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Jan 8, 2016

Pre-Bankruptcy Payment to Secured Creditor Escapes Statutory Deemed Trust

Secured creditors should take note of Callidus,1 wherein the Federal Court (the "Court") held that the bankruptcy of a tax debtor rendered a statutory deemed trust under section 222 of the Excise Tax Act (the "ETA") ineffective as against a secured creditor who, prior to the bankruptcy, received proceeds from the tax debtor’s assets.


In 2004, Cheese Factory Road Holdings Inc. (the "Tax Debtor") obtained a credit facility in the amount of $1,950,000 (the "Credit Facility") from Bank of Montreal (the "Bank") and granted the Bank certain security in respect thereof (the "Security").

By 2011, the Tax Debtor was in default under the Credit Facility. Pursuant to an assignment of debt and security agreement with Callidus Capital Corp. (the "Secured Creditor"), the Bank assigned all the Security and the indebtedness owing under the Credit Facility to the Secured Creditor. The Tax Debtor and the Secured Creditor then entered into a forbearance agreement, pursuant to which, amongst other things, the Secured Creditor received funds from the Tax Debtor’s sale of, and rents collected from, certain real property.

In April 2012, Canada Revenue Agency ("CRA") wrote to the Secured Creditor, claiming amounts collected but unremitted by the Tax Debtor for GST/HST based on the deemed trust mechanism of the ETA (the "April 2012 Letter"). The amounts in question went back to as early as 2010. Subsequent to receipt of the April 2012 Letter, the Tax Debtor assigned itself into bankruptcy at the Secured Creditor’s request. CRA then commenced an action against the Secured Creditor for the unremitted amounts.

To read the full article, please click here.