What is actually held in trust, and what is not
Subsection 227(4) of the Income Tax Act says every person who deducts or withholds an amount under the Act is deemed, notwithstanding any security interest in that amount, to hold it separate and apart from their own property and from property held by any secured creditor that but for the security interest would be theirs, in trust for the Crown. For income tax the trust arises on deduction, not on default. The Canada Pension Plan and Employment Insurance Act carry near-identical provisions borrowing the Income Tax Act's definitions, with one difference that matters: each applies where the employer has deducted the amount but has not remitted it. So the trust holds income tax withheld, the contribution required to be made by the employee under the Canada Pension Plan, and the employee's premium under the Employment Insurance Act — and, because subsection 227(4) reaches any amount deducted or withheld under the Act, withholding on payments to non-residents too. Your own employer share of CPP and EI sits outside the trust, as does corporate income tax. The employer share is still not an ordinary debt: the enhanced garnishment described below reaches it. Corporate income tax is an ordinary debt, garnishable under the ordinary power in subsection 224(1), which carries no priority over a security interest.
Unremitted, the trust spreads to your receivables
Subsection 227(4.1) describes what happens next. Where an amount deemed held in trust is not paid to the Crown in the manner and at the time the Act provides, property of the person — and property held by any secured creditor that but for a security interest would be the person's — equal in value to that amount is deemed to be held in trust from the time the amount was deducted or withheld, and to form no part of the person's estate or property from that same moment. The Act then adds the priority words: the property is beneficially owned by Her Majesty notwithstanding any security interest in it and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests. Receivables are property; the cash collected on them is proceeds. The Regulations write one narrow exception, under subsection 227(4.2) and section 2201: a prescribed security interest, meaning the part of a mortgage securing the performance of an obligation of the person that encumbers land or a building, registered under the appropriate land registration system before the amount was deemed held in trust. Section 2201(3) then excludes three things from even that — a lien, priority or other security interest created by statute, an assignment or hypothec of rents or leases, and a mortgage interest in any equipment or fixtures that a mortgagee or any other person has the right, absolutely or conditionally, to remove or dispose of separately from the land or building. Nothing secured by receivables qualifies.
Why a lender is caught where a true sale may not be
Subsections 227(4) and 227(4.1) take their definition of security interest from subsection 224(1.3), and the definition's opening words govern everything after them: any interest in, or for civil law any right in, property that secures payment or performance of an obligation. What follows is an inclusive list naming an assignment, alongside a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust or encumbrance of any kind whatever. So an assignment of your accounts taken as security sits inside the trust. An outright purchase is a different question. In First Vancouver Finance v. M.N.R. the Supreme Court described the subsection 227(4.1) trust as similar in principle to a floating charge over all the tax debtor's assets in the amount of the default, held that property the debtor disposes of is thereby released from it, and concluded that the trust does not operate over assets a tax debtor has sold in the ordinary course to third party purchasers — noting it significant that purchasers for value are not included in sections 227(4) and 227(4.1) whereas secured creditors are. The factor there had been found below to be a third party purchaser of book debts rather than a secured creditor, and the Minister did not take issue with that finding in the Supreme Court, so the Court laid down no test. Where a given facility falls is a question for the factor's counsel.
How the CRA reaches your customer directly
Subsection 224(1.2) is how the Crown collects. Notwithstanding any other provision of the Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any provincial enactment or any law — but subject to the stays in subsections 69(1) and 69.1(1) of the Bankruptcy and Insolvency Act and section 11.09 of the Companies' Creditors Arrangement Act — where the Minister has knowledge or suspects that a person is, or will become within one year, liable to make a payment, the Minister may require in writing that the person pay that money to the Receiver General instead. That person can be your customer, and the payment redirected can be one owed to you or one owed to a secured creditor who has a right to receive a payment that, but for its security interest, would be payable to you. On receipt of the requirement, the amount required to be paid becomes the property of Her Majesty, to the extent of that liability as assessed by the Minister and notwithstanding any security interest in it, and is paid to the Receiver General in priority to any such interest. It attaches to an amount assessed under subsection 227(10.1) or a similar provincial provision in a province with a federal collection agreement, and the Canada Pension Plan and the Employment Insurance Act each extend it to the employer's own contributions and premiums.
Insolvency does not clear it, and GST/HST is the opposite
Insolvency does not reset the position. Subject to subsection (3), subsection 67(2) of the Bankruptcy and Insolvency Act provides that, notwithstanding any federal or provincial legislation deeming property to be held in trust for the Crown, a bankrupt's property is not to be regarded as so held, for the purpose of the rule that keeps trust property out of the estate, unless it would be regarded that way without the statutory provision. Subsection 67(3) then exempts by name the trusts under Income Tax Act subsections 227(4) and (4.1), Canada Pension Plan subsections 23(3) and (4), and Employment Insurance Act subsections 86(2) and (2.1) — and subsection 37(2) of the Companies' Creditors Arrangement Act names the same six against the same rule. GST and HST are drafted to look the same and are not. The trust in subsection 222(1) of the Excise Tax Act applies despite any security interest, and nothing switches it off in a receivership. Bankruptcy does: subsection 222(1.1) turns it off at or after the time a person becomes bankrupt for amounts collected or collectible before then. So does a filing under the Companies' Creditors Arrangement Act, because neither exception list above names it. And a Division I proposal carries the Bankruptcy and Insolvency Act's provisions across under its section 66(1), so do not assume the trust survives one. Where the Income Tax Act extension excepts only sections 81.1 and 81.2 of the Bankruptcy and Insolvency Act, the Excise Tax Act extension in subsection 222(3) excepts the whole of it. Nearly the same words, and they part company at insolvency.
What you can still finance with arrears on the file
None of this makes a business with CRA arrears unfinanceable; the statute explains the decline. Receivables financing is where the conversation usually continues. Two things help, though neither is a legal cure: a CRA payment arrangement, and disclosing the balance early rather than at funding. The trust survives both and lasts as long as the default does. Crewline is a broker, not a lender, and does not give tax or legal advice: establish the remittance position with your accountant first.
Questions operators ask
Can I get invoice financing if I owe CRA source deductions?
Frequently yes, and the structure matters. An assignment of your accounts taken as security sits inside the Income Tax Act's definition of security interest, so a lender advancing against your receivables ranks behind the Crown's deemed trust. A factor that buys accounts outright is treated differently: in First Vancouver Finance v. M.N.R. the Supreme Court held the trust does not operate over assets a tax debtor has sold in the ordinary course to third party purchasers, and the factor there had been found below to be a third party purchaser of book debts rather than a secured creditor. Two limits travel with that, and one open question. The Court framed the holding as a sale in the ordinary course and did not decide what falls outside it; its reasoning turned on purchasers for value not being named in the provisions. The Court was equally clear that the proceeds of the sale are captured by the trust in your hands. And the deemed trust is not the only exposure: in that case the chambers judge held, and the Court of Appeal affirmed, that accounts the factor took after the Minister had served enhanced requirements to pay on the customer were caught by that separate garnishment power — a point the Supreme Court did not decide. Separately, that case shows the limit of a payment arrangement: the factor was forwarding part of the purchase price to the Minister against Great West's existing arrears and kept doing so, but Great West went on missing its current remittances, and the requirements to pay were served anyway.
Does bankruptcy wipe out unremitted source deductions?
No. Subsection 67(2) of the Bankruptcy and Insolvency Act would otherwise deny statutory deemed trusts the exclusion in paragraph 67(1)(a), leaving the property in the estate for creditors generally, but subsection 67(3) exempts by name the trusts under Income Tax Act subsections 227(4) and (4.1), Canada Pension Plan subsections 23(3) and (4), and Employment Insurance Act subsections 86(2) and (2.1). Subsection 37(2) of the Companies' Creditors Arrangement Act names the same six, so a restructuring does not extinguish them either — though a court can still rank ahead of them: in Canada v. Canada North Group Inc. a divided Supreme Court dismissed the Crown's appeal, holding that a judge supervising a Companies' Creditors Arrangement Act restructuring has the discretion under section 11 to give court-ordered priming charges priority over the subsection 227(4.1) trust, the plurality adding that this should be done only when necessary. A director's own personal bankruptcy is a separate question. Section 178 does not name this liability, so a discharge ordinarily releases it. Paragraph 178(1)(d) preserves a debt arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity, but that turns on the director's own conduct — the deemed trust binds the corporation, not the director — and the section 178 exceptions are read narrowly.
Is GST/HST treated the same as payroll source deductions?
Not at insolvency, though the sections read almost identically. The Excise Tax Act trust in subsection 222(1) applies despite any security interest, and nothing turns it off in a receivership, so there it does reach a secured creditor. Two things do: subsection 222(1.1), at or after the time a person becomes bankrupt for amounts collected or collectible before then, and the Companies' Creditors Arrangement Act, because subsection 37(2) names the income tax, CPP and EI trusts and omits this one, as subsection 67(3) of the Bankruptcy and Insolvency Act does. A Division I proposal carries the Bankruptcy and Insolvency Act's provisions across under its section 66(1), so do not assume the trust survives one of those either. Its extension in subsection 222(3) also excepts the whole of the Bankruptcy and Insolvency Act where the Income Tax Act version excepts only sections 81.1 and 81.2. Director liability is a different story — see below.
Am I personally liable for my company's unremitted remittances?
Potentially, and for payroll withholdings and GST/HST alike. Under subsection 227.1(1) of the Income Tax Act the directors at the relevant time are jointly and severally, or solidarily, liable with the corporation for the amount and any interest or penalties. Section 21.1 of the Canada Pension Plan and section 83 of the Employment Insurance Act impose the same liability for CPP contributions and EI premiums and apply subsections 227.1(2) to (7), and section 323 of the Excise Tax Act does the same for unremitted GST/HST — so whatever the deemed trust does in an insolvency, the director exposure on GST/HST is much the same shape, with its limitation running against the assessment rather than the proceeding, and attaching to net tax and to a net tax refund paid in error. Under the Income Tax Act a director is not liable unless a certificate for the corporation's liability has been registered in the Federal Court under section 223 and execution has been returned unsatisfied in whole or in part; or the corporation has commenced liquidation or dissolution proceedings or been dissolved and a claim has been proved within six months after the earlier of the commencement date and the dissolution date; or the corporation has made an assignment or had a bankruptcy order made against it and a claim has been proved within six months after that date. Subsection 227.1(3) provides a defence to a director who exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances, and subsection 227.1(4) bars proceedings more than two years after you last ceased to be a director.