Reasons for Judgment — LeBel J. (McLachlin C.J. and Binnie, Fish, Abella, Rothstein and Cromwell JJ. concurring)
I. Introduction
LeBel J. —
In these three cases, the Canadian and Quebec tax authorities, on the one hand, and the trustees in bankruptcy of certain businesses and financial institutions holding various security interests in the property of the bankrupts, on the other, disagree about what should be done with taxes on consumption that had been collected but not remitted, or were collectible, as of the date of the bankruptcy. The tax authorities submit that they are entitled to the amounts in issue as the owners thereof. The respondents contend that, under the law applicable in bankruptcy matters, the federal or provincial Crown is only an ordinary creditor and must be ranked as such with the debtors’ other creditors. The financial institutions submit that their security interests can be set up against the Crown as against any ordinary creditor. The Quebec Superior Court found for the Crown. The Quebec Court of Appeal set aside the judgments and accepted the arguments of the trustees and financial institutions. In my view, that decision is well founded, and I would uphold it.
II. Origins of the Cases
These three cases result from the bankruptcies of a number of businesses and from problems that arose as a result of their insolvency in respect of the administration of the federal goods and services tax (“GST”) imposed under the Excise Tax Act , R.S.C. 1985, c. E‑15 (“ETA ”), and the Quebec sales tax (“QST”) payable under the Act respecting the Québec sales tax, R.S.Q., c. T‑0.1 (“AQST”). To begin, I will summarize the facts that must be considered to understand these cases. The relevant statutory provisions are reproduced in the Appendix.
In this case, a manufacturing company required, as a supplier, to collect the GST and the QST went bankrupt on September 7, 2005. Raymond Chabot Inc. was appointed trustee in bankruptcy. The debtor had hypothecated its claims and accounts receivable in favour of the respondent Caisse populaire Desjardins de Montmagny. Quebec’s Deputy Minister of Revenue gave the trustee notice that he considered it to be his mandatary for the recovery of GST and QST amounts that had been collected but not remitted or were collectible. The tax authorities claimed that they owned the amounts in question. Furthermore, the record shows that some of the taxes that had been collected or were collectible at the time of the bankruptcy had been payable for more than 60 days. The Caisse populaire Desjardins de Montmagny claimed to hold valid security interests, which could be set up against the tax authorities, in the tax amounts related to the claims hypothecated in its favour. In view of these conflicting claims, the trustee asked the Superior Court to determine to whom the tax amounts belonged.
In this case, Consortium Promecan Inc. went bankrupt on March 20, 2004, and Raymond Chabot Inc. was appointed trustee. The debtor had not filed returns with respect to the GST and the QST since February 1, 2004. Quebec’s Deputy Minister of Revenue asked the trustee to remit to him all GST and QST amounts in respect of the period between February 1 and March 20, 2004 that had been collected or were collectible. The trustee replied that, in its view, the Deputy Minister was only an ordinary creditor in the bankruptcy, and it denied his request. The Crown appealed that decision to the Superior Court.
The tax claims in this case result from the bankruptcies of two companies, Alternative Granite et Marbre inc. and Stone Vogue Ressources inc., on November 5, 2004. The Crown claimed GST and QST amounts related to the accounts receivable of the bankrupt debtors. The National Bank of Canada had obtained, on those accounts, security under s. 427 of the Bank Act , S.C. 1991, c. 46 , and movable hypothecs. It tried to exercise its rights under these various security interests and claimed the proceeds of the accounts receivable as well as the GST and QST amounts related to these claims. It then applied to the Superior Court to resolve the resulting dispute between itself and the tax authorities. In the meantime, the Bank’s mandatary, the trustee and the Crown all collected portions of the disputed taxes and even of the accounts receivable.
III. Judicial History
A. Quebec Superior Court
The Superior Court heard the three cases separately. The result was the same in all of them. All three judges concluded that the Crown owned the disputed GST and QST amounts. If the trustee in bankruptcy collected them, it was as a mandatary of the tax authorities. Quebec’s Deputy Minister of Revenue and the Minister of National Revenue could not be considered to be mere ordinary creditors. In essence, the Superior Court judges held that the GST and QST amounts were not part of the bankrupt’s patrimony: 2006 QCCS 2108, 34 C.B.R. (5th) 245 (per Boisvert J.), 2006 QCCS 6370, [2006] J.Q. no 15239 (QL) (per St‑Julien J.), 2006 QCCS 2656, 21 C.B.R. (5th) 289 (per Bouchard J.). All three judgments were appealed to the Quebec Court of Appeal.
B. Quebec Court of Appeal, Forget, Doyon and Duval Hesler JJ.A.
Duval Hesler J.A., writing for the Court of Appeal, allowed the appeals and set aside the Superior Court’s judgments: 2007 QCCA 1837, 2007 QCCA 1835, 2007 QCCA 1813, [2008] R.J.Q. 39. She acknowledged that the QST and the GST are direct taxes payable by the recipient of the good or service. But in her view, as a result of the 1992 amendments to the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B‑3 (“BIA ”), the tax authorities must be treated as an ordinary creditor in such a case. They do not own tax amounts payable by purchasers of goods and services that are subject to the GST and QST, but instead have a claim against the supplier. Furthermore, any deemed trust in favour of the tax authorities ended at the time of the bankruptcy. The tax amounts in issue were therefore part of the bankrupt’s patrimony but remained subject to any security interests that had been validly granted to creditors like the Caisse populaire Desjardins de Montmagny and the National Bank of Canada. This Court granted leave for three appeals from that judgment.
IV. Analysis
A. Issues and Positions of the Parties
The issue is the nature of the rights of the tax authorities, the trustee in bankruptcy and the secured creditors to GST and QST amounts that have been collected but not remitted or are collectible at the time of the bankruptcy of a supplier within the meaning of the AQST and the ETA. In sum, the tax authorities submit that they own these amounts. In their opinion, the trustee collects the taxes on their behalf, as their mandatary, and these amounts are not part of the bankrupt’s patrimony. The respondents reply that the amounts are part of the bankrupt’s patrimony, subject to any validly granted security interests. In their view, the Crown does not have a right of ownership in the tax amounts and enjoys only the rights of an ordinary creditor in a bankruptcy situation. To resolve this issue, it will be necessary to begin by considering the nature of the two taxes in issue, the GST and the QST, and the mechanism for administering them. I will also need, before ruling on the legal characterization of the Crown’s rights, to discuss the effect of the 1992 amendments to the BIA .
B. Nature of the GST and the QST
The GST and the QST are similar types of taxes on consumption. The legal framework for imposing them was established almost 20 years ago now. They are considered to be direct taxes, and the ultimate recipient of taxable goods and services is responsible for paying them. However, the taxes are collected, and credits apply, at each step of the manufacturing and marketing chains. In principle, the supplier acts only as a mandatary of the Crown in collecting and remitting these taxes (Reference re Quebec Sales Tax, [1994] 2 S.C.R. 715, at pp. 720‑22).
The GST, which was implemented in 1990 by legislation that amended the ETA (S.C. 1990, c. 45), replaced the former federal manufacturers’ sales tax. The GST can be regarded as a value‑added tax. It is collected at every stage of the manufacturing and marketing of goods and services and is payable by the recipient, who is regarded as the debtor in respect of the tax liability to the Crown (s. 165 ETA). However, the supplier is responsible for collecting and remitting the tax (s. 221(1) ETA). The supplier is deemed to hold the amounts so collected in trust for Her Majesty (s. 222(1) and (3) ETA) and must periodically file returns and make remittances. In addition, the Act establishes a system under which input credits can be claimed, at each step of the marketing and supply of the good, in respect of the taxes the supplier has had to pay to his or her own suppliers (ss. 141.01 and 169(1) ETA). The ultimate recipient bears the full burden of the tax (R. Brakel & Associates Ltd., Value‑Added Taxation in Canada: GST, HST, and QST (2nd ed. 2003), at pp. 2‑3). This Court has confirmed this as a valid exercise of the Parliament of Canada’s taxing power (Reference re Goods and Services Tax, [1992] 2 S.C.R. 445).
In parallel with this federal tax reform, an in‑depth review of the consumption tax system took place in Quebec. In 1991, the National Assembly enacted new sales tax legislation, the Act respecting the Québec sales tax and amending various fiscal legislation, S.Q. 1991, c. 67. The National Assembly’s intention in enacting this statute was to achieve extensive harmonization with the GST and to align this aspect of Quebec’s tax system with the model chosen by the Parliament of Canada. The legislation came into force on July 1, 1992 (Brakel, at pp. 3‑4). Under an agreement with the Government of Canada, the Quebec government is responsible for collecting both the GST and the QST in Quebec (Brakel, at p. 4). Moreover, pursuant to s. 20 of the Act respecting the Ministère du Revenu, R.S.Q., c. M‑31 (“AMR”), amounts collected by suppliers of goods and services are deemed to be held in trust for the State. This Court held that this new sales tax falls within the provincial taxing power under s. 92(2) of the Constitution Act, 1867 (Reference re Quebec Sales Tax).
In 1992, the Parliament of Canada also made extensive changes to the BIA , and those changes are of particular relevance to this issue of the nature and extent of the Crown’s rights to recover the GST and QST amounts. The amendments in question were set out in the Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C. 1992, c. 27. Some of these changes related to the Crown’s priority in bankruptcy situations. The federal government seemed at the time to want to respond to criticisms that the system establishing the priority of the Crown’s claims often left nothing for a bankrupt’s ordinary creditors. A government spokesperson acknowledged these concerns at the time of the introduction of the legislation to revise the Crown priority system:
We also took steps to limit the priority of the Crown, one of the more blatantly unfair aspect[s] of the present Bankruptcy Act.
(House of Commons Debates, vol. II, 3rd Sess., 34th Parl., June 19, 1991, at p. 2106)
Felix Holtmann, the Chairman of the Standing Committee on Consumer and Corporate Affairs and Government Operations, also acknowledged the problems and injustices caused by the proliferation of deemed trusts developed to protect the Crown’s claims. He stressed the need to reduce the extent of such trusts in order to achieve a better balance among creditors in bankruptcy situations:
One of the main areas is Crown priority. Under the present Bankruptcy Act the Crown has a preferred claim for various types of taxes and ranks ahead of all unsecured creditors. In 1970 a study report made reference to Crown priority; then again in 1986 proposed bankruptcy amendments recommended the abolition of the Crown priority. With the Crown priority, creditors are less likely to participate in an insolvency, in a bankruptcy, and today rarely come out to meetings of creditors because there are no assets. The assets are fully secured to the secured creditors, banks and major lenders as well as to Crowns. As a result there is virtually nothing left for the unsecureds. We recommend that the Crown priority be abolished and that if the Crown wants to contract directly with the debtor, it be entitled to a contractual priority but not a Crown priority.
(Minutes of Proceedings and Evidence of the Standing Committee on Consumer and Corporate Affairs and Government Operations, Issue No. 9, September 5, 1991, at p. 9:5)
During the parliamentary debates on Bill C‑22 regarding the amendment of the BIA , comments by the government spokesperson confirmed that the government intended to reduce the Crown to the rank of an ordinary creditor in bankruptcy situations:
A second very important point in the legislation is that the Government of Canada, the Crown, does not put itself in a priority position. It stands in line with the unsecured creditors in almost all cases except for the deductions of tax and unemployment owed.
(House of Commons Debates, vol. IV, 3rd Sess., 34th Parl., November 1, 1991, at p. 4354)
In the course of the discussions in the Standing Committee on Consumer and Corporate Affairs and Government Operations, the government spokesperson had clearly expressed the intention to abolish the deemed trust in respect of the GST in bankruptcy situations:
As far as the GST is concerned, if there is a deemed trust for GST, it will not come under this particular provision so it will not survive. If there is a statutory lien or priority, or a statutory security interest for GST, it will not take priority under this legislation unless it is a registered interest.
(Minutes of Proceedings and Evidence of the Standing Committee on Consumer and Corporate Affairs and Government Operations, Issue No. 10, September 5, 1991, at p. 10:18)
The amendments to the bankruptcy legislation appear to be consistent with the legislative intention announced during the parliamentary debates. First of all, s. 67 BIA reinforces the principle that all the bankrupt’s property is part of the estate of the bankrupt and constitutes the common pledge of the creditors, although with the exception of property held in trust for another person. However, s. 67(2) BIA provides that, with certain exceptions, property may not be regarded as held in trust unless it would be so regarded in the absence of a statutory provision. This renders statutory trusts ineffective without affecting trusts resulting from the common law or the civil law or statutory trusts that secure claims of the federal and provincial Crowns related to source deductions for income tax, a comprehensive pension plan or the federal employment insurance program (s. 67(3) BIA). No mention is made of trusts related to the GST or to provincial taxes such as the QST. Moreover, s. 86(1) BIA confirms that the Crown is only an ordinary creditor in a bankruptcy situation:
86. (1) In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province or of any body under an Act respecting workers’ compensation, in this section and in section 87 called a “workers’ compensation body”, rank as unsecured claims.
In addition, not long after these changes to the BIA , the Parliament of Canada enacted concordance amendments with regard to GST claims (S.C. 1993, c. 27). It added subs. (1.1) to s. 222 ETA . As a result of this provision, deemed trusts intended to secure GST claims are ineffective in bankruptcy situations:
222. . . .
(1.1) Subsection (1) does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II.
The Quebec legislation respecting the QST does not contain a provision similar to s. 222(1.1) ETA that renders the deemed trust in favour of the tax authorities ineffective in bankruptcy situations. However, according to a settled principle of constitutional law regarding the Parliament of Canada’s legislative authority over bankruptcy and insolvency, the provincial legislatures may not modify the order of priority established in the BIA . In the event of conflict, the BIA will prevail and the provincial statute will be inapplicable regardless of the legislature’s intention (D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564, at para. 12, per Deschamps J.).
The tax authorities do not dispute the clear terms of the statutory provisions. Rather, they argue that those provisions do not apply to the GST and the QST and that the Crown is not a creditor, but the owner of the tax amounts. Thus, the amounts collected or collectible at the time of the bankruptcy in respect of the GST or the QST do not form part of the bankrupt’s patrimony. As a result, they are not included in the property that is to be liquidated in accordance with the order of priority established in the BIA . It will therefore be necessary to resolve the issue of the legal characterization of the Crown’s rights with respect to the GST and QST amounts. The characterization of those rights will essentially resolve the dispute before this Court.
D. Legal Characterization of the Crown’s Rights
In this analysis, it is important to abide by the fundamental rules of contemporary statutory interpretation. Parliament’s intent must be ascertained, and to do this, it is often necessary to review the statutory provisions at issue in their overall context (R. Sullivan, Sullivan on the Construction of Statutes (5th ed. 2008), at p. 276). This approach casts doubt on the validity of the tax authorities’ arguments.
The appellants’ arguments consist of a few fundamental propositions. They submit, first, that the GST and the QST are direct taxes on consumption. They are imposed on the consumer, and more specifically on the ultimate recipient of a taxable good or service. The legislation establishes a direct link between the Crown and the recipient, as the former may claim the taxes payable directly from the latter if they have not been collected (s. 296(1) (b) ETA). The appellants contend that where the GST is collected by a trustee in bankruptcy, the trustee, like the bankrupt supplier, collects it as an agent of, and on behalf of, the Crown. And the Crown is in a similar legal situation where the QST is concerned. The recipient owes the sales tax to the Crown pursuant to ss. 16 and 82 AQST. The supplier collects the tax on the Crown’s behalf and is deemed to be a mandatary of the Crown pursuant to s. 422 AQST. Moreover, under s. 23 AMR, a person who does not collect a tax he or she was required to collect becomes a debtor of the State for that amount. The appellants further submit that, in the context of the ETA and the AQST, the supplier, a mandatary of the Crown, is responsible, after supplying a taxable service or good to a consumer, for the recovery of property — a GST or QST amount — that belongs to the Crown and that remains Crown property, until it is remitted to the Crown. The legal situation is the same regardless of whether the tax is collected by the supplier or by a trustee after its bankruptcy. In the appellants’ view, when the collected tax is remitted, the mandatary does not settle a claim, but remits to the Crown its own property. Moreover, according to this argument, this Court has established a general principle that, in performing its obligation, the mandatary does not discharge a debt, but delivers over property belonging to the mandator (Victuni AG v. Minister of Revenue of Quebec, [1980] 1 S.C.R. 580, at p. 584, per Pigeon J.).
This set of legal propositions disregards the mechanisms for administering the GST and the QST. The legal characterization of the relationships between the tax authorities and the suppliers and recipients of goods and services cannot be considered in isolation from the overall context of the system for the collection and remittance of these taxes and from the provisions of the BIA .
An initial comment must be made about the impact of the federal bankruptcy legislation. The appellants are oversimplifying the trustee’s role and, in particular, his or her legal situation vis‑à‑vis the bankrupt. This Court has noted the complexity of the trustee’s duties in, for example, Lefebvre (Trustee of), 2004 SCC 63, [2004] 3 S.C.R. 326, at paras. 35‑37. The trustee’s role is not limited to representing the bankrupt. The trustee manages the bankrupt’s patrimony and is seized thereof as a result of the bankruptcy, but he or she also represents the creditors and is responsible to them for the liquidation and orderly distribution of the patrimony.
In the cases before the Court, the trustees were responsible for liquidating a patrimony that included the GST and QST amounts in issue, as the Court of Appeal concluded (see paras. 51‑55). In her reasons, Duval Hesler J.A. clearly and correctly defined the nature of the trustee’s role in this respect. The reason why the supplier was given the status of a mandatary was to ensure that the tax qualified as a direct tax so that the imposition, by the province of Quebec, of the QST in a form compatible with that of the federal GST would be constitutional (para. 50). However, the fact that this tax is ultimately borne by the recipient does not support a finding that the supplier and then the trustee, the bankrupt’s representative, merely collect and remit the Crown’s “property” or “thing”. The nature of the collection mechanism for the two taxes suggests another interpretation of the legal situation.
This mechanism is designed to implement a direct tax that is also a tax on the value added at each stage of the production and marketing of the good or service until it is acquired by its ultimate recipient. In such a system, as Duval Hesler J.A. noted, _translation_ “[t]he dollar collected is not the dollar remitted” (para. 52).
First of all, the collection mechanism does not require separate invoices for the GST and the QST. These taxes are indicated and included in the invoice or other document given to the recipient (s. 223 ETA ; s. 425 AQST). Next, the tax amounts collected by suppliers are remitted in accordance with the accrual, not cash, method of accounting. At periodic intervals, which vary depending on the individual supplier’s sales and sometimes on the nature of the business, suppliers remit to the tax authorities amounts corresponding to the tax amounts that have been billed for and are collectible during the reporting period in question even if these collectible amounts have not in fact been collected from the recipients. When sending remittances, suppliers deduct from the amounts being remitted credits corresponding to their own inputs, that is, to the taxes they have paid to their own suppliers. Thus, they remit net tax amounts based on the difference between the taxes they have collected and the taxes they themselves have paid (s. 228 ETA ; s. 437 AQST). At times, under this system, they can obtain rebates.
Moreover, nothing in the legislation respecting the GST and the QST requires suppliers to keep the taxes they collect separate. Until a bankruptcy occurs, only the deemed trusts established by s. 222 ETA and s. 20 AMR lead to this legal result by giving the tax authorities a right to equivalent amounts from the suppliers’ assets. Finally, while it is true that the recipient owes the tax to the Crown, a supplier who has remitted the tax owed by the recipient but has not collected it has a cause of action against the recipient (s. 224 ETA ; s. 427 AQST).
The statutory mandate imposed on the supplier to collect the GST and the QST differs from the mandate in issue in Victuni, which related to the acquisition and development of an immovable. The mandate with respect to the two taxes involves the performance of obligations to collect and then to remit, not the amounts collected, but a balance resulting from offsetting claims of the Crown and the supplier. The existence of these offsetting claims confirms that claims for the amounts collected by suppliers are fungible, as this Court in fact pointed out in British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, at pp. 34‑35.
I note that the appellants’ position amounts to maintaining that the deemed trusts established by s. 222 ETA and s. 20 AMR continue to exist after a bankruptcy. The appellants’ argument is inconsistent with the nature of their rights under the system for the collection and remittance of the GST and QST. It also conflicts with Parliament’s clear intent and with the very explicit wording of the relevant statutory provisions regarding what is to happen if a supplier goes bankrupt. Before 1992, the Crown held a priority where certain tax claims were concerned. These claims were often protected by an increasingly complex series of statutory deemed trusts. The 1992 amendments to the BIA rendered these trusts ineffective in a bankruptcy situation, although there were exceptions with respect, for example, to claims for income tax source deductions (see, for example, Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94). Other than where these exceptions apply, when a debtor goes bankrupt, the Crown becomes an ordinary creditor. The trustee will give it the same priority as other creditors of the same rank. The trustee will be personally responsible for paying the GST or QST in respect of its own activities only (s. 265 ETA ; s. 302.1 AQST).
Canadian tax authorities are bound by the choice of legislative policy now expressed in the BIA . The order of priority established in the BIA is also binding on the Quebec tax authorities, even though the AMR is silent on what happens to the deemed trust established in s. 20 thereof in the event of bankruptcy. The appellants’ arguments conflict with both the words of the statutory provisions in question and their underlying legislative intent, and cannot be accepted.
V. Conclusion
For these reasons, I would affirm the decision of the Quebec Court of Appeal and dismiss the appellants’ appeals with costs.
Cases cited
- 2006 QCCS 2108 2006 QCCS 2108 ¶ 6
- 2006 QCCS 6370 2006 QCCS 6370 ¶ 6
- 2006 QCCS 2656 2006 QCCS 2656 ¶ 6
- 2007 QCCA 1837 2007 QCCA 1837 ¶ 7
- 2007 QCCA 1835 2007 QCCA 1835 ¶ 7
- 2007 QCCA 1813 2007 QCCA 1813 para 50 ¶ 7, ¶ 23
- Reference re Quebec Sales Tax 23690-1994-06-23 pp 720 ¶ 9, ¶ 11
- Reference re Goods and Services Tax 22635, 22664-1992-06-25 ¶ 10
- D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General) 2005 SCC 52 para 12 ¶ 17
- Victuni v. Minister of Revenue of Quebec item-5668-1980-04-22 p 584 ¶ 20
- Lefebvre (Trustee of); Tremblay (Trustee of) 2004 SCC 63 paras 35 ¶ 22
- British Columbia v. Henfrey Samson Belair Ltd. 20515-1989-07-13 pp 34 ¶ 27
- Caisse populaire Desjardins de l'Est de Drummond v. Canada 2009 SCC 29 ¶ 28
Statutes and regulations cited
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Unresolved citations