1. Introduction
The equitable defence referred to in the title of this blog is properly yclept, ‘bona fide purchase of a legal interest for value without notice of a pre-existing equitable interest’.[1] Does a bona fide purchaser which is an unsecured creditor have a valid defence against the Crown which raises a claim under the deemed trust created under the Income Tax Act?[2] That in summary is the issue raised in Toronto-Dominion Bank (TD Canada Trust) v Canada.[3]
2. Facts
The operator of restaurant business (the Debtor) made source deductions from amounts paid to its employees but failed to remit some of the deductions to the Crown, as required by subsection 153(1) ITA. The Debtor ceased carrying on the business in 2015 and sold its assets for $100,000. TD Bank was an unsecured creditor of the Debtor because of a number of overdrafts in the Debtor’s accounts with TD Bank. The Debtor paid $37,595.07 to TD Bank in 2015 and 2016. TD Bank had not made any demand for payment, nor did it exercise any form of security with respect to the payment.
In 2018 the Canada Revenue Agency (CRA) notified TD Bank that it was claiming $36,250.86 plus interest for the unremitted source deductions of the Debtor. Until then TD Bank was unaware that the Debtor had failed to remit the required source deductions. The Crown brought an action against TD Bank for the amount claimed and relied on the deemed trust provisions of s. 227 of the ITA.
Subsections 227(4) and (4.1) were particularly relevant to the proceedings. They provide:
(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.
(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.
The Crown relied on the obligation to pay the proceeds arising from a sale of property to the Receiver General contained in the closing words of subsection (4.1):
the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
The parties then brought a motion for a decision on two questions.
Question One: Do the deemed trust provisions of section 227 of the ITA apply to unsecured creditors?
Question Two: Can unsecured creditors rely on the bona fide purchaser for value defence to defend against a deemed trust claim?
The Federal Court Judge held that the answer to Question One was yes, and that the answer to Question Two was no. In reaching this decision, the Federal Court Judge followed the reasoning in Canada v Toronto-Dominion Bank[4] and the decision of the Federal Court of Appeal in that case, Toronto-Dominion Bank v Canada.[5] Toronto-Dominion Bank was a secured creditor in those decisions. The Federal Court Judge in this case found that there was no reason to distinguish between secured and unsecured creditors. The parties appealed.
The court noted the parties referred only to the deemed trust provisions of the ITA, although some of the source deductions were for CPP and EI contributions and the statutes governing those contributions contain similar deemed trust provisions. In consequence, the court referred only to the deemed trust provisions of the ITA.
3. Analysis and Judgment
The court took the view that the first question is inaccurate, but the second question is the relevant question. Thus, the court focused solely on the second question.
The court noted that the question whether the bona fide purchaser defence is available to an unsecured creditor who has received proceeds from a person who has failed to remit required source deductions under the ITA is a question of law, and therefore the standard of review is correctness.
The court rejected the Crown’s argument that since the bona fide purchaser defence is only available as a defence against an equitable claim, it is not available in this case because the Crown is claiming under a deemed trust created by statute. By reference to John MM Troup Ltd v Ontario (Attorney General),[6] it took the view that the rules of equity, including the bona fide purchaser defence, can apply to a statutory trust, and concluded that whether the defence is available to unsecured creditors will depend on the interpretation of the relevant provisions of the ITA.
The court noted that there is no express language in subsections 227(4) and (4.1) that would preclude the availability of the bona fide purchaser defence. And by reference to Waters’ Law of Trusts in Canada,[7] the court concluded that the payment of a debt can satisfy the requirement for value in the context of the bona fide purchaser defence. Thus, it defined the issue as follows:
The issue to be addressed in this appeal is whether Parliament intended that this defence be available when an unsecured creditor receives, as payment of an amount owing to that unsecured creditor, an amount from the proceeds (arising from the sale of the tax debtor’s property) that would be deemed to be held in trust for the Crown.
By reference to Piekut v Canada (Minister of National Resources[8] the court went on to note that in interpreting statutory language, a court must engage in a textual, contextual and purposive analysis.
On a textual analysis, the court took the view that the relevant part of subsection 227(4.1) is its final clause, the proceeds of such property [sold by a tax debtor] shall be paid to the Receiver General in priority to all such security interests’. It noted that this obligation ‘simply mandates payment of the trust property to the beneficiary of the trust – the Receiver General on behalf of the Crown’.
On a contextual analysis, the court noted that the provisions of subsection 227(4.1) apply equally to all secured and unsecured creditors. And it reiterated that the ITA does not draw a distinction between some unsecured creditors and others, and that there is no basis to find that some unsecured creditors would not be subject to subsection 227(4.1 but others would be.
On a purposive analysis, the court concluded that when funds arising from the sale of a tax debtor’s property are paid to an unsecured creditor which has no knowledge of unremitted source deductions, the text and context do not require the unsecured creditor to forfeit the amounts received. The bona fide purchaser defence is available to the unsecured creditor. The court noted, ‘Parliament made a considered policy choice to prioritize protection of the fisc over the interests of secured creditors’ and further that ‘Finding that the bona fide purchaser defence is available to unsecured creditors is not inconsistent with the “policy choice to prioritize protection of the fisc over the interests of secured creditors”’, as the court concluded in para 84 of TD Bank FCA.
Based on these reasons, the court allowed the appeal and held that the answer to the second question is:
An unsecured creditor can rely on the bona fide purchaser for value defence to defend against a claim by the Crown for the unremitted source deductions of an employer who paid proceeds from the sale of their property to the unsecured creditor.
—
[1] LD Smith, The Law of Tracing (Oxford: Clarendon Press, 1997), p 328.
[2] RSC 1985, c 1 (5th Supp) (ITA), s 227.
[3] 2026 FCA 25.
[4] 2018 FC 538 (TD Bank FC).
[5] 2020 FCA 80 (TD Bank FCA).
[6] [1962] SCR 487.
[7] 5th ed by Donovan WM Waters, Mark R Gillen, and Lionel D Smith (Toronto: Thomson Reuters, 2021), section 26III.B.3, Tracing into the Payment of a Debt.
[8] 2025 SCC 13, para 43.
Written by: Albert Oosterhoff
Posted on: May 26, 2026
Categories: Commentary, WEL Newsletter
1. Introduction
The equitable defence referred to in the title of this blog is properly yclept, ‘bona fide purchase of a legal interest for value without notice of a pre-existing equitable interest’.[1] Does a bona fide purchaser which is an unsecured creditor have a valid defence against the Crown which raises a claim under the deemed trust created under the Income Tax Act?[2] That in summary is the issue raised in Toronto-Dominion Bank (TD Canada Trust) v Canada.[3]
2. Facts
The operator of restaurant business (the Debtor) made source deductions from amounts paid to its employees but failed to remit some of the deductions to the Crown, as required by subsection 153(1) ITA. The Debtor ceased carrying on the business in 2015 and sold its assets for $100,000. TD Bank was an unsecured creditor of the Debtor because of a number of overdrafts in the Debtor’s accounts with TD Bank. The Debtor paid $37,595.07 to TD Bank in 2015 and 2016. TD Bank had not made any demand for payment, nor did it exercise any form of security with respect to the payment.
In 2018 the Canada Revenue Agency (CRA) notified TD Bank that it was claiming $36,250.86 plus interest for the unremitted source deductions of the Debtor. Until then TD Bank was unaware that the Debtor had failed to remit the required source deductions. The Crown brought an action against TD Bank for the amount claimed and relied on the deemed trust provisions of s. 227 of the ITA.
Subsections 227(4) and (4.1) were particularly relevant to the proceedings. They provide:
(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.
(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.
The Crown relied on the obligation to pay the proceeds arising from a sale of property to the Receiver General contained in the closing words of subsection (4.1):
the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
The parties then brought a motion for a decision on two questions.
Question One: Do the deemed trust provisions of section 227 of the ITA apply to unsecured creditors?
Question Two: Can unsecured creditors rely on the bona fide purchaser for value defence to defend against a deemed trust claim?
The Federal Court Judge held that the answer to Question One was yes, and that the answer to Question Two was no. In reaching this decision, the Federal Court Judge followed the reasoning in Canada v Toronto-Dominion Bank[4] and the decision of the Federal Court of Appeal in that case, Toronto-Dominion Bank v Canada.[5] Toronto-Dominion Bank was a secured creditor in those decisions. The Federal Court Judge in this case found that there was no reason to distinguish between secured and unsecured creditors. The parties appealed.
The court noted the parties referred only to the deemed trust provisions of the ITA, although some of the source deductions were for CPP and EI contributions and the statutes governing those contributions contain similar deemed trust provisions. In consequence, the court referred only to the deemed trust provisions of the ITA.
3. Analysis and Judgment
The court took the view that the first question is inaccurate, but the second question is the relevant question. Thus, the court focused solely on the second question.
The court noted that the question whether the bona fide purchaser defence is available to an unsecured creditor who has received proceeds from a person who has failed to remit required source deductions under the ITA is a question of law, and therefore the standard of review is correctness.
The court rejected the Crown’s argument that since the bona fide purchaser defence is only available as a defence against an equitable claim, it is not available in this case because the Crown is claiming under a deemed trust created by statute. By reference to John MM Troup Ltd v Ontario (Attorney General),[6] it took the view that the rules of equity, including the bona fide purchaser defence, can apply to a statutory trust, and concluded that whether the defence is available to unsecured creditors will depend on the interpretation of the relevant provisions of the ITA.
The court noted that there is no express language in subsections 227(4) and (4.1) that would preclude the availability of the bona fide purchaser defence. And by reference to Waters’ Law of Trusts in Canada,[7] the court concluded that the payment of a debt can satisfy the requirement for value in the context of the bona fide purchaser defence. Thus, it defined the issue as follows:
The issue to be addressed in this appeal is whether Parliament intended that this defence be available when an unsecured creditor receives, as payment of an amount owing to that unsecured creditor, an amount from the proceeds (arising from the sale of the tax debtor’s property) that would be deemed to be held in trust for the Crown.
By reference to Piekut v Canada (Minister of National Resources[8] the court went on to note that in interpreting statutory language, a court must engage in a textual, contextual and purposive analysis.
On a textual analysis, the court took the view that the relevant part of subsection 227(4.1) is its final clause, the proceeds of such property [sold by a tax debtor] shall be paid to the Receiver General in priority to all such security interests’. It noted that this obligation ‘simply mandates payment of the trust property to the beneficiary of the trust – the Receiver General on behalf of the Crown’.
On a contextual analysis, the court noted that the provisions of subsection 227(4.1) apply equally to all secured and unsecured creditors. And it reiterated that the ITA does not draw a distinction between some unsecured creditors and others, and that there is no basis to find that some unsecured creditors would not be subject to subsection 227(4.1 but others would be.
On a purposive analysis, the court concluded that when funds arising from the sale of a tax debtor’s property are paid to an unsecured creditor which has no knowledge of unremitted source deductions, the text and context do not require the unsecured creditor to forfeit the amounts received. The bona fide purchaser defence is available to the unsecured creditor. The court noted, ‘Parliament made a considered policy choice to prioritize protection of the fisc over the interests of secured creditors’ and further that ‘Finding that the bona fide purchaser defence is available to unsecured creditors is not inconsistent with the “policy choice to prioritize protection of the fisc over the interests of secured creditors”’, as the court concluded in para 84 of TD Bank FCA.
Based on these reasons, the court allowed the appeal and held that the answer to the second question is:
An unsecured creditor can rely on the bona fide purchaser for value defence to defend against a claim by the Crown for the unremitted source deductions of an employer who paid proceeds from the sale of their property to the unsecured creditor.
—
[1] LD Smith, The Law of Tracing (Oxford: Clarendon Press, 1997), p 328.
[2] RSC 1985, c 1 (5th Supp) (ITA), s 227.
[3] 2026 FCA 25.
[4] 2018 FC 538 (TD Bank FC).
[5] 2020 FCA 80 (TD Bank FCA).
[6] [1962] SCR 487.
[7] 5th ed by Donovan WM Waters, Mark R Gillen, and Lionel D Smith (Toronto: Thomson Reuters, 2021), section 26III.B.3, Tracing into the Payment of a Debt.
[8] 2025 SCC 13, para 43.
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