Money made by receiver goes to RevCan, not to creditors

Still counts against outstanding employee tax holdbacks

You won’t be surprised to learn that the Income Tax Act gives tax collectors priority in most situations where a business owes several creditors.

This of course includes very wide priority where the business owes money it holds back as tax from employees’ salaries. But what happens when the business goes into receivership?

You could argue that, in such a case, the employees, if any are left, work for the receiver. So, what happens to the business’s outstanding holdback obligations? Can the revenuers go after money the receiver makes?

Those were the questions before British Columbia’s highest court in the recent case of Tuxedo Transport.

In August 1996, Christina Charles registered a general security agreement against Tuxedo’s assets. This gave her substantial collateral as a creditor of Tuxedo, and a strong position as what lawyers call a secured creditor.

(A creditor is “secured” when the debtor signs an agreement giving the creditor collateral on the debt, and usually a secured place in the lineup to get paid.)

In the ensuing months, Tuxedo failed to remit source payroll deductions to what was then called Revenue Canada (now the Canada Customs and Revenue Agency).

Tuxedo had slipped into financial trouble, causing its creditors to appoint a receiver. Revenue Canada made a claim against all of Tuxedo’s assets, asserting that the Income Tax Act impressed them with a deemed trust in Revenue Canada’s favour.

However, the receiver went to court, where the judge said that the trust applied only to property existing during the time when Tuxedo was in default of its income tax obligations.

It could not include property Tuxedo acquired after that. On that basis, the court awarded priority to Charles.

But now the British Columbia Court of Appeal has awarded Revenue Canada priority in all of the assets, ruling that the deemed trust applies even to the money made by the receiver.

Section 227(4.1) of the Income Tax Act, the court says, creates a situation where the trust operates from the time of the payroll deductions. This ensures, the court explains, that if the deductions remain unpaid when assets came into the taxpayer’s hands, those assets are part of the trust.

The funds in dispute here became part of the trust when the interim receiver collected Tuxedo’s book debts and accounts receivable.

For more information:

Royal Bank of Canada v. Tuxedo Transport Ltd., 2000 BCCA 430, Vancouver registry no. CA025719, July 10/00.

Latest stories