The Supreme Court of Canada ruled that bankruptcy trustees,
receivers and secured creditors can continue to collect the full
amount of accounts receivable of a bankrupt supplier, including the
Goods and Services Tax (GST) component, even if an amount remains
owing by the supplier to the Canada Revenue Agency (CRA).
In a decision released today, the Supreme Court of Canada
settled the ongoing controversy concerning the duty of a bankruptcy
trustee, a receiver or a financial institution holding a security
interest to remit to the tax authorities the GST and Québec
Sales Tax (QST) included in the total amount of the accounts
receivable of a bankrupt supplier, when the supplier is indebted to
the tax authorities for unremitted GST or QST.
The Federal CRA and Minister of Revenue of Québec (MRQ)
have a first-ranking deemed trust in all the property of a supplier
for an amount equal to the amounts owing to them by a supplier for
GST and QST, respectively, which deemed trust arises upon failure
of the supplier to remit same to the tax authorities. However, that
deemed trust ceases to have effect upon the bankruptcy of the
supplier, and the tax authorities then rank only as ordinary
The question submitted to the Court was whether the tax
authorities could claim a real trust or a right of ownership in the
taxes included in an unpaid account receivable owing to the
supplier on the date of its bankruptcy. The MRQ argued that it
could collect the GST and QST directly from the customers of the
bankrupt supplier if the account was unpaid at the date of
bankruptcy. The MRQ also argued that it could identify and claim
the GST and QST in the hands of the bankruptcy trustee, the
receiver or the financial institution who collected accounts from
the customers after the supplier's bankruptcy.
In the three cases decided today, the Québec Court of
Appeal had overturned the decisions of the Québec Superior
Court, all favourable to the MRQ. In each case, unpaid accounts
receivable of a bankrupt supplier had been collected after
bankruptcy, either by the trustee, the receiver, the financial
institution under its security interest, or even by the MRQ. The
uncertainty about the rights of the CRA and MRQ on the retail tax
portion of the accounts receivable had resulted in multiple
competing demands being made upon the customers of the bankrupt
The Québec Court of Appeal had determined that it was
Parliament's intent to have the GST and QST claims rank as
unsecured claims upon bankruptcy of a supplier. The Court further
considered that no real trust could exist on the GST and QST
component of accounts receivable, as the input tax credit system
did not permit tracing of the unpaid taxes.
2. Summary of the Supreme Court of Canada's Decision
In Sous-Ministre du Revenu du Québecv.
Caisse Populaire Desjardins de Montmagny and the two related
cases, the Supreme Court of Canada unanimously maintained the
decision rendered by the Québec Court of Appeal against the
tax authorities, for the same reasons. For the Court, the GST
collection system and bankruptcy law are not compatible with a
trust claim, as the taxes that need to be remitted are not the
taxes actually collected, but the net amount resulting from set-off
of amounts between the tax authorities and the supplier.
Therefore, the rights of the tax authorities do not have
priority over the rights of the bankruptcy trustee, the receiver or
the secured creditor to collect the full amount of an account
receivable of a bankrupt supplier. The GST and QST remain unsecured
claims in bankruptcy.
Because retail sales tax claims are usually larger when a
borrower is in default, today's ruling will provide an
additional incentive for financial institutions to realize their
security after bankruptcy of the borrower, to
avoid a potential liability to the tax authorities under the deemed
A detailed paper on this subject, has been published in the
September 2009 issue 25.1 of Banking and Finance Law
Review, and is also available on the Fraser Milner Casgrain
LLP website. Please click on
this link to read the article.
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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