Until last year it was a common understanding that a bankruptcy triggers a priority reversal of CRA’s super-priority deemed trust claim for GST/HST debt, even if proceeds were recovered by a secured creditor prior to bankruptcy of the debtor. The bankruptcy of a debtor was pursued as a late stage step in a secured creditor’s enforcement process in order to reverse priorities for the GST/HST debt.
However in July 2017, the Federal Court of Appeal in Canada v. Callidus Capital Corporation (2017 FCA 162) upended that understanding by finding that a bankruptcy does not extinguish CRA’s priority for GST/HST over proceeds recovered by a secured creditor before the bankruptcy of the debtor. The Court held that even though a bankruptcy rendered the Crown’s GST/HST deemed trust ineffective as against the debtor’s property, it did not extinguish the secured creditor’s separate obligation to pay over proceeds to the Crown that were collected by that creditor pre-bankruptcy.
This decision may dampen a lender’s willingness to work with a debtor rather than pursuing bankruptcy, as forbearance agreements typically require payments to be made or assets to be disposed of to reduce the indebtedness during the forbearance period. The result of the Callidus decision is that those funds could be at risk to a demand for payment by CRA.
In March 2018, the Supreme Court of Canada granted Callidus leave to appeal the Federal Court of Appeal’s decision . While the outcome of the appeal is uncertain, for now the Federal Court of Appeal’s decision remains law across Canada. Decisions about enforcing security where a debtor has substantial GST/HST debt should now include an expectation that CRA’s priority for GST/HST will not be reversed later by a bankruptcy. This could result in secured creditors pressing for early bankruptcy, rather than agreeing to forbearance terms with the debtor to facilitate a workout over time.
A copy of the decision is available here.