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
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.
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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