Case information

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Taxation - Income tax - Source deduction - Deemed trust - Application of deemed trust in specific context of debt repaid to Appellant by way of compensation - Whether compensation is “security interest” within meaning of s. 224(1.3) of Income Tax Act - Date on which compensation effected - Cause of action - Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 227(4.1).

The Appellant Caisse made a loan to a debtor company that had failed to remit source deductions to the Minister of National Revenue (“MNR”). A few years later, the loan was secured by a deposit certificate issued by the Caisse to the debtor after the debtor had made a deposit. The debtor failed to make the monthly loan payments and made an assignment of its property. The Caisse effected compensation between the proceeds of the deposit certificate and the loan. The MNR gave the Caisse formal notice to pay the amount of the source deductions protected by the deemed trust. The Caisse filed a simplified statement of claim in the Federal Court. Following a hearing, Prothonotary Tabib allowed the Respondent’s action and ordered the Caisse to pay the Respondent $26,863.53 with interest capitalized daily from February 26, 2001 until full payment.

The Federal Court judge dismissed the Caisse’s appeal challenging the deemed trust as a collection vehicle. The Caisse’s appeal to the Federal Court of Appeal was also dismissed. The Federal Court of Appeal held that the definition of “security interest” (s. 224(1.3) of the Income Tax Act) was broad enough to cover the right of retention and compensation the Caisse had in connection with the debtor’s deposit certificate.