The Supreme Court of Canada rules in favour of lenders in Callidus

Date Closed

November 08, 2018

Lead Office

Québec City

On November 8, 2018 the Supreme Court of Canada (SCC) in a unanimous decision ruled in favour of lenders on the issue of secured creditors' personal liability for deemed trust claims under section 222(3) of the Excise Tax Act (ETA). The SCC confirmed that the bankruptcy of a tax debtor, although subsequent to the repayment of the secured creditor's debt, renders the rights of the Crown under its deemed trust ineffective as against the secured creditor. 

Callidus Capital Corporation was a secured creditor of Cheese Factory Road Holdings Inc. pursuant to credit facilities being the object of a "forbearance agreement". Cheese Factory collected certain rents, including sales taxes, and remitted same to Callidus in reimbursement of its debt. After Cheese Factory went bankrupt, the Crown brought an action against Callidus seeking recovery of the amounts received by Callidus from the deemed trust prior to the bankruptcy relying on s. 222 (3) of the ETA, which provides that the proceeds of the tax debtors’ property shall be paid to the Crown as a priority over any security interests. 

The Federal Court of Appeal reversed the lower court’s decision, holding in favour of the Crown. McCarthy Tétrault LLP acted for the intervener Canadian Bankers Association before the SCC. The SCC reversed the Federal Court of Appeal decision endorsing the dissenting judgment in the same, confirming that the ETA deemed trust does not extend to pre-filing bankruptcy payments made by a borrower to a lender in circumstances where the borrower is subsequently rendered bankrupt. 

This decision is particularly important to the Canadian banking industry as it relates to direct liability of banks for their clients’ sales tax debt. It stands for the proposition that secured creditors are not personally liable to pay their borrowers’ sales tax debts following the bankruptcy of the latter. The SCC expressly stated that it was not commenting, one way or another, on the scope of the deemed trust or any liability of a secured creditor who received a voluntary repayment in the absence of a bankruptcy. 

McCarthy Tétrault LLP acted for the intervener Canadian Bankers Association with a team led by Philippe Bélanger that included Jocelyn Perreault and Pascale Klees-Themens.