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Equity - 'Bona Fide Purchase of a Legal Interest for Value Without Notice of a Pre-existing Equitable Interest' Defence. Toronto-Dominion Bank (TD Canada Trust) v. Canada
In Toronto-Dominion Bank (TD Canada Trust) v. Canada (Fed CA, 2026) the Federal Court of Appeal allowed an appeal, this brought against a Federal Court order responding to 'two questions posed on a motion brought under Rule 220 [SS: 'Questions of Law - Preliminary determination of question of law or admissibility'] of the Federal Courts Rules, SOR/98-106. The two questions related to the application of the deemed trust provisions in section 227 of the Income Tax Act".
Here the court considers 'deemed trusts' [ITA s.227], and considers the equitable "bona fide purchaser defence" where a deemed trustee (here, an employer) "sells its property and uses the proceeds to pay a debt owing to an unsecured creditor" (here, TD Bank) - and considered the argument that this involved a 'tracing' issue:[1] ... The deemed trust arises when an employer deducts or withholds amounts from the salary or wages paid to employees ....
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[5] The underlying dispute arises in the following context. An employer has failed to remit to the Receiver General all the amounts deducted from wages paid to employees. The employer sells its property and, instead of paying the unremitted source deductions, uses the proceeds from that sale to pay an amount owing to an unsecured creditor who does not have any notice of the failure of the employer to remit the required source deductions. The amount of the proceeds paid to the unsecured creditor exceeds the amount of the unremitted source deductions.
[6] The relevant question in the underlying dispute is whether, in these circumstances, the Crown can recover from that unsecured creditor an amount equal to the unremitted source deductions. This question is directly linked to whether the bona fide purchaser for value defence (which will be referred to herein also as the bona fide purchaser defence) is available to an unsecured creditor who has received proceeds from an employer who has unremitted source deductions. This is not a situation where the priority of the Crown with respect to unremitted source deductions is to be determined before the funds arising from the sale of property are dispersed. Rather this situation arises where the proceeds from the sale of property are in the hands of an unsecured creditor.
[7] In my view, for the reasons that follow, the answer to the second question is:An unsecured creditor can rely on the bona fide purchaser for value defence to defend against a claim by the Crown for the unremitted source deductions of an employer who paid proceeds from the sale of their property to the unsecured creditor. ....
[34] The question of whether the bona fide purchaser defence is available to an unsecured creditor who has received proceeds from a person who has failed to remit the required source deductions under the ITA is a question of law. Therefore, the standard of review is correctness (Housen v. Nikolaisen, 2002 SCC 33).
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V. Analysis
[35] As noted above, when an employer pays salary, wages or other remuneration to employees, the employer is required to deduct certain amounts from the amounts paid to employees and remit such amounts to the Receiver General (subsection 153(1) of the ITA). Subsection 227(4) of the ITA deems the amounts so deducted to be held in trust for the Crown. The Rule 220 question arises in a situation where an employer who has failed to remit the amounts deducted from employees to the Receiver General, sells its property and uses the proceeds to pay a debt owing to an unsecured creditor.
[36] The question is whether the unsecured creditor can rely on the bona fide purchaser defence to a claim by the Crown for payment of the unremitted source deductions.
[37] The bona fide purchaser defence is described by the Supreme Court in i Trade Finance Inc. v. Bank of Montreal, 2011 SCC 26:[60] Traditionally, the fact that a party is a bona fide purchaser for value without notice has been an equitable defence. Professor Smith describes this defence as follows:The full name of the equitable defence is 'bona fide purchase of a legal interest for value without notice of a pre-existing equitable interest.' The effect of the defence is to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. In other terms, where the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights.
(L. Smith, The Law of Tracing (1997), at p. 386 (footnote omitted)) [38] In Waters’ Law of Trusts in Canada (Donovan W.M. Waters, Mark R. Gillen and Lionel D. Smith, Waters' Law of Trusts in Canada, 5th ed (Toronto: Thomson Reuters Canada, 2021), the authors confirm that a bona fide purchaser for value will be able to defeat a claim related to the property received from a trustee, in circumstances where the trustee transferred the property in breach of the terms of the trust:Similarly, it may be said that tracing ends when the property is acquired by a bona fide purchaser of a legal interest for value without notice of the trust. This is not, however, really a question of tracing. Tracing is about substitutions. This is a case in which the property in question is followed to a new party, but that new party has a defence which defeats the plaintiff’s rights. The property is perfectly identifiable, as a matter of tracing and following; it is the claim which is defeated.
The bona fide purchaser for value is immune from a claim that he or she holds the property in trust….
[26.III The Principles of Tracing – 2. – Bona Fide Purchase] [39] The Crown, in paragraph 26 of its memorandum, submits that because the bona fide purchaser defence is only available as a defence against an equitable claim, it is not applicable in this appeal since the Crown’s claim is under the deemed trust provisions of the ITA. The Crown submits that:The only way the defence would be available against a statutory deemed trust claim is if Parliament actively imported the defence, which is contrary to both Parliament’s intent regarding the collection of source deductions via the deemed trust and the text of subsection 227(4.1) of the ITA. [40] In John M.M. Troup Ltd. v. Ontario (Attorney-General), 1962 CanLII 9 (SCC), [1962] S.C.R. 487, a builder, who received a holdback payment, deposited the amount in its bank account. The bank used the funds to pay down an overdraft in the account. There were unpaid subcontractors of the builder. The Mechanics' Lien Act, R.S.O. 1950, c. 227 stipulated that a builder who receives a payment holds such amount in trust for any unpaid subcontractors. The unpaid subcontractors commenced an action against the bank on the basis that they were the beneficiaries of the amount received by the builder. The Supreme Court found that the bank did not participate in a breach of trust because the bank acted in good faith and had no knowledge of the breach of trust by the builder.
[41] In the concurring reasons of Martland and Ritchie JJ. in John M.M. Troup Ltd., Martland J. stated, at page 505, in relation to a trust created under The Mechanics' Lien Act:Although the trust is created by statute, it thereupon becomes subject to the application of the rules of equity applicable to trusts. [42] Although this statement only appears in the concurring reasons, it supports the view that the rules of equity (including the bona fide purchaser defence) can apply to a statutory trust.
[43] The characterization of the particular statutory trust in issue in this appeal has been considered by the Supreme Court in First Vancouver and Canada v. Canada North Group Inc., 2021 SCC 30 (Canada North).
[44] In First Vancouver, the Supreme Court found that even though the deemed trust in subsections 227(4) and (4.1) of the ITA applied to after-acquired property (whereby the common law requirement of certainty of subject matter would not be satisfied), Parliament could characterize the trust as it chooses:[34] I find no contradiction in coming to the conclusion that after-acquired property can be subject to the trust even though the trust reaches back in time to a point before the acquisition of the property by the tax debtor. This is because the property so acquired will presumably have been taken in exchange for property of equal value which the debtor has disposed of. Thus, the acquired property can simply be viewed as replacing the initial subject matter of the trust. Moreover, since the trust is a deemed statutory trust, it is not governed by common law requirements, and, in this regard, the ongoing acquisition of trust property does not present a conceptual difficulty. I emphasize that it is open to Parliament to characterize the trust in whatever way it chooses; it is not bound by restraints imposed by ordinary principles of trust law. [45] The Supreme Court in First Vancouver found, at paragraph 40, that "“the deemed trust is in principle similar to a floating charge over all the assets of the tax debtor”".
[46] In Canada North, Côté J. (writing on behalf of Wagner C.J. and Kasirer J.) and Karakatsanis J. (writing on behalf of Martin J.) found that the deemed trust provisions of subsections 227(4) and (4.1) of the ITA did not create a "“true”" trust (paragraphs 46 to 55 and 118 to 133). Brown and Rowe JJ., in their dissenting reasons at paragraph 192, concurred with the conclusion that the deemed trust provisions of the ITA do not create a "“true”" trust.
[47] Even though the deemed trust arising under subsections 227(4) and (4.1) of the ITA may not be a "“true”" trust at common law, the question of whether the bona fide purchaser defence will nonetheless be available to unsecured creditors will depend on the interpretation of the relevant provisions of the ITA. Parliament chose to use the language of a trust and is presumed to know the meaning of the words that it chooses and "“the legal context in which it legislates”":[20] When Parliament uses a term with a legal meaning, it intends the term to be given that meaning. Words that have a well-understood legal meaning when used in a statute should be given that meaning unless Parliament clearly indicates otherwise. This principle has been applied in a number of cases such as Will-Kare Paving & Contracting Ltd. v. Canada, 2000 SCC 36, [2000] 1 S.C.R. 915, at paras. 29-30; Townsend v. Kroppmanns, 2004 SCC 10, [2004] 1 S.C.R. 315, at para. 9; A.Y.S.A. Amateur Youth Soccer Association v. Canada (Revenue Agency), 2007 SCC 42, [2007] 3 S.C.R. 217, at paras. 8-23 and 48-49. Most recently in R. v. Summers, 2014 SCC 26, [2014] 1 S.C.R. 575, the Court noted that "Parliament is presumed to know the legal context in which it legislates" and that it is "inconceivable" that Parliament would intend to disturb well-settled law without "explicit language" or by "relying on inferences that could possibly be drawn from the order of certain provisions in the Criminal Code": paras. 55-56.
[R. v. D.L.W., 2016 SCC 22] [48] There is no express language in subsections 227(4) and (4.1) of the ITA that would preclude the availability of the bona fide purchaser defence. The reference to "“[n]otwithstanding … any other law”" at the beginning of subsection 227(4.1) of the ITA, in my view, refers to the formation of the trust and the holding of the trust property. With respect to the obligation to pay the proceeds arising from the sale of property found in the closing words of subsection 227(4.1) of the ITA, the notwithstanding clause would simply mean that the proceeds are to be paid to the Receiver General even if some other law might dictate otherwise. However, where the proceeds are not actually paid to the Receiver General, the question will still remain whether the Crown can recover those proceeds from an unsecured creditor who is a bona fide purchaser.
[49] In First Vancouver, the Supreme Court did not specifically refer to the bona fide purchaser defence, but it did find that the deemed trust provisions did not apply to a sale of assets by the tax debtor in the ordinary course of its business:[40] In my view, the scheme envisioned by Parliament in enacting ss. 227(4) and 227(4.1) is that the deemed trust is in principle similar to a floating charge over all the assets of the tax debtor in the amount of the default. As noted above, the trust has priority from the time the source deductions are made, and remains in existence as long as the default continues. However, the trust does not attach specifically to any particular assets of the tax debtor so as to prevent their sale. As such, the debtor is free to alienate its property in the ordinary course, in which case the trust property is replaced by the proceeds of sale of such property. [50] In First Vancouver, Great West Transport Ltd. was in the transportation business. It entered into a factoring agreement with First Vancouver Finance, whereby Great West Transport sold its accounts receivable to First Vancouver Finance at a discount. Great West Transport was in default of remitting its source deductions to the Receiver General. The Supreme Court held that the Crown did not have an interest in the accounts receivable sold to First Vancouver Finance, and in particular in the accounts receivable payable by Canada Safeway:[46] In summary, the deemed trust does not operate over assets which a tax debtor has sold in the ordinary course to third party purchasers. As such, once the Canada Safeway invoices had been factored to First Vancouver, the Minister was prevented from asserting its interest in these invoices. [51] First Vancouver dealt with a sale of property in the ordinary course for proceeds that replaced such property. In the context of the Rule 220 question in the appeal that is before us, the question is whether the bona fide purchaser defence will be available if the proceeds arising from the sale of a tax debtor’s property are used to pay a debt owing to an unsecured creditor. As a result of the payment of the debt, the debt would be discharged but the tax debtor would not receive any property to replace the payment made to the unsecured creditor, thus depleting the assets held by the tax debtor.
[52] In Waters’ Law of Trusts in Canada, the authors confirm that the bona fide purchaser defence is available to a creditor who receives payment from trust funds in breach of the terms of the trust:It is easy to think that if the trustee uses trust property to pay a debt which he or she owes, there is an end to tracing. The money seems to be gone. Nevertheless, it should not be forgotten that the money received by the creditor is trust property. In most cases, it is true, this person is a bona fide purchaser, for value, of a legal interest in the money, and is without notice of the breach of trust; so he or she is immune to any claim.
[26III, The Principles of Tracing, 3.- Tracing into the Payment of a Debt] [53] This paragraph refers to footnote 105 which elaborates on the meaning of value in relation to the bona fide purchaser defence:Value, within the meaning of the Equitable defence of a bona fide purchase for value without notice, and also within the common law version of the defence which applies to money and negotiable instruments, includes the discharge of a pre-existing debt. For the Equitable defence, see Taylor v. Blakelock (1886), 32 Ch. D. 560 (Eng. Ch.); for cases involving good faith acquisition of money, see Cohen v. Mahlin (1926), 1926 CanLII 238 (AB CA), [1927] 1 W.W.R. 162, [1927] 1 D.L.R. 577 (Alta. C.A.) at 167-68 [W.W.R.], 581-82 [D.L.R.]; Law Society of Upper Canada v. Mazzucco, 2009 CarswellOnt 3437, 49 E.T.R. (3d) 61 (Ont. S.C.J.). Note however that in Equity it does not include a promise to repay, as where the transaction creates, rather than discharges, a debt: see supra, note 20 and chapter 11, Part II A.
[Emphasis in original] [54] As a result, the payment of a debt could satisfy the requirement for value within the bona fide purchaser defence. The issue to be addressed in this appeal is whether Parliament intended that this defence be available when an unsecured creditor receives, as payment of an amount owing to that unsecured creditor, an amount from the proceeds (arising from the sale of the tax debtor’s property) that would be deemed to be held in trust for the Crown.
[55] The majority of the Supreme Court in Piekut v. Canada (Minister of National Revenue), 2025 SCC 13, reiterated, at paragraph 43, that "“[t]he modern principle requires a court to interpret statutory language ‘according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole’”" (citing Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10; R. v. Downes, 2023 SCC 6, at para. 24). The majority also noted:[45] As a result, ‘plain meaning alone is not determinative and a statutory interpretation analysis is incomplete without considering the context, purpose and relevant legal norms’ (Alex [R. v. Alex, 2017 SCC 37], at para. 31; see also La Presse [La Presse inc. v. Quebec, 2023 SCC 22], at para. 23; Vavilov [Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65], at para. 118). At the same time, ‘just as the text must be considered in light of the context and object, the object of a statute and that of a provision must be considered with close attention always being paid to the text of the statute, which remains the anchor of the interpretative exercise’ (Quebec (Commission des droits de la personne et des droits de la jeunesse) v. Directrice de la protection de la jeunesse du CISSS A, 2024 SCC 43, at para. 24). [56] Subsection 227(4.1) of the ITA is therefore to be interpreted based on a textual, contextual and purposive analysis. At paras 57-95 the court usefully walks through it's statutory interpretation analysis of ITA s.227(4.1) ['Withholding taxes - Extension of trust'], citing several related cases:VI. Conclusion
[96] As a result, I would allow the appeal and set aside the Order issued by the Federal Court. I would provide the following answer to the Rule 220 questions:An unsecured creditor can rely on the bona fide purchaser for value defence to defend against a claim by the Crown for the unremitted source deductions of an employer who paid proceeds from the sale of their property to the unsecured creditor. . Toronto-Dominion Bank v. Canada
In Toronto-Dominion Bank v. Canada (Fed CA, 2020) the Federal Court of Appeal considered the equitable title defence of taking property unknowing of an encumbrance:[73] First, in i Trade Finance Inc. v. Bank of Montréal, 2011 SCC 26, [2011] 2 S.C.R. 360, at paragraph 60, the Supreme Court quoted with approval the following explanation of the bona fide purchaser for value defence:The full name of the equitable defence is ‘bona fide purchase of a legal interest for value without notice of a pre-existing equitable interest.’ The effect of the defence is to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. In other terms, where the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights.
(L. Smith, The Law of Tracing (1997), at p. 386 (footnote omitted, underlining added))
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