Does unremitted GST/HST rank ahead of the bank in bankruptcy?

Buyers usually ask this when a seller is behind on GST/HST and a lender or trustee may step in. The answer decides which creditor is paid first from the seller’s assets. It turns on the federal Bankruptcy and Insolvency Act, which sets the order of payment once a bankruptcy has started, and on a short list of Crown claims that the Act treats differently from ordinary tax debts.

What the Act does to a statutory trust

Some federal and provincial laws deem property to be held in trust for the Crown. In a bankruptcy, section 67 says the property of a bankrupt is not regarded as held in trust for the Crown just because a statute deems it so. Section 67(3) then names the exceptions: income tax source deductions, Canada Pension Plan contributions, Employment Insurance premiums, and comparable provincial deemed trusts for amounts withheld under provincial law. Unremitted GST/HST is not on that list.

Where the bank sits

The Office of the Superintendent of Bankruptcy describes a secured creditor as one who takes collateral for the extension of credit, and an unsecured creditor as one with no security. The Act says a bankruptcy does not prevent a secured creditor from realizing its security, subject to listed provisions and any court order, and that proceeds of the bankrupt’s property are applied in order of priority “subject to the rights of secured creditors”. A bank holding valid security over the assets therefore looks to that collateral first.

When a Crown claim can rank differently

Section 86 says provable Crown claims, even secured ones, rank as unsecured. It carves out claims secured by a kind of security that other creditors can also obtain, and certain statutory security whose sole or principal purpose is to secure Crown claims, if it was registered before the initial bankruptcy event. A CRA claim that falls into one of those categories could rank differently, so ask what, if anything, has been registered against the seller.

Bankruptcy is not the only route

This page covers bankruptcy under the Act. A proposal to creditors is a different process, and the CRA says making a proposal does not close a GST/HST account automatically. Receiverships follow their own provisions. When an account is closed, the CRA says a final GST/HST return must be filed and amounts owed remitted. Our page on what happens to GST/HST accounts when a business is sold covers that side.