Information on deemed trust

• If you are an employer, the amounts that you deduct and withhold from the wages of your employees are considered deemed trust amounts.
• If you are a business operating as a sole proprietor, partnership, or corporation, the goods and services tax/harmonized sales tax (GST/HST) amounts that you collect from your customers are considered deemed trust amounts.
  Note
  This also applies to registrants under the Air Travellers Security Charge Act.

Payroll deductions and GST/HST amounts are important sources of revenue for the government and are collected by businesses as agents of the government. In order to protect these amounts from being diverted to other creditors, Parliament enacted powerful tools to collect these amounts.

This ensures that the government has the revenues needed to support social programs and address priorities that impact all Canadians.

As an employer, you hold in trust amounts that are deducted from your employees' wages for:

• income tax
• Canada Pension Plan (CPP) contributions ^{Footnote 1}
• employment insurance (EI) premiums

Along with the amounts you deduct from your employees' wages, when you send your payroll deductions to the Canada Revenue Agency (CRA), you must also include the employer's part of CPP contributions and EI premiums.

As a business that collects GST/HST, you hold in trust the GST/HST amounts you collect from your customers. For each reporting period of your business, you must send these amounts to the CRA, along with any GST/HST amounts that you have billed to your customers. You can deduct input tax credits from the GST/HST you collected or billed in the period.

If you do not send payroll deductions or GST/HST amounts to the CRA when they are due, the CRA will assess your business for the amount owing and ask you to pay the full balance right away, including any penalties and interest that apply.

You cannot use deemed trust amounts as cash flow. Even if you hold these amounts with your personal or business funds, the amounts are considered to be held separate and apart.

If deemed trust amounts are not paid, the CRA can:

• garnish bank accounts, accounts receivable, and any other income sources;
• seize and sell assets; and
• use other legal actions to collect amounts owing.

If you have a deemed trust debt owing to the CRA, the amount of the debt becomes secured to the CRA over all your assets, regardless of any security interest you may have given to other creditors. The CRA also has priority over the proceeds of the sale of any of your assets.

The Income Tax Act and the Excise Tax Act give the CRA the authority to collect deemed trust amounts in priority to other creditors collecting amounts owed to them.

The CRA does not have to register deemed trust debts in a public registry, such as a personal property security registry or a land titles office registry.

Normally when you sell a business asset, the CRA will not assert its priority over the asset that has been sold. However, if you use the proceeds of the sale to pay a debt to a creditor in order to avoid potential collection actions by that creditor instead of paying your deemed trust debt, the CRA may issue a deemed trust claim letter to that creditor because of the CRA's priority over the proceeds of the sale.

A deemed trust claim letter:

• outlines the deemed trust debt owed to the CRA;
• provides the legislative authority under which the CRA is acting; and
• warns that failing to pay the amount of the deemed trust claim may result in legal proceedings.

Deemed trust priority can be a complicated issue. You may wish to seek legal or professional advice.

If the CRA becomes aware that your creditor is taking action against your assets, the CRA may issue a deemed trust claim letter to that creditor to recover any amount received by them that should have been sent to the CRA.

Under the Income Tax Act, a deemed trust claim will include any amounts deducted from employee wages that the business did not send to the CRA. These amounts may include federal and provincial taxes, as well as CPP contributions and EI premiums.

Under the Excise Tax Act, a deemed trust claim will include amounts for GST/HST that was collected by the business but not paid to the CRA.

When a business owes a deemed trust amount, the proceeds of sale of any asset must first be used to pay the deemed trust debt of the business, whether the business sells the asset or a secured creditor enforces payment and sells the asset.

If a deemed trust debt is not paid, the CRA may send a deemed trust claim letter to the creditor who has received funds from the sale of the asset, whether the funds were received voluntarily from the business or as a result of enforcement action by the creditor. The CRA can take court action against a creditor who does not pay the amount of a deemed trust claim.

A deemed trust claim letter:

• outlines the deemed trust debt owed to the CRA;
• provides the legislative authority under which the CRA is acting; and
• warns that failing to pay the amount of the deemed trust claim may result in legal proceedings.

If you receive a deemed trust claim letter, you should call the CRA contact person indicated on the letter as soon as possible.

A creditor who receives a deemed trust claim letter must pay the CRA the lesser of:

• the amount included on the deemed trust claim letter; or
• the amount the creditor received from the sale of the assets of the business.

If you do not comply with the deemed trust claim letter, the CRA may initiate legal action to recover these amounts. If court actions are initiated, you will have to pay any pre and post-judgment interest and court costs.

If a deemed trust debt existed at the time that a mortgage was registered, the deemed trust debt has priority over the registered mortgage.

With certain exceptions, a voluntary mortgage that was registered on land or a building before a deemed trust debt arose will have priority over the deemed trust.

There is no requirement for the CRA to register a deemed trust debt against a tax debtor's land or building.

The amount of the mortgage that has priority over a deemed trust debt is called a prescribed security interest.

There are four exceptions to the CRA's priority in collecting deemed trust debts:

1. The rights of unpaid suppliers for goods supplied during the 30 days before the bankruptcy of an employer or registrant.
2. The rights of farmers, fishers, and aquaculturists for products supplied during the 15-day period before the bankruptcy of an employer or registrant.
3. With certain exceptions, a mortgage on land or on a building that was voluntarily given and duly registered before a deemed trust debt arose.
4. As a matter of CRA policy, reasonable fees and expenses for bailiffs and sheriffs who seize and sell assets at a creditor's request, as well as reasonable insolvency fees and expenses that are authorized by the CRA before selling the assets of a taxpayer.

When a tax debtor's land or building is sold, the CRA will calculate the value of the secured creditor's prescribed security interest.

To determine the prescribed security interest amount that will have priority over the deemed trust, the CRA will reduce the mortgage amount due to the secured creditor by:

• any payments made by the tax debtor for the mortgage after the deemed trust debt arose; and,
• where alternate security is available to the secured creditor for the mortgage, the value of the alternate security.

Part 1 - CRA calculation showing the value of the bank's mortgage that has priority over the deemed trust (the bank's prescribed security interest)

Description	Amount
Mortgage amount at the time of the first deemed trust default date after the mortgage was registered Footnote 4	$175,000
Payments made towards the mortgage from the first deemed trust default date Footnote 5	($17,500)
Alternate security available to the bank for the mortgage Footnote 5	($100,000)
Value of the bank's prescribed security interest Footnote 6	$57,500

Part 2 - Distribution of amounts on closing date (in order of priority)

Proceeds and distributions	Amount
Sale proceeds	$225,000
As a policy, the CRA will allow the $10,000 closing costs to the bank (payable to the lawyer/notary handling the sale for the bank)	($10,000)
The CRA's deemed trust priority for amounts outstanding before mortgage was registered (payable to the CRA) Footnote 7	($70,000)
The bank's prescribed security interest priority (payable to the bank) Footnote 8	($57,500)
The CRA has priority over the balance of the proceeds for the amount of the HST deemed trust debt (payable to the CRA) Footnote 9	($20,000)
Balance of sale proceeds (payable to the bank)	($67,500)
No surplus available to tax debtor	$0

You can request a comfort letter from the CRA before extending credit.

A comfort letter confirms that business accounts are in good standing with the CRA, and is based on the CRA's records, without any audit done to review the accuracy of information provided to the CRA by a client or their representative.

For information on how to request a comfort letter, go to Comfort letters.