Callidus Capital Corporation v. Her Majesty the Queen

(Federal) (Civil) (By Leave)


Taxation – Customs and excise – Bankruptcy and insolvency – Trusts – Whether s. 222(3) of the Excise Tax Act creates a cause of action in favour of the Crown against a secured creditor who receives proceeds of a tax debtor’s property, at a time when HST or GST is owing by the tax debtor to the Crown, that is independent of the existence of the deemed trust under s. 222 of the Act and that can be pursued notwithstanding the subsequent bankruptcy of the tax debtor?


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Callidus Capital Corporation was a secured creditor of Cheese Factory Road Holdings Inc. Pursuant to a trust agreement, Cheese Factory held all funds received in trust for Callidus and it remitted all funds to Callidus to be applied to its debt. Cheese Factory collected harmonized sales tax and goods and services tax and remitted those tax proceeds to Callidus. Callidus applied those proceeds to Cheese Factory’s debt. Section 222 of the Excise Tax Act, R.S.C. 1986, c. E-15, creates a deemed trust in favour of the Crown on the property of a tax debtor for payment of all amounts of tax collected by the tax debtor but not remitted to the Crown. Where property subject to the deemed trust gives rise to proceeds, s. 222(3) mandates that the proceeds are to be paid to the Crown in priority to all security interests. However, once a tax debtor becomes bankrupt, s. 222(1.1) provides that the deemed trust ceases to be effective in respect of any amounts that, prior to bankruptcy, were collected or became collectible by the tax debtor. The Crown demanded payment of the tax proceeds. Cheese Factory made an assignment in bankruptcy. The Crown commenced a proceeding against Callidus. Callidus brought a motion on consent asking the Federal Court to determine the following question:

Does the bankruptcy of a tax debtor and subsection 222(1.1) of the ETA render the deemed trust under section 222 of the ETA ineffective as against a secured creditor who received, prior to the bankruptcy, proceeds from the assets of the tax debtor that were deemed to be held in trust?

The Federal Court answered the question in the affirmative. A majority of the Federal Court of Appeal allowed an appeal and answered the question in the negative.

Lower Court Rulings

August 17, 2015
Federal Court

T-1940-13 / 2015 FC 977
Question answered in the affirmative
July 27, 2017
Federal Court of Appeal

A-400-15, 2017 FCA 162
Appeal allowed; Question answered in the negative