Bobby Solhi On The Recent GST/HST Decision In TD Bank v. Canada

Bobby Solhi of TaxChambers LLP is quoted by Bloomberg BNA International Tax Monitor on the recent Federal Court's ruling in Canada v. Toronto-Dominion Bank case.

Below is an excerpt of the featured article for Bloomberg BNA:

Canadian Court Orders Bank to Pay Customer's Tax Debt

Ruling confirms lender liable for customer's tax debt after loans repaid
Tax lawyers suggest ruling open to appeal

By Peter Menyasz

A recent court ruling in Canada shows the tax agency has the power to extract money from financial institutions to cover their customers' tax debts, even if the bank didn't know the debts existed.

The Canadian Federal Court ruled Toronto-Dominion Bank must pay the Canada Revenue Agency C$67,854 ($52,195), plus interest, for a former mortgage customer's tax debt.

The ruling, published June 12 but issued May 25, should be a cautionary tale for banks as it confirms that debts to the tax agency take priority, tax lawyers told Bloomberg Tax.

The ruling could face further review by higher courts if the bank decides to appeal.

The ruling is based on deemed trust rules in Section 222 of the Excise Tax Act, which gives priority to certain tax debts over secured creditors' claims.

Businesses that collect the federal value-added Goods and Services Tax—or the Harmonized Sales Tax, which incorporates provincial sales tax—are deemed to be holding the money in trust for the federal government. If the amounts aren't remitted when due, businesses are assessed and directed to pay immediately in full, including interest and penalties that may apply.

The Bank's Loss

Toronto-Dominion gave an independent landscaper a home equity line of credit and mortgage in 2010, both secured by the customer's home. At the time, the bank wasn't aware of the customer's tax debt. The customer, referred to only as "Mr. Weisflock," sold the house in 2011 and fully repaid the line of credit and mortgage.

The customer should have paid his tax debt with the money realized from the sale, but chose to repay the bank instead, Justice Sebastien Grammond said in the ruling, which awarded the government pre- and post-judgment interest.

The Canada Revenue Agency issued demand letters to the bank in April 2013 for the customer's failure to remit federal Goods and Services Tax in 2007 and 2008, but the bank refused to pay.

"The bank's loss in this case is the result of the operation of rules establishing priorities among creditors," he said.

The court rejected the bank's defense that it was a "bona fide purchaser for value," so it should be exempt from the rule requiring it to pay. It rejected the bank's defense even though it acknowledged rulings by the Supreme Court of Canada and Ontario Court of Appeal which supported use of the defense by an individual receiving funds, including payment of an existing debt, who was unaware the money was obtained fraudulently.

"Even if this result appears harsh, it was clearly contemplated by Parliament," the ruling said.

The Canada Revenue Agency reviews all rulings, and both parties have 30 days to appeal, agency spokesman Etienne Biram said June 13. "It would be inappropriate to comment further."

Toronto-Dominion Bank recognizes the court's decision, but can't provide further comment because a decision on whether to appeal is pending, Julie Bellissimo, a spokeswoman for TD Bank Group, told Bloomberg Tax June 13 in an email.

Bank Should Consider Appeal

The court relied in part on a 2017 ruling set to be reviewed by the Supreme Court of Canada, Toronto tax lawyer Bobby Solhi, a partner with TaxChambers LLP, told Bloomberg Tax.

"Toronto-Dominion may want to appeal," he said.

The ruling reflects that deemed trust rules are "quite strict," and should be a warning to lenders to investigate a borrower's existing tax obligations, Toronto sales tax specialist Simon Thang said June 12.

The lender made a "creative" argument that the common law "purchaser for value" exception should apply, but the court rejected it, Thang, a principal with Thang Tax Law, told Bloomberg Tax. "It will be interesting to see if this argument is appealed."

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

*Bobby B. Solhi is a GST/HST tax lawyer and partner at TaxChambers LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Bobby Solhi On The Recent GST/HST Decision In TD Bank v. Canada