Does the Canada Revenue Agency “Deemed Trust” Priority Trump a Mortgagee’s Claim to Insurance Proceeds Payable Pursuant to a Standard Mortgage Clause?

Author: Adam D. Crane

The Supreme Court of Newfoundland and Labrador Trial Division (General) recently rendered its decision in Travelers Canada v. Elite Builders Inc., 2017 NLTD(G) 214, finding that insurance monies payable to a mortgagee pursuant to a Standard Mortgage Clause are not subject to the deemed trust provisions of the Income Tax Act R.S.C. 1985, c.1 (5th Supp.), Canada Pension Plan, R.S.C. 1985, c. C-8 and Employment Insurance Act, S.C. 1996, c. 23.

Key Points

  • Insurance proceeds payable to a lender/mortgagee under a Standard Mortgage Clause are not property of a borrower/mortgagor/tax debtor and are not subject to the Canada Revenue Agency’s “deemed trust” priority under sections 227(4) and 277(4.1) of the Income Tax Act, sections 23(3) and (4) of the Canada Pension Plan and sections 86(2) and (2.1) of the Employment Insurance Act;

  • The Standard Mortgage Clause is a separate and independent contract between the lender/mortgagee and the insurer outside of the mortgage contract between the lender/mortgagee and borrower/mortgagor. 

  • The Standard Mortgage Clause does not create a security interest in property of a tax debtor pursuant to section 224(1.3) of the Income Tax Act


This case involved competing claims to insurance proceeds by Nortip Development Corporation (“Nortip”) a mortgage lender to Elite Builders Inc. (“Elite”) and the Canada Revenue Agency (“CRA”).

Elite is the owner of property located at 90 North Street, St. Anthony, Newfoundland and Labrador. The property which suffered fire damage on May 25, 2014 was insured by Travelers Canada.

Nortip loaned money to Elite and took a mortgage over the Property. The mortgage contained a typical insurance clause requiring Elite to “purchase and maintain direct damage insurance against any insurable loss or damage to any structure for the replacement cost value of the structure” and ensure that the loss is payable to Nortip, in accordance with the Standard Mortgage Clause approved by the Insurance Bureau of Canada or a similar clause approved by Nortip.

Travelers Canada paid the fire loss claim by paying the insurance proceeds in the amount of $148,979 into court.  The CRA asserted a priority to the insurance proceeds in accordance with the deemed trust and enhanced garnishment provisions under the Income Tax Act, Canada Pension Plan and Employment Insurance Act, even over secured creditors, except for any monies which constituted a prescribed security interest as defined by section 2201 of the Income Tax Regulations.

Supreme Court of Newfoundland and Labrador Trial Division (General) Decision

In order to determine the priority between the competing claims of the CRA and Nortip, the Court reviewed the legislative and regulatory provisions by which the CRA claimed their priority and the legal basis upon which Nortip claimed an entitlement to the insurance proceeds.

The Court reviewed deemed trust provisions in sections 227(4) and 227(4.1) of the Income Tax Act as well as the Supreme Court of Canada decision in the case of First Vancouver Finance v. Minister of National Revenue, 2002 SCC 49. The Court found that an employer who makes statutory deductions from employee wages is deemed to hold the deductions in trust for Her Majesty until they are remitted to the CRA and that:

… if the amounts are not remitted when due then property of the employer and property held by any secured creditor of the employer, that but for a security interest, would be property of the employer, equal in value to the amount deemed to be held in trust, is deemed to be held in trust for Her Majesty whether or not the property is subject to a security interest.

In its analysis, the Court reviewed the terms “secured creditor” and “security interest”, ultimately finding that that the definition of “security interest” under the Income Tax Act is quite expansive and includes mortgages, term savings agreements, general assignment of books debts, and mechanics’ liens.

The key factor in those instances was the right of the debtor to redeem the property or interest in property. A security interest as defined in the Income Tax Act grants an interest in property of a tax debtor to a third party in exchange for securing payment or performance of an obligation.

The crux of the decision is whether the Standard Mortgage Clause grants a mortgagee a security interest in property of a tax debtor, which would be subject to the CRA’s deemed trust priority.

The Court examined an alternate scenario in which a lender obtains a separate policy of insurance to protect its own interest in property against fire loss or other perils. It concluded that the deemed trust provisions would not be applicable to insurance proceeds under the separate policy of insurance as the borrower/tax debtor has no interest or right in the insurance proceeds under the separate policy.

Notably, the Court held that the Standard Mortgage Clause creates a separate and independent contract between the lender/mortgagee and the insurer outside of the mortgage contract. As such, the mortgagor/tax debtor does not have a property interest in insurance proceeds payable under the Standard Mortgage Clause and the CRA’s deemed trust priority would not attach to such proceeds.

To read a copy of the decision, please visit the following link:

This article is intended for information purposes only and does not constitute legal advice or a legal opinion. If you require further information or legal advice, Patterson Law would be pleased to discuss the issues addressed in this publication.