On October 30, 2009, the Supreme Court of Canada rendered judgment in the matter of the Deputy Minister of Revenue of Québec and Her Majesty the Queen v. Caisse Populaire Desjardins de Montmagny and Raymond Chabot Inc., trustee in the bankruptcy of 9083-4185 Québec Inc.

The Supreme Court of Canada confirmed the judgment of the Québec Court of Appeal and held that the Québec Sales Tax (QST) and the Goods and Services Tax (GST) either collectible or collected but not remitted to the tax authorities formed part of the patrimony of a bankrupt debtor company.

The Court noted, as it had in prior decisions, that the GST and the QST are both "direct" taxes, meaning that they are imposed directly by the Crown on the recipient's taxable supplies. This is mechanically achieved by deeming tax collected by a supplier to be collected on behalf of the tax authorities, whether federal or provincial, as the case may be, and by thus deeming a trust to exist in favour of such tax authorities with respect to such amounts collected.

For the purposes of the GST, the Court relied on specific legislative provisions, as well as on the intent of Parliament, to find that such deemed trusts in favour of the Crown cease to exist upon the bankruptcy of a supplier who becomes bankrupt, within the meaning of the Bankruptcy and Insolvency Act. Indeed, the Excise Tax Act, under which the GST is imposed, specifies that its provisions deeming a trust to exist in favour of the Crown do not apply to amounts of GST collected or that were collectible by a person that became a bankrupt.

With respect to the QST, since no such corresponding exceptions exist under either An Act Respecting the Québec Sales Tax or An Act Respecting the Ministère du Revenu; such deemed trusts are not specifically negated for QST purposes. However, under the provisions of the Bankruptcy and Insolvency Act, property may not be regarded as held in trust unless it would be so regarded in the absence of a statutory provision. In resolving this apparent conflict between the applicable federal and provincial statutes, the Court found that "according to a settled principle of constitutional law regarding the Parliament of Canada's legislative authority over bankruptcy and insolvency, the provincial legislatures may not modify the order of priority established in the [Bankruptcy and Insolvency Act]".

In the result, the Court found that neither the GST nor the QST could be claimed by the tax authorities, as the statutory deemed trusts do not apply in the situation at issue involving amounts collected or collectible by persons who were bankrupt. Instead, such amounts of GST and QST would be considered to form part of the property of the bankrupt person. In the case of amounts of GST and QST collectible on accounts receivable of a bankrupt person, such amounts would accrue in favour of creditors which hold a security over the accounts receivable of such bankrupt person.

This decision will be of great interest to bankruptcy trustees and secured lenders, as it clarifies the effect of a bankruptcy over amounts of GST and QST collected or collectible. As the Harmonized Sales Tax (HST) regime, which many provinces have now implemented, is imposed under the same Act and subject to the same provisions as the GST, this decision is likely to also similarly impact HST collected or collectible by a bankrupt person.

Still pending before the Supreme Court is an application for leave to appeal by Century Services Inc. v. Attorney General of Canada which deals with deemed trusts for tax collected by companies subject to the Companies' Creditors Arrangement Act. The Supreme Court is set to render judgment on this application for leave on Thursday, November 5, 2009.

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