Last week, the Supreme Court of Canada decided that the bankruptcy of a tax debtor extinguishes the Crown’s deemed trust priority under the Excise Tax Act (‘ETA”) over funds being held by a secured creditor, where such funds were received prior to bankruptcy.


The tax debtor in question had failed to remit GST and HST to the Crown. It had also defaulted on certain obligations towards one of its creditors (the appellant in this case). The tax debtor came to a forbearance agreement with the appellant creditor which resulted in the debtor marketing and selling property and delivering the proceeds to the appellant to partially repay the amounts owed, which came close to $591,000.

Around the same time, the Crown sent a letter to the appellant claiming an amount owed of close to $99,000 based on the deemed trust mechanism under s. 222 of the ETA for collected but unremitted GST/HST by the debtor.

Under s. 222(1) and (3) of the ETA, GST and HST collected is deemed to be held in trust for the Crown and allows it to trace and collect unremitted GST/HST, despite any pre-existing security interest. However, s. 222(1.1) of the ETA also states that this deemed trust is extinguished upon bankruptcy.

In the months that followed, the tax debtor declared bankruptcy. The Crown then filed an action against the appellant creditor, claiming the full amount of unremitted GST/HST on the basis of the deemed trust mechanism.

The Federal Court refused the action on the basis that s. 222 extinguished the deemed trust due to the debtor’s bankruptcy. However, the Federal Court of Appeal overturned the decision. The appellant then appealed to the Supreme Court of Canada.


The Supreme Court of Canada set out the question at issue as follows:

“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 for the Plaintiff?” 


The Supreme Court of Canada issued its judgment from the bench; it did not set out its own reasons, but rather stated that it was allowing the appeal based on the dissenting judge’s reasons as stated in the Federal Court of Appeal decision.

In that judgment, the majority of the Federal Court of Appeal had ruled that the Crown’s priority over the tax debtor’s assets survived the bankruptcy, which included the proceeds received by the appellant. The majority stated:

“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.”

However, the Federal Court of Appeal’s dissenting judge found that a proper interpretation of s. 222(1.1) of the ETA meant that the debtor’s bankruptcy retroactively extinguished the Crown’s priority over its assets, including those received by the appellant. The dissenting judge stated:

“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.”

The Supreme Court of Canada therefore allowed the appeal, which means that the bankruptcy of the tax debtor extinguished the deemed trust and the Crown was not entitled to claim the amount from the appellant.

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Contact Mark Feigenbaum to learn how he can assist you with your legal or tax matters and provide you with comfort in knowing that you are in highly experienced hands. Prior to forming his law firm, Mark worked in the cross-border tax department of an international Big 4 firm and held accounting management positions in a range of sectors in both Canada and the US. Mark combines this legal, tax, and business knowledge to provide thorough, multi-disciplinary advice and exceptional risk management for his clients. Mark offers services to clients in the U.S., Canada, and around the world. Contact Mark online, or at (905) 695-1269 or toll-free at (877) 275-4792 to book a meeting today.