In a decision released today, the Supreme Court of Canada settled the ongoing controversy concerning the liability of a financial institution to the tax authorities when it repays its loans by way of set-off against its own term deposit at a time when the borrower is also indebted to the tax authorities for payroll source deductions.
The Federal and Quebec Provincial Tax Authorities have a first ranking deemed trust in all the property of a tax debtor for an amount equal to the amounts deducted from employee salaries, which arises upon failure of the employer to remit same to the tax authorities. That deemed trust takes priority over all security interests held by a financial institution and, as such, would have priority over the pledge of a term deposit from a third party. The question was whether the same would apply if the term deposit was an amount due from the same entity to whom the loan was owed.
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