GST and Provincial Tax trusts in bankruptcy

Today's Supreme Court of Canada decision in Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny, 2009 SCC 49 deals with priority and statutory trust claims by the Crown in the event of a bankruptcy. 

 

Narrowly put, claims by Her Majesty for GST fall into those of general creditors of a bankrupt and not into trust claims created by statute.  While arising under the Quebec Code, and while the language reflects civil law, the decision ought to be fully applicable across Canada.

 

A summary of the decision follows:

 

The GST imposed under the Excise Tax Act ("ETA") and the QST payable under the Act respecting the Québec Sales Tax are taxes that are collected, and in respect of which credits are available, at each step of the manufacturing and marketing of taxable goods and services.  They are payable by the recipient, who is regarded as the debtor in respect of the tax liability to the Crown.  In principle, the supplier acts only as a mandatary of the Crown in collecting and remitting these taxes and is deemed to hold the amounts so collected in trust for Her Majesty.

 

 

A number of businesses went bankrupt.  The Canadian and Quebec tax authorities (the "tax authorities") claimed from the trustees the GST and QST amounts that had been collected but not remitted, or were collectible, by those businesses as of the dates of their bankruptcies.  The tax authorities submitted that they were entitled to the amounts in issue as the owners thereof.  Financial institutions that held various security interests in the property of the bankrupts contended that, under the law applicable in bankruptcy matters, the federal or provincial Crown is only an ordinary creditor and must be ranked as such with the debtors' other creditors, and that their security interests could therefore be set up against the Crown.  The Quebec Superior Court found for the tax authorities on the basis that the GST and QST amounts were not part of the bankrupts' patrimonies.  The Quebec Court of Appeal set aside the judgments.

 

The Supreme Court dismissed the appeal from the Quebec Court of Appeal.

 

When a supplier goes bankrupt, the tax authorities do not own GST and QST amounts that have been collected but not remitted or are collectible at the time of the bankruptcy.  Instead, they have an unsecured claim against the supplier.  The legal characterization of the relationships between the tax authorities and the suppliers and recipients of goods and services cannot be considered in isolation from the overall context of the system for the collection and remittance of these taxes and from the provisions of the Bankruptcy and Insolvency Act ("BIA").  The tax authorities' position amounts to maintaining that the deemed trusts established by s. 222 ETA and s. 20 of the Act respecting the Ministère du Revenu ("AMR") continue to exist after a bankruptcy, which conflicts with both the words and the intent of the statutory provisions in question, and is inconsistent with the nature of the tax authorities' rights under the system for the collection and remittance of the GST and QST. 

 

In light of the 1992 amendments to s. 67 BIA, the deemed trusts established by ss. 222 ETA and 20 AMR are terminated at the time of the bankruptcy.  Parliament also enacted concordance amendments to the ETA by adding subsection (1.1) to s. 222.  As a result of this provision, deemed trusts intended to secure GST claims are ineffective in bankruptcy situations.  Although the Quebec legislation does not contain a provision similar to s. 222(1.1) ETA, Parliament's legislative authority over bankruptcy prevents the provincial legislatures from modifying the order of priority established in the BIA.  Thus, the trustee is responsible for liquidating patrimonies that include the GST and QST amounts in issue.  The mandate the supplier or the trustee is deemed to have been given with respect to the two taxes involves the performance of obligations to collect and then to remit, not the amounts collected, but a balance resulting from offsetting claims of the Crown and the supplier.