Bona fide purchaser for value defence available to unsecured creditors: Federal Court of Appeal clarifies the scope of a deemed trust

In the recent case of The Toronto‑Dominion Bank (TD Canada Trust) v. His Majesty the King, 2026 FCA 25, the Federal Court of Appeal (FCA) held that an unsecured creditor who receives payment from a debtor that failed to remit source deductions can rely on the bona fide purchaser for value defence (the Defence) in response to the Crown’s deemed trust claim under section 227 of the Income Tax Act (ITA).

Background

The case arose following the sale of a company’s (the Debtor) restaurant assets for $100,000. From these proceeds, the Debtor paid $37,595.07 (the Funds) to the Toronto-Dominion (TD) Bank to repay an unsecured overdraft facility. At the time of payment, and unknown to TD, the Debtor had failed to remit payroll source deductions to Canada Revenue Agency (CRA). Relying on section 227(4.1) of the ITA, the Crown later sought to recover the Funds directly from TD.

At first instance, the Federal Court held that unsecured creditors could not rely on the Defence in response to the Crown’s deemed trust claim for unremitted source deductions. On appeal, however, the FCA disagreed, concluding that the Defence is available to unsecured creditors and that Parliament did not intend to require recipients acting in good faith, without notice, to repay such payments. Accordingly, the appeal was allowed.

The Federal Court of Appeal’s decision

The FCA identified the central issue on appeal as whether Parliament intended the Defence to be available to an unsecured creditor who receives payment of a debt from proceeds of a tax debtor’s property deemed to be held in trust for the Crown.

To answer this question, the Court applied the modern approach to statutory interpretation, which requires courts to interpret statutory language through a textual, contextual, and purposive analysis to determine a meaning that is harmonious with the Act as a whole (Piekut v. Canada (Minister of National Revenue), 2025 SCC 13, at para. 43).

Textual analysis

Section 227(4.1) of the ITA states that proceeds of a debtor’s property are to be paid to the Receiver General in priority to all such security interests. Upon textual analysis, the FCA held that while the text identifies what must be paid to the Receiver General, the text does not indicate who is required to pay the proceeds arising from the sale of the property of the tax debtor to the Receiver General. As such, the question that arises is what are the consequences if, instead of paying the proceeds to the Receiver General, the tax debtor pays the proceeds to an unsecured creditor? To determine whether Parliament intended that unsecured creditors could rely on the Defence (and therefore not be required to forfeit any proceeds received by them), it is necessary to consider the context and purpose of the deemed trust provisions in the ITA.

Contextual analysis

Upon a contextual analysis, the FCA held, that the condition in section 227(4.1) of the ITA creates an obligation on the tax debtor (or whoever is selling the tax debtor’s property) to pay the proceeds arising from the sale of the tax debtor’s property to the Receiver General. If instead of paying such proceeds to the Receiver General the tax debtor uses the proceeds to pay outstanding salary or wages to employees – even though this payment is in breach of the obligation to pay the proceeds to the Receiver General – the employees who receive the amounts have nonetheless received the amounts as salary or wages. The FCA further held that contextual analysis would lead to an interpretation that Parliament intended unsecured creditors to be able to rely on the Defence so that amounts paid by an employer who is in default of remitting source deductions could not be recovered from employees who, as bona fide purchasers, receive payment of salary or wages owed to them.

Purposive analysis

Key to the FCA’s purposive analysis was the fact that at the time the Funds were received by TD, TD had no knowledge that the Debtor owed unremitted source deductions to the CRA. The FCA confirmed that the purpose of the deemed trust provision is to give the Crown priority over secured creditors for unremitted source deductions and, while sale proceeds remain in the hands of the tax debtor, the Crown ranks ahead of both secured and unsecured creditors. However, once those proceeds have been paid to an unsecured creditor who does not have knowledge of the tax debt such funds are not required to be returned.

In conclusion, this decision clarifies that the Defence is available to unsecured creditors who receive payment in good faith (without knowledge of unremitted source deductions) from a tax debtor’s sale proceeds. While the Crown retains priority over both secured and unsecured creditors while proceeds remain with the debtor, once payment is made in good faith to an unsecured creditor, that creditor is not required to repay the funds.

The MLT Aikins Insolvency and Restructuring group is highly skilled, with deep experience across Western Canada. Our insolvency and restructuring lawyers have a unique understanding of the importance of consensual outcomes and problem solving in preserving asset value and driving positive results for clients.

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