Canada: SCC Holds No Priority For GST Claims In CCAA Proceedings

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Restructuring & Insolvency, February 2011

On December 16, 2010, the Supreme Court of Canada (the SCC) released its decision in Century Services Inc. v. Canada (Attorney General) (aka Re Ted LeRoy). At issue in Century Services was an apparent conflict between the deemed trust provisions of the Excise Tax Act (the ETA) which granted super priority status to the Crown with respect to its claims for unremitted Goods and Services Tax (GST) and the Companies' Creditors Arrangement Act (the CCAA), Canada's principal statute for the reorganization of large insolvent companies, which did not recognize this priority. The scope of the court's discretion when supervising reorganizations under the CCAA was also at issue in respect of its ability to issue orders for the purpose of providing a bridge between the restructuring provisions of the CCAA and the liquidation provisions of the Bankruptcy and Insolvency Act (BIA).

The SCC concluded, among other things, that GST did not have priority in CCAA proceedings and, in any event, the priority provisions in the BIA (which undoubtedly reverse the priority of GST priority claims) should apply to the distribution of proceeds of liquidation.


The debtor, Ted LeRoy Trucking Ltd. (LeRoy) commenced proceedings under the CCAA. During the CCAA proceedings, certain of LeRoy's redundant assets were sold. The CCAA judge ordered that a portion of the proceeds equal to the Crown's claim for unremitted GST be segregated into the Monitor's trust account pending resolution of the priority dispute between the Crown and LeRoy's secured creditor, Century Services Inc. (Century). Subsequently, it was concluded that a reorganization of LeRoy's business would not be possible and LeRoy sought an order lifting the stay of proceedings to assign itself into bankruptcy. At the same time, the Crown applied for an order that the GST monies held by the Monitor be paid to the Receiver General of Canada prior to the bankruptcy (as the deemed trust claim would be ineffective in bankruptcy).

The CCAA judge ordered that the stay be lifted to allow LeRoy to assign itself into bankruptcy, and dismissed the Crown's application. The Court of Appeal overturned the CCAA judge's decision and held that the Court was bound by the priority scheme provided by the ETA which grants the Crown a super priority for its GST claims. Secondly, the Court of Appeal held that by ordering the GST funds segregated in the Monitor's trust account, the judge had created an express trust in favour of the Crown and ordered that the money held by the Monitor in trust be paid to the Receiver General on the basis that trust monies are not available to creditors of the settlor of the trust (i.e., LeRoy) and are payable to the beneficiary of such trust (i.e., the Receiver General). Century appealed to the SCC.

Issues and Commentary

The appeal to the SCC raised three main issues:

1. Whether s.222(3) of the ETA displaces s. 18.3(1) (now section 37) of the CCAA, thereby giving the Crown priority for GST claims in CCAA proceedings?

Section 222(3) of the ETA provides that the Crown has a superpriority claim for unremitted GST pursuant to a deemed trust, notwithstanding any other statute, other than the BIA. Section 18.3 of the CCAA provides that no deemed trusts in favour of the Crown continue in a CCAA proceeding, other than the deemed trust securing remittance of employee source deductions. Prior to this decision, the Ontario Court of Appeal in Re Ottawa Senators Hockey Club Corp. found that the ETA deemed trust for GST gave the Crown priority over secured creditors under the CCAA. Century Services reversed Ottawa Senators and held that the CCAA provision superseded the provision of the ETA. This decision finally resolves what some practitioners believed was an incorrect result in the Ottawa Senators case, and there is now certainty that GST claims are unsecured claims in CCAA proceedings

2. Whether the CCAA judge exceeded his CCAA authority by lifting the stay of proceedings to allow the debtor to make an assignment in bankruptcy?

The SCC held that the order lifting the stay to allow the debtor to make an assignment in bankruptcy was within the authority of the CCAA judge, and was appropriate in that it advanced the underlying purpose of the CCAA because it fostered a harmonious transition from reorganization to liquidation.

Given that the SCC held that GST did not have priority in CCAA proceedings, it did not need to go further to consider the issue of whether the order lifting the stay to allow the debtor to make an assignment into bankruptcy was appropriate. However, the fact that the SCC did consider and resolve the issue is significant and provides considerable guidance with respect to other deemed trusts which have no effect in bankruptcy, such as provincially created deemed trusts in favour of pension contributions. Accordingly, this decision should provide certainty to creditors that upon liquidation of a debtor that commenced proceedings under the CCAA, distributions will be made in accordance with the scheme of priorities set out in the BIA.

3. Whether the CCAA judge's order requiring segregation into the Monitor's trust account of an amount equal to the Crown's GST claim created an express trust in favour of the Crown in respect of those funds?

The SCC held there was no intention to create an express trust. Frequently in CCAA or other insolvency proceedings, money is ordered to be segregated, on a without prejudice basis, pending the resolution of a dispute over claims to those funds. This decision confirms that parties will not inadvertently lose priority to such funds as a result of an agreement or court order requiring the funds be segregated pending the outcome of that dispute.

In addition to determining the specific issues before it, the SCC also took the opportunity to provide useful guidance on the purpose and scope of Canadian insolvency law generally. While the SCC has previously dealt with matters relating to the CCAA, this is the first decision directly interpreting the provisions of the CCAA. This guidance is welcomed by insolvency practitioners and will assist courts across Canada in interpreting provisions of the CCAA, applying other insolvency laws and exercising the supervising court's discretion and authority under the CCAA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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