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.
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
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.
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.
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