On April 29, in Toronto Dominion v. Queen, the Federal Court of Appeal has unanimously decided on the interpretation of sections 222 (1) and (3) of the Excise Tax Act (the “Act”). The central issue of the dispute was: “Is a secured creditor, who receives the proceeds from the sale of a tax debtor’s property at a time when GST is owed to the Crown, required to pay the proceeds or the part of it equal to the tax debt to the Receiver General by priority over any collateral?

The tax debtor operated a landscaping business as a sole proprietor. Before becoming a client of the Toronto-Dominion, he collected GST through his business but did not pay it to the Receiver General. In 2010, the Bank granted credit facilities to the debtor and his wife, which were guaranteed by security registered on the debtor’s property. The debtor sold the property and repaid his debt to the Bank. Subsequently, the Canada Revenue Agency (CRA) asserted its right against the Bank to collect the unpaid GST amount by the debtor, because of the trust deemed under section 222 of the Act. The Bank denied having to pay that amount.

The Court, in a ruling penned by Judge Dawson, ruled on the following grounds for challenges raised by the Bank.

Interpretation of Section 222 (1) and (3) of the Act

In light of the interpretation of the wording of paragraphs 222 (1) and (3), Justice Dawson concluded that the legislature intended to give priority rank to the deemed trust when assets are also subject to a guarantee that it took effect before or after collection of the GST. This interpretation by the judge arose from the wording “despite any security interest in that amount” in paragraph 222 (1). It also asserted that at the time of the Bank’s loan to the debtor and at the time it received its guarantee, the debtor’s assets, up to the amount of the tax debt, was already deemed to be assets in which the Crown had a beneficiary right.

Purchaser in Good Faith Defence

The Bank argued that since it is a bona fide acquirer for valuable consideration of the amounts received by the debtor and that the deemed trusts provisions of the Act did not apply to them, it could not be compelled to pay the required amounts. However, this argument was rejected since the Supreme Court of Canada has already ruled that banks and credit unions cannot be assimilated to third-party purchasers. They are considered secured creditors so that the assets on which they pledged their security have remained subject to the deemed trust, and were still so when they were sold[1].

Loan to the Debtor Personally

The Bank argued that the Federal Court should have drawn a distinction between a tax debtor operating a sole proprietorship business and a tax debtor carrying out transactions in a personal capacity. The judge dismissed this argument, stating that it was unfounded. The evidence did not specify what the Bank knew about its debtor’s source of income or what it had done, if any, to determine whether its debtor was meeting its obligations under the Act.

To overcome the uncertainty, many title insurers now offer an amendment to protect lenders from the super-priority deemed trusts, for a certain time after the security is delisted.

Finally, it should be noted that a motion for leave to appeal was filed on July 6 at the Supreme Court of Canada.

By Catherine Demers


[1] First Vancouver Finance v. M.R.N., 2002 SCC 49, paragraph 39.