Canada: Canadian And Quebec Tax Authorities Held To Be Ordinary Creditors In Respect Of A Bankrupt’s Unremitted GST/QST

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Restructuring & Insolvency, November 2009

On October 30, 2009, the Supreme Court of Canada (the Court) released its decision in Québec (Revenue) v. Caisse populaire Desjardins de Montmagny. The Court held that a trustee in bankruptcy under the Bankruptcy and Insolvency Act (Canada) (BIA) does not hold in trust for the Crown Goods and Services Tax (GST) and Quebec Sales Tax (QST) collected by the debtor but not remitted prior to the bankruptcy date or that are collectible at the time of the bankruptcy (Unremitted GST/QST). The Unremitted GST/QST is part of the debtor's patrimony which is seized and held by the trustee and not property of the Crown held by the trustee as an agent. The Crown is therefore an ordinary creditor with an ordinary claim in the amount of any Unremitted GST/QST.

BACKGROUND

The Supreme Court of Canada was seized with appeals originating from three decisions of the Superior Court of Québec, in which the issue to be decided was the ownership of amounts of Unremitted GST/QST. In all three cases, the Superior Court held that the trustee in bankruptcy was holding these amounts in trust for the benefit of the Crown, who was the owner thereof. The Québec Court of Appeal reversed all three of the lower court decisions.

The Supreme Court decision affirmed the judgment rendered by the Court of Appeal.

SUPREME COURT DECISION

Legal Context
The Court described the nature of both the GST and the QST, under the Excise Tax Act (Canada) (ETA) and the Act respecting the Québec sales tax (QSTA) respectively, as a value-added tax under which each supplier in the value chain generally pays the net tax collected to the Crown, after setting off the amount of tax paid to its own suppliers. The Court also confirmed that the ETA and the Act respecting the Ministère de Revenu (Québec) (MRQA) provide that GST/QST collected by suppliers is held in trust in favour of the Crown.

Subsequently, the Court came to the conclusion that Parliament's clear goal in amending the BIA in 1992 was to make the BIA fairer to all creditors by limiting the Crown's priority.

The Court pointed out that section 67(2) of the BIA states that, for the purposes of bankruptcy proceedings, the debtor's property will not be deemed to be held in trust in favour of the Crown, with certain exceptions, despite provisions in federal or provincial legislation which deem that such property is held in trust. The Court also noted that section 86(1) of the BIA states that the Crown is an ordinary creditor in a bankruptcy situation. As regards the GST, the Court observed that section 222(1.1) of the ETA specifically provides that deemed trusts intended to secure GST claims are ineffective in a bankruptcy situation.

Though no similar provision exists in the QSTA or the MRQA, the Court relied on the Canadian Parliament's legislative authority over bankruptcy and insolvency to decide that the Québec National Assembly could not modify the order of priority established in the BIA.

Characterization of the Crown's Rights

The Crown submitted that the debtors collected the Unremitted GST/QST as an agent of the Crown, and that the Crown was therefore the owner of the unremitted amounts. It argued that the trustees who were now holding the Unremitted GST/QST were simply holding the property as an agent of the Crown. In other words, the Crown was not a creditor but rather the owner of such amounts, and therefore provisions such as section 67(2) of the BIA would not restrict the right of the Crown to such amounts. The Court dismissed this argument, saying that it was inconsistent with the mechanisms for collecting and administering the GST and QST, as well as with the context and priority regime created by the BIA.

The Court found that the reason why the supplier was given the status of a mandatary was to satisfy constitutional limitations and to harmonize the federal and provincial sales tax system. According to the Court, the simple fact the GST/QST are ultimately borne by the recipient does not support the arguments that a supplier collects and remits property of the Crown under a common mandatary relationship. In support of its position, the Court found that, based on the following reasons, it did not follow that the Unremitted GST/QST is the property of the Crown:

  • Amounts collected or collectible by suppliers are not necessarily amounts due to the Crown; suppliers collect GST/QST and set off amounts paid to their own suppliers.
  • Nothing in the relevant legislation requires suppliers to keep the GST/QST they collect separate from their other assets; statutory deemed trusts give tax authorities the right to equivalent amounts of GST and QST owed by the supplier, not to specific property.
  • Though a supplier's customer owes the GST/QST to the Crown, the supplier who has remitted such tax but has not collected it from its customer has a cause of action against the customer, not the Crown.

The Court, therefore, stated that the suppliers' mandates were not mandates to collect and remit property of the Crown. The suppliers' mandates were instead characterized as mandates to perform obligations to collect GST/QST, to offset amounts collected against amounts paid to other suppliers, and to remit the balance to the Crown.

CONCLUSION

The Supreme Court of Canada expressed the view that the Crown's arguments ultimately support the position that the statutory deemed trusts in which the Unremitted GST/QST were held in favour of the Crown continued to exist after a bankruptcy. Such position was found by the Court to be incompatible with the nature of the system by which the taxes are collected and remitted. Treating the Crown as an ordinary creditor with respect to amounts owed for Unremitted GST/ QST is consistent with the clear legislative intent underlying the 1992 amendments to the BIA to make the bankruptcy regime fairer to all creditors by limiting the priorities accorded to the Crown. The trustee will nevertheless remain personally responsible for paying the GST or QST, though only in respect of its own activities.

This decision is consistent with the judgment in Québec (Sous-ministre du Revenu) c. De Courval, rendered by the Québec Court of Appeal on March 3, 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.

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.

Authors
Events from this Firm
16 Oct 2018, Seminar, Toronto, Canada

Join Blakes lawyers for our 10th annual overview of recent legal and regulatory developments and practical strategies to navigate the changing regulation of Canada’s payments industry.

26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions