Caisse Populaire Desjardins de Montmagny: Crown Does Not “Own” Unremitted GST Amounts

The only surprising thing about the recent Supreme Court of Canada (“SCC”) decision in Quebec (Revenue) v Caisse Populaire Desjardins de Montmagny, [2009] 3 SCR 286 [CP Desjardins de Montmagny] is that the Quebec Superior Court (“QCSC”) at first instance found in favour of the Crown in all three cases from which the appeals arose.

The issue in CP Desjardins de Montmagny was determining the status of collected but unremitted GST and QST amounts where a business later filed for bankruptcy, and determining the priority as between the government, the trustee in bankruptcy, and secured creditors in claiming the amounts in question. Since the 1992 amendments to the Bankruptcy and Insolvency Act, RSC 1985, c B‑3 [BIA], it is established law that any statutory deemed trust creating a superpriority for the Crown for amounts related to excise tax is extinguished as soon as the debtor files for bankruptcy. Tax authorities must be treated as an ordinary creditor. Thus the fact that the QCSC found in favour of the Crown was surprising; all three judgments were overturned by the Quebec Court of Appeal (“QCCA”) and the appellate judgments were upheld by the SCC in short order.

The appeal arose from three cases involving bankruptcies of a number of companies and problems related to unremitted GST and QST amounts. In all three cases, businesses filed for bankruptcy under the BIA while they had GST and QST amounts that had been collected but not yet remitted or collectible by the Crown. In two of the claims – 9083-4185 Québec Inc (MPX) (Syndic de), 2006 QCCS 2108 and Consortium Promecan Inc (Syndic de), 2006 QCCS 6370 – the Quebec Deputy Minister of Revenue gave notice to the respective businesses’ trustee in bankruptcy of the Minister’s stance that the Crown “owned” the GST and QST amounts collected by the bankrupt business. In Alternative Granite et Marbre Inc (Syndic d’), 2006 QCCS 2656, the National Bank of Canada had a security interest in the accounts of the bankrupt debtors, pursuant to the Bank Act, SC 1991, c 46. However, the Deputy Minister of Revenue of Quebec claimed these amounts as GST and QST amounts collected by the bankrupt businesses on behalf of the Crown.

In all three cases, the QCSC sided with the Crown, holding that the Crown owned the disputed GST and QST amounts. “In essence, the Superior Court judges held that the GST and QST amounts were not part of the bankrupt’s patrimony” (para 6).

The QCCA overturned all three decisions, holding that the Deputy Minister of Quebec is an unsecured creditor under the BIA and must be treated as an ordinary creditor (« que le sous-ministre du Revenu du Québec, pour fins de réclamation sur TPS et TVQ s’il y a lieu, est un créancier ordinaire au sens de la Loi sur la faillite et l’insolvabilité et, qu’en conséquence, il n’a aucun droit sur les comptes à recevoir ou autres actifs de la débitrice » 9083-4185 Québec Inc (Syndic de), 2007 QCCA 1837, para 7).

Writing for a unanimous panel of seven justices, Justice LeBel dismissed the Crown’s appeal in a summary fashion (the judgment consists of 30 short paragraphs).

He clarified that under the BIA, any statutory deemed trust created in favour of the Crown is extinguished when the debtor files for bankruptcy (with the exception of the three employee source deductions expressly enumerated in subsection 67(3) of the BIA: income tax deductions under subsection 227(4) or (4.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp); CPP contributions under subsection 23(3) of the Canada Pension Plan, RSC 1985, c C-8; and EI contributions under subsection 86(2) or (2.1) of the Employment Insurance Act, SC 1996, c 23. See Caisse Populaire Desjardins de l’Est de Drummond v Canada, [2009] 2 SCR 94 and its analysis by TheCourt.ca).

Justice LeBel then addressed the Deputy Minister’s submission that the Crown “owns” the GST and QST amounts collected by a business. Essentially, the argument was that the GST and QST amounts collected by a business are never the property of the business itself but immediately become the property of the Crown upon collection. As such, upon bankruptcy, these sums do not form part of the bankrupt business’s patrimony to be apportioned amongst secured and unsecured creditors. Rather, the trustee is to hold these funds separately, and turn them over to the Crown as its mandatary.

This line of argumentation basically ends up with the same result that the government was aiming to overcome with the 1992 amendments to the BIA overriding of Crown statutory trusts under the BIA regime. At that time, subsection 67(2) was introduced, which reads:

(2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision. [Emphasis added]

As discussed in Justice LeBel’s decision, the aim of this and other amendments was to limit the priority given to the Crown in bankruptcy proceedings. The aim was to avoid a situation where the federal and provincial Crowns would clean up the bankrupt’s estate due to unremitted taxes, leaving nothing behind for the unsecured creditors. Rather, the Crown was to be considered an unsecured creditor on par with other unsecured creditors and compete for its claim. Conceding that the Crown does not have a superpriority trust in respect of excise tax amounts but then claiming that the Crown outright owns these amounts from the outset has the effect of a “super-superpriority.”

Justice LeBel rightly rejected this argument, finding that such a proposition would be contrary to a purposive and contextual reading of the BIA as well as the federal Excise Tax Act, RSC 1985, c E-15 and Quebec Act respecting the Ministère du Revenu, c A-7.003.