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Ottawa, April 7, 1997
1997-030
Unremitted Source Deductions and Unpaid GST
Related documents:
Finance Minister Paul Martin today announced proposed amendments to the Income Tax Act, the Canada Pension Plan, the Employment Insurance Act and the Excise Tax Act to clarify that the Crown's claims for unremitted source deductions and unpaid GST take priority over all other claims.
The proposed amendments respond to the recent decision of the Supreme Court of Canada in Her Majesty the Queen v. The Royal Bank of Canada, which held that the current rules in the Income Tax Act creating a deemed trust do not give priority to the Crown over certain assignments of inventory and that clearer language is required to assign absolute priority to the Crown. The amendments will apply from June 1994.
The Minister noted that it is important to assert the absolute priority of the Crown's claim as unremitted source deductions are part of the gross wages of employees and are held in trust for remittance to the Receiver General. Further, source deductions are automatically credited to these employees on account of taxes paid for the year and they are paid over to those provinces that are parties to the Federal/Provincial Tax Collection Agreements, on account of the employee's provincial taxes payable. Similarly, GST input tax credits of the suppliers are credited against unpaid GST even when the net GST remains unpaid. Thus, the amendment will ensure that tax revenue losses are minimised and that delinquent taxpayers and their secured creditors do not benefit from failures to remit source deductions and GST at the expense of the Crown.
The attached backgrounder and draft proposal provide further details on today's announcement.
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For further information:
Alexandra MacLean
Tax Legislation Division
(613) 992-5636
Backgrounder
Amounts withheld by employers from salaries and wages paid to employees on account of income tax, CPP and EI are required to be remitted to the government within a certain period of time. Employees are given credit for the amounts withheld regardless of whether the withholdings are remitted to the government. Accordingly, where an employer has withheld these amounts from salaries and wages of employees, but not yet remitted them to the government, the amounts are deemed by the Income Tax Act to be held in trust for the government. A similar trust is deemed to be in place in respect of net GST collected but not remitted.
The deemed trust provisions were intended to ensure that unremitted source deductions and unpaid GST were to be recovered in absolute priority to all debts. Together with the enhanced garnishment and the director's liability provisions, these deemed trust provisions were intended to secure the annual collection of most of the government's tax revenues to the extent possible. In exchange for this absolute priority, the Crown waived all other priorities in bankruptcy.
The proposed amendments will clarify that the deemed trusts for unremitted source deductions and GST apply whether or not other security interests have been granted in respect of the inventory or trade receivables of a business. Typically this will ensure that, where a person grants a security interest in property such as inventory or trade receivables assigned as collateral under a general security agreement or a Bank Act security, the deemed trusts for unremitted source deductions or unpaid GST will nonetheless apply to the inventory or receivables of the business given as collateral. To satisfy the liability for unremitted source deductions and unpaid GST, inventory or receivables, in an amount equal to the unremitted deductions and unpaid GST, are considered to be beneficially owned by the Crown (regardless of any security interest that may have been granted) and their proceeds are payable to the Crown in priority to any security interest. The deemed trust provisions will not, however, override a prescribed security interest such as a mortgage interest in real estate or other exceptions that may be provided by regulation, where the failure to remit source deductions or net GST cannot benefit the secured creditor.
Draft Proposal
(1) Subsections 227(4) and (4.1) of the Income Tax Act are replaced by the following:
Trust for moneys deducted
(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.
Extension of trust
(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any enactment of a province or any law, where at any time an amount deemed by subsection (4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed
(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person in trust for Her Majesty whether or not the property is subject to such a security interest, and
(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest
and is property beneficially owned by Her Majesty notwithstanding any security interest in such property or in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
Meaning of security interest
(4.2) For the purposes of subsections (4) and (4.1), a security interest does not include a prescribed security interest.
(2) Subsection (1) is deemed to have come into force on June 15, 1994.
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