Case information

Taxation — Income tax — Deductions subject to trust — Hypothecs — Priorities — Order of collocation — Value of prescribed security interest — Statutory interpretation — Meaning of words “rights of the secured creditor securing the obligation” — Failure by employer to remit to Canada Revenue Agency source deductions withheld from earnings of its employees — Deemed trust for benefit of Her Majesty — Employer also defaulting on hypothec, leading to sale of its immovable under judicial authority — Hypothecary creditor contesting collocation scheme after sale under judicial authority — Method for calculating hypothecary creditor’s prescribed security interest — Whether suretyship held by hypothecary creditor constitutes security within meaning of Income Tax Regulations and Income Tax Act, thereby reducing amount of its priority — Whether section 2201(2) of Income Tax Regulations grants discretion that exceeds application of reasonable and sufficient discretion — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 227(4) and (4.1) — Income Tax Regulations, C.R.C., c. 945, s. 2201(1) and (2).

Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch). Please note that summaries are not provided to the Judges of the Court. They are placed on the Court file and website for information purposes only.

The deemed trust mechanism provided for in section 227(4.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“ITA”), gives Her Majesty a means to recover payroll deductions on a priority basis in relation to any other secured creditor. A narrow class of secured creditors is exempted from that priority by the prescribed security interest (“PSI”) exception under section 227(4.2) of the ITA. The effect of this exception is that creditors holding an immovable hypothec retain their priority of rank up to the amount of the PSI calculated in accordance with section 2201 of the Income Tax Regulations, C.R.C., c. 945. The courts below had to determine the amount of the PSI of a secured creditor whose claim was to be given priority in the collocation over that of the government. The Superior Court did not take the value of the secured creditor’s suretyship into account in calculating the PSI amount. It concluded that a personal security is not a “righ[t] of the secured creditor securing the obligation” within the meaning of the ITA and the Regulations. The Court of Appeal reversed that conclusion. In its view, the ordinary meaning of the words “rights of the secured creditor” applies to all patrimonial rights of the secured creditor securing the obligation, including a suretyship.