In a Canadian corporate bankruptcy, the Canada Revenue Agency (CRA) holds a “super priority” over unremitted source deductions like employee CPP and EI. These funds are considered to be held in a “deemed trust.” This means the CRA legally gets paid from the sale of the company’s assets before almost anyone else, including the banks that hold secured mortgages.
When a business goes bankrupt in Canada, a frantic race begins among creditors to claim the remaining assets. Typically, secured creditors like banks (who hold mortgages or equipment liens) get paid first, while unsecured creditors like local suppliers get pennies on the dollar. However, the Canada Revenue Agency (CRA) wields a legal weapon that completely disrupts this standard hierarchy: the deemed trust.
If your failing business in Ontario, Alberta, or anywhere else in Canada deducted money from employees’ paycheques for the Canada Pension Plan (CPP), Employment Insurance (EI), or income tax, but failed to send that money to the government, you have created a massive legal issue. The law views this money not as corporate revenue, but as money belonging to the Crown that you were merely holding in trust. Because of this, the CRA jumps to the very front of the line, utilizing a “super priority” claim that can devastate the recovery plans of both secured lenders and business directors.
Step-by-Step Process: How Deemed Trusts Impact Bankruptcy
Understanding how the CRA enforces a deemed trust is vital for any business owner considering closing their doors. Here is how a Licensed Insolvency Trustee (LIT) must handle these powerful government claims.
Step 1: The Trustee Audits Unremitted Deductions
When a Licensed Insolvency Trustee takes over a bankrupt company, their first duty is to examine the payroll and tax accounts. They must calculate exactly how much the company owes in unremitted CPP, EI, and employee income tax. They will also calculate unpaid GST/HST, which operates under a similar, though slightly different, priority system.
Step 2: The CRA Asserts its Super Priority
Once the bankruptcy is filed, the CRA formally asserts its deemed trust claim. Under Section 67(3) of the Bankruptcy and Insolvency Act (BIA), the assets of the bankrupt company are legally considered to not even belong to the company up to the amount of the unremitted payroll deductions. This effectively shields that specific value from all other creditors.
Step 3: Asset Liquidation and Distribution
The LIT will sell the company’s assets-such as real estate, machinery, and inventory. Before the bank can take the proceeds from the sale of the building they hold a mortgage on, the LIT must carve out the exact amount owed to the CRA for the deemed trust and hand it over to the government.
Step 4: Assessing Director Liability
If the sale of the corporate assets is not enough to cover the unremitted source deductions and GST/HST, the nightmare shifts to the individuals running the company. Under the Income Tax Act and Excise Tax Act, corporate directors are personally liable for these specific debts. The CRA will pierce the corporate veil and aggressively seize the personal bank accounts and homes of the directors to recover the shortfall.
Comparing Creditor Priorities in Bankruptcy
| Creditor Type | Examples of Debt | Order of Payout |
|---|---|---|
| Super Priority (Deemed Trust) | Unremitted CPP, EI, and employee income tax. | First. Paid before all other secured and unsecured claims. |
| Secured Creditors | Bank mortgages, PPSA equipment loans. | Second. Paid from the specific assets they hold security over. |
| Unsecured Creditors | Suppliers, corporate credit cards, utilities. | Last. Usually receive a small fraction of what they are owed. |
How Much Does it Cost in Canada?
Dealing with CRA super priority claims is a high-stakes financial scenario that requires expert legal and financial guidance.
- The CRA Debt Itself: This includes the principal amount of unremitted taxes, plus severe compounding interest and gross negligence penalties.
- Licensed Insolvency Trustee Fees: Administering a corporate bankruptcy generally costs $10,000 to $25,000+ CAD, depending on the complexity of the asset sales.
- Tax Lawyer Fees: If directors need to defend themselves against personal liability assessments (e.g., arguing a “due diligence” defence), legal retainers generally start between $5,000 and $15,000 CAD.
How Long Does the Process Take?
Resolving deemed trust claims heavily dictates the timeline of a business bankruptcy. While a standard corporate liquidation might take 9 to 12 months, negotiating with the CRA over exact payroll figures and fighting personal director liability assessments can stall the final closure of the bankruptcy for 2 to 3 years. Directors must act immediately to secure counsel before the CRA issues personal garnishments.
Frequently Asked Questions (FAQ)
Does a Division I Proposal stop the CRA deemed trust?
No. Under a commercial restructuring proposal, the Bankruptcy and Insolvency Act explicitly requires that all unremitted source deductions be paid in full, usually within 6 months of court approval, for the proposal to be legally viable.
Is GST/HST considered a deemed trust in bankruptcy?
Unremitted GST/HST is a deemed trust while the company is operating. However, interestingly, once a company officially files for bankruptcy, the CRA’s super priority for GST/HST is reversed, and they become a regular unsecured creditor for those specific tax amounts.
Can the bank stop the CRA from taking the money?
Generally, no. The super priority mechanism was specifically designed by Parliament to defeat the claims of secured lenders. Banks despise deemed trusts because it directly reduces the value of the collateral they hold.
How can a director avoid personal liability for CRA debt?
To avoid personal liability for unremitted payroll taxes, a director must prove a “due diligence” defence-meaning they took active, reasonable steps to ensure the taxes were paid, but were prevented by circumstances outside their control. Ignorance of the company’s finances is not a valid defence.
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