On October 30, 2009, the Supreme Court of Canada released its long-anticipated decision in Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny. At issue in this case (and two companion cases) was the legal characterization of Crown rights with respect to collected but unremitted GST and Quebec sales tax (QST) in the hands of a trustee in bankruptcy. The Supreme Court confirmed that the Crown is an ordinary unsecured creditor with respect to such amounts, subject to the rights of prior ranking security holders.
Summary of Facts
Prior to its bankruptcy, a Quebec-based manufacturer had hypothecated its claims and accounts receivable in favour of the Caisse populaire Desjardins de Montmagny. The Caisse populaire had registered its security and claimed to hold valid security interests. The manufacturer had collected GST and QST in the course of its business but was late making remittances at the time of its bankruptcy. Quebec's Deputy Minister of Revenue gave the trustee in bankruptcy notice that he considered it to be his mandatary or agent for the recovery of unremitted QST and GST (which the Province of Quebec collects for the federal Crown). The Deputy Minister also claimed that it owned the amounts in question, despite the apparent security interests (hypothecs) held by the Caisse populaire.
Trial and Appeal Decisions
The trial judge found that the unremitted taxes were being held by the trustee in bankruptcy as a mandatary or agent of the Crown and that the Crown was therefore the owner of all such amounts. The Quebec Court of Appeal reversed the trial court's decisions, finding that the Crown was merely an ordinary creditor with respect to unremitted GST and QST. The Crown appealed the Court of Appeal's decision to the Supreme Court.
The Supreme Court unanimously affirmed the decision of the Court of Appeal, finding in favour of the secured creditor Caisse populaire.
Under the GST legislation, a supplier of goods or services who collects GST is deemed to hold such amounts in trust for the Crown. Similarly, under the QST legislation, such amounts are held by the supplier as mandatary or agent for the Crown. The Deputy Minister's position was that all such taxes collected by a supplier as trustee or mandatary are Crown property at the time they are collected and cannot be subject to the rights of a secured creditor. The Deputy Minister argued that the trustee in bankruptcy was therefore holding Crown property which did not form part of the bankrupt's patrimony and should not have been distributed in accordance with the priority provisions of the Bankruptcy and Insolvency Act (BIA).
In reaching its decision, the Supreme Court considered the purpose of the 1992 amendments to the BIA as determined from House of Commons debates and Standing Committee evidence. The Supreme Court found that the amendments were intended to limit the Crown's statutory priority over claims in a bankruptcy. Specifically, the Supreme Court found that:
s.67(2) of the BIA . renders statutory trusts ineffective without affecting trusts resulting from the common law or the civil law or statutory trusts that secure claims of the federal and provincial Crowns related to source deductions for income tax, a comprehensive pension plan or the federal employment insurance program. No mention is made of trusts related to the GST or to provincial taxes such as the QST. Moreover, s. 86(1) BIA confirms that the Crown is only an ordinary creditor in a bankruptcy situation.
In addition, the Supreme Court noted that concordant legislation in subsection 222(1.1) of the Excise Tax Act (Canada) (ETA) rendered deemed trusts intended to secure GST claims ineffective in bankruptcy situations. The same result arises under the QST legislation because under constitutional principles, the provincial legislatures may not modify the order of priority established under the BIA.
The Deputy Minister argued unsuccessfully that these statutory provisions did not apply to unremitted GST and QST because those amounts were property of the Crown, not the bankrupt's estate.
The Supreme Court rejected this argument because it was not supported by the relevant statutory provisions. The Supreme Court characterized the supplier's trust or mandatary obligations as being in support of the broader tax collection and remittance mechanisms applicable to GST and QST, rather than expressions of Crown ownership of collected taxes. Accordingly, there was no reason to favour an interpretation that the deemed trusts continue to apply to property in the hands of a trustee in bankruptcy when to do so would conflict with explicit rules to the contrary in the BIA and ETA.
It should be noted that the Companies' Creditors Arrangement Act was amended on September 18, 2009 to add new section 37, which provides that, with a few exceptions, deemed trusts do not survive the commencement of CCAA proceedings. It will be interesting to see whether this provision will put an end to the debate regarding the priority of the Crown's claim in the CCAA context. If so, Canada's two major restructuring statutes will be to the same effect in that regard.