2017 FCA 162, 2017 FCA 162

A-400-15 2017 FCA 162 Her Majesty the Queen ( Appellant ) v. Callidus Capital Corporation ( Respondent ) Indexed as: Canada v. Callidus Capital Corporation Federal Court of Appeal, Pelletier, Near and Rennie JJ.A.—Toronto, January 19; Ottawa, July 27, 2017.

Customs and Excise –– Excise Act –– Appeal from Federal Court order answering affirmatively question of law as to whether bankruptcy of tax debtor, Excise Tax Act (ETA), s. 222(1.1) rendering deemed trust under ETA, s. 222 ineffective as against secured creditor who received, prior to bankruptcy, proceeds from assets of tax debtor deemed to be held in trust for appellant –– Appellant claiming owed $177 299.70 plus interest in unremitted GST, HST by operation of deemed trust mechanism in ETA, s. 222; commencing action in Federal Court to recover debt –– Pursuant to forbearance agreement, tax debtor delivering proceeds from property to respondent to partially repay amounts owing thereto; respondent applying proceeds to partially reduce tax debtor’s indebtedness –– Tax debtor making assignment in bankruptcy –– Federal Court finding, in particular, that deemed trust mechanism under ETA, s. 222 operating to grant Receiver General “absolute priority”, but that deemed trust, extinguished upon debtor’s bankruptcy such that Crown becoming unsecured creditor in respect of unremitted amounts –– Whether tax debtor’s bankruptcy, ETA, s. 222(1.1) rendering deemed trust under ETA, s. 222 ineffective as against secured creditor who received, prior to bankruptcy, proceeds from assets of tax debtor deemed to be held in trust –– Per Rennie J.A. (Near J.A. concurring): Question of law in present case having to be answered in negative –– Support for conclusion found in language of ETA, s. 222 which provides mechanism whereby Crown can recover collected but unremitted GST or HST –– Amendments in 2000 to deemed trust mechanism in ETA imposing obligation on secured creditors to pay proceeds derived from trust assets to the Crown –– Crown having cause of action to enforce personal liability of secured creditor not complying with statutory obligation to pay under ETA –– Secured creditors not complying with obligation personally liable to Crown –– While ETA, s. 222(1.1) releasing tax debtor’s assets from deemed trust upon bankruptcy, subsection not extinguishing pre-existing personal liability of secured creditor who received proceeds from deemed trust –– In present case, any proceeds from sale of tax debtor’s property should have been paid to Crown in priority to any security interest pre-bankruptcy –– Proceeds here paid out of priority in contradiction to express wording of ETA, s. 222(3) –– Also, “crystallizing event” to ground independent cause of action not needed since legislation establishing obligation to pay –– Appeal allowed — Per Pelletier J.A. (dissenting): Trust created by ETA, s. 222(3) lapsed due to lack of subject-matter by operation of ETA, s. 222(1.1) following tax debtor’s bankruptcy –– As of date of bankruptcy, no amounts subject to ETA, s. 222(1) trust; therefore no property of tax debtor subject to deemed trust pursuant to ETA, s. 222(3) –– Therefore, no proceeds of that property payable to Crown by respondent.

This was an appeal from a Federal Court order in which the Court answered affirmatively the question as to whether the bankruptcy of a tax debtor and subsection 222(1.1) of the Excise Tax Act (ETA) render the deemed trust under

section 222 of the ETA ineffective as against a secured creditor who received, prior to bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust for the plaintiff. The Crown claimed it was owed $177 299.70 plus interest in unremitted GST and HST by the operation of the deemed trust mechanism in

section 222 of the ETA . It commenced an action in the Federal Court to recover the debt. The respondent defended, and the parties agreed to set down a question of law for determination. The respondent carries on business as a lender of monies to commercial enterprises on a secured basis. Pursuant to a forbearance agreement, the tax debtor delivered sale and rent proceeds from its property to the respondent to partially repay the amounts owed thereto. The respondent applied these proceeds to partially reduce the tax debtor’s indebtedness.

The tax debtor made an assignment in bankruptcy at the request of the respondent. The plaintiff commenced proceedings against the respondent on the basis of the deemed trust mechanism governed by

section 222 of the ETA on account of GST and HST that the tax debtor in question collected but failed to remit for specific reporting periods. Before the Federal Court, the appellant argued that as a result of the respondent’s failures to remit GST and HST to the Receiver General, all of its assets were deemed to be held in trust in favour of the appellant in priority to the claims of the respondent pursuant to

section 222 of the ETA and that all proceeds the respondent received from the tax debtor, up to the amount secured by the deemed trust, should have been paid to the Receiver General of Canada as a result of the deemed trust mechanism under the ETA . The Federal Court found in particular that the deemed trust mechanism under

section 222 of the ETA operates to grant the Receiver General “absolute priority”, but that the deemed trust, and the accompanying priority, are extinguished upon bankruptcy of the debtor such that the Crown becomes an unsecured creditor in respect of unremitted amounts. It determined that any liability that arises under subsection 222(3) of the ETA to disgorge proceeds is extinguished upon bankruptcy by the operation of subsection 222(1.1) .

On appeal, the respondent submitted that, on a proper reading of the statutory language, the deemed trust under subsection 222(1) of the ETA and the extension under subsection 222(3) are both extinguished upon bankruptcy. Since the Crown relied on subsection 222(3) to establish the personal liability of the secured creditor, the respondent argued it should follow that any personal liability must be extinguished upon bankruptcy as well. Determination of the question of law in this case turned on the

interpretation of the effect of bankruptcy on the prior operation of the deemed trust mechanism as against a secured creditor who received proceeds from the tax debtor’s deemed trust assets prior to bankruptcy. The issue was how to answer the question of law, namely, whether the bankruptcy of a tax debtor and subsection 222(1.1) of the ETA render the deemed trust under

section 222 of the ETA ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust. Held (Pelletier J.A. dissenting), the appeal should be allowed.

Per Rennie J.A. (Near J.A. concurring): The question of law in this case had to be answered in the negative. Support for this conclusionwas found in the language of

section 222 of the ETA, which provides a mechanism whereby the Crown can recover collected butunremitted GST or HST. The issue concerned the Crown’s recovery mechanisms for dispositions made prior to bankruptcy.Amendments in 2000 to the deemed trust mechanism in both the Income Tax Act and the ETA imposed an obligation on securedcreditors to pay proceeds derived from trust assets to the Crown (subsection 222(3)). Based on the Federal Court of Appeal’s reasoningin its 2004 decision in Canada (Attorney General) v.

National Bank of Canada, the Crown has a cause of action to enforce the personalliability of a secured creditor who does not comply with its statutory obligation to pay under the ETA. Secured creditors who do notcomply with the obligation to pay proceeds derived from deemed trust assets are personally liable to the Crown, which has a separatecause of action against them, irrespective of the subsequent bankruptcy of the debtor.

While subsection 222(1.1) releases a tax debtor’sassets from the deemed trust upon bankruptcy, the subsection does not extinguish the pre-existing personal liability of a secured creditorwho received proceeds from the deemed trust. In the present case, pursuant to the language of subsection 222(3) of the ETA, any proceeds from a sale of the tax debtor’s propertyshould have been paid to the Crown in priority to any security interest pre-bankruptcy.

Proceeds were paid out of priority in contradictionto the express wording of subsection 222(3), which created an obligation independent of the existence of the deemed trust, to pay.Context was also examined. Referencing other collection tools available to the Crown, the Federal Court stated that there must be a“crystallizing event” in order to ground an independent cause of action. However, there was no need for a crystalizing event since thelegislation establishes the obligation to pay.

The respondent’s argument that Parliament’s intent was that the Crown becomes an unsecured creditor upon the bankruptcy of thedebtor in relation to amounts owed pre-bankruptcy was not supported by the language of the statute and would also undermine thepurpose of the provision. The

interpretation the respondent urged would allow a secured creditor to manipulate both pre- and post-bankruptcy priority and would significantly dilute the absolute priority of the Crown confirmed by both Parliament and the courts in thiscontext. This cannot be what Parliament intended. Per Pelletier J.A. (dissenting): The trust created by subsection 222(3) of the ETA lapsed due to lack of subject-matter by operation ofsubsection 222(1.1) of the ETA following the tax debtor’s bankruptcy.

As of the date of bankruptcy, there were no amounts subject tothe subsection 222(1) trust and therefore no property of the tax debtor subject to a deemed trust pursuant to subsection 222(3) of theETA. As a result, no proceeds of that property were payable to the Crown by the respondent. The fact that, prior to the bankruptcy, ademand for payment was made on the respondent was irrelevant. This view of the matter did not put the Crown’s interests unjustifiablyat risk. In terms of context, subsections 67(2) and (3) of the Bankruptcy and Insolvency Act were examined.

Subsection 67(2) makes itclear that Parliament intended to do away with the deemed trusts in bankruptcy. By eliminating these trusts in bankruptcy (with theexclusion of unremitted source deductions as set in subsection 67(3)), Parliament put the Crown on the same footing as unsecuredcreditors. STATUTES AND REGULATIONS CITED Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, ss. 67(2),(3). Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36. Employment Insurance Act, S.C. 1996, c. 23. Excise Tax Act, R.S.C., 1985, c. E-15, ss. 222, 313(1) “tax debt”, (1.1), 317, 325.

Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 227(4.1). CASES CITED APPLIED: Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27, (1998), 36 O.R. (3d) 418, [1998] S.C.J. No. 2 (QL); Canada(Attorney General) v. National Bank of Canada, 2004 FCA 92, 324 N.R. 31, [2004] F.C.J. No. 371 (QL). CONSIDERED: Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; Caisse populaire Desjardins de l’Est deDrummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94; First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; RoyalBank of Canada v.

Sparrow Electric Corp., (SCC), [1997] 1 S.C.R. 411, (1997), 143 D.L.R. (4th) 385; Bank of NovaScotia v. Huronia Precision Plastics Inc. (2009), 50 C.B.R. (5th) 58, (Ont. S.C.J.―Commercial List); TorontoDominion Bank v. Canada, 2010 FCA 174, [2012] 1 F.C.R. 197, 325 D.L.R. (4th) 174, affd 2012 SCC 1, [2012] 1 S.C.R. 3; Housen v.Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd., (MB CA), [1992] 2W.W.R. 641 (Man. C.A.); Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny, 2009 SCC 49, [2009] 3 S.C.R. 286. REFERRED TO: Heavyside v.

Canada (1996), (FCA), 43 C.B.R. (3d) 128, [1996] F.C.J. No. 1608 (QL) (C.A.). AUTHORS CITED Department of Finance, Press Release, 1997-030, “Unremitted Source Deductions and Unpaid GST” (7 April 1997), online: Media Room– Press Releases www.fin.gc.ca. Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.

Sullivan, Ruth. Sullivan on the Construction of Statutes , 6th ed. Markham, Ont.: LexisNexis, 2014. APPEAL from a Federal Court order ( 2015 FC 977 , 28 C.B.R. (6th) 209) in which the Court answered affirmatively the question as to whether the bankruptcy of a tax debtor and subsection 222(1.1) of the Excise Tax Act render the deemed trust under

section 222 thereof ineffective as against a secured creditor who received, prior to bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust for the plaintiff. Appeal allowed, Pelletier J.A. dissenting. APPEARANCES Louis L’Heureux and Edward Harrison for appellant. Harvey G. Chaiton and Sam P. Rappos for respondent. SOLICITORS OF RECORD Deputy Attorney General of Canada for appellant. Chaitons LLP , Toronto, for respondent. The following are the reasons for judgment rendered in English by Rennie J.A.: I.

Introduction [ 1 ] The Crown appeals from the order of the Federal Court ( per McVeigh J.), dated August 17, 2015 ( 2015 FC 977 , 28 C.B.R. (6th) 209), in which the Court answered the following question in the affirmative and awarded costs to Callidus Capital Corporation (Callidus): Does the bankruptcy of a tax debtor and subsection 222(1.1) of the [ Excise Tax Act , R.S.C., 1985, c. E-15, as amended (the ETA)] render the deemed trust under

section 222 of the ETA ineffective as against a secured creditor who received, prior to bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust [for the plaintiff]? [ 2 ] The Crown claimed it was owed $177 299.70 plus interest in unremitted GST and HST by the operation of the deemed trust mechanism in

section 222 of the Excise Tax Act , R.S.C., 1985, c. E-15 ( Excise Tax Act ), as amended. It commenced an action in the Federal Court to recover the debt. Callidus defended, and the parties agreed to set down a question of law for determination. For the purposes of determining the question of law the parties submitted an agreed statement of facts, which is reproduced below: Background 1. Cheese Factory Road Holdings Inc. (“Cheese Factory”) is a privately-held Ontario corporation that carried on business as a real estate investment company.

Cheese Factory is or was the registered owner of properties municipally known as 680 Bishop Street, Cambridge, Ontario (the “Bishop Property”) and 181 Pinebush Road, Cambridge, Ontario (the “Pinebush Property”). 2. At all material times Callidus was a privately-held Ontario corporation that carried on business throughout Canada as a lender of monies to commercial enterprises on a secured basis. Failures to remit GST and HST 3.

The Plaintiff [Her Majesty the Queen, or the appellant] claims that between 2010 and 2013, Cheese Factory collected but failed to remit GST and HST to the Receiver General for a total amount of $177,299.70. BMO credit facilities 4. Pursuant to a commitment letter dated September 22, 2004, Cheese Factory obtained a credit facility in the principal amount of $1,950,000 from the Bank of Montreal (“ BMO ”). Cheese Factory also granted the guarantee and security documents listed on

Schedule “A” attached hereto [not attached, can be found at AB, Tab 4, page 35] in favour of BMO to secure its direct and indirect obligations to BMO (collectively, the “ Security ”). 5. As of December 2, 2011: (

a) Cheese Factory was in default under the credit facility extended to it by BMO in the principal amount of $1,950,000; (

b) Cheese Factory was indebted to BMO as borrower under the commitment letter in the amount of $1,416,418.61 (inclusive of principal and interest but exclusive of fees; (

c) Cheese Factory was in default under the guarantees granted by it to BMO; and (

d) Cheese Factory was indebted to BMO as guarantor in the amounts of $3,387,658.53 and US$81,233,28, which amounts include principal and interest but do not include fees. Assignment of debt and obligations to Callidus 6. Pursuant to an Assignment of Debt and Security agreement dated December 2, 2011, BMO assigned to Callidus all of its right, title and interest in and to the direct and indirect indebtedness and obligations owed to it by Cheese Factory, along with the Security.

7. Pursuant to a Forbearance Agreement dated December 2, 2011, Callidus agreed to forbear from enforcing the BMO agreements, subject to and in accordance with the terms and conditions of the Forbearance Agreement. Pursuant to the Forbearance Agreement, Callidus also agreed to extend to Cheese Factory (and other debtors) certain demand credit facilities, which amended the credit facilities granted by BMO. Sale Proceeds from the Bishop Property 8.

Pursuant to the terms of the Forbearance Agreement, Cheese Factory agreed to market the Bishop Property, among other properties, for sale and to deliver the net sales proceeds to Callidus to partially repay the amounts owed to Callidus under the credit facilities. 9. On or about April 5, 2012, Cheese Factory sold the Bishop Property to Poladian Holdings Inc. for a purchase price of $790,000. 10. On or about April 9, 2012, Callidus received the sum of $590,956.62 from the sale of the Bishop Property (the “ Sale Proceeds ”). 11.

Callidus has applied the Sale Proceeds to partially reduce the outstanding indebtedness and obligations owed to it by Cheese Factory. Rent Proceeds from the Pinebush Property 12. Pursuant to the terms of the Forbearance Agreement and a Blocked Accounts Agreement dated November 9, 2011 (the “ Blocked Accounts Agreement ”), Cheese Factory also agreed to open blocked accounts (the “ Blocked Accounts ”) at a Royal Bank of Canada (“ RBC ”) and to deposit all funds received from all sources into the blocked accounts. 13. The Blocked Accounts Agreement provides that: (

a) Cheese Factory shall hold all cash and Cheques (as defined therein) received by it in trust for Callidus, segregated from all other funds and other property of Cheese Factory, until such time as the cash and Cheques are delivered to RBC for deposit in the Blocked Accounts; and (

b) RBC shall transfer, prior to the end of each Business Day, all amounts on deposit in the Blocked Accounts to Callidus’ account or accounts. 14. All rent proceeds received from Cheese Factory or from the tenant of the Pinebush Property since December 2011 have been deposited into the Blocked Accounts. 15. Since the date that Callidus received an assignment of the BMO credit facilities and security on December 2, 2011 up to and including July 31, 2014, the sum of $780,387.62 in gross rent has been deposited into the Blocked Accounts. 16.

Callidus has applied all amounts deposited into the Blocked Accounts to partially reduce the outstanding indebtedness and obligations owed to it by Cheese Factory. Deemed Trust Asserted by the Plaintiff 17. On or about April 2, 2012, the Plaintiff, by way of a letter to Callidus, claimed an amount of $90,844.33 on the basis of the deemed trust mechanism of the Excise Tax Act, R.S.C. 1985, c. E.15, as amended (the “ ETA ”). Bankruptcy of Cheese Factory 18.

On or about November 7, 2013, at the request of Callidus, Cheese Factory made an assignment in bankruptcy under the Bankruptcy or Insolvency Act, R.S.C. 1985, c. B-3 , as amended. Action Commenced by the Plaintiff 19. The Plaintiff commenced this proceeding against Callidus pursuant to a statement of claim dated November 25, 2013. 20. The Plaintiff claims the total amount of $177,299.70 plus interest from Callidus on the basis of the deemed trust mechanism governed by

section 222 of the ETA on account of GST and HST that Cheese Factory collected but failed to remit for reporting periods commencing on October 31, 2010 up to and including January 31, 2013. 21. The Plaintiff contends that as a result of Cheese Factory’s failures to remit GST and HST to the Receiver General: (

a) all of Cheese Factory’s assets were deemed to be held in trust in favour of the Plaintiff in priority to the claims of Callidus pursuant to

section 222 of the ETA ; and, (

b) all proceeds of Cheese Factory’s property received by Callidus, up to the amount secured by the deemed trust, should have been paid to the Receiver General of Canada as a result of the deemed trust mechanism under

section 222 of the ETA . 22. Callidus served and filed a statement of defence. Question of Law 23. Does the bankruptcy of a tax debtor and subsection 222(1.1) of the ETA render the deemed trust under

section 222 of the ETA ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust?

II. Legislation [ 3 ] The relevant provisions of the Excise Tax Act provide: Excise Tax Act , R.S.C., 1985, c. E-15 Trust for amounts collected 222

(1) Subject to subsection (1.1), every person who collects an amount as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from property held by any secured creditor of the person that, but for a security interest, would be property of the person, until the amount is remitted to the Receiver General or withdrawn under subsection (2).

Amounts collected before bankruptcy (1.1) Subsection (1) does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act ), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II. Withdrawal from trust

(2) A person who holds tax or amounts in trust by reason of subsection (1) may withdraw from the aggregate of the moneys so held in trust (

a) the amount of any input tax credit claimed by the person in a return under this Division filed by the person in respect of a reporting period of the person, and (

b) any amount that may be deducted by the person in determining the net tax of the person for a reporting period of the person, as and when the return under this Division for the reporting period in which the input tax credit is claimed or the deduction is made is filed with the Minister. Extension of trust

(3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act ), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust, is deemed (

a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and (

b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests . [Emphasis added.] III. Federal Court decision [ 4 ] The Court answered the question in the affirmative. [ 5 ] The Court found that the deemed trust mechanism under

section 222 of the Excise Tax Act operates to grant the Receiver General “absolute priority”, but that the deemed trust, and the accompanying priority, are extinguished upon bankruptcy of the debtor such that the Crown becomes an unsecured creditor in respect of unremitted amounts. The Court determined that any liability that arises under subsection (3) to disgorge proceeds is extinguished upon bankruptcy by the operation of subsection (1.1).

Subsection (3) operates to extend the deemed trust created pursuant to subsection (1) to the debtor’s property, and any liability arising from it is dependent on the continuing existence of the deemed trust. [ 6 ] The Court reviewed the legislative history and priority schemes of the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B-3 (the BIA), the Companies’ Creditors Arrangement Act , R.S.C., 1985, c. C-36 (the CCAA) and the reasoning of the Supreme Court of Canada in Century Services Inc. v.

Canada (Attorney General) , 2010 SCC 60 , [2010] 3 S.C.R. 379 ( Century Services ), and observed [at paragraph 26] that the enactment of subsection 222(1.1) appeared to align with Parliament’s intent to “move away from asserting priority for Crown claims in insolvency law”. While deemed trusts in relation to source deductions, such as Canada Pension Plan contributions, “remain operative” in bankruptcy, deemed trusts over GST/HST do not. [ 7 ] Applying the reasoning in Century Services and the earlier decision of Caisse populaire Desjardins de l’Est de Drummond v.

Canada , 2009 SCC 29 , [2009] 2 S.C.R. 94 ( Caisse ), the Judge held [at paragraph 32] that the absence of express confirmation of the trust upon bankruptcy in the BIA reflected “Parliament’s intention to allow it to lapse upon insolvency proceedings being commenced.” The Judge found [at paragraph 35] that, similar to the factual scenarios in both Supreme Court of Canada cases, “the Crown seeks to maintain the deemed trust without express legislative language to do so”, and further, that subsection 222(1.1) operates to “remove [the] imperative” language in subsection 222(3) of “shall be paid”.

The Judge was not persuaded by the Crown’s reference to legislative amendments in the year 2000 (the 2000 amendments) to the deemed trust mechanism in the Income Tax Act (R.S.C., 1985 (5th Supp.), c. 1) ( Income Tax Act ) because they were specific to source deductions, and distinguished the cases on which the Crown relied for the same

reason. The Judge favoured [at paragraph 42] Callidus’ argument that the amendments made to the Excise Tax Act in 1992 demonstratedParliamentary intent to “oust the Crown priority over all other interests in bankruptcy”, and that this

interpretation was evident in thejurisprudence. [8] The Judge dismissed the Crown’s analogy to other collection tools in the Excise Tax Act, noting that those provisions did notassist the Crown’s position. Both sections 317 (garnishment) and 325 (non-arms’ length transfers) require a “crystallizing event” beforeliability will attach prior to bankruptcy, and the Crown had not demonstrated how to reconcile a “pre-existing, fully engaged cause ofaction” with subsection (1.1).

In the case of a non-arms’ length transfer, the event is the transfer of property for less than fair marketvalue, while in the garnishment context the crystallizing event is service of a “requirement to pay” (RTP) notice.

The Judge stated that,had an RTP notice been issued in this case, Callidus’ obligation to pay would have survived bankruptcy of the debtor. [9] The Judge ultimately held that the tax debtor’s bankruptcy engaged subsection 222(1.1) of the Excise Tax Act, which renderedthe deemed trust, and any independent liability arising from operation of the deemed trust, ineffective in regard to the pre-bankruptcyamounts Callidus had received. IV.

Issues [10] Before this Court, Callidus submits that, on a proper reading of the statutory language, the deemed trust under subsection 222(1)and the extension under subsection 222(3) are both extinguished upon bankruptcy.

As the Crown relies on subsection 222(3) to establishthe personal liability of the secured creditor, Callidus argues it should follow that any personal liability must be extinguished uponbankruptcy as well. [11] The Crown concedes that, upon the bankruptcy of a tax debtor, subsection 222(1.1) of the Excise Tax Act renders the deemedtrust under subsection 222(3) of the Excise Tax Act ineffective with respect to the debtor’s property at the time of bankruptcy.

The Crownasserts, however, that the contested question on appeal is whether subsection 222(1.1) of the Excise Tax Act also extinguishes thedistinct and personal liability of the secured creditor that may arise prior to bankruptcy by virtue of subsection 222(3) of the Excise TaxAct. [12] The respondent urges that the Judge correctly found that subsection 222(1.1) reflects Parliament’s intent to move away fromCrown priority in insolvency law, in particular with respect to GST/HST.

It is conceded by the Crown that the deemed trust ceases tooperate upon the debtor’s bankruptcy, specifically in relation to GST/HST amounts collected but not remitted prior to bankruptcy. I agreewith the Judge that Parliament has drawn a clear distinction post-bankruptcy between source deductions under the Income Tax Act andGST/HST amounts under the Excise Tax Act by virtue of subsection 222(1.1) and subsections 67(2) and (3) of the BIA. [13] The issue here however, is the priority that may have existed prior to any insolvency or bankruptcy proceedings. Determinationof the question of law turns on the

interpretation of the effect of bankruptcy on the prior operation of the deemed trust mechanism asagainst a secured creditor who received proceeds from deemed trust assets of the tax debtor prior to bankruptcy. V. Analysis [14] The answer to the question on appeal turns on the application of the governing principles of statutory

interpretation. Rizzo &Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27 (Rizzo), instructs at paragraph 21, quoting E. A. Driedger,Construction of Statutes (2nd ed. 1983), at page 87 that “[t]oday there is only one principle or approach, namely, the words of

an Act areto be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of theAct, and the intention of Parliament.” Put otherwise, the intention of Parliament is to be gleaned from the text, read in its context and inlight of its purpose. Applying these principles, it is my view that the question should be answered in the negative. [15] Support for this conclusion is found in the language of

section 222, to which I turn.

Section 222 of the Excise Tax Act provides amechanism whereby the Crown can recover collected, but unremitted, GST or HST. [16] Subsection 222(3) operates to deem all of a tax debtor’s property to be held in trust for the benefit of the Crown where GST/HSTis collected but not remitted. It is undisputed that subsection 222(1.1) renders the deemed trust ineffective with respect to the property ofthe tax debtor at the time of bankruptcy.

The issue in this appeal concerns the Crown’s recovery mechanisms for dispositions made priorto bankruptcy. [17] The importance of timing is reflected in the text of subsection 222(3). Assets sold by the tax debtor, or realized upon by thesecured creditor prior to bankruptcy are no longer “property of the person and property held by any secured creditor of the person that,but for a security interest, would be property of the person” at the time of bankruptcy, and as a result, are not available to all creditorsupon bankruptcy. First Vancouver Finance v.

M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720 (First Vancouver), at paragraph 42, confirmsthat “when an asset is sold by the tax debtor, the deemed trust ceases to operate over that asset”. The subsequent extinction of thedeemed trust on bankruptcy is irrelevant with respect to assets that have already been sold―it has already disappeared.

Thisinterpretation is supported by the legislative evolution of subsection 222(1.1). [18] Amendments in the year 2000 [S.C. 2000, c. 30, s. 50] to the deemed trust mechanism in both the Income Tax Act and the ExciseTax Act imposed an obligation on secured creditors to pay proceeds derived from trust assets to the Crown (subsection 222(3)). Thisamendment, including wording that proceeds “shall be paid to the Receiver General in priority to all security interests” was prompted bythe decision in Royal Bank of Canada v. Sparrow Electric Corp., (SCC), [1997] 1 S.C.R. 411 (Sparrow).

In Sparrow,the Court held that analogous deemed trust provisions for source deductions did not oust a secured creditor’s security interest in adebtor’s inventory. In Sparrow, the Supreme Court of Canada suggested this wording as the language that Parliament could add if itwished to confirm the priority of the Crown’s deemed trust. [19] The first test of the amended provisions arose in First Vancouver. The Court held that the enhanced trust provisions confirmedCrown priority over secured creditors.

[ 20 ] The amended trust provisions in the ITA came before this Court in Canada (Attorney General) v. National Bank of Canada , 2004 FCA 92 , [2004] F.C.J. No. 371 (QL), 324 N.R. 31 ( National Bank ) where, at paragraph 40, the Court held: It seems obvious to me that a secured creditor who does not comply with his statutory obligation to “pay” the Receiver General the proceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable for the unpaid amount. The amount is “payable” out of the proceeds flowing from the property and, as we have seen,

section 222 of the ITA provides that “ All ... amounts payable under this Act are debts due to Her Majesty and recoverable as such ....” (Emphasis added).

In light of these provisions, and since the respondents concede that they received the proceeds from the sale of the property subject to their security interest, without making the remittance that was payable, the appellant has a cause of action to recover these amounts. [Emphasis in original.] [ 21 ] This Court, in National Bank noted that the Crown has absolute priority over proceeds from property subject to a deemed trust, and that “the positive obligation imposed on the secured creditor to pay the Receiver General the proceeds from the property subject to the trust could not be clearer”: National Bank , at paragraph 37.

The Court went on to note [at paragraph 40] that a secured creditor who does not comply with this obligation “is personally liable”, and the amount is “payable” to the Receiver General and may be enforced as a cause of action under the appropriate Income Tax Act provisions. [ 22 ] Similarly, I note that a “tax debt” in the “Collection”

section [Division VII, subdivision E] of the Excise Tax Act is defined as “any amount payable or remittable by a person under this Part”, and tax debts are recoverable by the Crown in Federal Court: Excise Tax Act , subsections 313(1) and (1.1) . The Court in National Bank held that the cause of action arises “when the Minister becomes aware of the failure by the secured creditor to pay”: at paragraph 44.

On this Court’s reasoning in National Bank , the Crown has a cause of action to enforce the personal liability of a secured creditor who does not comply with its statutory obligation to pay under the Excise Tax Act . [ 23 ] Given the near-identical language of the two provisions, it is my view that the reasoning in National Bank is dispositive of this appeal.

Secured creditors who do not comply with the obligation to pay proceeds derived from deemed trust assets are personally liable to the Crown, which has a separate cause of action against them, irrespective of the subsequent bankruptcy of the debtor. [ 24 ] I note that the use of the imperative “shall” in subsection 222(3) “confers no residual discretion”: Ruth Sullivan, Sullivan on the Construction of Statutes , 6th ed. (Markham, Ont.: LexisNexis, 2014), at pages 91–92. The protection offered the Crown by the provision is not passive ― it creates a mandatory obligation: see National Bank , at paragraphs 37 and 40.

While the Judge was correct to note that Sparrow , First Vancouver and National Bank pertained to the deemed trust mechanism specific to source deductions under the Income Tax Act , the salient point, from a statutory

interpretation perspective, is that the 2000 amendments are materially identical to those made contemporaneous to the amendments to the Excise Tax Act and operate analogously prior to bankruptcy. [ 25 ] Given this similarity, both mechanisms render a secured creditor who receives funds out of the deemed trust personally liable for the amount owed to the Crown under an independent cause of action: National Bank , at paragraph 40. The distinction urged by Callidus, namely that National Bank concerned payroll deductions and not GST, is of no consequence.

Prior to bankruptcy, the recovery mechanisms in subsection 227(4.1) of the Income Tax Act and subsection 222(3) of the Excise Tax Act operate, for present purposes, identically, and the related jurisprudence is equally applicable. [ 26 ] While subsection 222(1.1) releases a tax debtor’s assets from the deemed trust upon bankruptcy, the subsection does not extinguish the pre-existing personal liability of a secured creditor who received proceeds from the deemed trust.

The personal liability is fully engaged, the debt is due and can be pursued by the Crown in a cause of action independent of any subsequent bankruptcy proceedings. The continued existence of the cause of action is not dependent on the debtor’s other assets that may or may not remain in trust, as it arises because of the secured creditor’s breach of a statutory obligation to remit. To find otherwise would effectively neutralize the deemed trust mechanism with respect to GST/HST amounts. [ 27 ] I note that Callidus relies heavily on Caisse and Century Services to support its argument with respect to liability.

These cases are of limited assistance. Caisse did not concern either the issue of a deemed trust or the independent liability of a secured creditor; rather, the issue was the extent of the Crown’s interest in GST collected by a trustee in bankruptcy. Century Services concerned whether the deemed trust provisions of the Excise Tax Act continued under CCAA proceedings, which are not at issue. [ 28 ] Callidus points further to the case of Bank of Nova Scotia v. Huronia Precision Plastics Inc. (2009), 50 C.B.R. (5th) 58 (Ont.

S.C.J.―Commercial List) ( Huronia ) , in which a receiver was appointed, some of the debtor’s assets were sold, and the bank made a motion to lift the stay in order to bring a bankruptcy application against the debtor. The Crown moved for an order directing the receiver to pay unremitted GST immediately. The motion Judge held that the bank had the ability to reverse the priority of the deemed trust by bringing an application for bankruptcy, and denied the Crown’s motion.

Callidus argues that, on the appellant’s reading of the statute, the receiver in Huronia would have had a duty to remit GST to the Crown notwithstanding the subsequent bankruptcy of the debtor. Callidus argues that this was exactly what the motion Judge in Huronia specifically rejected. [ 29 ] It is difficult to glean much from the very brief Huronia decision, which focused on the particular wording of a court order. There was also a receiver and a stay of proceedings in place in Huronia, such that it is not clear whether insolvency proceedings had already commenced.

As well, the factual matrix in this appeal does not invoke the reversal of priority post-bankruptcy; rather this appeal addresses the effect of bankruptcy on the liability of a secured creditor that may arise as a result of pre-bankruptcy priority. [ 30 ] Again, continuing with the plain language of

section 222, subsection (1.1) does not say that, upon the debtor’s bankruptcy, all rights that arose as a result of the deemed trust are extinguished. Nor is there language in

section 222 to the effect that the deemed trust evaporates retroactively so as to extinguish liability arising before bankruptcy. Subsequent bankruptcy simply operates to release the debtor’s assets from the deemed trust. The argument that the evaporation of the trust on bankruptcy works retroactively, and undoes or unwinds legal obligations that are already engaged, has no support in the text, and, as we will see, undermines the purpose of the 1992 amendment. [ 31 ] In the present case, proceeds from a sale of the tax debtor’s property were paid to the secured creditor.

The debtor subsequently made an assignment into bankruptcy. Pursuant to the language of subsection 222(3) , any proceeds should have been paid to the Crown in

priority to any security interest pre-bankruptcy. Callidus has conceded that the deemed trust mechanisms in both the Income Tax Act andthe Excise Tax Act operate in the same manner prior to bankruptcy. Proceeds were paid out of priority in contradiction to the expresswording of subsection 222(3), which created an obligation, independent of the existence of the deemed trust, to pay. [32] I turn next to context, which includes analogous collection tools within the Excise Tax Act that impose obligations on thirdparties. For example, the garnishment provisions in

section 317 of the Excise Tax Act use the same language regarding paramountcy overall statutes except the BIA. In this context, the courts have accepted that, where an RTP notice is served pre-bankruptcy, subsequentbankruptcy does not extinguish liability of a third party who fails to abide by the notice: Toronto Dominion Bank v. Canada, 2010 FCA174, [2012] 1 F.C.R. 197, 325 D.L.R. (4th) 174, affirmed 2012 SCC 1, [2012] 1 S.C.R. 3 (Toronto Dominion). [33] Further,

section 325 of the Excise Tax Act establishes liability for a non-arms’ length third party who has been transferredproperty. The liability of the third party is not affected by the debtor’s subsequent bankruptcy: Heavyside v. Canada, (FCA), [1996] F.C.J. No. 1608 (QL), (1996), 43 C.B.R. (3d) 128 (C.A.). Absent language suggesting otherwise, statutes should be readso as to achieve consistency and harmony across like provisions. [34] Referencing other collection tools available to the Crown, the Judge stated that there must be a “crystallizing event” in order toground an independent cause of action.

Had an RTP issued, Callidus’ obligation to pay would have survived bankruptcy. In my view, thesearch for a crystallizing event or something analogous to that is not quite apt, given that the deemed trust mechanism is not locatedwithin the

section of the legislation dealing with assessments, and, in any event, there is no legislative requirement for, or mechanism bywhich, such a notice could issue. There is no need for a crystallizing event, as the legislation establishes the obligation to pay. The words“if at any time” make clear that the obligation has no temporal limitation, nor is it contingent on crystallizing events. [35] It has been held by this Court, and affirmed by the Supreme Court of Canada, that

section 317 [Excise Tax Act] (garnishment)transfers ownership of amounts otherwise owing to a tax debtor, on receipt by the garnishee of an RTP notice: Toronto Dominion, atparagraph 52. In Toronto Dominion, this Court held that the words establishing the supremacy of the Excise Tax Act over legislationexcept the BIA was simply intended to limit the Crown’s power to issue an RTP post-bankruptcy. [36] Although the circumstances are not entirely analogous, under

section 317 the Minister “may issue” an RTP and the amountsimilarly “shall be paid”. It appears that amounts owing to the tax debtor by a third party may require notice in order to “crystallize”, inthe words of the Judge, the Crown’s cause of action in garnishment proceedings. Where the Crown seeks to garnish, it is not necessarilyclear who the cause of action is against, and for what amount. The present circumstance is the opposite. Here, the trust operates over theamounts already in the debtor’s possession, and the circumstances are such that an amount has left the trust.

Both the amount and theparty in receipt are known. [37] I note further that the subsequent bankruptcy of a tax debtor does not extinguish the Crown’s right to amounts owing where anRTP issued pre-bankruptcy.

It would be inconsistent if the Crown could prevent funds from entering the debtor’s estate, but it could notrecover amounts that were removed from the deemed trust out of priority to it and which have not since been returned to the debtor’sestate. [38] To conclude, I turn to the purpose of the provision in question. [39] Callidus argues that Parliament’s intent was that the Crown becomes an unsecured creditor upon the bankruptcy of the debtor inrelation to amounts owed pre-bankruptcy, and that allowing this appeal would allow the Crown to recover indirectly what it cannotrecover directly. [40] Callidus contends that, upon bankruptcy, subsection 222(1.1) operates to extinguish both the deemed trust and to remove theimperative in subsection 222(3) such that the personal liability of a secured creditor who received funds is also extinguished.

I haveexplained why this

interpretation is not supported by the language of the statute, but it would also undermine the purpose of theprovision. The

interpretation urged by Callidus would allow a secured creditor to manipulate both pre- and post-bankruptcy priority.Callidus agrees that the Crown has priority pre-bankruptcy, and it admits that it did not abide by that priority. Yet it asks this Court toenforce post-bankruptcy priority to the opposite effect or, put otherwise, to enforce post-bankruptcy priority to defeat priorities related topre-bankruptcy distributions. [41] Callidus’

interpretation effectively defeats the purpose of the addition of subsection 222(3), and would create perverse incentiveson the part of the secured creditors to not abide by the deemed trust.

This was the very mischief to which the amendments were directed: … Thus, the amendment will ensure that tax revenue losses are minimised and that delinquent taxpayers and their secured creditors donot benefit from failures to remit source deductions and GST at the expense of the Crown. … The deemed trust provisions will not, however, override a prescribed security interest such as a mortgage interest in real estate orother exceptions that may be provided by regulation, where the failure to remit source deductions or net GST cannot benefit the securedcreditor. (Department of Finance, Press Release, 1997-030, “Unremitted Source Deductions and Unpaid GST” (7 April 1997), online: MediaRoom – Press Releases www.fin.gc.ca, page 2; appellant`s memorandum of fact and law, at paragraph 75.) [42] A finding that the secured creditor’s obligation to pay Crown proceeds from the deemed trust disappears on bankruptcy wouldallow the secured creditor to benefit from the debtor’s failure to remit, as noted by the Supreme Court of Canada in Sparrow.

Ashappened here, a secured creditor could choose the timing of bankruptcy and liquidate the deemed trust assets so as to satisfy theirinterests at the expense of the Crown. Even if the Crown sends a demand letter or commences an action, the secured creditor could, atany time, simply trigger the bankruptcy of the tax debtor and avoid all consequences of the deemed trust priority. [43] Callidus’

interpretation would significantly dilute the absolute priority of the Crown confirmed by both Parliament and the courtsin this context. This cannot be what Parliament intended. Part of the broader context is the fact that the Crown does not have knowledge

of the state of affairs between the tax debtor and its creditors; hence the provision, in statute, of the ability to enforce the duty to collect and remit by third parties: First Vancouver , at paragraph 22. To allow a secured creditor to avoid the priority created by the deemed trust mechanism pre-bankruptcy would render the mechanism, and the priority it creates, effectively useless.

If Parliament had intended, as it did post-bankruptcy, for the deemed trust to have no discernable effect on priorities pre-bankruptcy, it simply could have removed the provision altogether. [ 44 ] I would allow the appeal with costs and answer the question in the negative to the extent outlined above. Near J.A.: I agree. *** The following are the reasons for judgment rendered in English by [ 45 ] Pelletier J.A. (dissenting): I have read the reasons of my colleague.

I come to a different conclusion for the following reasons. [ 46 ] In brief, I am of the view that the trust created by subsection 222(3) of the Excise Tax Act , R.S.C., 1985, c. E-15 (the Act) lapsed due to lack of subject-matter by operation of subsection 222(1.1) of the Act following Cheese Factory Road Holdings Inc.’s (Cheese Factory) bankruptcy. As of the date of bankruptcy, there were no amounts subject to the subsection 222(1) trust and therefore no property of Cheese Factory subject to a deemed trust pursuant to subsection 222(3) of the Act.

As a result, no proceeds of that property were payable to the Crown by Callidus Capital Corporation (Callidus). The fact that, prior to the bankruptcy, a demand for payment was made on Callidus is irrelevant. [ 47 ] This is an appeal from a decision of the Federal Court in which it decided a question of law. As a result, the standard of review is the appellate standard set out in Housen v.

Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235: correctness for questions of law and palpable and overriding error for questions of fact and mixed fact and law, except when it is possible to identify an extricable error of law, in which case the correctness standard applies. In this case, the standard of review is correctness. [ 48 ] To assist in the analysis, I reproduce below subsections 222(1), (1.1) and (3) . Trust for amounts collected 222

(1) Subject to subsection (1.1), every person who collects an amount as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from property held by any secured creditor of the person that, but for a security interest, would be property of the person, until the amount is remitted to the Receiver General or withdrawn under subsection (2).

Amounts collected before bankruptcy (1.1) Subsection (1) does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act ), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II. … Extension of trust

(3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the Bankruptcy and Insolvency Act ), any enactment of a province or any other law, if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust is deemed (

a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from the property of the person, whether or not the property is subject to a security interest, and (

b) to form no part of the estate or property of the person from the time the amount was collected, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to a security interest and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests. [ 49 ] In order to avoid repetition and to enhance the readability of these reasons, references to subsections in the text which follows are references to subsections of

section 222 of the Act , unless otherwise specified. [ 50 ] Subsection (1) creates a trust with respect to amounts collected as tax but not remitted or applied as permitted by subsection (2) which has no application here. Subsection (3) on the other hand creates a trust with respect to the property of the “person” i.e. the tax debtor. [ 51 ] The subsection (1) trust arises when an amount is collected as or on account of tax and ends when the amount is remitted to the Receiver General.

The result is that the amount subject to the subsection (1) trust varies as amounts are collected and remittances are made to the Receiver General. [ 52 ] The event which gives rise to the deemed trust pursuant to subsection (3) is not the failure to remit the amounts collected as tax to the Receiver General, as is the case in subsection (1). It is the failure to remit the amount deemed by subsection (1) to be held in trust

for Her Majesty: 222 … Extension of trust (3) … if at any time an amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General … property of the person …. is deemed (

a) to be held, from the time the amount was collected by the person, in trust for Her Majesty… [Emphasis added.] [ 53 ] As a result, if amounts are deemed to be held in trust pursuant to subsection (1) and not remitted to the Receiver General, then the property of the person is deemed to be held in trust from the time the amount was collected. It follows from this that if no amounts are deemed to be held in trust, no subsection (3) trust arises. [ 54 ] While the subsection (3) trust attaches to property of the person, it does not capture the whole of the person’s interest in their property.

The property subject to the subsection (3) trust is defined as: 222 … Extension of trust (3) … property of the person … equal in value to the amount so deemed to be held in trust [pursuant to subsection 222(1)] is deemed (

a) to be held … in trust for Her Majesty … [Emphasis added.] [ 55 ] This means that the corpus of the statutory trust is a limited pecuniary interest in the property of the tax debtor. Every item of the tax debtor’s property is subject to this trust but only to the extent of the amount deemed to be held in trust by subsection (1). This is a necessary limitation because of the obligation to pay imposed on secured creditors who realize on their security. Subsection (3) requires them to pay “the proceeds of the property” in priority to their security interest.

The unqualified obligation to pay the proceeds would require secured creditors to pay the entire proceeds, not simply that portion of the proceeds equal to the amount deemed to be held in trust pursuant to subsection (1). [ 56 ] Absent a clear indication of a contrary intention, legislation should be drafted and interpreted on the assumption that the Crown only collects amounts which it is owed and not more.

In this case, the legislative draftsman dealt with this issue by defining the property subject to the deemed trust in such a way that trust property, and therefore the proceeds of trust property, is equal to the amount of the subsection (1) deemed trust. [ 57 ] As this review shows, the deemed trusts created by subsections (1) and (3) are distinct but interlinked in two important ways. First, the subsection (3) trust arises when amounts deemed to be held in trust pursuant to subsection (1) are collected but not remitted.

Second, the subject-matter of the subsection (3) trust is property of the tax debtor to the extent of the amounts deemed to be held in trust pursuant to subsection (1). The effect of this interlinking is that the creation of the subsection (3) trust depends on the existence of the subsection (1) trust. If no amounts are deemed to be held in trust pursuant to subsection (1), then no subsection (3) trust arises. However, once a trust has arisen, it may subsequently fail for lack of subject-matter if the amount deemed to be held in trust is reduced to nil because of payments on account or otherwise.

This is because the subject-matter of the subsection (3) trust is defined by reference to the amount deemed to be held in trust pursuant to subsection (1). [ 58 ] The application of these provisions to property in the hands of the tax debtor is reasonably straightforward.

The issue in this case is how these provisions apply to the tax debtor’s secured creditors. [ 59 ] Prior to bankruptcy, subsection (3) provides that where amounts deemed to be held in trust pursuant to subsection (1) have not been remitted: 222 … Extension of trust (3) … property held by any secured creditor of the person that, but for a security interest, would be property of the person , equal in value to the amount so deemed to be held in trust, is deemed (

a) to be held , from the time the amount was collected by the person, in trust for Her Majesty … … and the proceeds of the property shall be paid to the Receiver General in priority to all security interests . [Emphasis added.] [ 60 ] The operation of the deemed trusts in

section 222 of the Act can be illustrated by an example. Let us assume that a tax debtor has collected and failed to remit $20 000 on account of GST/HST. The tax debtor has real property which is subject to a mortgage. The mortgage lender forces the sale of the property and receives proceeds of $50 000. Subsection (1) creates a deemed trust with respect to the $20 000 collected as tax but not remitted to the Receiver General. Subsection (3) creates a trust with respect to the debtor’s property but only to the extent of the amounts held in trust pursuant to subsection (1).

As a result, the mortgage lender, having received proceeds of property equal in value to the amount deemed to be held in a subsection (1) trust, i.e. $20 000, is liable to pay that amount to the Crown. [ 61 ] Would the result be any different if subsequent to the Crown’s demand for payment of $20 000, the tax debtor made a $10 000

payment to the Receiver on account of GST/HST collected but not remitted? The amount for which the secured creditor was liablewould be different but the manner of determining the amount of that liability would be the same. The payment to the Receiver Generalwould reduce the amount of the subsection (1) deemed trust to $10 000 which in turn would reduce the extent to which the debtor’sproperty was subject to the subsection (3) deemed trust. The secured creditor would be liable to pay the proceeds of the property subjectto the subsection (3) trust, i.e. $10 000.

Similarly, if the tax debtor were to pay the entire $20 000, the amount of the secured creditor’sliability would be reduced to nil. [62] The significance of the last example is that a demand for payment by the Crown does not “crystallize” the amount of the debtor’sor the secured creditor’s liability to the Crown. That liability is determined by the amount deemed to be held in the subsection (1) trustwhich in turn determines the extent to which property of the debtor is deemed to be held pursuant to the subsection (3) trust. [63] How is this scheme affected by the bankruptcy of the tax debtor?

Subsection (1.1) provides that at or after the time ofbankruptcy, subsection (1) does not apply to any amounts that were collected on account of tax prior to that time. The result is that afterbankruptcy, there is no amount deemed to be held in trust pursuant to subsection (1) for amounts collected as tax but not remitted pre-bankruptcy. The subsection (3) trust which arose prior to bankruptcy no longer has any subject-matter because the trust only attaches toproperty of the tax debtor to the extent of the subsection (1) trust which no longer exists.

This is true for the tax debtor as well as for thetax debtor’s secured creditors. [64] I can see no difference in principle between the reduction of the subsection (1) trust to nil by payment or by operation of law. Ineither case, the subsection (3) trust whose operation depends upon the existence of an amount deemed to held in trust pursuant tosubsection (1), is at an end. Had Parliament meant to make the subsection (3) trust a function of the continued existence of unremittedamounts, it could have said so easily enough. [65] Does this Court’s decision in Canada (Attorney General) v.

National Bank of Canada, 2004 FCA 92, 324 N.R. 31 (NationalBank) affect this conclusion?

In that case, this Court said, with respect to provisions of the Income Tax Act, R.S.C., 1985 (5th Supp.), c.1(the ITA) and the Employment Insurance Act, S.C. 1996, c. 23 (the EIA) that are substantially the same as subsections (1) and (3), that asecured creditor who received proceeds of property subject to a trust without remitting the amount of tax payable was liable to theCrown: It seems obvious to me that a secured creditor who does not comply with his statutory obligation to “pay” the Receiver General theproceeds of property subject to the deemed trust in priority over his security interest is personally liable and thereby becomes liable forthe unpaid amount.

The amount is “payable” out of the proceeds flowing from the property … and since the respondents concede thatthey received the proceeds from the sale of the property subject to their security interest, without making the remittance that waspayable, the appellant has a cause of action to recover these amounts. National Bank, at paragraph 40. [66] It is important to keep the facts of National Bank in mind. Secured creditors of tax debtors under the ITA and the EIA hadrealized on their security and had failed to remit the proceeds to the extent of the outstanding tax debt to the Minister of NationalRevenue.

At all material times, the tax debt was outstanding and, therefore, the deemed trusts under the legislation were in effect. As aresult, National Bank is a case about enforcing existing deemed trusts. [67] It is true that this Court, citing the decision of the Supreme Court of Canada’s decision in First Vancouver Finance v. M.N.R.,2002 SCC 49, [2002] 2 S.C.R. 720 (First Vancouver Finance), said that “The trust continues to apply to all the assets for as long as thedefault [to remit source deductions] continues”: National Bank, at paragraph 29.

Both National Bank and First Vancouver Trust involveddeemed trusts under the ITA which is not the case here. Furthermore, the ITA has no provision equivalent to subsection (1.1). As aresult, National Bank is authority for the proposition that, prior the tax debtor’s bankruptcy, the deemed trusts created by subsection 222apply to all assets as long as there are amounts subject to the subsection (1) deemed trust.

However, National Bank is not authority forthe proposition that this state of affairs persists after the latter’s bankruptcy. [68] The Crown argues that the failure to pay the proceeds of subsection (3) trust property to the Receiver General gives rise to aseparate and fully engaged cause of action against the secured creditor. Contrary to the Crown’s submissions, this argument cannot besupported by this Court’s decision in National Bank which is authority for a much narrower proposition.

As I hope to have shown earlier,the notion that a secured creditor’s obligation is somehow crystallized at a particular point in time without regard to the status of thesubsection (1) deemed trust cannot account for reductions in the secured creditor’s obligations as a result of reductions in the amountsdeemed to be held in trust.

If, on the other hand, the secured creditor’s obligation varies with the amounts held in the subsection (1)deemed trust, there is no statutory basis for distinguishing between reduction in the subsection (1) deemed trust due to payments onaccount and reductions which occur by operation of law. [69] I recognize that this results in a situation in which a secured creditor has an incentive to resist payment in the hope that theamount of the subsection (1) deemed trust will be extinguished and may even help that process along by petitioning the tax debtor intobankruptcy.

I would only say that in this case, the Crown made a demand for payment in April 2012 but appears to have taken no steps toenforce its demand until November 2013. Nor does the Crown appear to have had recourse to the other collection tools available to inunder the Act.

I am not persuaded that the view I take of this matter puts the Crown’s interests unjustifiably at risk. [70] To summarize, an examination of the text of subsection 222 of the Act teaches that the relationship between the deemed trustscreated by subsection (1) subsection (3) is such that the extinction of the former upon bankruptcy―by operation of subsection(1.1)―puts an end to the latter at the same time. [71] As pointed out in Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2 (QL), atparagraph 21, the

interpretation of a statute must consider the text, the context and the purpose of the legislation. The conclusion towhich I have arrived following my examination of the text of

section 222 is supported by both its context and purpose. [72] Part of the context subsection 222, and subsection (1.1) in particular, is subsections 67(2) and (3) of the Bankruptcy and

Insolvency Act, R.S.C., 1985, c. B-3 (BIA) which provide as follows: 67 … Deemed trusts

(2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property tobe held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose ofparagraph (1)(

a) unless it would be so regarded in the absence of that statutory provision.

Exceptions (3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income TaxAct, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which isin this subsection referred to as a “federal provision”) nor in respect of amounts deemed to be held in trust under any law of a provincethat creates a deemed trust …. [73] Subsection 67(2) makes it clear that Parliament intended to do away with the deemed trusts in bankruptcy.

The effect of thesetrust is to withdraw the property subject to the deemed trust from the estate of the bankrupt so that the federal government’s claim takespriority over the claims of unsecured creditors. By eliminating these trusts in bankruptcy, Parliament put the Crown on the same footingas unsecured creditors. [74] The preservation of the deemed trust for unremitted source deductions in subsection 67(3) is explained by the fact that sourcedeductions are amounts which belong to the employee in question.

The trust in respect of those funds is a real trust in favour of theemployees as well as a deemed trust in favour of the Crown: Although (s. 227(4)) calls the trust created by it a deemed one, the trust is in truth a real one. The employer is required to deduct from hisemployees’ wages the amounts due by the employees under the statute. This money does not belong to the employer anymore. It belongsto the employees. The employer holds it in a statutory trust to satisfy their obligations. Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd., (MB CA), [1992] 2 W.W.R. 641 (Man.

C.A.), at page 646, cited withapproval in Royal Bank of Canada v.

Sparrow Electric Corp., (SCC), [1997] 1 S.C.R. 411, (1997), 143 D.L.R. (4th)385, at paragraph 28. [75] As a contextual factor, these provisions, together with the absence of a provision equivalent to subsection (1.1) in any of the Actsreferred in subsection 67(3) of the BIA, tend to show that the Parliament intended to create a special regime for source deductions in theevent of bankruptcy but that no such regime was intended in the case of amounts of unremitted tax under the Act. [76] The purpose of subsection (1.1) was outlined in Quebec (Revenue) v.

Caisse populaire Desjardins de Montmagny, 2009 SCC 49,[2009] 3 S.C.R. 286, where the rationale for amendments to statutory trusts in bankruptcy proceedings (including subsection (1.1) isreviewed at paragraphs 12–17. The purpose of amendments to the BIA and the Act was to ensure that “the Government of Canada, theCrown, does not put itself in a priority position. It stands in line with the unsecured creditors in almost all cases except for the deductionsof tax and unemployment owed”: see paragraph 14. [77] The

interpretation which I propose of subsections (1), (1.1) and (3) gives effect to this purpose. [78] As a result, I am of the view that the Federal Court correctly answered the question which was put to it. I would therefore dismissthe appeal with costs.