What is a Deemed Trust?

What is a Deemed Trust?

By simple definition, a “trust” constitutes property held by a third party (the trustee) for the benefit of another (the beneficiary).

A deemed trust is a trust created by statute or by legislation, whether you like it or not.  

  • When an employer deducts income tax, CCP, and EI from its employees’ pay, those amounts are deemed to be held in trust for the Crown and remitted later.  

  • Similarly, when a vendor collects GST/HST, they are deemed to be holding those amounts in trust for the Crown’s benefit.  

The deemed trust attaches to the employer or vendor’s assets and must be paid to the Crown in priority to all other security interests.  

Regardless of whether the funds have been segregated or commingled with the employer or vendor’s property, the deemed trust is a priority over all other security interests.

If you do not pay the payroll deductions or GST/HST amounts to Canada Revenue Agency (“CRA“) when they are due, CRA will assess your business for the amount owing and ask you to pay the full balance right away, including any penalties and interest that apply.

You should not use money held in trust for the Crown as a source of cash to run your business. Even if you keep these amounts with your personal or business funds, you should consider them to be held separate and apart.

In a bankruptcy, amounts owing for GST/HST and the employer portion of CPP and EI, and penalties and interest on these amounts are unsecured claims, ranking the same as all other general creditors of a debtor. However, before bankruptcy occurs, CRA may obtain a lien or charge (by filing a memorial judgment) against the real or personal property of a debtor. If CRA files a memorial judgement, it will be a secured creditor in bankruptcy for those debts.

Although income tax debt is not a deemed trust, if CRA files a memorial judgement for income tax debt, it will be a secured creditor in bankruptcy for that debt.

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