In our April 12, 2018, blog we wrote about the case of Canada v. Callidus Capital Corporation. The Supreme Court of Canada since heard an appeal of this case and gave its unanimous decision on November 11, 2018, allowing the appeal and overturning the decision of the lower court.

The Federal Court of Appeal had determined a bankruptcy did not extinguish CRA’s deemed trust for GST/HST over proceeds that had been recovered by a secured creditor before the bankruptcy of the debtor.

The Supreme Court of Canada disagreed. Instead, they ruled that CRA’s deemed trust for GST is extinguished by a bankruptcy. Therefore it does not extend to pre-bankruptcy payments made by a borrower to a lender where the borrower later becomes bankrupt. The result is that a bankruptcy will trigger a priority reversal for GST/HST debt even when proceeds were recovered by a secured creditor prior to the bankruptcy of the debtor.

The Supreme Court of Canada’s decision is anticipated to have the effect of supporting borrower attempts to make payment arrangements such as through forbearance agreements, rather than immediate enforcement of security.

Intervenors in the appeal who made submissions to the Court included the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the Insolvency Institute of Canada, and the Canadian Bankers Association.