Tax & Trade Blog

After the recent decision of the Federal Court of Appeal (“FCA”) in Canada v. Callidus Capital Corporation, 2017 FCA 162 (“Callidus”), any secured creditors dealing with debtors that also have CRA issues, should immediately seek professional advice about the implications of this case before acting on their security interests to seize funds or property.

The reason for this gratuitous advice follows!

Subject to a few narrow exceptions, there are special income tax and GST/HST provisions giving the CRA super-priority to certain tax amounts in the possession of a tax debtor.  Specifically, unremitted GST/HST and unremitted income tax withholdings are both subject to a “deemed trust” in the hands of the taxpayer under special provisions in Excise Tax Act (ETA) and the Income Tax Act (ITA).   When funds or property of a tax debtor are paid over or seized by a tax debtor’s secured creditors that deemed trust remains intact, and the CRA holds a “super-priority” over those funds and that property.

In the past, secured creditors took the position that these rules and the “super-priority” disappeared on the subsequent bankruptcy of a debtor.

However, the Federal Court of Appeal in Callidus held that a tax debtor’s bankruptcy does not extinguish the Crown’s deemed trust over assets that were received or obtained by a secured creditor prior to the tax debtor’s bankruptcy.   More importantly, the FCA confirmed that secured creditors in these situations remained personally liable to the CRA for the tax debtor’s unremitted GST/HST and unremitted source withholdings, up to the value of the assets received or realized upon.

The recent Auditor General Report is not good news for the Canada Revenue Agency (CRA).

The CRA has nine call centres located across Canada that are supposed to provide taxpayers with timely and accurate information about their taxes, credits and benefits.

Based on the Auditor General of Canada’s report, however, a taxpayer calling the CRA is more likely to get blocked than to speak to a live agent, and when reaching a live agent, often has a fairly good chance of obtaining incorrect information.

Not good news at all, if you are the CRA.

In a previous blog post titled “CRA coming for contractors?” we discussed the recent decision of the Federal Court of Appeal in Rona Inc. v. Canada (Minister of National Revenue), which seemed to suggest that CRA may have a special project on the go to target Canadian home improvement contractors that are currently operating in the underground economy.

An email and website post from PayPal to its users earlier this week seems to indicate that the CRA is now going after all Canadians that buy and sell online.

In Canada, the CRA can often pursue a corporation’s directors for unpaid tax debts of the corporation.  But there are certain “pre-conditions” that must be met.

One of these, which rarely gets any attention at all is the requirement that “a certificate for the amount of the liability of the corporation [be] registered in the Federal Court… and execution for that amount [be] returned unsatisfied in whole or in part”:  see section 323(2)(a) of the Excise Tax Act (ETA) and section 227.1(2)(a) of the Income Tax Act (ITA).

Historically, the Courts have considered that these provisions do not impose an obligation upon the CRA to make reasonable efforts to search for assets of a corporate debtor; rather, all the CRA needs to do is “act in good faith”:  see Barrett (2012 FCA 33).

In Tjelta (2017 TCC 187), the Tax Court of Canada (TCC) was asked to determine what the FCA meant in respect of the CRA’s good faith requirement. 

Not much it seems!

The Tax Court of Canada (TCC) recently considered how the GST/HST works in situations where individuals and businesses buy and sell used motor vehicles, and the case is instructive.

In Brian & Deborah Dewan Enterprises Ltd. v. The Queen (2017 TCC 135), the TCC dismissed the appeal of the appellant which failed to collect and remit the GST/HST on disposition of vehicles used in its commercial activities on the mistaken belief that the GST/HST was paid by the purchaser to the Ministry of Transportation (MTO) on registration of the vehicles. 

Businesses which fail to understand the possible interaction of the federal GST/HST and provincial sales tax in certain circumstances, for example, in this case, the Ontario Motor Vehicle Tax (MVT) on disposition of used vehicles, would be put in a disadvantageous position and suffer losses.