Deemed trust (source deductions and GST/HST)

A buyer meets a deemed trust when checking whether a seller has remitted the tax it withheld or collected. If amounts are not remitted, both statutes extend the trust to other property of the person and property held by a secured creditor, so ask for proof of remittance before closing. Whether an amount ranks ahead of a lender depends on the statute.

The two statutes

Under section 227(4) of the Income Tax Act, every person who deducts or withholds an amount under the Act is deemed, despite any security interest, to hold it separate and apart from their own property and from property held by a secured creditor. Section 222(1) of the Excise Tax Act does the same for an amount collected as tax under Division II, the GST/HST.

Bankruptcy changes the result

Under section 227(4.1) of the Income Tax Act, if a deemed-trust amount is not paid as the Act requires, property of the person and property held by a secured creditor, equal in value to that amount, is deemed held in trust for the Crown, despite the Bankruptcy and Insolvency Act except its sections 81.1 and 81.2. Section 222(1.1) of the Excise Tax Act says subsection (1) does not apply, at or after the time a person becomes bankrupt, to amounts collected or collectible before that time. See whether unremitted GST/HST ranks ahead of the bank and security interest.