eCaseNote 2018 No. 05 December 17, 2018 / eCasenote

A Whiff of Relief for Secured Creditors Realizing Against Bankrupt Tax Debtors
Callidus Capital Corp. v. Canada, 2018 SCC 47


In this case, the Supreme Court of Canada sided with a dissenting judge of the Federal Court of Appeal in a decision that clarifies the rules relating to a secured creditor’s obligations when realizing against a bankrupt tax debtor.


Callidus Capital Corporation (“Callidus”) was a secured creditor to Cheese Factory Road Holdings Inc. (“Cheese Factory”), a real estate investment company. After running into financial difficulties, Cheese Factory agreed to sell one of its properties and pay Callidus the proceeds. In addition to being indebted to Callidus, Cheese Factory was indebted to the Government of Canada (the “Government”): Cheese Factory had failed to remit $177,000 in GST and HST.

When Cheese Factory declared bankruptcy, the Government, relying on section 222 of the Excise Tax Act (the “Act”), claimed that Callidus was required to remit the full amount owing for GST and HST on Cheese Factory’s behalf. Callidus disagreed and refused to pay.

The Decision

The Government argued that under subsection 222(1) of the Act amounts collected on account of GST and HST are deemed to be held in trust for the Government. Subsection 222(3) of the Act provides that when amounts owing are not remitted the deemed trust extends to the tax debtor’s property or any property subject to a security agreement. That is, the obligation to remit runs with the tax debtor’s secured property—regardless of whether a secured creditor has realized on its security. Accordingly, Callidus by taking possession of the proceeds from sale of the tax debtor’s property, became liable to remit the amount owing for GST and HST.

In its defence, Callidus relied on subsection 222(1.1), which states that s. 222(1) does not apply if the tax debtor becomes bankrupt. The existence of a s. 222(3) trust depends on the existence of a s. 222(1) trust. Therefore, because the s. 222(1) trust was extinguished by the tax debtor’s bankruptcy, so too was the s. 222(3) trust.

The dissenting decision with which the Supreme Court agreed sided with Callidus, noting that “if no amounts are deemed to be held in trust pursuant to s. 222(1), then no s. 222(3) trust arises.” At the end of the day, Callidus was not liable to remit the amounts owing because Cheese Factory had declared bankruptcy.


The Supreme Court’s reversal is a victory for anyone who values commercial certainty and liquidity in the Canadian economy. The decision will promote commercial certainty by ensuring that secured creditors will not unexpectedly find themselves on the hook for their borrowers’ failure to remit GST and HST. It will promote liquidity by encouraging lenders to extend credit to tax debtors. This decision should be of special interest to those in Newfoundland and Labrador, where bankruptcies are on the rise.

This decision also confirms for unsecured creditors that the Government does not take automatic priority over them for claims against a bankrupt tax debtor. As the Federal Court of Appeal dissent stated:

By eliminating these trusts in bankruptcy, Parliament put the Crown on the same footing as unsecured creditors … It stands in line with the unsecured creditors in almost all cases except for the deductions of tax and unemployment owed.

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