Friday, November 21, 2014


A statutory deemed trust is an unregistered floating charge on the property of a fiscal debtor who is in default to remit deductions at source to fiscal agencies. It takes precedence over any other security interest such as a mortgage or hypothec.

For example, a lender secures a loan on a building with a first-ranking mortgage. The borrower subsequently defaults to remit deductions at source. The fiscal agencies, both Canada Revenue Agency and Revenu Québec, will get paid before the lender.

An interesting illustration of how a bank arguably mismanaged a statutory deemed trust can be found in Banque Nationale du Canada v. Agence du Revenu du Québec et al., 2011 QCCA 1943.

The facts can be summarized as follows:

In May 1994, the Bank lends Canouxa (the “Borrower”) the sum of $175,000.00 secured by a first-ranking movable hypothec on property of the Borrower (the “Secured Property”). Furthermore, the loan is guaranteed by Egido (the (“Guarantor”) who takes a second-ranking movable hypothec on the Secured Property.

Between May 1995 and December 1999, the Borrower is in default to remit deductions at source to Revenu Québec.

On November 2, 1999, the Borrower is put into bankruptcy. The Bank is a secured creditor for the amount of $41,725.75 in virtue of its first ranking hypothec.

On February 10, 2000, the Bank serves on the bankruptcy trustee and registers a prior notice which is followed by a motion to foreclose i.e. take in payment the Secured Property.

On June 6, 2000, a consent judgment is rendered declaring the Bank to be the owner of the Secured Property and in consideration for the payment of the sum of $47,295.75, the rights resulting from the Judgment are assigned to the Guarantor.

In May 2001, Revenu Québec claims the Secured Property from the bankruptcy trustee to the extent of $21,560.73 on the basis of a statutory deemed trust as recognized by Sub-Section 67(3) of the Bankruptcy and Insolvency Act.

In June 2001, Revenu Québec learns that the Secured Property is no longer in the possession of the bankruptcy trustee and thereupon demands payment from the Bank in the amount of $21,560.73 based on the alleged statutory deemed trust.

The Bank argued that the funds it received from the Guarantor were not proceeds from the sale of the Secured Property that would be subject to a statutory deemed trust but instead, consideration for the assignment of the loan, adding further that Revenu Québec should have pursued the Guarantor who acquired the Secured Property, not the Bank.

Both the trial judge and the Court of Appeal rejected the Bank’s argument on the basis of their interpretation of the consent judgment that intervened between the Bank, the Borrower and the Guarantor, and concluded that what the Bank transferred to the Guarantor was not a hypothecary loan but rather title to the Secured Property itself.

The Court of Appeal made an interesting distinction between the statutory deemed trusts of the Canada Revenue Agency and Revenu Québec which are created by different statutes and are worded differently. The Federal statute (paragraphs 227(4) or (4.1) Income Tax Act) deems all property of the fiscal debtor to be subject to the statutory deemed trust. In contrast, Article 20 of the Quebec Tax Administration Act appears to limit the scope of the statutory deemed trust to the funds that the fiscal debtor should have remitted and does not necessarily attach to any other property of the fiscal debtor. In the case at bar, the Bank did not raise this argument and may have therefore implicitly acquiesced that the scope of Revenu Québec’s statutory deemed trust was as large as that of the CRA.

The Court of Appeal added that Revenu Québec had the evidentiary burden to establish that the fair market value of the Secured Property sold by the Bank to the Guarantor was at least equal to the amount of its claim. Revenu Québec did not offer such evidence but instead, submitted that the fair market value of the Secured Property was equivalent to the amount paid by the Guarantor.

In the circumstances, the claim of Revenu Québec should have been dismissed on the basis of lack of evidence. However, Revenu Québec was saved by the fact that the Bank had filed a certified evaluation of the Secured Property which established the value between $36,000.00 and $45,000.00.

In light of the foregoing, a lender should be prudent when evaluating the security given for a loan since subsequent events, i.e. the default of the borrower to remit deductions at source to the fiscal agencies, may significantly depreciate the value of the security. Aside from requiring additional guarantees or a greater contribution of equity from the borrower, the lender could require the borrower, as a condition of the loan, to provide periodic statements from the fiscal agencies to confirm that the borrower is in conformity with its statutory filing and remittance obligations.