August 24, 2020
Issue
Does the Superintendent’s levy provided for in section 147 of the Bankruptcy and Insolvency Act (BIA) apply to payments made to Her Majesty in right of Canada for amounts owed for unremitted source deductions?
Position
It is the Office of the Superintendent of Bankruptcy’s (OSB) position that the levy does not apply to amounts paid to Her Majesty in right of Canada when those amounts, owed for unremitted source deductions, are deemed to be held in trust by the insolvent person under subsections 227(4) or (4.1) of the Income Tax Act (ITA), subsections 23(3) or (4) of the Canada Pension Plan (CPP) or subsections 86(2) or (2.1) of the Employment Insurance Act (EIA).
Levy is likewise not payable when payments are made to Her Majesty in right of Canada following a request made by the Minister of National Revenue (MNR) under subsection 224(1.2) of the ITA to be paid by the insolvent person for a debt owed by one of the insolvent person’s creditors for unremitted source deductions. These payments constitute payments of property claims rather than payments made on account of creditors’ claims. Therefore, they are not subject to the levy.
Considerations
Subsections 227(4) and (4.1) of the ITA, subsections 23(3) and (4) of the CPP and subsections 86(2) and (2.1) of the EIA create deemed trusts in favor of Her Majesty in right of Canada for amounts held by a person having made source deductions under one of these three legislative acts and having failed to remit them.
Amounts deemed to be held in trust under these subsections are not property of the bankrupt that vest with the trustee (subsections 67(1)(a), (2) and (3) of the BIA). Accordingly, they are not available for distribution to the creditors. Any amount paid to Her Majesty in right of Canada in the context of these deemed trusts are not payments made by way of dividend; therefore, no levy is payable on these amounts (subsection 147(1) of the BIA). Moreover, in the levy calculation, the amounts paid under these deemed trusts are not to be considered in any way. Payments made under similar provisions in provincial legislation are to receive the same treatment (subsection 67(3) of the BIA).
It is important to make a distinction between amounts paid under deemed trusts created by virtue of the subsections of the ITA, the CPP or the EIA mentioned above and amounts paid in the context of a request made by the MNR under subsection 224(1.2) of the ITA.
In the latter scenario, a creditor of the insolvent person owes money to the MNR by virtue of a notice of assessment issued for, inter alia, failure to remit source deductions as well as for interest and penalties applicable on the unremitted amount (subsections 224(1.2) and 227(10.1) of the ITA). The MNR then has the option of presenting a request to the insolvent person to pay directly to Her Majesty in right of Canada (i.e. Canada Revenue Agency) any amounts owed to his/her creditor on account of this creditor’s liability under the ITA (subsection 224(1.2) of the ITA).
Although a deemed trust is created for the unremitted source deductions amount, this deemed trust applies on the creditor’s assets, not on the insolvent person’s assets. However, subsection 224(1.2) of the ITA transfers the property of those amounts to the MNR. It follows that the claim made by the MNR is to be considered a property claim. Section 81 of the BIA provides that property is to be delivered to the creditor having made a property claim. The delivery of property is not to be considered as a dividend, as it is not a distribution made on account of creditors’ claims. Therefore, no levy is payable (subsection 147(1) of the BIA).
Even though subsection 60(1.1) of the BIA states that a Division I proposal must provide for the payment in full of any amounts owed under subsection 224(1.2) of the ITA within 6 months of the court approval of the proposal (unless Her Majesty consents otherwise), this does not convert the property claim to a creditor claim; this only dictates the timing of the recovery of this property claim in the context of a Division I proposal in order to allow the debtor some breathing room to help maintain the viability of the proposal. Therefore, subsections 60(4) and 147(1) of the BIA do not apply and the right of the Crown to recover the property claim without incurring levy remains.