, is perhaps
For it is now incorrect to assume that no valid grounds can be
set up by a financial institution against the authority issuing
such a demand for payment, provided the tax debtor is also indebted
to the financial institution.
In November 2014, the Federal Court of Appeal upheld a decision
of the Tax Court of Canada1 allowing the appeal of
Caisse Desjardins de Québec (the "Caisse") of an
assessment made against it under subsection 317(3) of the
Excise Tax Act.
The Caisse had granted the tax debtor in question a line of
credit, from which amounts drawn down were repayable on demand. The
Crown, which was owed sales taxes (GST and PST) by the tax debtor,
served the Caisse with a written requirement to pay the amounts
owing pursuant to subsection 317(3) of the Excise Tax
Despite the requirement to pay, the Caisse refused to remit to
the Crown the amounts that it held on behalf of the tax debtor, on
the grounds that when it received the written requirement, the
amounts that it owed the tax debtor had been cancelled out by legal
compensation. The Caisse argued that amounts advanced under the
credit agreement were exigible at any time and were not subject to
any term or condition for their repayment. Accordingly, the
indebtedness of the Caisse towards the tax debtor was cancelled
out, through the effect of legal compensation, by a partial
repayment of the balance owing under the line of credit.
The key issue in this matter was the exigibility of the amounts
in question, which is an essential condition for legal compensation
to operate. The Crown maintained that the tax debtor's
indebtedness to the Caisse was not exigible when its written
requirement was served on the Caisse, such that the compensation
and set-off of the reciprocal debts of the Caisse and the tax
debtor could not be set up against it.
The Caisse's contention that legal compensation had
effectively taken place was successful however, and the assessment
against it was quashed.
In light of this decision of the Federal Court of Appeal, it can
be concluded that legal compensation can be set up against the
Crown in respect of a written requirement to pay under the
Excise Tax Act (GST). There is little doubt that the
rationale under this decision can also be applied to a garnishee
who receives a demand for payment from Revenue Quebec on account of
the PST or even any other tax debt.
Thus, before complying with a demand for payment from a tax
authority, financial institutions would be well advised to first
verify whether or not the tax debtor is also indebted to it
pursuant to a contract under which the amounts owing are payable on
1 Canada v. Caisse Desjardins de
Québec, 2014 FCA 279 ; Caisse populaire
Desjardins de Québec v. The Queen, 2013 TCC
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).