gst/hst headaches with real property transactions · 2. a supply of services in relation to real...

GST/HST Headaches with Real Property TransactionsPresenters: Janet E. Kasun and Salvatore MirandolaBorden Ladner Gervais LLP

Agenda

1. Introduction

2. Timing, Collection & Remittance

3. HST Transitional Rules

4. Recaptured ITCs

5. Place of Supply

6. Residential Properties

7. Public Service Bodies

8. CRA Superpriority2

Introduction

• “Real Property” includes– In Quebec, immovable property and every lease thereof

– Elsewhere, messuages, lands & tenements of every nature and description and every estate or interest in real property, whether legal or equitable

– Mobile home, floating home and any leasehold or proprietary interest therein

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Introduction

• Distinct treatment under ETA– All supplies taxable, “commercial activities”, unless exemption applies

– Supplies by way of sale taxable, even if supplier is non‐registered small supplier, unless exemption available

– Exception to usual “supplier collects” rules

• Plus all the usual ETA complexities

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Timing, Collection and Remittance Issues

When is Tax Payable?• for taxable supplies of real property by way of sale, tax is payable…

– for residential condominium units where possession is transferred before the condominium complex is registered as a condominium, on the earlier of (i) the day ownership is transferred and (ii) 60 days after the condominium complex is registered (168(5)(a) ETA)

– for other kinds of real property sales, on the earlier of (i) the day ownership is transferred and (ii) the day possession is transferred under the agreement for the supply (168(5)(b) ETA)

• for taxable supplies of real property by way of lease, licence or similar arrangement, tax is payable on the earlier of (i) the day payment is made and (ii) the day the payment becomes due (168(1) and 152(2)ETA)

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Who Collects and Remits the Tax?1. The general rule for most taxable supplies is that a

registered (and unregistered, for real property supplies) vendor/supplier collects and accounts for the HST/GST in respect of the supply. The general rule creates cash flow problems for purchasers of commercial real properties because of the timing differences between paying the tax and recovering the tax. (221(1) and 228(1)‐(2) ETA)• vendors whose only commercial activity is selling real

property otherwise than in the course of a business are not required to register for HST/GST (240(1)(b) ETA)

• such vendors that are required to collect HST/GST on sales of real property (i.e., where the alleviating rule described below does not apply) account for the tax on form GST62 (238(2) ETA); remit it to CRA by the end of the following month (245(1) ETA); and file a separate rebate application for HST/GST previously paid by the unregistered vendor (257 ETA)

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Who Collects and Remits the Tax?2. Special alleviating rule for many taxable supplies of real property

made by way of sale – recipient self‐assesses the tax and claims allowable input tax credits. (221(2) and 228(4) ETA)

3. Rule applies where:• the supplier is a non‐resident; OR• the recipient is registered (excluding situations where an individual is

buying a residential complex or cemetery plot); OR • in certain situations where real property (used residential complex) is

returned to the vendor, an election is made to treat the return transfer as taxable

4. Where the recipient is registered and acquires the property primarily for recipient’s commercial activities, the tax is reported on the GST/HST return for the period of the supply. (228(4)(a) ETA) The applicable input tax credits will typically be claimed in this return as well.

5. In any other case, the recipient reports the tax on form GST60 and pays the applicable tax to CRA. (228(4)(b) ETA)

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Notes• Although the vendor is not required to collect tax

(suggesting that the vendor may choose to collect the tax) under 221(2) ETA, the purchaser mustself‐assess the tax under 228(4) ETA. Accordingly, a purchaser who pays the vendor can still be assessed for not having paid the tax to CRA!

• Vendor should ensure that the purchaser is registered before agreeing not to collect the tax, since there is no due diligence defence if the vendor has mistakenly failed to collect HST/HST in circumstances where the alleviating rule does not apply

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Notes• Call the CRA Business Enquiries telephone

number (1‐800‐959‐5525) and provide the name and Business Number

• Search the CRA GST/HST Web Registry: cra.gc.ca/gsthstregistry

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Notes• Obtain a purchaser’s representations, such as:

– Purchaser is registered for HST/GST– Registration number– If possible, copy of CRA’s confirmation letter re

registration– Purchaser is acquiring the real property on its own

account and not as agent– Acknowledgment that vendor is relying on the

purchaser’s representations regarding HST/GST to support not collecting the tax

– An indemnity – purchaser agrees to pay HST/GST plus interest and penalty if the vendor is assessed for failing to collect

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A Few CasesFranklin Estates v. Canada, [1994] GSTC 64 (TCC)– purchaser paid GST directly to vendor on sale of land – purchaser should have self‐assessed the GST because

the alleviating rule applied– vendor did not remit the GST to Revenue Canada– Revenue Canada assessed the purchaser for the tax– TCC upheld the assessment, because the obligation to

self‐assess is not permissive for the purchaser

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A Few CasesAménagements CLC Inc. v. Verdon et al, 2010 GTC 1062 (Court of Quebec, Civil Division, Small Claims)– vendor sold land to two persons who provided false GST

and QST registration numbers to the vendor– vendor was reassessed for failing to collect GST and QST

– the alleviating rule did not apply because the purchasers were, in fact, NOT registered

– vendor sued the purchasers for damages– court ordered the purchasers to reimburse the vendor

for the GST and QST assessed to the vendor, plus interest

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HST Transitional RulesKey Dates

• March 26, 2009 Ontario announces HST

• July 23, 2009 B.C. announces HST

• Oct. 14, 2009 to April 30, 2010 no collection, but possible self assessment

• May 1, 2010 suppliers collect (where applicable)

• July 1, 2010 IMPLEMENTATION

• Aug. 26, 2011 BC Referendum results

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Transition – Non‐Residential Real Property

• HST applies where both ownership and possession transferred on or after July 1, 2010– Deeming rule where construction 90% or more complete

• Progress payments & holdbacks HST applied where payment due after Oct. 14, 2009 and goods delivered/services performed after June 2010– Holdback treated the same as related payment

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Transition – Commercial Leases

• Generally HST applies to portion of lease interval after June 30, 2010

• Exceptions – lease interval starts before July 1 and ends before July 31, 2010

– Payment made before May 1, 2010 by consumer

– Payment made between Oct. 14, 2009 and April 30, 2010 self assessment by non‐consumer not entitled to full ITC

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Transition – New Housing

• 5% GST only if either ownership or possession transferred prior to July 1, 2010– GST new home rebate

• HST where both ownership and possession transferred on or after July 1, 2010– Except where written agreement on or before June 18, 2009 (Ont.), November 18, 2009 (B.C.)

– RST transitional rebate available

– HST new home rebate

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Grandparenting – New Housing

• Agreement on or before June 18, 2009 (Ont.) November 18, 2009 (B.C.)– Detached, semi‐detached or attached house purchaser

must be individual, Condos purchaser need not be individual

• Does not apply to apartment buildings (other than condos), mobile homes, modular homes

• Builder must pay transitional tax adjustment where home completed after July 1– Can claim ITCs for all GST/HST paid on costs

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Grandparenting – Modification of Agreement

• Grandparenting will apply if agreement modified BUT NOT if a new agreement– Can add upgrades

– Can’t switch lot

– Can assign if all parties at arm’s length• Consideration paid to original buyer under assignment agreement is a separate sale of an interest in real property (GST/HST based on date of agreement)

• First reseller may also be grandparented

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RST Transitional Rebate• Home at least 10% complete at July 1

• May be claimed by:– Individual purchaser of single family home, builder of condo, apartment building, rental units

– Available where purchase for rental, resale or personal use

• Calculated based on estimated RST content based on either square footage or selling price & % complete

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Recaptured ITCs• Large businesses and certain financial institutions– Group sales in excess of $10M (including intercompany sales) (excluding sales of capital real property)

– Bank, trust company, credit union, insurer, segregated fund, investment plan, CDIC

– But not public service body, farmers, SLFI

• Energy, telecommunications, road vehicles, meals & entertainment

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RITCs and Real Property

• Energy – electricity, gas, steam & anything else that can be used to generate energy in certain manners

• Telecommunications service or access to a telecommunications circuit– Excludes access to internet, web‐hosting service, toll free numbers

• BUT not if for resupply

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RITCs & Landlord/Tenant

• Energy acquired by tenant as part of a single supply of leased real property not subject to recapture

• Landlord supplying energy as part of supply of leased property will be subject to RITC

• Applies even where tenant a manufacturer, would not be subject to RITC

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Place of Supply – Introduction1. Generally, GST/HST applies to supplies of real property and supplies of services

in relation to real property situated in Canada (other than exempt supplies).

• In Stantec Inc. v. The Queen, 2008 GTC 579 (TCC), the Court considered whether property and services were acquired “in relation to” shares of the capital stock of a related corporation for purposes of the holding company input tax credit rules in section 186 ETA. Justice Miller concluded as follows:

“Reasonably regarded in relation to” is an expression of the widest possible import. The Supreme Court of Canada addressed the phrase “in relation to” in Slattery (Trustee of) v. Slattery* suggesting it implies a wide, rather than narrow, view in connecting two matters. When this expansive approach has a lead‐in with the words “reasonably regarded”, I reach the inevitable conclusion that it should not take very much to draw a nexus between acquiring the listing services and the shares of either Keith Companies or Stantec California.

There is no question there is a strong nexus between the listing services and the Stantec shares — they were the very shares listed, but the connection need not be one of a primary nor substantial nor directly related nature. The concept of “in relation to” is not one of prominence let alone exclusivity.

• TCC judgement affirmed by FCA at 2009 GTC 2035

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Place of Supply – Introduction

2. GST (5%) is imposed on every recipient of a taxable supply made in Canada of real property (subsection 165(1) ETA). The general place of supply rules in section 142 of the ETA are relevant to this determination.

3. HST (rate varies) is imposed on every recipient of a taxable supply made in a participating province(subsection 165(2) ETA). The particular rate of GST or GST/HST will depend on the nexus of the real property to particular province(s) – this rule engages the provincial place of supply rules. (Schedule IX and Regulations)

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Place of Supply – General Place of Supply Rules

1. A supply of real property is deemed to be made in Canada if the real property is situated in Canada. (142(1)(d) ETA)

2. A supply of services in relation to real property is deemed to be made in Canada if the real property is situated in Canada. (142(1)(d) ETA)

3. A supply of real property is deemed to be made outside of Canada if the real property is situated outside of Canada. (142(2)(d) ETA)

4. A supply of services in relation to real property is deemed to be made outside of Canada if the real property is situated outside of Canada. (142(2)(d) ETA)

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Place of Supply – Non‐Resident Override Rule for Services

Section 143 ETA• The override rule does not apply to supplies

of real property, but does apply to supplies of services in relation to real property.

• Supplies of services that would otherwise be considered to be made in Canada are deemed to be made outside of Canada unless:

– The supply is made in the course of a business carried on in Canada; or

– At the time the supply is made, the supplier is registered

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Place of Supply – Provincial Place of Supply Rules

• A supply is deemed to be made in a province if it is made in Canada and made in a particular province following the rules in Sch. IX (section 144.1 ETA and also the New Harmonized Value‐added Tax System Regulations)

• A supply made in Canada that is not made in a participating province is deemed to be made in a non‐participating province. (144.1 ETA)

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Schedule IX (real property)

• A supply of real property is made in a province if the property is situated in the province.

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New Harmonized VAT System Regs (services in relation to real property) –ss. 14 and 18• A service in relation to real property that is situated in Canada and

situated primarily (more than 50%) in the participating provinces is made in the participating province with the greatest proportion of the real property.

• If the property is equally situated in two or more participatingprovinces, the supply is deemed to be made in the province with the highest HST rate.

• If there is more than one province with the same HST rate in Rule 2, then choose the province most closely connected with the business address of the supplier that is most closely connected with the supply. If still unclear (because there is no relevant business address in one of the relevant participating provinces), choose the province physically closest to the business address of the supplier that is most closely connected with the supply.

• A service in relation to real property is made in a non‐participating province if the property is not situated primarily (50% or more) in participating provinces.

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Place of Supply – Allocations

1. If the real property is situated partly in one province, and partly in another province or outside Canada, each part is deemed to be a separate taxable supply for separate reasonably attributable consideration. The HST applies to the part situated in the participating provinces. (section 136.2 ETA)

2. For services relating to real property – if the real property is situated inside and outside of Canada, only the proportion of the service that relates to Canadian real property may be deemed to be situated in a participating province.

3. Leases of real property – deemed separate supplies for each lease interval. Whether the supply by lease, etc. is made in or outside Canada is determined in the first lease interval. (section 136.1 ETA)

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Place of Supply – Examples – Real Property

(from GST/HST TIB‐103)

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Place of Supply – Examples –Services in Relation to Real Property

(from GST/HST TIB‐103)

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Residential Properties ‐ General

• Subject to tax when “new”– New construction

– Substantial renovation

– Conversion from commercial use

• Subsequently exempt– Resale

– Rental

• Rebates reduce tax burden

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Used Residential Property

Exemption for Sale (s. 2 Part I Sch. V ETA)

• Sale of a “residential complex”

• By a person who is not a “builder” UNLESS– An ITC was claimed by the vendor on acquisition or improvement; or

– In limited circumstances, the parties elect that the transaction be treated as taxable (sale back to original vendor)

• Defined terms are key

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“Residential Unit”• Detached house, semi‐detached house, row house, condo, mobile home, floating home or apartment, suite or room in a hotel, motel, inn, boarding house, lodging house, residence for students, seniors or other individuals– Similar premises

• IF used, last used or if never used intended to be used as a place of residence of individual

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“Residential Complex”

• one or more “residential units” together with immediately contiguous land necessary for residence

• Whole of building or unit used primarily as a place of residence of an individual or relation

• Mobile home, floating home

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“Residential Complex”

• NOT building or part of building (unless used primarily as a place of residence of an individual) that is:– a hotel, motel, inn, boarding house, lodging house or other similar premises AND

– All or substantially all of the leases, licenses or similar arrangements provide or are expected to provide for periods of continuous use or possession of less than 60 days

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“Builder”

• Either builds or substantially renovates the residential complex OR is deemed to have done so (generally conversion from commercial use)

• Can include a mortgagee or contractor who has an interest in the property

• Does not include a person building his own for purely personal purposes (not business/nature of trade)

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“Relation”

• Individuals connected by:– Blood relationship (one is the child or other descendant of the other, or siblings)

– Marriage (one married to the other or to a person connected by blood relationship to the other)

– Common law partnership (similar to marriage)

– Adoption

• Also includes former spouse and former common law partner

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“Substantial Renovation”• All or substantially all of the building of the building other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced

• Conversion of non‐residential property to residential is deemed to be a substantial renovation (s. 190(1) ETA)

• Non‐substantial renovations result in deemed supply and self assessment (s. 192 ETA)

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Residential Definitions

A Few Cases

Wotherspoon v. The Queen 2011 GTC 984• Purchased ski chalet for personal use

• Received new home rebate

• Argued: GST should not have applied to purchase

• Unsuccessful, not a residential complex as vendor rented for periods less than 60 days

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Residential Definitions

A Few Cases1096288 Ontario Ltd. v. The Queen 2011 GTC 2008 (FCA)

• Homes moved from one lot to another and installed on new foundation– Once land and house separated, no longer “residential

complex”

– Company “builder” as preparing foundation and installing house “construction”

• Sale of home subject to GST

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Residential Self Supply RulesSingle Unit Complex/Condo Unit• leased or occupied by builder

– Self supply, tax on FMV (s. 191(1) ETA)

– May claim ITCs/rebate for costs (if not previously claimed)

• ITC if registered (s. 193 ETA), rebate if not (s. 257 ETA)

– May be entitled to new home rebate

• Does not apply to owner built home where no business/trade (see definition of “builder”)

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Residential Self Supply Rules

Condo unit

• possession given before registration, deal falls through– Builder deemed to have made a supply of the unit when the

agreement to purchase/sell is terminated, tax on FMV (s. 191(2) ETA)

– Necessary because tax is not payable until legal title is transferred or 60 days after registration of the complex (s. 168(5) ETA)

– Subsequent supply by builder (sale, rental, occupancy) exempt

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Apartment Building• deemed supply of entire complex when:

• Construction or substantial renovation substantially completed and

• Possession or use of a unit given to the first tenant or occupied by builder

• Tax payable based on FMV of complex (s. 191(3) ETA)

• May claim ITCs/rebate for GST on construction costs

• New housing rebate may be available

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Addition to a multiple unit residential complex

• Deemed supply of addition on later of substantial completion or first occupancy (similar to apartment building) (s. 191(4) ETA)

• Tax on FMV, ITC/rebate available for tax paid on construction costs

• New housing rebate may be available

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Residential Self Supply RulesExceptions• Personal use (s. 191(5) ETA)

– Builder an individual

– Complex used primarily as a place of residence of individual or relative

– Not used primarily for any other purpose; and

– Individual claimed no ITCs

• Student residence (s. 191(6) ETA) built by university, college or school authority

• Communal organizations (s. 191(6.1) ETA)

• Remote work sites (s. 191(7) ETA) where complex supplied to employees or contractors of builder

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Residential Self Supply RulesA Few Cases

Résidences Majeau Inc. v. R., [2010] G.S.T.C. 10 (F.C.A.)– Owner of apartment building for seniors built 18 unit addition

– Construction costs $1.3 million, claimed ITCs of $90,000

– Valued addition at $700,000, remitted GST of about $50,000

– Trial Court found FMV determined in “a very superficial, not to say rather accommodating manner”, “the FMV arrived at [by the appraiser] appears to have been determined, if not dictated by the Appellant”

– Tax Court found cost method appropriate, appeal dismissed, FCA upheld

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Residential Self Supply RulesA Few Cases

Coates v. R., 2011 TCC 74 (Informal)– Coates built 4 houses on the same street in 6 years, occupied each

one

– Case related to the third of the 4

– Found to be a “builder” as engaged in an adventure in the nature of trade, clear pattern of building a home, living in it for a period of time, selling at a profit and then starting the process over again, evidence showed at least a secondary intention of selling house

– Held that exception in 191(5) applied as, by definition a builder must be engaged in business or trade, therefore secondary intention was not relevant as long as property actually used as builder’s residence

– Inconsistent with prior decisions which interpreted “primarily” as intention to live in home permanently

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A Few Cases

Rob Walde Holdings Ltd. v. R. 2009 TCC 74• Farming corporation build residence, 50% home for

shareholders, 50% business

• Split costs, corporation claimed ITCs for half, shareholders claimed new home rebate

• CRA assessed self‐supply, allowed full ITCs & landlord rebate

• Entire building “residential complex” as family had access, corporation “builder”

• ETA does not permit “prorating”50

New Housing Rebates

• Owner occupied – Purchased from builder (s. 254 ETA) after construction/renovation

complete

– Built by owner (s. 256 ETA)

• Both new construction and substantial renovations

• Criteria– Primary place of residence (CRA Policy P‐228)

• Not the same as “principal residence” for income tax

• First in order of importance

• Intention test

– GST paid

– Purchaser or relation first to live in home

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New Housing Rebates

• Landlord (s. 256.2 ETA)– Amounts the same as owner occupied

• Key distinctions: – Individual owner may assign rebate to builder who can credit it towards the HST on the purchase price

– Landlord rebate cannot be assigned to builder,

– “owner occupied” may only be claimed by individuals

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New Housing Rebates• Provincial and federal portion calculated separately– Federal rebate 36% of federal portion of tax for homes up to $350,000 value, phased out to $450,000 and eliminated for higher priced homes

– Ontario & B.C. rebate administered by CRA based on first $400,000/$525,000 of price, no phase out

– Nova Scotia’s rebate only applies to first time buyers, no longer administered by CRA

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New Housing Rebates

A Few Cases

Nadeau c. R. 2011 GTC 973• Renovations to basement more than doubled municipal

assessment value, cost more than purchase price

• Court applied criteria from CRA Bulletin B‐092A– Cost/market value not relevant

– Addition must double size (unfinished portion not considered)

– Existing residence must case to exist

• Held: major renovations, but not “substantial”, no rebate

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New Housing Rebates

A Few Cases

Goyer c . R 2010 TCC 511• Ms. Goyer purchased lot with two friends

• Friends were listed on all documents as owners, Ms. Goyer claimed only for financing reasons

• Build home

• Rebate denied, only primary place of residence of Ms. Goyer, not the friends

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New Housing Rebates

A Few CasesLemieux c. R. 2009 TCC 17

• Manager of group home built addition on top of garageto accommodate his family

• Rebate claim denied– Not a separate residential complex

– Not a substantial renovation

• Cannot circumvent $450,000 cap by building in stages

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Public Service Bodies ‐ Introduction

• There are special rules which apply to dealings in real property by public sector bodies

• Public service bodies are defined as non‐profit organizations, charities, municipalities, school authorities, hospital authorities, public colleges, and universities (123(1) “public service body”ETA)

• Not all exemptions or rules apply the same way to supplies to or by all forms of public service bodies, so check the relevant provisions carefully

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Public Service Bodies – Supplies to Public Service Bodies

• Generally, public service bodies are subject to the normal rules for paying GST/HST in respect of purchases or leases of real property or services in respect of real property

• PSBs are entitled to claim rebates of part (or all, in some cases) of the otherwise unrecoverable GST/HST paid on most of their purchases – there are separate recoverable percentages for different public service bodies, and separate rates for the federal GST and provincial HST in participating provinces (259 ETA)

• Most PSBs are entitled to full input tax credits for purchases of capital real property intended to be used primarily (more than 50%, according to CRA’sinterpretation of “primarily”) in commercial activities, and no input tax credits for purchases of capital real property not intended to be used primarily in commercial activities (209 and 199 ETA)

• There are change‐in‐use rules that apply to PSBs where the use of capital property changes from non‐commercial to primarily commercial (claim ITCsbased on basic tax content) or from primarily commercial to non‐commercial (self‐assess and remit tax) (209 and 199 ETA)

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Public Service Bodies – Supplies by Public Service Bodies

1. There is a general exemption for supplies (sales, leases) of real property made by public service bodies (other than financial institutions, municipalities or governments). (V‐VI‐25 for non‐charities; V‐VI.1‐1 for charities)

2. There are a number of exclusions: (V‐VI‐25 for non‐charities; V‐VI.1‐1 for charities)

• Sales of residential complexes• Deemed supplies of real property (eg., deemed supplies as a result

of changes in use of real property from primarily commercial to primarily non‐commercial)

• Sales of real property to individuals or personal trusts (exception: where there is a structure on the property that was used by the PSB as an office or in the course of commercial activities or making exempt supplies)

…..

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2. There are a number of exclusions: (V‐VI‐25 for non‐charities; V‐VI.1‐1 for charities) (con’t)

• Supplies of real property where the property was used primarily (more than 50%) in commercial activities immediately before the supply

• supplies of designated municipal property, where the supplier is a designated municipality

• (for NPOs, municipalities, universities, public colleges or school authorities) certain leases of short‐term accommodation

• (for non‐charity PSBs) supplies of commercial real property made by way of lease (where continuous possession is less than one month) or licence, and the supply is made in the course of a business

• (for non‐charity PSBs) certain supplies of parking spaces made by way of lease, licence or similar arrangement in the course of a business

• (for non‐charity PSBs) certain supplies of real property that the PSB seized or repossessed (unless the supply is specifically exempt under another provision)

• Supplies of real property in respect of which a section 211 election is in effect (see below)

3. Most supplies of real property made by municipalities are taxable.

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4. PSBs can make an election under section 211 ETA to treat certain otherwise exempt sales or leases of real property as taxable supplies.

• Election can be made for (i) capital real property; (ii) real property held in inventory for purposes of supply; and (iii) real property acquired by lease/licence/similar arrangement for the purpose of supply by lease/licence/ similar arrangement or assignment of the arrangement

• May provide the supplier with input tax credit entitlements in respect of acquisition of the property

• Recipient of the now taxable supply may be indifferent to being charged the tax (i.e., if the recipient is acquiring the property for its commercial activities)

• A section 211 election supersedes the “primary use” rule for claiming ITCs (i.e., ITCs based on percentage use in commercial activities), and the change‐in‐use rules apply based generally on the percentage change in use from commercial to non‐commercial or from non‐commercial to commercial

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CRA Superpriority ‐ Overview• Every person who collects an amount as or on

account of HST/GST is deemed to hold the amount in trust for the Crown (222 ETA)

– This deemed trust overrides a “security interest”– The deemed trust is extended to property equal in

value to the amount collected as or on account of tax

– A “security interest” is defined not to include a “prescribed security interest”

– The deemed trust does not apply at or after a person becomes a bankrupt within the meaning of the Bankruptcy or Insolvency Act

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CRA Superpriority – Prescribed Security Interest

• Security Interest (GST/HST) Regulations, enacted March 3, 2011 and made retroactive to October 20, 2000

• Defines a prescribed security interest (i.e., a security interest that is not trumped by the deemed trust created in section 222 ETA) in the following manner:

– the part of a mortgage or hypothec securing the performance of an obligation by a person that encumbers land or a building, if the mortgage or hypothec is registered before the HST/GST is collected

– the prescribed security interest includes the amount of any insurance or expropriation proceeds relating to the mortgaged land or building

– the prescribed security interest excludes a lien, a priority or other security interest created by statute; an assignment or hypothec of rents or leases; or a mortgage interest in any equipment or fixtures that anyone has the right to remove or dispose of separately from the land or building

– the prescribed security interest at any particular time is limited to the outstanding amount of the debt obligation secured by the mortgage or hypothec that is outstanding at the time, less (a) the value of the rights of the secured creditor securing the debt obligation (eg. the value of other collateral), and (b) all amounts subsequently applied to reduce the debt obligation

• Accordingly, any potential or actual realizations by the secured creditor will reduce the “prescribed security interest” and increase the value in the land or building available to satisfy the deemed trust

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CRA Superpriority – Century Services

• The deemed trust is not effective in bankruptcies, on a plain reading of the ETA: 222(1) and (3)

• There was debate in the case law on whether the deemed trust was effective in the course of proceedings under the Companies Creditors’ Arrangement Act (more flexible restructuring regime for insolvent companies) because of conflicting provisions in the ETA and the CCAA, both of which purported to apply despite other legislation

• The debate was resolved by the Supreme Court of Canada in Re Ted Leroy Trucking [Century Services] Ltd., 2011 DTC 5006 – the deemed trust is not effective during CCAA proceedings either

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