Tenth Annual Lloyd Houlden Fellowship
The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) is proud to present the 10th Annual Lloyd Houlden Fellowship paper.
The Interplay between Statutory Trusts and
the Bankruptcy and Insolvency Act
By Isabel Langlois, B.A., LL.B., LL.M., Associate at Bennett Jones LLP Calgary
Acknowledgements: I would like to thank Howard Gorman, Q.C. and Randal Van de Mosselaer for their helpful comments on this paper, Sarah Ivany for her editing work and Chris Miller for his research assistance. Errors and omissions are of course my sole responsibility. The views expressed in this research paper are mine and should not be taken as representing those of the Canadian Association of Insolvency and Restructuring Professionals or Norton Rose Fulbright Canada LLP or Bennett Jones LLP. This research paper is not intended to provide legal advice.
PART I. INTRODUCTION
Over the course of the last fifty years, the federal Parliament and provincial legislatures have enacted a variety of legislation containing statutory trust provisions in an attempt to by-pass the claims of secured creditors and circumvent the scheme of distribution set forth in the Bankruptcy and Insolvency Act. In recent years, courts across Canada have issued conflicting decisions concerning the treatment of statutory trusts in the bankruptcy context, particularly those arising pursuant to provincial construction lien legislation. Although such statutory trusts are effective when a business is solvent and operating, Canadian courts have been unable to agree whether funds subject to these statutory trusts constitute trust property for the purposes of subsection 67(1)(a) of the BIA, such that they are excluded from the debtor’s bankrupt estate. Despite the conflicting decisions, the Supreme Court of Canada recently denied leave to appeal in Iona Contractors Ltd v Guarantee Company of North America, which would have been the perfect occasion to clarify the law on the interplay between statutory trusts and the BIA.
A review of the jurisprudence suggests that Canadian courts have misunderstood when and how the “three certainties” required for valid common law trusts may be established in the case of statutory trusts. In particular, courts have disagreed on the interpretation of the 1989 Supreme Court of Canada decision British Columbia v Henfrey Samson Belair Ltd, and whether certainty of intention and certainty of object may be implied by the wording of statutory trust provisions. Other courts have disagreed on when and how certainty of subject-matter may be established. Indeed, several courts have allowed statutory trusts to survive bankruptcy in cases where the three certainties were clearly not present. As a result of this confusion, it has become increasingly difficult to predict whether a particular statutory trust will survive bankruptcy.
This research paper will provide insolvency professionals with an overview of fundamental trust principles and a basic understanding of how both the legislative and judicial treatment of statutory trusts in Canada have evolved over the past fifty years. By situating the recent case law within this broader historical context, I hope to provide clarity regarding how and why the inconsistencies in the current jurisprudence developed. I will argue that unless the BIA is amended, only the statutory trusts that fall within the narrow exceptions set out in the BIA andthe statutory trusts that possess the characteristics of valid common law trusts should survive bankruptcy. To hold otherwise is contrary to the scheme of distribution provided under the BIA and the legislative evolution of bankruptcy legislation.
This research paper is divided into four parts. Following this introduction, Part II will outline the Canadian bankruptcy regime, including relevant sections of the BIA and the doctrine of paramountcy. Part III will summarise the origin of common law trusts. Part IV will set out the legislative history of statutory trusts and the provisions of the BIA that address those trusts. Finally, Part V will identify current inconsistencies and issues in the recent jurisprudence.
PART II. THE CANADIAN BANKRUPTCY REGIME
- Constitutional Powers and the Doctrine of Paramountcy
Under the Constitution Act, the Parliament of Canada has the exclusive legislative authority to enact laws with respect to bankruptcy and insolvency. Provincial legislatures, on the other hand, have the exclusive legislative authority to enact laws with respect to property and civil rights, including laws relating to tort, contract, and property.
The BIA, a federal statute, is Canada’s primary insolvency legislation and governs the bankruptcy regime. It provides a mechanism through which creditors can assert claims against the estate of a bankrupt debtor. When a debtor files for bankruptcy, a trustee in bankruptcy is appointed and the assets of the debtor vest in the trustee. The trustee sells those assets and distributes the proceeds to the bankrupt’s creditors according to a specific scheme of distribution set out in subsection 136(1) of the BIA. The claims of secured creditors have priority, followed by certain preferred creditors, including claims for unpaid wages and rents and municipal taxes, amongst others. Remaining proceeds, if any, are then divided pro rata amongst the unsecured creditors.
Provincial legislation governs the priority of creditors when the debtor does not have the status of bankrupt. However, the legal doctrine of paramountcy provides that if a provincial statute overlaps with the BIA and the terms of the two statutes conflict, the provincial legislation remains valid but is deemed to be inoperative to the extent that it conflicts with the BIA. Subsection 72(1) of the BIA codifies this doctrine, and states that provincial legislation relating to property and civil rights applies in the bankruptcy context, provided there is no conflict with the provisions of the BIA.
- Subsection 67(1)(a) of the BIA
Subsection 67(1) of the BIA states that certain property held by the bankrupt does not form part of the bankrupt estate, and so it cannot be distributed amongst creditors. Importantly, subsection 67(1)(a) states that the property of a bankrupt does not include “property held by the bankrupt in trust.” The phrase “property held by the bankrupt in trust” is not defined in the BIA and courts across Canada have been inconsistent in their application of subsection 67(1)(a). In particular, there is conflicting jurisprudence regarding whether property that is the subject of statutory trusts is exempt from distribution by virtue of this provision.
PART III. COMMON LAW TRUSTS
- The Characteristics of Common Law Trusts
The trust has its origin in the English court of equity. A trust arises when one person (the settlor), transfers property to another person (the trustee), who holds the property in trust for the benefit of a third person (the beneficiary). Initially, the settlor holds both the legal and equitable title to the property. When a trust is created, the settlor divides the ownership of the property between the trustee and the beneficiary, transferring the legal title to the trustee and the equitable title to the beneficiary. Generally, the settlor will stipulate the terms upon which the trustee must manage the trust property in a trust instrument. The trustee owes fiduciary obligations to the beneficiary and is compelled by equity to hold and manage the trust property according to the terms of the trust instrument.
The most important feature of a trust is that it allows more than one person to have rights in the same property concurrently. There is, in effect, dual ownership as the interests in the property are shared between the trustee and the beneficiary. This is particularly important in the bankruptcy context as property in respect of which the bankrupt holds legal title does not form part of the bankrupt estate and will not be available to the bankrupt’s creditors if the trustee becomes bankrupt. If a trustee is petitioned into bankruptcy, the legal title of the trust property will vest in the trustee in bankruptcy, but the beneficiary will retain its equitable interest in the property. As such, the beneficiary’s proprietary claim to the trust property will have priority over the claims of all the trustee’s creditors, including secured creditors.
- Types of Common Law Trusts
There are two primary types of common law trusts: express trusts and trusts that arise by operation of law. An express trust is created when the settlor transfers property to a trustee and makes it clear that the trustee is to hold the property for the benefit of the beneficiary. The three requirements to create a valid express trust are: 1) certainty of intention; 2) certainty of subject-matter; and 3) certainty of object.
a) The Three Certainties
To create a valid express trust, it must be clear that the settlor’s intention is to create a trust. If it is unclear whether the settlor intended to transfer the property as a gift, or whether the settlor simply intended to impose a moral obligation upon someone else, no trust can exist. Secondly, it must be possible to identify the property that is subject to the trust with certainty. The trust property must be sufficiently segregated from the trustee’s other non-trust property. Finally, the settlor must make the identity of the beneficiary clear. A trust can have more than one beneficiary but, at the time the trust is created, the identity of all beneficiaries must be ascertainable.
b) Trusts arising by Operation of Law
Other trusts, including constructive and resulting trusts, arise by operation of law, and are often imposed by courts as equitable remedies. For example, a court may declare that, due to of some form of misconduct or the unjust enrichment of a defendant, the defendant holds certain property in trust for the plaintiff. No certainty of intention is required with constructive and resulting trusts because the trusts are declared by the courts based on the principles of equity.
- Remedy for Breach of Trust
A breach of trust will occur if the trustee fails to manage the trust property in accordance with the terms of the trust instrument. There are two remedies available to the beneficiary in the case of a breach of trust. First, the beneficiary has proprietary rights in the trust property and may bring a claim against the trust property itself. Second, the trustee may bring a claim against the trustee in its personal capacity.
a) Remedy against Trust Property
The beneficiary’s equitable interest in the property is also a right in the property. This proprietary right allows the beneficiary to “trace” the trust property into other forms and/or into the hands of certain third parties if the trustee improperly converts or disposes of the trust property. There is no limit to the number of transfers through which the beneficiary may trace trust property. If the trust property consists of certain funds and they become mixed with other funds, the rules of tracing can identify the trust funds. However, if the trust funds are mixed with other funds such that the trust funds cannot be traced and identified, it will become impossible for the beneficiary to reclaim the trust property. A beneficiary may not trace trust property if the property is acquired by a bona fide purchaser for value without notice of the trust.
b) Remedy against the Trustee Personally
The trustee may be personally liable to the beneficiary for any loss suffered if the original trust property cannot be traced. If the trustee is unable to restore the original trust property (i.e. if the trust property was a unique object), the beneficiary may request that the trustee compensate the beneficiary for the value of the trust property with its own money. The beneficiary can also pursue third parties who have participated and assisted in a breach of trust or knowingly received trust property in breach of trust.
PART IV. LEGISLATIVE HISTORY OF STATUTORY TRUSTS
- Origin of Statutory Trusts
At its origin, the trust mechanism was most commonly known and utilised in the administration of family estates. Both federal and provincial legislatures have expanded the trust mechanism into a wide variety of legislation to afford protection to certain groups of people that otherwise would have little or no protection. For instance, statutory trust provisions require employers to hold vacation pay and pension benefits in trust for the benefit of their employees; real estate brokers to hold money in trust for the benefit of their sales agents; travel agencies to hold money in trust for the benefit of airline companies and hotels; load brokers to hold money in trust for the benefit of carriers of goods; and contractors to hold money in trust for the benefit of sub-contractors and suppliers. Certain statutory trusts “deem” trust property to be held separate and apart from other non-trust property, whether or not the funds are actually kept separate and apart. The most common types of statutory deemed trusts are trusts created in favour of the Crown.
- Historical Evolution of Statutory Deemed Trusts in Favour of the Crown
When the first Canadian bankruptcy statute was enacted, the majority of creditors were unsecured and the Crown enjoyed the status of a preferred creditor. However, in the decades that followed, new methods of financing were developed and the number and types of secured lenders increased. As a result, despite its status as preferred creditor, the Crown rarely received any proceeds from the distribution of bankrupt estates. It is against this backdrop that both the federal Parliament and provincial legislatures enacted legislation with mechanisms such as liens and deemed trusts to by-pass the claims of secured creditors.
In particular, the legislatures enacted statutory deemed trust provisions to protect the federal and provincial Crowns’ ability to collect source deductions and goods and services taxes. In the ordinary course, businesses collect income taxes, unemployment insurance premiums and pension plan contributions from their employees, in addition to sales taxes on goods and services, and are expected to remit those amounts to the Crown. However, a business experiencing financial difficulties will often draw on those collections to service cash flow problems. To address this reality, federal and provincial governments incorporated statutory trust provisions into various tax statutes that deem the funds collected by businesses on behalf of the Crown to be held in trust for the benefit of the Crown, whether the funds are actually segregated from the businesses’ other operating funds.
In the 1980s and early 1990s, the Supreme Court of Canada heard a series of cases that tested the validity of the Crown’s new legislative devices in a bankruptcy context. Ultimately, the Court held that in non-bankruptcy situations, provincial legislation could validly create liens to secure debts as against the property of a debtor. However, once bankruptcy occurred, subsection 107(1) of the Bankruptcy Act (now subsection 136(1) of the BIA) determined the ranking of competing claims.
The first case in which the Supreme Court of Canada considered a statutory deemed trust was the 1989 decision British Columbia v Henfrey Samson Belair Ltd. The Supreme Court was asked to determine whether property subject to a statutory trust in favour of the Crown created under the British Columbia Social Service Tax Act constituted “property held by the bankrupt in trust” under the BIA such that it was excluded from the estate of the bankrupt corporation. The legislation stated that the defendant corporation was deemed to hold the provincial sales tax it collected in trust for Her Majesty in right of British Columbia. The corporation failed to remit the tax and co-mingled the tax funds with other funds. The corporation was later assigned into bankruptcy and the Crown claimed a statutory trust over the assets of the corporation equal to the amount of the sales tax collected but not remitted.
Justice McLachlin, writing for the majority of the Supreme Court of Canada, held that the phrase “property held by the bankrupt in trust for any other person” only referred to property held under a valid common law trust because, in equity, that property belongs to another person. She found that it was not the intention of the legislature to allow property subject to a statutory trust to be removed from the bankrupt estate unless such a trust had all the elements necessary to constitute a valid trust at common law. With respect to the sales tax at issue in the case, Justice McLachlin noted:
 I turn next to s. 18 of the Social Service Tax Act and the nature of the legal interests created by it. At the moment of collection of the tax, there is a deemed statutory trust. At that moment the trust property is identifiable and the trust meets the requirements for a trust under the principles of trust law. The difficulty in this, as in most cases, is that the trust property soon ceases to be identifiable. The tax money is mingled with other money in the hands of the merchant and converted to other property so that it cannot be traced. At this point it is no longer a trust under general principles of law. In an attempt to meet this problem, s. 18(1)(b) states that tax collected shall be deemed to be held separate from and form no part of the collector's money, assets or estate. But, as the presence of the deeming provision tacitly acknowledges, the reality is that after conversion the statutory trust bears little resemblance to a true trust. There is no property which can be regarded as being impressed with a trust. Because of this, s. 18(2) goes on to provide that the unpaid tax forms a lien and charge on the entire assets of the collector, an interest in the nature of a secured debt.
Justice McLachlin found that the tax funds had been co-mingled such that certainty of subject-matter could not be established. She held that the tax collected was not excluded from the bankrupt estate and was available for distribution to the creditors. Although Justice McLachlin stated that there was no conflict between the Social Service Tax Act and the BIA, she cautioned that extending subsection 47(a) of the BIA (now subsection 67(1)(a) of the BIA) to include all provincially created statutory trusts would permit the provinces to create their own priorities under the BIA, and improperly encroach on the federal Parliament’s exclusive legislative authority over bankruptcy. She also noted, however, that even though the provinces did not have the jurisdiction to re-order the priorities specified in the BIA, they may still create statutory trusts that will survive bankruptcy, but only if those trusts contain all the elements required for a valid trust at common law.
On the facts of Henfrey, Justice McLachlin reached the correct conclusion. Unfortunately, her analysis of trust law only addressed certainty of subject-matter, and she omitted any discussion regarding certainty of intention or certainty of object. As a result, several courts have since interpreted the majority decision in Henfrey as authority to imply certainty of intention from the words of the statute. Further, Justice McLachlin did not address the possibility that the trust funds, despite having been mixed with the corporation’s other funds, may be traceable and therefore identifiable.
- Amendments to Bankruptcy Legislation in 1992
In 1992, shortly after Henfrey, several significant amendments were made to the BIA. Amendments to Canadian bankruptcy legislation had been contemplated for years, with several failed attempts occurring between 1970 and 1984. During that same period several advisory committees were tasked with studying Canadian bankruptcy laws and providing recommendations. In 1970, the Advisory Committee on the Bankruptcy and Insolvency Act published its recommendations, known as the Tassé Report. With respect to Crown claims, the Tassé Report cautioned against the use of statutory deemed trusts in bankruptcy situations, because they grant a privilege to the Crown that is not available to other creditors. The Tassé Report did not object to the creation of secured interests by provincial legislation, but it recommended that those security interests be registered so that notice could be provided to other creditors:
3.2.043 We are of the opinion that the use of deemed trusts to circumvent the scheme of distribution in the Bankruptcy Act should be avoided, where there is not, in the estate, at the time of the bankruptcy, sufficient money to satisfy the claim of the government for the money deducted.
3.2.044 Statutory Charges: The scheme of distribution has also been circumvented by provincial legislation making a department or agency of government a secured creditor for amounts owed to it. This would not be objectionable if the department or agency had to perfect their security under the laws applicable to other secured creditors. But this is not generally so. Moreover, the preference, given to the department or agency of government by this type of legislation, may further injure the other creditors who, not knowing of the outstanding security interest may extend credit to the debtor. For these reasons, we recommend that governments should be subject to the same rules for the perfection of their security interests as are applicable to other creditors holding similar securities.
The Report of the Advisory Committee on Bankruptcy and Insolvency published in 1986, known as the Colter Report, went even further and recommended the abolition of Crown priorities, including all liens and statutory trusts. Bill C-22, which incorporated recommendations from both the Tassé Report and the Colter Report, was introduced to the House of Commons in June 1991. In October 1991, the House of Commons Standing Committee on Consumer and Corporate Affairs published a report on the pre-study of Bill C-22. The Standing Committee described the changes with respect to Crown claims as follows:
Under section 136 of the Bankruptcy Act, claims of the federal and provincial governments are given a preferred ranking over the claims of ordinary unsecured creditors. These claims must be paid in full before other unsecured creditors receive any distribution from a bankrupt’s estate.
In addition to this statutory priority, the federal and most provincial governments have created statutory deemed trusts and deemed liens which are intended to take priority over secured creditors. Pursuant to a deemed trust, certain sums of money are presumed to be held in trust for the Crown. The deemed trust device effectively circumvents section 136 because section 67 of the Act excludes from the estate of a bankrupt all property held in trust for another person. The federal government has used this legal fiction in respect of claims for amounts deducted from employees under the Canada Pension Plan, the Unemployment Insurance Act and the Income Tax Act. Provinces have created statutory deemed trusts and liens to cover amounts owing for wages, vacation pay and sales tax.
Bill C-22 and Crown Priorities
Bill C-22 would limit the ability of the federal and provincial governments to give their claims priority over creditors. The Crown would lose its preferred creditor status under section 136 of the Act and, subject to a number of exceptions, Crown claims would be treated as ordinary unsecured claims.
One exception would relate to statutory security interests (a security interest created by law for the purpose of protecting the position of the Crown). Statutory security in respect of amounts owing to the federal and provincial governments would be valid in a bankruptcy or under a proposal if registered before the bankruptcy or the date on which the notice of intention or proposal was filed. Such security would be subordinate to any previously registered competing security.
In addition, certain statutory security interests for source deductions under the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act would be exempt from the registration requirement for security interests and would have priority over other claims. Provincial statutory security interests for source deductions of income tax and public pension plan premiums in a province which collects its own income taxes or administers its own pension plan would also enjoy priority in relation to a bankruptcy or proposal.
Statutory deemed trusts would no longer be recognized in a bankruptcy. Deemed trusts for source deductions or amounts withheld under the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act would however, continue to be valid. Deemed trusts for source deductions for income tax and provincial pension plan premiums under provincial income tax and pension plan legislation would also be exempt from the non-recognition of deemed trusts.
Bill C-22 received Royal Assent in June 1992. As part of the amendments, the Crown lost its status as a preferred creditor. Subsection 86(1) of the BIA now provides that the Crown has the status of an ordinary unsecured creditor. However, Parliament created certain exceptions in favour of the Crown. Subsection 87(1) of the BIA provides that claims that arise by provincial and federal legislation in favour of the Crown will survive bankruptcy and become secured claims if properly registered in the prescribed system of registration prior to the bankruptcy. Subsections 67(2) and (3) deal specifically with statutory deemed trusts arising in favour of the Crown. Subsection 67(2) abolishes all deemed trusts except for those that would otherwise be valid at common law. Subsection 67(3) creates exceptions for deemed trusts arising pursuant to the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan, and their provincial equivalents. Subsections 67(2) and (3) of the BIA now provide:
(2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision.
(3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which is in this subsection referred to as a “federal provision”) nor in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where
(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4) or (4.1) of the Income Tax Act, or
(b) the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan, that law of the province establishes a provincial pension plan as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan,
and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision.
- Continued Evolution of Statutory Deemed Trust Provisions: Sparrow, First Vancouver, and Caisse Populaire
The 1992 amendments to the BIA prompted yet more litigation testing the deemed trust provisions in the Income Tax Act, the Employment Insurance Act, and the Canada Pension Plan, and those statutes were amended several times in response. Ultimately, as a result of successive rounds of litigation and legislative amendments, the Crown’s deemed trusts arising pursuant to the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan, and their provincial equivalents, now have a “super-priority” status in bankruptcy.
The first important case to consider the treatment of statutory deemed trusts in the wake of the 1992 amendments was Royal Bank v Sparrow Electric Corp. In Sparrow, the debtor failed to remit payroll deductions as mandated by the Income Tax Act. The debtor was petitioned into bankruptcy and the Crown invoked a deemed trust over the proceeds of the debtor’s inventory. The bank asserted priority by virtue of both a general security agreement and an assignment of inventory under the Bank Act. Justice Iacobucci, writing for the majority of the Supreme Court of Canada, held that the bank’s security was a fixed and specific charge over the inventory. Since the inventory was subject to the bank’s security interest before the deductions giving rise to the deemed trust occurred, the bank’s interest attached to the inventory prior to the deemed trust taking effect and therefore had priority over the deemed trust. Justice Iacobucci went on to state that the language of the deemed trust provisions, at the time, did not grant the Crown absolute priority over secured creditors and that, “it [was] open to Parliament to step in and assign absolute priority to the deemed trust.”
In response to Sparrow, the deemed trust provisions of the Income Tax Act were amended in 1998 to their current form. Particularly, subsection 227(4)-(4.2) was amended to include the phrase “notwithstanding any security interest.” Under the current deemed trust provisions, the deemed trust is triggered the moment there is a default in remitting source deductions and attaches to both real and personal property of the debtor. The property is held under a trust for the benefit of the Crown notwithstanding any security interest registered against the property. However, subsection 227(4.2) of the Income Tax Act provides that deemed trusts in favour of the Crown do not defeat a “prescribed security interest.” A “prescribed security interest” is defined in the Income Tax Regulations and includes a mortgage securing the performance of an obligation provided the mortgage is registered against title before the deemed trust arises.
The Supreme Court of Canada considered the new deemed trust provisions in First Vancouver Finance v Minister of National Revenue. In that case, a factoring company entered into a factoring agreement with a company to purchase its accounts receivable at a discount. Once each account was sold to the factoring company, individual debtors were notified that subsequent payments should be made directly to the factoring company. The company failed to remit source deductions before it was assigned into bankruptcy. The Crown asserted a deemed trust over an account receivable the company had assigned to the factoring company. Justice Iacobucci, writing for the majority, held that the account receivable was impressed with a deemed trust in favour of the Crown. He explained that when the factoring company came into possession of the account receivable, the deemed trust had already attached to the account. He further explained that the factoring company was a third party purchaser of a book of debt and not a secured creditor. As the trust did not attach specifically to any assets of the tax debtor, the debtor was free to alienate its property. When an asset was sold by the tax debtor to a bona fide purchaser for value without notice, the deemed trust ceased to operate over that asset, but the deemed trust attached to the proceeds of sale.Justice Iacobucci compared the deemed trust device to a floating charge:
 […] I find that the s. 227(4.1) deemed trust is similar in principle to a floating charge over all the tax debtor’s assets in favour of the Crown. The trust arises the moment the tax debtor fails to remit source deductions by the specified due date, but is deemed to have been in existence from the moment the deductions were made. As long as the tax debtor continues to be in default, the trust continues to float over the tax debtor’s property. Thus, at any given point in time, whatever property then belonging to the tax debtor is subject to the deemed trust.
First Vancouver confirmed that the intent of Parliament in drafting the statutory deemed trust provisions in the Income Tax Act was to grant a super-priority to the deemed trust in respect of property that is already subject to a security interest. Later decisions, including Ministre du Revenue national c Caisse Populaire de bon Conseil, confirmed that the deemed trust provisions allow the Crown to recover trust property from third parties, whether or not the third parties have knowledge of the deemed trust. In that case,a company offered a term deposit to the Caisse to secure an extension on its line of credit. The company defaulted on its line of credit and failed to remit income tax and employment insurance premiums to the Crown. The company made an assignment into bankruptcy and the Caisse used the term deposit to set-off the outstanding line of credit. The Crown alleged a deemed trust over the term deposit and asked the Caisse to turn over an amount equal to the company’s unremitted source deductions. Justice Rothstein, writing for the majority of the Supreme Court of Canada, found that the term deposit constituted a “security interest” within the meaning of the Income Tax Act, and held that the Crown’s deemed trust took priority over the term deposit.
Deemed trusts are powerful tools that bear little resemblance to common law trusts, and their use has historically been justified by unique policy considerations. Courts have repeatedly stated that source deductions are “at the heart” of income tax collection in Canada. Courts have also recognised that the Crown does not have the same level of knowledge regarding the tax debtor as that debtor’s bank or other secured lenders, and it cannot assess risk or structure its affairs with the tax debtor in the same way. Thus, as an “involuntary creditor,” the Crown must rely on the important vehicle of deemed trusts to collect source deductions that employers fail to remit. More recently, policy considerations have also been used to protect employees and to justify the creation of a super-priority in favour of certain pension benefits.
- Pension Claims in Bankruptcy
If an employer participates in a prescribed pension plan, the employer is required, amongst other things, to deduct pension contributions from its employees’ wages and to make contributions to the pension fund. If the pension plan is underfunded, special payments may also be required. Several provinces have incorporated deemed trust provisions in pension benefits legislation in an attempt to protect employees’ pension benefits from the claims of secured creditors. Pension benefits legislation varies from province to province. For instance, in Ontario, subsection 57(1) of the Pension Benefits Act provides that “where an employer receives money from an employee under an arrangement that the employer will pay the money into a pension fund as the employee’s contribution under the pension plan, the employer shall be deemed to hold the money in trust for the employee until the employer pays the money into the pension fund.”
Prior to the amendments to the BIA in 2008, courts have relied on Henfrey to find that in bankruptcy situations, unless a valid trust at common law could be established, employees could not rely on deemed trust provisions of pension benefits legislation to claim priority for their pension benefits. For instance, in Continental Casualty Co v MacLeod-Stedman Inc, the bankrupt employer had not detailed the retirement pension plan contributions it was obliged to make on its employees’ behalf pursuant to the Manitoba Pension Benefits Act, and had no specific fund set aside to represent those contributions. The Pension Benefits Act provided that any sum required to be contributed to a pension plan by an employer shall, when due, be deemed to be held by the employer in trust for the plan, whether or not the sum had been kept separate. On appeal, Appellate Justice Helper for the Manitoba Court of Appeal found that the pension claim did not have the attributes of a common law trust and was therefore not covered by subsection 67(1)(a) of the BIA. Appellate Justice Helper stated that Parliament’s intention under subsection 67(1)(a) was to identify trusts under general trust law principles, and that statutory trusts not meeting common law trust criteria could not be recognised in bankruptcy proceedings. Appellate Justice Helper further stated that subsection 136(1) of the BIA sets out a complete scheme for distributing assets upon bankruptcy, leaving no room for the concurrent operation of provincial legislation affecting that scheme. To treat the employer’s debt to the pension plan as a deemed trust under the Pension Benefits Act, and to remove part of the employer’s assets representing that debt from its estate, would have the effect of reordering priorities set out in subsection 136(1). Finally, Appellate Justice Helper stated that the reasoning in Henfrey was not limited to provincial Crown claims but had progressively and finally provided a definite ruling on the relationship between priorities under the BIA and any other provincial statute which directly or indirectly affects priorities.
Similarly, in Graphicshoppe Ltd, Re, the employees of the bankrupt company filed a proof of claim with the trustee in bankruptcy for their pension plan contributions. The employees relied on subsection 67(1)(a) of the BIA to argue that their pension plan contributions were property held by the bankrupt in trust. The trustee in bankruptcy disallowed the employees’ claim on the basis that the employees were unable to trace their pension plan contributions into the property in the possession of the bankrupt at the date of the bankruptcy. Appellate Justice Moldaver writing for the majority of the Ontario Court of Appeal held that the trustee in bankruptcy had correctly determined that the employee contributions did not constitute trust funds under subsection 67(1)(a) of the BIA. Also relying on Henfrey, Appellate Justice Moldaver found that the employer held its employees’ pension contributions in trust when it deducted them from their employees’ pay. At that moment, the trust property was identifiable and the trust met the requirements of a trust under established principles of trust law. Shortly thereafter however, the trust property ceased to be identifiable. The employee contributions were commingled with the employer’s other funds and, prior to the date of bankruptcy, they were converted into other property and were no longer traceable. Appellate Justice Moldaver held that the employees had a trust interest and a right to seek a proprietary remedy with respect to the pension contributions so long as they could be identified or traced. However, once the trust funds had been converted into property that could not be traced, the employees’ claims under subsection 67(1)(a) of the BIA were extinguished.
In addition to several amendments regarding employees’ unpaid wages, the BIA was amended effective July 2008 to provide for a super-priority for unremitted contributions to pension plans. Section 81.5 now creates a charge over all of the debtor’s assets above every other claim, right, charge or security of the debtor to secure: 1) an amount equal to the sum of all amounts that were deducted from the employees’ remuneration for payment to the fund, 2) an amount equal to the normal cost that was required to be paid by the employer to the fund, and 3) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision. The priority charge under section 81.5 of the BIA is narrow in scope and is limited to certain pension claims. For instance, the super-priority charge does not apply to special payments. All other pension claims, including the contributions deemed to be held under a trust by provincial pension benefits legislation, will be considered unsecured claims, unless the employer has segregated the pension plan contributions and a valid common law trust can be established. A pension plan is defined in the Bankruptcy and Insolvency General Rules as “a pension plan regulated by an Act of Parliament or of the legislature of a province.”
The charge has a super-priority against all of the assets of the debtor, ranking ahead of the claims of secured creditors, except for 1) the rights of unpaid suppliers to repossess goods and the rights of farmers, fisherman and aquaculturists to a secured charge against the inventory pursuant to sections 81.1 and 81.2 of the BIA, 2) deemed trusts in favour of the Crown pursuant to subsection 67(3) of the BIA, and 3) security for unpaid wages pursuant to sections 81.3 and 81.4 of the BIA. Given that the pension charge may erode the security of secured creditors in the debtor’s assets, subsection 136(1) of the BIA was also amended by way of subsection 136(1)(d.02) to give secured creditors a preferred claim equal to the difference a secured creditor would have received but for the operation of section 81.5 and the amount actually received by the secured creditor. Section 81.5 of the BIA now provides:
Security for unpaid amounts re prescribed pensions plan — bankruptcy
81.5 (1) If the bankrupt is an employer who participated or participates in a prescribed pension plan for the benefit of the bankrupt’s employees, the following amounts that are unpaid on the date of bankruptcy to the fund established for the purpose of the pension plan are secured by security on all the assets of the bankrupt:
(a) an amount equal to the sum of all amounts that were deducted from the employees’ remuneration for payment to the fund;
(b) if the prescribed pension plan is regulated by an Act of Parliament,
(i) an amount equal to the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that was required to be paid by the employer to the fund, and
(ii) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985,
(iii) an amount equal to the sum of all amounts that were required to be paid by the employer to the administrator of a pooled registered pension plan, as defined in subsection 2(1) of the Pooled Registered Pension Plans Act; and
(c) in the case of any other prescribed pension plan,
(i) an amount equal to the amount that would be the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament,
(ii) an amount equal to the sum of all amounts that would have been required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985, if the prescribed plan were regulated by an Act of Parliament, and
(iii) an amount equal to the sum of all amounts that would have been required to be paid by the employer in respect of a prescribed plan, if it were regulated by the Pooled Registered Pension Plans Act.
Rank of security
(2) A security under this section ranks above every other claim, right, charge or security against the bankrupt’s assets, regardless of when that other claim, right, charge or security arose, except
(a) rights under sections 81.1 and 81.2;
(b) amounts referred to in subsection 67(3) that have been deemed to be held in trust; and
(c) securities under sections 81.3 and 81.4.
The super-priority under section 81.5 of the BIA is still being litigated to define its scope and application. However, it is clear that Parliament, through the 2008 amendments to the BIA, intended to create a super-priority for certain pension benefits. The treatment of other statutory trusts in a bankruptcy context remains unclear. In particular, the treatment and effect of statutory trusts arising pursuant to construction lien legislation has given rise to conflicting decisions across Canada in recent years.
PART V. INCONSISTENCIES AND ISSUES IN THE RECENT JURISPRUDENCE
- Historical Evolution of Provincial Construction Lien Legislation
The nature of the construction industry is such that there are often various layers of people involved in one construction project. Generally, the owner of a property under construction will enter into a contract with a general contractor who, in turn, will contract with sub-contractors. The sub-contractors will then contract with suppliers. This is often referred to as the “construction pyramid,” with the owner at the top of the pyramid. Because sub-contractors and suppliers have no direct contractual relationship with the owner of the property, they have no recourse against the owner if they are not paid. To address this issue and provide sub-contractors and suppliers with greater protection, most Canadian common law provinces have enacted provincial construction lien legislation.
A construction lien is a secured claim against a property for the value of materials and services that result in a physical improvement to the property. The lien has its origin in the civil law and was first seen in North America in the State of Louisiana and in the Province of Québec. The concept then spread throughout the United States before reaching the Canadian common law provinces. Under provincial construction lien legislation, a person who performs services or supplies materials improving the property of an owner has a lien against the property up to the price of the services or materials provided. The lien arises the moment the services are provided or the materials are supplied, and if a sub-contractor is not paid, it can register its lien against the owner’s property, and eventually, if required, force the sale of the owner’s property to satisfy its claim. The owner can post security as a substitute for the lien, in which case the subcontractor’s rights are transferred to the security. The owner can also limit its exposure by holding back a statutorily mandated amount from the contractor until it is satisfied that there are no liens registered against its property. If a lien is registered, the owner can pay the holdback amount into court, and allow the contractor and the sub-contractors to litigate entitlement. If a lien is properly registered, it will create a secured interest against the property for the value of the materials and services provided.
Between the 1930s and 1970s, several common law provinces incorporated statutory trust provisions into their construction lien legislation, in addition to the lien remedy, to afford further protection to those involved in construction projects. The statutory trust provisions stipulate that funds received on account for the general construction contract are held in trust for the benefit of unpaid sub-contractors and suppliers. The statutory trust provisions ensure that the funds paid by the owner trickle down the construction pyramid. When an owner pays a contractor for work done to a property, the contractor is statutorily obliged to hold a portion of those funds in trust for the benefit of the sub-contractors and suppliers the contractor engaged to perform the work. The language of provincial construction lien legislation varies from province to province and certain provinces impose a trust upon any funds borrowed for the construction project by the owner of the property.
The lien and the trust are two separate remedies designed to protect unpaid sub-contractors and suppliers. The trust concept emanates from the common law courts of equity and is unrelated to the civil law lien. The available remedy under the lien provisions is against the owner’s property and the holdback funds. The available remedy under the trust provisions is against the trust funds or an action for breach of trust against the trustee. The trust is not a security device or a charge against the land; it is a mechanism whereby property is held for the benefit of another. The funds subject to the statutory trust simply happen to be the same funds as the holdback funds.
- The Interaction of the Trust and Lien Remedies and the BIA: Early Case Law
The Saskatchewan courts were among the first to consider the interplay between statutory trusts arising pursuant to provincial construction lien legislation and the BIA. In Duraco Windows Industries (Sask) Ltd v Factory Window & Door Ltd (Trustee of), a supplier sold windows to a contractor to install at various construction projects. Prior to its bankruptcy, the contractor deposited payments it received from various clients into one operating account. The contractor filed for bankruptcy prior to paying the supplier. The Saskatchewan Court of Queen’s Bench was called upon to determine whether the payments deposited in the contractor’s operating account were subject to a valid trust for the benefit of the supplier.
Justice Geatros followed Henfrey and held that the application of subsection 67(1)(a) of the BIA was confined to trusts that fulfilled the requisite criteria for valid common law trusts. Justice Geatros held there was no inference that a trust was created by the fact that the contractor had deposited all payments made by the owners into one bank account. Further, Justice Geatros found no evidence suggesting that the contractor and the supplier intended to create a trust relationship. Rather, their relationship was simply as creditor and debtor, and supplier and purchaser. Due to the lack of certainty of intention alone, Justice Geatros held that the funds kept in the operating account were not held in trust.
In Roscoe Enterprises Ltd v Wasscon Construction Inc, a contractor paid certain monies into court to vacate a registered lien. The lien claimant settled for a portion of the money paid into court. The contractor was petitioned into bankruptcy and the trustee in bankruptcy argued that the remaining money that had been paid into court was part of the bankrupt estate. Other lien claimants, however, argued that the remaining money was held in trust for their benefit. Justice Zarzeczny, found that the remaining funds did not qualify as trust property under subsection 67(1)(a) of the BIA. In this case, it was not clear if the funds paid into court by the contractor were in fact proceeds received from the owner. Justice Zarzeczny found that the funds subject to the statutory trust had been co-mingled with other funds and there was no clear basis upon which to trace the project funds to the amount paid into court. Justice Zarzeczny noted, however, that his conclusion might have been different if the funds had been paid into court to vacate the liens of the lien claimants.
Finally, in D & K Horizontal Drilling (1998) Ltd (Trustee of) v Alliance Pipeline Ltd, a contractor failed to pay its sub-contractors, and the sub-contractors registered liens against the land of the project owner.The project owner paid funds into court to vacate the liens. The contractor was later petitioned into bankruptcy, and the trustee in bankruptcy argued that the funds paid into court were owed to the contractor and were part of the contractor’s bankrupt estate. Justice Barclay of the Saskatchewan Court of Queen’s Bench held that the funds paid into court were not part of the contractor’s bankrupt estate, but not as a result of an argument based on statutory trusts. He noted that when funds are paid into court to vacate a lien, the right to force the sale of the land is extinguished and the funds stand in place of the security in the land. Accordingly, the sub-contractors’ right against the funds paid into court are not affected by the contractor’s bankruptcy, as such rights exist independent of the sub-contractor’s relationship with the contractor.
Justice Barclay relied on the 1962 Supreme Court of Canada decision in John MM Troup Ltd v Royal Bank for the proposition that provincial lien legislation is constitutional, competent legislation, and does not conflict with federal bankruptcy legislation. Although the federal Parliament alone determines distribution priorities in the bankruptcy context, the BIA depends on provincial property and civil rights legislation to inform the rights of the parties involved in the bankruptcy. Further, subsection 72(1) of the BIA specifically contemplates interaction with provincial legislation.
It is important to note that Justice Barclay did not find that the money paid into court was subject to a statutory trust, and he distinguished Duraco and Roscoe on the grounds that, unlike in those cases, the funds in question had been paid into court to discharge the liens. On appeal, the Saskatchewan Court of Appeal affirmed the decision of the Court of Queen’s Bench.
The Saskatchewan courts understood the difference between the lien and trust mechanisms and how they operate in a bankruptcy context. If a lien is validly registered, it will create a security interest that will survive bankruptcy. If funds are paid into court to vacate a lien prior to bankruptcy, the funds will stand in substitution for the lien, and thus will not form part of the estate of the bankrupt. In non-bankruptcy situations, construction lien legislation can validly create and impose trust obligations. However, pursuant to Duraco, if there is no evidence of an intention to create a trust, then the statutory trust will not survive the bankruptcy of the contractor.
- Recent Decisions
a) Confusion between the Lien and Trust Mechanisms
Despite the early conceptual clarity of the above-noted Saskatchewan decisions, more recent decisions have created confusion with respect to the application of statutory trusts arising pursuant to provincial legislation and the BIA. The Alberta Court of Appeal decision Iona Contractors Ltd v Guarantee Company of North America is one such case. The Calgary Airport contracted with a general contractor to build an airport runway. As a pre-condition to the contract, the contractor obtained a performance bond and a labour and material payment bond to guarantee both the completion of the project and payment to sub-contractors and suppliers. The contractor subsequently filed for bankruptcy. At the time of the contractor’s bankruptcy, the contract had been substantially completed, and the Airport had held back $997,715.83 from the contractor. The Airport initially brought an interpleader application, but the parties subsequently agreed that the funds would be transferred to the surety’s counsel to be held in trust pending the result of the trustee in bankruptcy’s application seeking entitlement to the funds. The surety argued that the holdback funds were subject to a statutory trust pursuant to the Alberta Builders’ Lien Act for the benefit of the sub-contractors who had assigned their claims to the surety. Justice Eidsvik, for the Alberta Court of Queen’s Bench, held that the holdback funds were not held in trust for the benefit of the sub-contractors that survived bankruptcy. The surety company appealed the decision to the Alberta Court of Appeal.
Two of the three Justices of the Alberta Court of Appeal found that the funds were impressed with a statutory trust that satisfied the common law trust requirements and, by virtue of the bonds, should be remitted to the surety company as subrogee to the sub-contractors. Appellate Justice Slatter, writing for the majority, noted that statutory trusts could qualify under subsection 67(1)(a), if they had the necessary elements of valid trusts at common law. He held that both certainty of intention and certainty of object were implied by the language of the legislation. The majority also held that certainty of subject-matter was established. The majority found that the lien rights arose the minute the work was performed by the sub-contractors, and that the funds captured by the statutory trust provisions were quantified in the hands of the Airport on the date of bankruptcy. A valid statutory trust existed at the time of the contractor’s bankruptcy and the statutory trust never mixed with other funds, because the trust attached only to the funds which were subject to the interpleader application and not to all the property of the bankrupt.
With respect, the majority decision is difficult to understand. The Airport did not bring the interpleader application to discharge liens as the runway was a federal undertaking and no liens could be registered. This is the reason bonds had been provided. Rather, the Airport brought the interpleader application pending the resolution of the dispute surrounding the funds and did not have any intention to create a trust for the benefit of the sub-contractors. In fact, the Airport did not know who was entitled to the funds. Further, no statutory trust could have arisen because, at the time of the contractor’s bankruptcy, the holdback funds were still in the hands of the Airport. The trust provisions of the Alberta Builders’ Lien Act are narrow: a statutory trust only comes into existence after a certificate of substantial performance is issued and payment is made by the owner to the contractor. Once the contractor receives the payment from the owner, it must hold that money in trust for the benefit of the sub-contractors.
The majority in IonaContractors failed to make the crucial distinction between the lien and the trust remedies and suggested that the statutory trust arose at the same time the lien rights arose. However, only two months later, the Supreme Court of Canada in Stuart Olson Dominion Construction Ltd v Structural Heavy Steel expressly noted that the lien and the trust provide two separate and independent remedies. In the words of Justice Rothstein:
 The BLA is silent as to how these provisions interact. However, the text and context of the provisions, as well as the history of the Act reveal that these are two separate remedies for unpaid persons who have done work, provided services, or supplied materials for a construction project. Registering a lien bond does not relieve a contractor of its trust obligations under the BLA. […]
In Iona Contractors, the majority’s apparent confusion regarding the lien and trust mechanisms had considerable consequences: the Court held that the alleged statutory trust survived bankruptcy when in fact a statutory trust never arose. The Supreme Court of Canada refused to grant leave to appeal to the trustee in bankruptcy.
b) Confusion Regarding Certainty of Subject-Matter
There are also conflicts in recent jurisprudence with respect to when and how certainty of subject-matter may be established. In Royal Bank of Canada v Atlas Block Co, a supplier provided bags of cement powder to a manufacturer of concrete blocks. The manufacturer sold the concrete blocks to various contractors and deposited the sale proceeds into a single account. A receiver was subsequently appointed over the manufacturer, and at the time of the appointment, the manufacturer had approximately 440 accounts receivable. The manufacturer was later assigned into bankruptcy and the receiver sought directions from the Court as to whether the supplier had a valid statutory trust claim against the accounts receivable that had been deposited into the manufacturer’s account.
Justice Penny of the Ontario Superior Court of Justice held that the supplier’s trust claim under the Construction Lien Act did not survive the manufacturer’s bankruptcy. Justice Penny found that because the manufacturer, and subsequently the receiver, co-mingled the funds subject to the statutory deemed trust, certainty of subject-matter was destroyed, notwithstanding the possibility that the funds could be traced and identified:
 Because funds from construction projects were co-mingled with funds from other sources, there can be no certainty of subject matter, as described by the S.C.C. in British Columbia v Henfrey Samson Belair Ltd. [1989 CarswellBC 711 (S.C.C.)] quoted above in para. 37. There mere fact that it might be possible to trace the funds for products incorporating Holcim materials to particular projects does not change this. Once co-mingling has occurred, that is the end of the matter (see, TCTsupra, para 19).
However, only a few months later, Justice Penny’s statement was rejected by the British Columbia Supreme Court in 0409725 BC Ltd and by the Nova Scotia Supreme Court in Kel-Greg Homes Inc, Re. In both cases, the bankrupt companies operated as general contractors. When the trustees in bankruptcy were appointed, they seized the companies’ bank accounts. The respective courts were asked to determine whether the funds in the bank accounts were impressed with a trust for the benefit of unpaid sub-contractors and suppliers. Both courts held that, in the particular circumstances of each case, certainty of subject matter existed. However, they disagreed as to when certainty of subject matter would ultimately be destroyed. Justice Grauer of the British Columbia Supreme Court held that funds subject to a statutory trust could be co-mingled with other trust funds, but could not be co-mingled with funds from other sources. Conversely, Justice Rosinski of the Nova Scotia Supreme Court held that the mere co-mingling of trust funds with other trust or non-trust funds did not necessarily result in there no longer being certainty of subject-matter, provided that the funds could be traced and identified.
c) Confusion Regarding Certainty of Intention
Finally, there has been confusion with how courts have treated certainty of intention. The majority of cases that have disallowed statutory trust claims have done so on the basis that the statutory trust in question lacked certainty of subject-matter. As a result, there is scant judicial discussion with respect to certainty of intention. Iona Contractors, 0409725 BC and Kel-Greg Homes, all appear to have held that certainty of intention could be implied based on the wording of the legislation; however, none of the decisions contain a fulsome analysis of the issue. While Justice McLachlin did not directly discuss certainty of intention in Henfrey, the above-noted decisions appear to rely on her reasons as authority that certainty of intention may be implied from the language of the legislation giving rise to a statutory trust. Particular reliance has been placed on the following passage:
 […] At the moment of collection of the tax, there is a deemed statutory trust. At that moment the trust property is identifiable and the trust meets the requirements for a trust under the principles of trust law. The difficulty in this, as in most cases, is that the trust property soon ceases to be identifiable. The tax money is mingled with other money in the hands of the merchant and converted to other property so that it cannot be traced. At this point it is no longer a trust under general principles of law. […]
Three cases have considered certainty of intention in greater depth; unfortunately, the conclusions reached by courts in different jurisdictions conflict with each other. In British Columbia v National Bank of Canada, the British Columbia Court of Appeal disallowed a statutory trust claim in favour of the Crown pursuant to the Tobacco Tax Act, because the trust lacked certainty of intention. National Bank was cited with approval by the Alberta Court of Queen’s Bench in Bassano Growers Ltd v Price Waterhouse Ltd, where the Court considered a statutory trust arising pursuant to the Marketing of Agricultural Products Act, and held that certainty of intention could not be implied by the language of the statute:
 The Applicants argue that the language of s. 31 of the MAPA is sufficient to create certainty of intention, subject matter and objects and that once the trust is deemed it has the essential characteristics of a common law trust. The Court cannot accept this reasoning. As Hollinrake, J.A. wrote for the British Columbia Court of Appeal in National Bank, supra at 232:
With respect, I do not think the Crown can rely on the statute to create the facts necessary to establish a trust under general principles of trust law. I think that would be contrary to the underlying principle in Henfrey Samson. That principle being that the province cannot legislate to, in effect, create its own priorities contrary to those in the Bankruptcy Act. If a province cannot deem a trust in order to accomplish this I cannot see how it can by legislation create facts through that legislation to accomplish the same end.
Absent the statute, there is no evidence to support a certainty of intention to create a trust. Neither is there certainty of subject matter. There is no common law trust on the facts of the case at bar.
However, in Chibou-Vrac Inc, Re, the Superior Court of Québec disagreed with the way in which the courts in National Bank and Bassano Growers interpreted Henfrey, and held that certainty of intention could be implied by the wording of the legislation:
 Nous ne croyons pas qu'il s'agisse là de la portée qu'il y a lieu d'attribuer aux propos de la juge McLauchlin [McLachlin] dans l'arrêt British Columbia v. Henfrey Samson Belair Ltd. En effet, retenir une telle interprétation aurait pour conséquence de nier l'existence des fiducies législatives en matière de faillite. L'impossibilité de recourir aux termes de la loi pour établir les conditions d'existence d'un trust de common law empêcherait effectivement la Couronne de bénéficier de l'article 67(1) a) L.f.i. Or, la juge McLauchlin [McLachlin] a clairement affirmé qu'une fiducie législative provinciale pouvait bénéficier de la protection de l'article 67(1) a) L.f.i., sans que la province ne créée de ce fait sa propre priorité sous la L.f.i., si les exigences de la common law était respectées. À ce moment, les faits établis par la législation ne procurent pas une priorité à la province mais soumettent plutôt la fiducie ainsi créée au même régime que tout trust, en établissant les conditions nécessaires à l'existence d'une fiducie au sens de 67(1) a) L.f.i.
It is unfortunate that none of the recent decisions have addressed the issue of certainty of intention in detail, especially given that in Iona Contractors, Appellate Justice Paperny, in dissent, noted that the law with respect to certainty of intention is far from settled:
 Most courts dealing with deemed statutory trusts seem to assume that certainty of intention has been established, perhaps implied by virtue of the statutory language that creates the trust. That appears to have been the case in Henfrey Samson Belair, where McLachlin J does not discuss the intention to create the trust. An exception is Duraco Window, where Geatros J of the Saskatchewan Court of Queen's Bench expressed doubt that the parties intended to create a trust relationship with respect to the funds in the bankrupt contractor's bank account. Although the issue seems not to be entirely settled, for purposes of this appeal I have accepted that the creation of the statutory trust in s 22 of the BLA is sufficient to establish certainty of intention.
Unless statutory trusts are categorised by Parliament as a special type of trust where no certainty of intention is required, I suggest that the better view is that certainty of intention cannot be created by the language of the statute alone. The issue with implying certainty of intention on the basis of statutory language is that it is not the settlor who declares the trust but rather the legislation, a third party. However, to have a valid trust at common law, the settlor, who has absolute ownership of the property, must establish the trust and divide the property between the trustee and the beneficiary. For a statutory trust to survive bankruptcy, there needs to be a positive action by the settlor to establish a trust and create a trustee/beneficiary relationship.
- Required Amendments
While the requirement that in order to survive bankruptcy, a statutory trust must have all the characteristics of a valid common law trust may seem harsh on sub-contractors and suppliers, the reality is that innocent beneficiaries are often competing with innocent unsecured creditors for the same dollars in a bankruptcy. Parliament was alive to the policy considerations surrounding source deductions and created a super-priority for certain deemed trusts in favour of the Crown. Parliament was also alive to the policy considerations surrounding pension benefits in favour of employees and legislated accordingly. If Parliament considers that other trust beneficiaries, including sub-contractors and suppliers, should be afforded the same level of protection, as Justice Iacobucci put it in Sparrow, “it is open to Parliament to step in and assign absolute priority to the deemed trust.”
For statutory trust claims arising pursuant to construction lien to survive bankruptcy, Parliament would have to amend the BIA to give them a “super-priority.” Further, based on the evolution of the statutory trusts for source deductions, each provincial construction lien statute will likely have to be amended to provide that the trust funds are deemed to be held under a trust whether or not the funds are actually kept separate and apart. Given the nature of the construction industry and how the funds of various construction projects are often mixed into the contractor’s single operating account, this requirement would be essential to avoid any tracing problems. Unless these amendments are made, I suggest that the better view is that only the statutory trusts that possess the characteristics of valid common law trusts should survive bankruptcy.
PART VI. CONCLUSION
It is difficult to reconcile the recent decisions dealing with statutory trusts arising pursuant to construction lien legislation. It is also difficult to understand the decisions in which statutory trusts were held to constitute “property held by the bankrupt in trust” despite the clear lack of the three certainties. The courts’ continued reliance on Henfrey is also questionable. In Altas Block, the Ontario Superior Court of Justice relied on Henfrey and held that because the funds from construction projects were co-mingled with funds from other sources there was no certainty of subject-matter. The Court did not address the possibility that the trust funds, despite having been mixed with other funds, were traceable and therefore identifiable. A review of the principles of trust law suggests, however, that as long as trust property can be identified through tracing it is possible for the beneficiary to reclaim the trust property.
In several other decisions, including more recently Iona Contractors, 0409725 BC, and Kel-Greg Homes, courts have relied on Henfrey for the proposition that certainty of intention may be implied from the language of the statutory trust provisions. However, unless statutory trusts are categorised by Parliament as a special type of trust that does not require certainty of intention to be valid, the better view is that certainty of intention necessitates some positive action on the part of the settlor and cannot be created by the language of the statute alone. Parliament’s intention when it amended the BIA in 1992 was to ensure that, save for a few exceptions listed under subsection 67(3), only those statutory trusts that have all the attributes of valid common law trusts will survive bankruptcy. The words “unless it would be so regarded in the absence of that statutory provision” under subsection 67(2) of the BIA suggests that certainty of intention cannot be implied solely on the basis of the language used in the legislation.
Although some decisions have assumed that the 1992 amendments to the BIA were a direct result of the ruling in Henfrey, there is nothing to suggest that Henfrey was ever considered by Parliament. Rather, a review of the House of Commons Standing Committee’s Report on the pre-study of Bill C-22 suggests that the drafters of the 1992 amendments to the BIA contemplated that, except for a few statutory trusts in favour of the Crown, statutory trusts “would no longer be recognized in a bankruptcy.”
Accordingly, unless the BIA and the statutory trust provisions contained in each provincial construction lien statute are amended, the better view is that only the statutory trusts that possess the characteristics of valid common law trusts should survive bankruptcy. This reasoning would equally apply to all statutory trust provisions. To hold otherwise would be contrary to the scheme of distribution under subsection 136(1) of the BIA and the legislative evolution of bankruptcy legislation. Unfortunately, the Supreme Court of Canada denied leave to appeal in the Iona Contractors case. It would have been the perfect occasion for this country’s highest court to review the conflicting jurisprudence and clarify the law on the interplay between statutory trusts and the BIA. Until the Supreme Court of Canada issues a decision on this subject, insolvency professionals are left having to navigate this conflicting and confusing area of law.
Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA]
Iona Contractors Ltd v Guarantee Company of North America, 2014 ABQB 347, reversed on appeal, 2015 ABCA 240, leave to appeal refused, 2016 CarswellAlta 660 [Iona Contractors] Note: The Calgary office of Norton Rose Fulbright Canada LLP acted as counsel to Ernst & Young Inc, in its capacities as Receiver and Manager, and Trustee in Bankruptcy of Iona Contractors Ltd
British Columbia v Henfrey Samson Belair Ltd,  2 SCR 24 [Henfrey]
Constitution Act, 1867, s 91(21)
Ibid, s 92(13)
BIA, supra note 1
 The BIA defines “property” but does not define “property held by the bankrupt in trust”. Property is defined under section 2 of the BIA as follows: “property means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property”
 For a comprehensive and excellent overview of the origin of the law of trust and equity see Alistair Hudson, Equity and Trusts 8th ed (Oxon: Routledge, 2015) at 16 [Equity and Trusts]; See also Donovan WM Waters, QC, Waters’ Law of Trusts in Canada, 4th ed (Toronto: Thomson Reuters Canada Limited, 2012) at 5 [Waters’ Law of Trusts]
Waters’ Law of Trusts, supra note 8 at 19
Equity and Trusts, supra note 8at 92
Ibid, at 479
Ibid, at 1270
 Ibid, at 1334-1335
Ibid, at 1353
 Equity and Trusts, supra note 8 at 954; Air Canada v M & L Travel Ltd, Martin and Valiant (1991), 2 OR (3rd) 184
Employment Standards Act, 2000, SO 2000, c 41, s 40(1); Textron Financial Canada Ltd v Beta Ltée/Beta Brands Ltd, (2007) 37 CBR (5th) 107, 2007 CarswellOnt 6705
 Graphicshoppe Ltd, Re,  OJ No 5184, 2005 CarswellOnt 7008 [Graphicshoppe]
Groupe Sutton-Royal Inc, Re, 2015 QCCA 1069
Travel Industry Act, SO 2002, c 30, Schedule D, s 27; Conquest Vacations Inc, Re,  WDFL 1096, 2010 CarswellOnt 9597; Points of Call Holidays Ltd, Re, (1991) 5 CBR (3d) 307, 1991 CarswellBC 472 [Points of Call]; See also Jeffrey Carhart & Ira Smith, “The True Status of “Trust Funds” in Bankruptcies in the Travel Industry: The Decision in Conquest Vacations Inc. (2010)” (2011) 28:1 Nat’l Insolv Review
Truck Transportation Act, RSO 1990, c T-22, Load Brokers, O Reg 556/92, s 15; GMAC Commercial Credit-Corp-Canada v TCT Logistics Inc,  WDFL 1542, 2005 CarswellOnt 636; Norame Inc, Re, 2008 ONCA 319, 2008 CarswellOnt 2323; Canadian Imperial Bank of Commerce v Nadiscorp Logistics Group Inc, 66 CBR (5th) 1, 2009 CarswellOnt 5771
 Report of the Study Committee on Bankruptcy and Insolvency Legislation, Canada 1970, at 56 [Tassé Report]
 Tassé Report, supra note 21 at 56
 Diane Winters & Nancy Arnold, “Crown Priorities: The Supreme Court of Canada Trilogy” (1998)15:2 Nat’l Insolv Review [Crown Priorities]; Diane Winters “The Continuing Evolution of the Deemed Trust: The Case of First Vancouver Finance” (2002) 14:6 Comm Insolv R
Rainville c Québec (Sous-ministre du Revenu),  1 SCR 35 (the Crown claimed a lien pursuant to s 30 of the Retail Sales Tax Act, RSQ 1964, c 71), Deloitte Haskins & Sells Ltd v Alberta (Workers’ Compensation Board),  1 SCR 785 (the Workers’ Compensation Board claimed a charge pursuant to s 78(4) of the Workers’ Compensation Act, 1973 (Alta), c 87), and FBDB c Commde la santé et de la sécurité du travail,  1 SCR 1061 (la Commission de la santé et de la sécurité du travail (Québec’s equivalent of the Workers’ Compensation Board) claimed a lien pursuant to the Worker’s Compensation Act, RSQ, c A-3); See also Husky Oil Operations Ltd v Minister of National Revenue,  3 SCR 453 [Husky Oil]
 Henfrey, supra note 3
Social Service Tax Act, RSBC 1979, c 388, s 18(1)(b)
Henfrey, supra note 3 at para 38
Ibid, at para 42
Ibid, at para 19 (Justice Cory in dissent); See also Bassano Growers, infra note 81; Robinson, Little & Co, (Trustee of) v Saskatchewan (Minister of Labour),  1 WWR 354, 1989 CarswellSask 46; Kel-Greg Homes, infra note 76; Roscoe, infra at note 63; Graphicshoppe, supra note 17; Points of Call, supra at note 19
 As part of the amendments, the Bankruptcy Act changed its name for the Bankruptcy and Insolvency Act
 Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act, Report of the Standing Senate Committee on Banking, Trade and Commerce, November 2003.
 Margaret Smith, Law and Government Division, “Bankruptcy Law Update” Parliamentary Research Branch, Library of Parliament, May 18, 1999 at 1 [Bankruptcy Law Update]
 Tassé Report, supra note 21 at 113; See also Frank Bennett & Aubrey E Kauffman, Bill C-22: Bankruptcy Reform (Toronto: Law Society of Upper Canada, Dept of Education, 1992) at F-3
 Tassé Report, supra note 21 at 113
 Proposed Bankruptcy Act Amendments, Report of the Advisory Committee on Bankruptcy and Insolvency, January 3, 1986, at 76-79 [Colter Report]
 Report of the Standing Committee on Consumer and Corporate Affairs Respecting Bill C-22, October 1991 [Report of the Standing Committee]
Ibid, at Chapter VI
 Bankruptcy Law Update, supra note 33 at 1
Current versions of the legislation: Income Tax Act, RSC 1985 c 1 (5th Supp), s 227(4) and (4.1) [Income Tax Act]; Canada Pension Plan, RSC 1985, c C-8, s 23(3) and (4) [Canada Pension Plan]; Employment Insurance Act, SC 1996, c 23, s 86(2) and (2.1) [Employment Insurance Act]
Ibid, See also Dauphins Plains Credit Union Ltd v Xyloid Industries Ltd,  1 SCR 1182. After Dauphins Plains Credit, the Income Tax Act was amended to include the additional words “whether or not that amount has in fact been kept separate and apart from the employer’s own money or from the assets of the estate”
Royal Bank v Sparrow Electric Corp,  1 SCR 411 [Sparrow]
Bank Act, SC 1991, c 46
Sparrow, supra note 42 at para 112
 Subsection 227(4)-(4.2) of the Income Tax Act:
Trust for moneys deducted
(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.
Extension of trust
(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed
(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and
(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest
and is property beneficially owned by Her Majesty notwithstanding any security interest in such property 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.
Meaning of security interest
(4.2) For the purposes of subsections 227(4) and 227(4.1), a security interest does not include a prescribed security interest.
 The definition of “security interest” in the Income Tax Act is not the same when compared to the definition of “security interest” found in provincial personal property security legislation. The term “security interest” is defined under section 224(1.3) of the Income Tax Act and the same definition applies to deemed trusts arising pursuant to the Employment Insurance Act and the Canada Pension Plan; Note thatsection 222(1.1) of the Excise Tax Act, RSC 1985, c E-15 specifically provides that trusts arising pursuant to the deemed trust provisions, that mirror the language of the Income Tax Act with respect to goods and sales tax, do not survive the bankruptcy of the tax debtor.
Income Tax Regulations, CRC c 945, s 2201
First Vancouver Finance v Minister of National Revenue, 2002 SCC 49 [First Vancouver]
Ministre du Revenue national c Caisse Populaire de bon Conseil, 2009 SCC 29; See also Canada (procureur général) c Banque Toronto Dominion, 2007 FC 313
 Pembina on the Red Development Corp v Triman Industries Ltd (1991), 85 DLR (4th) 29 (Man CA) per Appellate Justice Lyon dissenting), quoted in approval by Justice Gonthier (dissenting on another issue) in Sparrow, supra note 42 at para 36 and Justice Iacobucci in First Vancouver, supra note 48 at para 22; See also Crown Priorities, supra note 23 at 1
Pension Benefits Act, RSO 1990, c P-8, s 57(1)
Continental Casualty Co v MacLeod-Stedman Inc  MJ No 551; The Pension Benefits Act, RSM 1987, c P32
Ibid at para 19 citing Husky Oil, supra note 24 at para 35
Graphicshoppe Ltd, Re, supra note 17; See also Ivaco, Inc, Re, (2006) 26 CBR (5th) 203
Bankruptcy and Insolvency General Rules, CRC c 368, s 59.1
 For instance, see Royal Bank of Canada v Galmar Electrical Contracting Inc, 2015 ONSC 5561
 Alberta Builders’ Lien Act, RSA 2000, c B-7 [Builder’s Lien Act]; Ontario Construction Lien Act, RSO 1990, c C-30 [Construction Lien Act]; British Columbia Builders’ Lien Act, SBC 1997, c 45; Saskatchewan Builders’ Lien Act, SS 1984-85-86, c B-7.1 [Saskatchewan Builders’ Lien Act]; Manitoba Builder’s Lien Act, CCSM, c B-91 [Manitoba Builders’ Lien Act]; New Brunswick Mechanics’ Lien Act, RSNB 1973, c M-6; Nova Scotia Builder’s Lien Act, RSNS 1989, c 227 [Nova Scotia Builder’s Lien Act]
 In the Matter of the Mechanics’ Lien Act, Chapter 249 of the Revised Statutes of Saskatchewan, 1953, and Amendments thereto – In the further matter of the Royal Commission on Mechanics’ Liens, Report of the Commission before the Honourable Harold Francis Thomson, QC, Commissioner, DG McLeod, QC of Counsel to the Commission, at 15
 Liens in the Construction Industry, a Report Prepared for the Honourable J Gary Lane, QC, Minister of Justice by the Special Advisory Committee to the Minister of Justice on Builder’s Liens, August 1984 (Sakatchewan)
 Manitoba Builders’ Lien Act, supra note 58 at s 5(2); Nova Scotia Builders’ Lien Act, supra note 58 at s 44A; Saskatchewan Builders’ Lien Act, supra note 58 at s 6; Construction Lien Act, supra note 58 at s 7(1)
 Duraco Windows Industries (Sask) Ltd v Factory Window & Door Ltd (Trustee of),  9 WWR 498, 1995 CarswellSask 210 [Duraco]
 Roscoe Enterprises Ltd v Wasscon Construction Inc,  2 WWR 564, 1998 CarswellSask 463 [Roscoe]
Ibid, at para 19
D & K Horizontal Drilling (1998) Ltd (Trustee of) v Alliance Pipeline Ltd, 2002 SKQB 86, affirmed on appeal, 2002 SKCA 145 [D & K Horizontal Drilling]
John MM Troup Ltd v Royal Bank  SCR 487
 Later decisions have misinterpreted D & K Horizontal Drilling for being a statutory trust case. See Altas Block, infra note 73 at para 36 and 0409725 BC Ltd, 2015 BCSC 561, infra note 75 at paras 35-36
Iona Contractors, supra note 2
Ibid, at para 47
Ibid, at paras 46-47
Builders’ Lien Act, supra note 58, s 22
Stuart Olson Dominion Construction Ltd v Structural Heavy Steel, 2015 SCC 43 [Stuart Olson]; See also Kel-Greg Homes, infra note 76at para 55, Justice Rosinski distinguished Iona Contractors relying upon Stuart Olson
Royal Bank of Canada v Altas Block Co, 2014 ONSC 3062 [Atlas Block]
Construction Lien Act, supra note 58
0409725 BC Ltd, 2014 BCSC 1196; 2015 BCSC 561; 2015 BCSC 1221 [0409725 BC]
Kel-Greg Homes Inc, Re, 2015 NSSC 274 [Kel-Greg Homes]
0409725 BC, 2015 BCSC 561 at para 29
Kel-Greg Homes, supra note 76 at paras 17 and 52-53
 See also Duraco, supra note 62 at para 13
 British Columbia v National Bank of Canada,  2 WWR 305, 1994 CarswellBC 639, at paras 36 and 40 [National Bank]; Tobacco Tax Act, RSBC 1979, c 404
Bassano Growers Ltd v Price Waterhouse Ltd,  AJ No 860, affirmed on appeal, 1998 ABCA 198 [Bassano Growers]; Marketing of Agricultural Products Act, SA 1987, c M-5.1
Chibou-Vrac Inc, Re,  RJQ 2809; 2003 CarswellQue 2008; Author’s translation: “We do not believe this is the interpretation to be attributed to the words of Justice McLachlin in British Columbia v Henfrey Samson Belair Ltd. This interpretation would deny the existence of statutory trusts in the bankruptcy context. If the Crown is unable to rely on the provisions of the statutory trust to create a valid trust at common law this would effectively prevent the Crown from benefiting from subsection 67(1)(a) of the BIA. However, Justice McLachlin clearly stated that a statutory trust created by provincial legislation could benefit from subsection 67(1)(a) of the BIA, without having the provinces create their own priorities under the BIA, if the statutory trust complies with the requirements necessary to establish a valid common law trust. At this moment, the provisions of the provincial legislation do not give priority to the province but rather establish the necessary conditions for a valid trust at common law under subsection 67(1)(a) of the BIA.”
Iona Contractors, supra at note 2 at para 109
 In her article titled “Common law and Statutory Trusts: In Search of Missing Links” Aline Grenon acknowledged that statutory trusts generally do not meet the requirement of certainty of intention. She suggested, however, that statutory trusts may be considered a third novel and separate category of trusts, in addition to express trusts and trusts arising by operation of law, where no manifestation of intention by the settlor is required; See Aline Grenon, “Common law and Statutory Trusts: In Search of Missing Links” 15:2 Est & Tr J at 116-117
Sparrow, supra note 42 at para 112
 House of Commons Debates, 34th Parl, 2nd Sess, from April 3, 1989 to May 8, 1991, 38-39-40 Elizabeth II, 1989-1991, Vol I to XIV; House of Commons Debates, 34th Parl, 3rd Sess, from May 13, 1991 to June 23, 1993, 40-41-42 Elizabeth II, 1991-1993, Vol I to XVI
 Report of the Standing Committee, supra note 37 at Chapter VI
Iona Contractors, supra note 2