This article provides answers to some common questions about deemed trusts. You’ll want to consult your own tax professional or attorney to get specific answers to questions about your own situation, but this will give you an overview of how these entities work.
What are deemed trust amounts?
Are you an employer? When you withhold any amount from your employees’ wages, that is considered a deemed trust amount. Are you a business? When you collect GST or HST amounts from your customers, those are deemed trust amounts as well. These provide the Canadian government with crucial revenue, and employers and businesses withhold these amounts as agents of the government. Parliament has passed some stringent legislation to provide for the collection of these amounts, so that the government has the funding that it needs to operate.
What do employers need to know?
You’ll withhold funds for three different trust accounts: income taxes, employment insurance (EI) premiums and Canadian Pension Plan (CPP) contributions. When you remit payroll deductions to the Canada Revenue Agency (CRA), you are also responsible for submitting the employer’s portion of the EI premiums and the CPP contributions. In Quebec, you deduct contributions to the Quebec Pension Plan instead of the CPP.
What do GST/HST collectors need to know?
If you own a business that collects these taxes as a part of your sales, then those amounts go into trust for your customers. You have to remit these funds to the CRA in each reporting period, as well as any tax amounts that you have billed to customers. You are allowed to deduct input tax credits from the taxes that you billed or collected during that reporting period. It’s worth noting that, in Quebec, the CRA does not take in any GST. Revenue Quebec can provide information about GST for businesses in that province.
What is the consequence for failure to pay amounts due to the CRA that I keep in trust?
The first step is a demand from the CRA for the full balance due immediately, after the CRA has assessed your business for the relevant reporting period, including interest and penalties. Funds in a deemed trust cannot count toward your cash flow. You can intermingle that money with business or personal funds, but they cannot serve for accounting purposes as any sort of personal or business income.
What can the CRA do if I still fail to pay the trust amounts due?
If you do not satisfy the CRA’s demand, the agency can seize your assets and sell them, garnish your accounts receivable, bank accounts or other sources of income, as well as other legal remedies for collecting those amounts.
If my business accrues a deemed trust debt with the CRA, what happens next?
Once the CRA identifies a debt that you owe on the basis of a deemed trust, the CRA receives a security for the amount of the debt, and it takes precedence over any other liens, no matter what sort of lien it might be (such as a primary mortgage). The CRA also has priority over any funds coming in from the sale of assets. This takes place under the authority of the Income Tax Act and the Excise Tax Act. In fact, the CRA does not have to post those claims in a public registry, as in a land title office or with personal property security.
If you sell a business asset, the CRA will generally not step in and establish its priority over the proceeds, unless you use the proceeds to pay off another creditor with the purpose of avoiding possible collection actions. If that happens, the CRA might send a deemed trust claim letter to that creditor asserting their priority claim to the money. That letter would specify the debt, outline the legislative basis that gives the CRA this authority, and warn the creditor that legal proceedings could ensue if the creditor does not pay the sum to the CRA.
Are there any exceptions to the deemed trust priority for the CRA?
There are four exceptions to the CRA priority when it comes to collecting debts from deemed trust amounts:
The rights of farmers, fishers and aqua culturists for products that they supplied in the 15 days before a registrant or employer’s bankruptcy
The rights of suppliers who provided goods in the 30 days preceding a registrant or employer’s bankruptcy
A voluntary mortgage on a building or land that was registered properly before the deemed trust debt took place
Any reasonable expenses and fees for sheriffs and bailiffs who seize assets and sell them at the request of a creditor, as well as any fees and expenses that the CRA authorizes before putting taxpayer assets up for sale.