Canada: The Supreme Court Unanimously Overturns The Decision Of The Federal Court Of Appeal In Callidus Capital Corporation V. Canada

Where there is a bankruptcy, there is no personal liability of a secured creditor to the Crown for funds received prior to the bankruptcy from a realization of assets that were subject to the deemed trust under the Excise Tax Act (Canada) ("ETA").

Factual Background

In this matter, the debtor Cheese Factory Road Holdings Inc. ("Cheese Factory") had collected but failed to remit GST/HST to the Crown between 2010 and 2013. As a result, the assets of Cheese Factory were deemed to be held in trust in favour of the Crown in accordance with section 222 of the ETA.

In December 2011, Cheese Factory was in default under a credit facility extended to it by Bank of Montreal ("BMO").

On December 2, 2011, BMO assigned to Callidus Capital Corporation ("Callidus") the indebtedness owed to it by Cheese Factory. Subsequently to this assignment of debt, Callidus and Cheese Factory entered into a forbearance agreement, whereby Callidus agreed notably to market certain assets to partially repay the amounts owed to Callidus under the credit facilities.

As per the agreement, Cheese Factory eventually sold these assets in April 2012 for an amount of $790,000.00. Callidus received the net proceeds from that sale ($590,956.62) and applied them to partially reduce the outstanding indebtedness owed to it by Cheese Factory.

Meanwhile, also in April 2012, the Crown sent a letter to Callidus claiming an amount owed of $98,844.33 based on the deemed trust mechanism under the ETA for collected but unremitted GST/HST by Cheese Factory.

In the ensuing months, Cheese Factory made a voluntary assignment in bankruptcy under the Bankruptcy and Insolvency Act ("BIA"). Following the bankruptcy of Cheese Factory, the Crown commenced proceedings against Callidus again based on the deemed trust under section 222 of the ETA.

The main question submitted first before the Federal Court and then before the Federal Court of Appeal can be formulated as follows:

Does the bankruptcy of a tax debtor 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?

Decision of the Federal Court

The Federal Court answered in the affirmative, by stating that the deemed trust mechanism created under section 222 of the ETA in favour of the Crown could not be set up as against a secured creditor for the collected but unremitted GST/HST by the tax debtor where there is a bankruptcy. The Court held that this principle applied regardless of the fact that the secured creditor received the proceeds from the assets prior to the bankruptcy.

Decision of the Federal Court of Appeal

In a split decision, the majority in the Federal Court of Appeal overturned the ruling of the Federal Court. The Court held that where a deemed trust was applicable prior to a bankruptcy, the deemed trust mechanism also applied to the proceeds received by a secured creditor from the realization of assets prior to the bankruptcy of the tax debtor notwithstanding that bankruptcy.

The majority of the Federal Court of Appeal stated notably the following:

[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.

However, Justice Pelletier dissented from this decision on the basis that, upon bankruptcy, the deemed trust mechanism under section 222 of the ETA was rendered ineffective, including with respect to the proceeds of a sale of assets completed prior to the bankruptcy.

The Supreme Court, which had granted leave to appeal from the decision of the Federal Court of Appeal, heard the appeal this past November 8.

Decision of the Supreme Court

In a unanimous decision rendered from the bench, the Supreme Court justices allowed the appeal and overturned the decision of the Federal Court of Appeal. In doing so, the Supreme Court reached the same conclusion as Justice Pelletier as dissenting judge in the decision of the Federal Court of Appeal, which is that in light of section 222(1.1) of the ETA, the deemed trust mechanism created under section 222 of the ETA does not apply where there is a bankruptcy. In other words, a secured creditor is not liable for the repayment of proceeds received from the realization of assets of a tax debtor prior to its bankruptcy.


This decision of the Supreme Court allowing the appeal will allow secured creditors to avoid facing potential proceedings from the Crown to recover the proceeds from the realization of assets of a tax debtor prior to its bankruptcy. The impact of this decision will be important for insolvency practitioners and secured creditors. Indeed, it is a very high burden on a secured creditor to ensure that a debtor is in compliance with its tax obligations toward the Crown. Before the decision of the Supreme Court, a secured creditor was at risk to see the deemed trust mechanism applied after the fact against the proceeds received from a realization of assets for collected but unremitted GST/HST, despite the bankruptcy.

That being said, it is important to note that the Supreme Court has specified that it did not rule on the framework applicable to section 222(3) of the ETA with regard to the personal liability of secured creditors where there is no bankruptcy.

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.

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