All About Estates

DEEMED TRUST: TAX DEBTS AND PROCEEDS OF INSURANCE

In Canada (A.G.) v Nortip Development 2019 NLCA 34, a company fell behind in remitting payroll withholdings and related amounts for several periods over a two-year period to the Canada Revenue Agency (“CRA”). Around the same time, a property with a mortgage owned by the same company, was destroyed by fire.

A portion of proceeds of insurance on that property (equal to the amount owed to the CRA) were claimed by both the CRA and the mortgagee of the property. A Court order was issued requiring that the disputed amount be paid into Court pending a ruling by a judge on the matter.

The judge determined that, under the terms of the mortgage, any money payable under the contract of insurance was not the property of the company (mortgagor and tax debtor) because of the standard mortgage clause. The judge held that the effect of the standard mortgage clause was to create a separate independent, and distinct contract of insurance between the mortgagee and the insurer. While the mortgage itself constituted a security interest, the separate contract of insurance created by the standard mortgage clause did not create a security interest within the meaning of the relevant sections of the Income Tax Act (the “Act”). The proceeds of insurance was, consequently, not subject to the deemed trust rule of the Act.

The Crown appealed from that decision.

The Court of Appeal held that the facts of the appeal were not in dispute and that the appeal turned on the question of the correct interpretation of both the deemed trust provisions in the Act and the standard mortgage clause. The Court reviewed the relevant provisions of the mortgage agreement before concluding that the insurance proceeds were not caught by a security interest within the meaning of section the Act. It held that the insurance proceeds were payable to the mortgagee under the separate policy of insurance which was created by the standard mortgage clause. In the Court’s view, the insurance proceeds “belonged” to the mortgagee and could never have been considered property of the tax debtor. As a result, the deemed
trust and super priority lien in favour of the Crown in respect of the  withholdings not remitted and related payments did not attach to those proceeds.

The appeal was dismissed.

Happy Reading.

About Steven Frye
Baker Tilly WM LLP is a leading, independent audit, tax, and business advisory firm based in Vancouver and Toronto, serving clients across Canada. Drawing on well-trained teams across a variety of disciplines, we ensure the alignment of our professional’s skills and experience with client requirements, resulting in exceptional service and business outcomes.

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