In Callidus We 'Trust' – The SCC Rules On The Deemed Trust Provisions Of The Excise Tax Act And Overturns The Federal Court Of Appeal Ruling In Callidus Capital Corporation V. Her Majesty The Queen

Callidus Capital Corporation v. Her Majesty the Queen, 2018 SCC 47 (SCC)

Callidus 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 remitted them to be applied to its debt. The amounts paid to Callidus under this arrangement included tax proceeds which Cheese Factory had failed to remit to the CRA. When the Crown asserted entitlement to the unremitted tax proceeds by virtue of the deemed trust mechanism in s. 222 of the Excise Tax Act (ETA), R.S.C. 1986, c. E-15, and demanded payment, Cheese Factory made an assignment in bankruptcy. The Crown then commenced a proceeding against Callidus in Federal Court to recover Cheese Factory's tax debt.

In support of the relief claimed against Callidus, the Crown relied on the 'superpriority' status created by s. 222(3) of the ETA, which mandates that proceeds subject to a deemed trust are to be paid to the Crown in priority to all security interests.

The ETA also provides, however, that once a tax debtor becomes bankrupt, 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 (s. 222(1.1)). The result is that after bankruptcy, there is no amount deemed to be held in trust pursuant to s.222 (1) for amounts collected as tax but not remitted. Callidus argued that this provision operated to likewise render the deemed trust ineffective against a secured creditor, such as Callidus, who received proceeds of property subject to the deemed trust from the debtor pre-bankruptcy. Callidus advanced a motion to have this question of law determined by the Court.

The Federal Court agreed with Callidus that the deemed trust, and the accompanying priority, are extinguished upon bankruptcy of the debtor, such that the Crown becomes an unsecured creditor in respect of unremitted amounts. Any liability that arises under section 222(3) compelling a secured creditor to disgorge proceeds is dependent on the continuing existence of the deemed trust, and is therefore extinguished upon bankruptcy by the operation of section 222(1.1).

The majority of the Federal Court of Appeal allowed the Crown's appeal...