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Federal Tax - Deemed Trusts. 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. . Jayco Inc. v. Canada (Revenue Agency)
In Jayco Inc. v. Canada (Revenue Agency) (Ont CA, 2022) the Court of Appeal considered the liability of the federal Crown to a statutory trustee required to collect GST/HST:[6] The appellant relies on s. 221(1) of the ETA, which requires a supplier to collect the tax payable by a recipient:221(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax […] payable by the recipient in respect of the supply. [7] The appellant argues that this provision made it an agent of the respondents when it carried out the instructions of the CRA to either pay or secure the taxes claimed. Accordingly, the appellant argues that it is entitled to an indemnity owed by a principal to an agent when the principal’s instructions turn out to be based on an erroneous view of tax liability. The appellant acknowledges that the weight of authority has concluded that auditors carrying out administrative duties under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) [the ITA] owe no duty of care to taxpayers, but it argues that s. 221(1) of the ETA makes the present relationship different.
[8] It is plain and obvious that this claim could not succeed.
[9] The motion judge held that the Supreme Court of Canada resolved the issues of indemnity raised by this appeal in Reference re Goods and Services Tax, 1992 CanLII 69 (SCC), [1992] 2 S.C.R. 445. The appellant, however, submits that reference questions are advisory opinions which are not a decision by a court on the merits and which bind no one: In Re Statutes of Manitoba relating to Education (1894), 1894 CanLII 80 (SCC), 22 S.C.R. 577, at pp. 677-678; Reference re Secession of Quebec, 1998 CanLII 793 (SCC), [1998] 2 S.C.R. 217, at para. 25.
[10] In Reference re Goods and Services Tax, Alberta argued that since suppliers were designated as agents of the government for the collection of the GST/HST, the common law duties of principals to agents were triggered, including a duty to reimburse agents for all costs and liabilities incurred in the course of the agency. The court found this to be an exaggeration of the common law duty of principals to agents, and adopted the language of Professor Fridman in The Law of Agency (5th ed. 1983), at p. 164:The most important duty of the principal is to remunerate the agent for services rendered. The obligation to pay such remuneration – the agent’s “commission” – exists only where it has been created by an express or implied contract between principal and agent. [11] The court concluded that the duty to remunerate the agent for costs incurred in the course of the agency does not arise automatically, and only arises in cases in which the principal and the agent contract, expressly or by implication, for such remuneration to be paid. In the case of the GST/HST, it concluded that there was no contractual duty of reimbursement arising expressly or by implication, although it left open the case of whether “there could ever arise a case in which governments would be under a duty to reimburse agents unilaterally created by statute for the costs incurred in the course of their agency”: at p. 476.
[12] The court went on to consider the common law right of indemnification for agents who inadvertently cause tortious injury to others in the course of their agency, and concluded that the collection of taxes as an agent in compliance with the ETA could not give rise to a right to indemnification: at pp. 476-477.
[13] Finally, the court noted that any right to remuneration for the time and trouble involved in collecting the GST/HST would have to flow from the Act itself. The Act was silent on compensation, though it provided for a one-time transitional credit. Since Parliament had directed its mind to the issue of compensation for the costs of compliance with GST/HST collection, and established a scheme for compensation, “common law rights which might have operated but for the statute cannot be relied upon”: at p. 478.
[14] Here, there is no question of express or implied contractual entitlement to reimbursement. There is no tortious liability to a third party which is the subject of a claim for indemnification. Section 221(1) of the ETA limits the agency to the “collection” of the tax from a recipient of a supply.
[15] Both the ITA and the ETA rely on self-reporting by taxpayers. Those acts establish administrative structures for the assessment and audit of taxpayers. When the CRA delivers a Notice of Assessment or Reassessment claiming that more taxes are owing and the taxpayer delivers a Notice of Objection, the parties are taking opposing positions. Under these circumstances, it cannot be said that the taxpayer is acting as agent of the tax authority when it incurs interest or legal costs in the course of asserting its position.
[16] Interest paid to post security for the taxes claimed, and legal fees incurred to contest the assessment, are not incurred for the “collection” of the tax from a recipient of a supply.
[17] In the face of the comprehensive statutory scheme providing for Notices of Objection, appeals to the Tax Court of Canada, judicial review and some remedies for overpayment, such as interest on refunds and awards of costs, the absence of statutory provisions for indemnification for other interest paid and other legal costs is telling. Here, the Tax Court of Canada awarded solicitor and client costs to Jayco. Section 221 does not provide a basis to infer a statutory entitlement to more costs and interest beyond that provided in the ETA and the Tax Court of Canada Act, R.S.C., 1985, c. T-2.[1]
[18] Reference re Goods and Services Tax is not binding, but it is persuasive. The motion judge was correct to conclude that it is plain and obvious that there is no right of indemnity arising from s. 221 of the ETA for the expenses claimed by the appellant. . Jayco Inc. v. Canada (Revenue Agency)
In Jayco Inc. v. Canada (Revenue Agency) (Ont CA, 2022) the Court of Appeal considered the negligence duty of care and proximity of the federal Crown to statutory trustees required to collect GST/HST:Does the CRA owe a duty of care in relation to its administrative and audit functions?
[19] The motion judge held that there was ample case law rejecting the proximity required to formulate a private law duty of care between the CRA and taxpayers facing an audit. While he noted that there could be a private law duty of care where the CRA undertook a criminal investigation, an investigator of criminal offences did not have the same relationship of an auditor to a taxpayer while carrying out administrative duties in an audit. This conclusion is so clearly right that the motion judge came to the correct decision in dismissing Jayco’s duty of care claim pursuant to r. 21.1(1)(b).
[20] Resolution of this issue turns on whether there is sufficient proximity between a taxpayer and the CRA to establish a prima facie duty of care. The relationship between the parties and broad questions of policy are relevant here: Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, at para. 30. The second stage of the inquiry asks whether there are residual policy considerations which should negate or limit that duty of care.
[21] Where a statutory regulator is mandated to protect the public interest, the creation of a private law duty of care may conflict with the regulator’s public duties. As noted in Imperial Tobacco, at paras. 43-45:A complicating factor is the role that legislation should play when determining if a government actor owed a prima facie duty of care. Two situations may be distinguished. The first is the situation where the alleged duty of care is said to arise explicitly or by implication from the statutory scheme. The second is the situation where the duty of care is alleged to arise from interactions between the claimant and the government, and is not negated by the statute.
The argument in the first kind of case is that the statute itself creates a private relationship of proximity giving rise to a prima facie duty of care. It may be difficult to find that a statute creates sufficient proximity to give rise to a duty of care. Some statutes may impose duties on state actors with respect to particular claimants. However, more often, statutes are aimed at public goods, like regulating an industry (Cooper), or removing children from harmful environments (Syl Apps). In such cases, it may be difficult to infer that the legislature intended to create private law tort duties to claimants. This may be even more difficult if the recognition of a private law duty would conflict with the public authority’s duty to the public: see, e.g., Cooper and Syl Apps. As stated in Syl Apps, “[w]here an alleged duty of care is found to conflict with an overarching statutory or public duty, this may constitute a compelling policy reason for refusing to find proximity” (at para. 28; see also Fullowka v. Pinkerton’s of Canada Ltd., 2010 SCC 5, [2010] 1 S.C.R. 132, at para. 39).
The second situation is where the proximity essential to the private duty of care is alleged to arise from a series of specific interactions between the government and the claimant. The argument in these cases is that the government has, through its conduct, entered into a special relationship with the plaintiff sufficient to establish the necessary proximity for a duty of care. In these cases, the governing statutes are still relevant to the analysis. For instance, if a finding of proximity would conflict with the state’s general public duty established by the statute, the court may hold that no proximity arises: Syl Apps; see also Heaslip Estate v. Mansfield Ski Club Inc., 2009 ONCA 594, 96 O.R. (3d) 401. However, the factor that gives rise to a duty of care in these types of cases is the specific interactions between the government actor and the claimant. [22] Here, the mandate of the CRA is to ensure that taxpayers pay taxes that are lawfully owed, for the benefit of all taxpayers and the country as a whole. The ETA establishes a comprehensive regime to deal with disputes over taxes owing, including appeals and judicial review. Recognition of a private law duty here would conflict with the agency’s duty to the public; there is nothing in the legislative scheme to suggest that such a duty was contemplated. The administrative regime for enforcement of the GST/HST is broadly similar to that in place to enforce the ITA.
[23] There are many instances where courts have held that broad statutory public duties foreclose a private law duty of care. As noted in Reference re Broome v. Prince Edward Island, 2010 SCC 11, [2010] 1 S.C.R. 360, such public duties do not generally, in and of themselves, give rise to private law duties of care: at para. 13; see also Eliopoulos v. Ontario (Minister of Health & Long Term Care) (2006), 2006 CanLII 37121 (ON CA), 82 O.R. (3d) 321 (Ont. C.A.); and River Valley Poultry Farm Ltd. v. Canada (Attorney General), 2009 ONCA 326, 95 O.R. (3d) 1.
[24] Nor is there anything in the specific relationship between the appellant and the CRA that suggests that a finding of sufficient proximity would be appropriate. That the CRA was ultimately shown to have been wrong to assess the appellant for the taxes it claimed is not enough.
[25] The appellant argues that McCreight v. Canada (Attorney General), 2013 ONCA 483, 116 O.R. (3d) 429 holds that in some circumstances, revenue authorities will owe a duty of care to a taxpayer.
[26] In McCreight, the CRA was concerned that taxpayers and their accountants were applying for fraudulent research and development credits. It obtained search warrants for the homes and businesses of the taxpayers, their lawyers and accountants. It was authorized to retain the materials seized until July 1999. It had not completed its examination of the materials by then and applied for an extension. It was ordered to return the original materials by November 9, 1999.
[27] On November 9, 1999, criminal charges were laid against various taxpayers and advisors alleging fraud and conspiracy. There was a judicial finding that the information in support of the charges was sworn “primarily to retain possession of the seized documents”: at para. 6. The criminal charges were ended by discharges, withdrawals or stays.
[28] The plaintiffs sued for a variety of causes of action, including negligence. This court overturned the motion judge’s ruling that it was plain and obvious that the CRA investigator owed no duty of care to the plaintiffs, at paras. 60-62:In my view, in this case, the motion judge erred in concluding that it was plain and obvious that the respondent CRA investigators did not owe a duty of care to McCreight and Skinner, policy considerations would foreclose such a duty in any event and, therefore, the negligence claim had no reasonable prospect of success and should be struck.
Firstly, given the Supreme Court's ruling in Hamilton-Wentworth that, in certain circumstances, police officers may owe a duty of care to their suspects, surely it is not plain and obvious that a CRA investigator owes no such duty when operating under ITA provisions that attract criminal sanction and under the Criminal Code. The same analogical reasoning applies to any residual policy rationale that could negate such a duty.
Secondly, I see no relevant distinction between the above-cited case of Leroux and this case. That case that involved a claim of negligence against CRA employees as well and the British Columbia Court of Appeal dismissed an appeal of an order permitting the cause of action to proceed to trial. The Court was not persuaded that the claim should be struck because it was at least arguable that such a cause of action could succeed and the issue was to be considered at trial. [29] The critical distinction that made McCreight different from the present case was the institution of criminal proceedings. Hill v. Hamilton‑Wentworth Regional Police Services Board, 2007 SCC 41, [2007] 3 S.C.R. 129 established that police officers have a duty in certain circumstances to an identified suspect to conduct a reasonable investigation.
[30] This court’s approval of Leroux v. Canada Revenue Agency, 2012 BCCA 63, 347 D.L.R. (4th) 122 as a basis to allow the action to proceed where criminal charges have been laid does not amount to affirmation that a duty of care also exists when the CRA undertakes administrative assessments and audits.
[31] As the court noted in McCreight, it is not plain and obvious that CRA investigators owe no duty of care to those they are investigating when operating under ITA provisions that attract criminal sanction and under the Criminal Code: at para. 61.
[32] Here, the appellant’s proximity claim was “made in a non-criminal investigation where only its economic interests were at stake. Any liberty interests it might have had were not threatened and it asserted no Charter rights”: River Valley, at para. 51.
[33] Policy reasons also favour rejection of a private law duty of care in relation to administrative assessments and audits. Such a duty would expose the government to unlimited liability to a practically unlimited class: taxpayers.
[34] I agree with the views expressed in Grenon v. Canada Revenue Agency, 2017 ABCA 96, 49 Alta. L.R. (6th) 228, at para. 25, leave to appeal refused, [2017] 2 S.C.R. vii (note):[I]t is plain and obvious that an action in negligence cannot succeed. It is clear that, because of the inherently adverse relationship between auditors who are exercising a statutory function and taxpayers, a finding of sufficient proximity to ground a private law duty of care does not exist. [35] I conclude that the motion judge was correct to conclude that the CRA did not owe a private law duty of care to Jayco when it assessed Jayco for the taxes it claimed were owing.
[36] A taxpayer may not be left without a remedy where it can establish the ingredients of an intentional tort, such as misfeasance in public office, which requires a showing of deliberate unlawful conduct in the exercise of public functions and awareness of the unlawfulness of the conduct and the likelihood of injury to the plaintiff: Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, at para. 23. Here, the appellant has not established any such intentional tort. . Canada v. Canada North Group Inc.
In Canada v. Canada North Group Inc. (SCC, 2021) the Supreme Court of Canada distinguishes common law trusts from statutory tax deemed trusts at paras 32-57.
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