Q: I know the GST had certain priority rights over the bank's security package that the provincial sales tax did not have. Now that we have the HST in Ontario and British Columbia, does the HST now enjoy the same priority rights as the GST ?

A: As GST priorities were governed by federal legislation, the Canada Revenue Agency (“CRA”) did have priority rights over secured creditors under the deemed trust provisions that the provinces did not have in respect of retail sales tax. This has now changed.

The Harmonized Sales Tax (“HST”) came into effect in Ontario on July 1, 2010. The 13% HST combines the 5% GST and the 8% Ontario provincial sales tax into one tax to be collected by the federal government. The rules that pertain to GST will now pertain to HST, for example, the remittance and priority of HST will be governed by the Excise Tax Act (the “ETA”). Section 222 of the ETA which provides for the deemed trust in favour of the Crown will now give the Crown a super priority for the full amount of unremitted HST, not just the GST component. The same rules that apply to GST will now apply to HST namely that the so called super priority will be lost in a bankruptcy. The CRA priority is not lost in a CCAA proceeding or a court appointed receivership. However, an Enhanced Requirement to Pay issued by CRA pursuant to the ETA will be stayed unless it was received prior to the date of bankruptcy, receivership or CCAA protection. It should be noted that such notices are deemed to be received on the date of mailing by CRA.

Lenders should ensure that all Borrowing Base Certificates are revised to provide for HST rather than GST as a priority payable.