Government Priority in Distress Sales

A landlord has certain rights under the Commercial Tenancies Act (Ontario), referred to as a right of distress, to seize a tenant’s assets to satisfy rent arrears.

We have recently become aware of important information regarding the liability of landlords and bailiffs when exercising rights of distress against the assets of a defaulting tenant.

Both the Federal and the Ontario Government have a “super” priority right for payment of any amounts owing by a tenant in respect of employee source deductions, Goods and Services taxes and provincial sales taxes. These arrears create a security interest in the tenant’s assets which security interest is in priority to the rights of any other creditor, including the landlord. Furthermore, this priority for payment is operative notwithstanding that the arrears have not yet been assessed.

A landlord or bailiff exercising a right of distress who fails to remit outstanding amounts to the appropriate governmental authority when distributing the proceeds of a distress sale will be subject to a civil claim for payment. The amount of the claim will be the lesser of the full amount due on account of the arrears and the gross proceeds of the distress sale.

In this regard, the Canada Customs and Revenue Agency has advised as follows:

In order to avoid liability in these circumstances, it is incumbent on landlords and bailiffs to determine the extent of the liability of the delinquent tenant on account of the employee source deductions or GST arrears prior to distributing the proceeds of sale. This would involve providing written notification of the distress proceedings to the local Canada Customs and Revenue Agency Tax Services Office and requesting details of any amount payable.

If you have any questions or would like further details regarding this priority claim, please contact us and we would be pleased to discuss it with you further.