Federal Court of Appeal ruling encourages title insurers to offer new coverage

On April 29, in the Toronto Dominion v. Queen The Federal Court of Appeal rendered a unanimous decision on the interpretation of sections 222(1) and (3) of the Excise Tax Act. The central question in the case was: “Is a secured creditor who receives the proceeds of the sale of the property of a tax debtor, at a time when the debtor owes GST to the Crown, required to pay the proceeds, or a portion thereof equal to the tax debt, to the Receiver General in priority to any security interest?

In this case, the tax debtor operated a landscaping business as a sole proprietorship. Prior to becoming a customer of the Toronto-Dominion, he collected GST on his business, but did not remit it to the Receiver General. In 2010, the Bank granted credit facilities to the debtor and his wife, which were secured by a registered security interest in the debtor’s building. The debtor sold the property and repaid the Bank’s claims. Subsequently, the Canada Revenue Agency (CRA) asserted its right against the Bank to collect the debtor’s unpaid GST due to the deemed trust under section 222 of the Act. The Bank denied having to pay the said amount.

The Court, under the pen of Judge Dawson, ruled on the following grounds of contestation raised by the Bank.

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

In interpreting the wording of subsections 222(1) and (3), Dawson J. inferred that Parliament intended to give priority to the deemed trust where the property was also subject to a security interest, whether the security interest took effect before or after the GST was collected. The judge’s interpretation followed from the wording “notwithstanding any security interest therein” in subsection 222(1). She also stated that at the time of the Bank’s loan to the debtor and at the time it received its guarantee, the debtor’s property, up to the amount of the tax debt, was already deemed to be property in which the Crown had a beneficial interest.

Defense of bona fide purchasers

The Bank argued that, since it was a bona fide purchaser for value of the amounts received by the debtor, and the deemed trust provisions of the Act did not apply to them, it could not be compelled to pay the amounts demanded. This argument was rejected, however, as the Supreme Court of Canada had already ruled that banks and caisses populaires could not be equated with third-party purchasers. They are considered secured creditors, so that the property on which they claimed their security remained subject to the deemed trust, and still was when it was sold[1].

Loan granted to the debtor personally and not to his company

The Bank argued that the Federal Court should have drawn a distinction between a tax debtor operating a sole proprietorship and a tax debtor carrying out transactions in a personal capacity. The judge rejected this argument, stating that it was ill-founded. The evidence did not indicate what the Bank knew about its debtor’s source of income, or what, if anything, it had done to determine whether its debtor was complying with its obligations under the Act.

To alleviate this uncertainty, many title insurers now offer a rider to protect lenders against the super-priority of deemed trusts, for a specified period after the security is removed.

Finally, a motion for leave to appeal was filed with the Supreme Court of Canada on July 6.

By Catherine Demers


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

Share this publication