Supreme Court of Canada Rules in Favour of Lenders in Callidus
In a 2017 judgment discussed here, the Federal Court of Appeal permitted the CRA to assert a claim against a secured creditor who had received a repayment from its borrower prior to bankruptcy when the borrower also owed unremitted GST obligations to the Crown. The decision in Canada v. Callidus Capital Corporation turned on the interpretation of 222(3) of the Excise Tax Act, which creates a trust in favour of the Crown over GST collected but not remitted to the receiver general. On November 8, 2018, the Supreme Court of Canada reversed that decision in a bench ruling. The decision, which was unanimous and endorsed the dissenting judgment in the Court below, confirms that the ETA deemed trust will not extend to pre-filing bankruptcy payments made by a borrower to a lender in circumstances where the borrower is subsequently rendered bankrupt.
The judgment from the country’s highest court should provide lenders with assurances that, if they revert to bankruptcy, they will not face subsequent claw back claims from the Crown under the ETA. The result recognizes both the clear legislative intent to leave the CRA without priority for GST claims in bankruptcy and the practical complications that the Federal Court of Appeal created with its decision. Lenders faced liability even though they did not necessarily have insight on potential deemed trust claims and were faced with the unenviable position of being encouraged to enforce security against a distressed counterparty even if their desire was to work through credit issues by accepting voluntary pay downs.
Left unresolved by the Supreme Court of Canada is the operation of subsection 222(3) of the ETA in the circumstances where the tax debtor does not become bankrupt. In the recent decision of Canada v. Toronto-Dominion Bank, the Federal Court allowed the CRA to recover on a GST deemed trust claim from a lender who had received repayment from a non-bankrupt borrower on residential mortgage security. That decision, which is also subject to appeal proceedings and involved reliance on the now overturned Callidus Federal Court of Appeal decision, represents the next battlefront in the continuing conflict between secured creditors and the CRA in the proper scope and reach of deemed trust legislation.