Principal Issues: [TaxInterpretations translation] If a property is sold by a tax debtor for proceeds equal to the FMV of that property to a bona fide third party, will the deemed trust under 227(4.1) cease to apply to the sold property, and thereafter apply to the proceeds of sale, whether or not such sale occurs in the ordinary course of the vendor's business?
Position: General comments.
Reasons: Questions of fact.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 31
Deemed trust
Subsection 227(4) provides that any person who deducts or withholds an amount is deemed to hold the amount in trust separate and apart from the property of the person. The property of the taxpayer is then deemed, in the event of non-payment of the amount, to be held in trust for Her Majesty under subsection 227(4.1) and to not be part of the taxpayer's patrimony.
Where a property is sold by a taxpayer to an unrelated third party, the treatment of the application of the deemed trust and the "floating charge" it creates on the assets of the vendor is a recurring issue, particularly with respect to the extent of representations to be required of the vendor.
Such deemed trust does not affect a particular property of the taxpayer, but rather the totality of the taxpayer’s property to the extent that a specified amount has not yet been paid to the tax authorities. Subsection 227(4.1) also specifies that, in the event of the sale of a property, the proceeds of disposition derived from it must be paid to the Receiver General. This suggests, as the Supreme Court of Canada stated in First Vancouver Finance v. MNR (2002 DTC 6998) that the deemed trust ceases to apply to the property sold to a third party, but continues to apply to the proceeds of disposition of the property.
Questions to the CRA
a) In the event of the sale of a property at fair market value to a bona fide third party, and whether or not the sale occurs in the ordinary course of the vendor's business, can the CRA confirm that a deemed trust does not prevent the sale of the property to a third party?
b) Can the CRA confirm that a deemed trust will cease to apply to a property sold to a bona fide third party purchaser and that it will then apply only to the proceeds of disposition of that property?
CRA Response
The rights granted to Her Majesty pursuant to subsections 227(4) and 227(4.1) establish a form of "floating charge" whose purpose is to preserve the State's claim. In broad terms, a deemed trust established under those provisions ceases to apply to property of a tax debtor when the tax debtor disposes of the property in the normal course of business for FMV consideration to an arm's length bona fide purchaser. That position is supported in particular by the Supreme Court of Canada in First Vancouver Finance.
It appears to us that the sale (as understood within the meaning of Article 1708 of the Civil Code of Québec) of a property by a tax debtor, made for consideration corresponding to the fair market value of the property and to an arm’s length third party, would not result in the impoverishment of the deemed trust, and would generally result in the trust thereafter applying to the proceeds of the sale held by the tax debtor, despite the fact that the sale may have been made outside its normal business activities.
However, the deemed trust also applies to property held by a secured creditor within the meaning of subsection 224(1.3) which, in the absence of a security interest within the meaning of that subsection, would be that of the tax debtor. In that regard, it is understood that the wording of the preceding paragraph shall in no way be interpreted so as to restrict the application of subsection 227(4.1). Thus, the scope of the deemed trust cannot be limited by the fact that a secured creditor could in certain circumstances be equated with a third party purchaser.
Yannick Roulier
(613) 957-2134
2011-041308