Canada: No Crown Super-Priority For HST In CCAA Proceedings

Last Updated: April 21 2011
Article by Sam Babe

In its recent decision in Century Services Inc. v. Canada,1 the Supreme Court of Canada (the "SCC") held that, in the context of a Companies' Creditors Arrangement Act2 (the "CCAA") proceeding, the Crown does not have a superpriority claim over the property of a debtor for unremitted goods and services tax ("GST") amounts. The decision of the SCC majority rejected existing appellate-level case law, and brought the priority of Crown claims in-line with what they are in bankruptcy proceedings.

One of the main issues before the SCC was how to resolve the apparent conflict between Section 18.3 of the CCAA (replaced on September 18, 2009 by the essentially identical new Section 37) and the GST deemed trust provisions of the Excise Tax Act3 (the "ETA"). Section 18.3 (now Section 37) of the CCAA nullifies all provincial or federal statutory deemed trusts in favour of the Crown in a CCAA proceeding (with the exception of trusts in relation to source deductions for income tax and Canada Pension Plan and Employment Insurance contributions). Section 222 of the ETA creates a deemed trust in favour of the Crown for unremitted GST or harmonized sales tax ("HST") (Subsection 222(1)), and extends that deemed trust over the property of the debtor whether or not it is encumbered by a third-party security interest (Subsection 222(3)). The Crown's deemed trust is stated not to apply in bankruptcy, and the super-priority claim to debtor property is stated to exist notwithstanding any other statutory provision except the Bankruptcy and Insolvency Act4(the "BIA").5 Courts have therefore held there to be a conflict between Section 18.3 of the CCAA and Section 222 of the ETA,6 a conflict made all the more intractable because the CCAA and ETA provisions both contain language to the effect that they apply despite conflicting language in any other statute.

Prior to Century Services, the leading case on the issue of this conflict was the 2005 decision by the Ontario Court of Appeal (the "OCA") in Ottawa Senators Hockey Club Corp.,7 which the British Columbia Court of Appeal (the "BCCA") followed in Century Services. The OCA held that the super priority in favour of the Crown created by ETA Section 222 was not affected by the old CCAA Section 18.3. The OCA held that ETA Section 222 governed to the extent of the conflict because: (i) the absence of a carve-out in ETA Section 222(3) for the CCAA (where there was a carve-out for the BIA) signalled Parliament's intent not to exclude companies under CCAA protection; and (ii), on application of the doctrine of implied repeal, the more recently enacted ETA Section 222(3) (enacted in 2000) governed to the extent of the conflict with the provisions of the older CCAA Section 18.3 (enacted in 1997).

Five years later, the OCA's reading of legislative intent in Ottawa Senators was rejected by the SCC in Century Services. The SCC observed that one consistent aim of amendments to the insolvency statutes over the past several decades has been the harmonization of common aspects in CCAA and BIA proceedings and that another aim has been to limit super-priority CRA claims (subject to certain exceptions which Parliament has always made explicit). In the context of those legislative aims, the SCC held that the OCA could not be correct that the absence of a carve-out in ETA Section 222(3) for the CCAA signalled Parliament's intent not to exclude property of companies under CCAA protection from the Crown's deemed trust. Since other Crown deemed trusts are explicitly preserved in Section 18.3 (now 37) of the CCAA, reading in (as the OCA did) a preservation of the ETA deemed trust as well, without any explicit statutory language to that effect, would make the CCAA internally inconsistent. Moreover, if the Crown's deemed trust did survive in a CCAA proceeding (as the OCA held), there then would be an "asymmetry" between the priority schemes of the CCAA and the BIA. That asymmetry between the statutes could give secured creditors a strong incentive to not support CCAA proceedings, thus potentially depriving a debtor of the chance to restructure under the most flexible and responsive regime.

Although the SCC was only deciding on the relation between ETA Section 222 and the old CCAA Section 18.3, it interpreted the subsequent enactment of CCAA Section 37, in replacement of Section 18.3, without any carve-out to preserve the GST deemed trust, as confirmation of the SCC's interpretation of Parliament's intention. Rejecting the dissent arguments of Justice Abella on the issue, the majority also held that, to the extent the OCA in Ottawa Senators had been correct in applying the doctrine of implied repeal to preserve the GST deemed trust in a CCAA proceeding, application of that same principle now, post-enactment of CCAA Section 37, would yield exactly the opposite result from Ottawa Senators.8

The SCC's decision in Century Services gives timely comfort to secured creditors, as the recent harmonization of provincial sales taxes with the federal GST in both Ontario and British Columbia raised the stakes considerably. On July 1, 2010, Ontario and British Columbia each became a "participating province" as that term is defined in the ETA, and HST became payable pursuant to the ETA in Ontario at a rate of 13% and in British Columbia at a rate of 12%. As a consequence, HST in both provinces, in its totality (i.e including its provincial component), became subject to the deemed trust provisions of Section 222 of the ETA. While deemed trusts for collected sales tax amounts did exist under the old (i.e. pre-HST) Ontario and British Columbia statutes, Section 18.3 of the CCAA ensured that these deemed trusts did not survive in CCAA proceedings (and, in the old Ontario statute, there was a carve-out of CCAA and BIA proceedings from the effect of the deemed trust). If the SCC had not settled the point as it did in Century Services, the existing law (i.e. the OCA's Ottawa Senators decision, followed by the BCCA) would have entailed a Crown trust and priority over debtor property for HST amounts owing in their entirety, and not just for the smaller, federal component. The dollar amounts in question could thus have increased by two to three times or more. While the application of the doctrine of implied repeal could still have been argued for (in light of the recent enactment of CCAA Section 37), the dispute between the SCC majority and Abella J. on that point in Century Services shows that the result would not have been a foregone conclusion.

It is worth noting that, despite the SCC's effort to reflect the statutory aim of harmonizing common aspects in CCAA and BIA proceedings, the SCC's Century Services decision actually creates asymmetry between the priority regime ina CCAA proceeding and the priority regime in its closest analogue under the BIA, a proposal. The extension of the deemed trust over all property of the debtor in Subsection 222(3) of the ETA is stated to be subject to the provisions of the BIA, but there is no provision in the BIA that would adversely affect the operation of the ETA deemed trust in a proposal. In addition to those provisions specific to a bankruptcy (which proceeding is already carved out in its entirety in ETA Subsection 222(1.1)), all that is preserved by the ETA Subsection 222(3) carve-out for provisions of the BIA is: (i) the right of repossession of unpaid suppliers in a receivership (Section 81.1); (ii) the super-priority of farmers, fishermen and aquaculturists in receivership (Section 81.2); and (iii) the super-priorities in receivership or interim receivership for wages (Section 81.4) and pension amounts (Section 81.6). In the context of a BIA proposal, or a receivership for that matter, secured creditors remain subordinated to CRA's GST/HST claims because there is no general nullification of statutory deemed trusts (as there is in bankruptcy courtesy of BIA Subsection 67(2)).

This asymmetry is, however, tempered somewhat by the fact that secured creditors have relatively greater control in a receivership or proposal proceeding than they do in a CCAA proceeding, and thus survival of the GST/HST superpriority in a receivership or proposal does not put secured creditors at as much of a disadvantage as it did in a CCAA proceeding prior to Century Services. In a receivership, secured creditors always have the option of petitioning the debtor into bankruptcy to overcome the GST/HST deemed trust, and running the receivership in parallel to a bankruptcy.9 Although the same had also been true in CCAA proceedings,10 it is easier to bankrupt a company in a receivership because the ranking secured creditor has a large degree of control over the proceedings (and the debtor has very little control once the proceedings are underway). Likewise, in BIA proposal proceedings, if a secured creditor is stayed, it will have the option of moving to terminate the proceedings on the grounds that the proceedings are not being conducted in good faith, will materially prejudice creditors or will not likely result in any proposal that is viable and acceptable to creditors.11 Moreover, there are a number of situations where a secured creditor will not even be stayed in a proposal proceeding.12 The fact remains, however, that CRA can retain a super-priority claim for GST/HST amounts, and commensurate voting rights, in a BIA proposal, that it no longer has (thanks to Century Services) in a CCAA plan.

Although the Century Services decision does not create a uniform priority across all insolvency proceedings for CRA HST/GST deemed trust claims, it is still a positive development for both secured lenders and borrowers. There will no longer be pressure to terminate CCAA proceedings with strategic bankruptcies to reverse CRA's priority, and thus significant associated costs and potential adverse effects to the debtor can be avoided. Likewise, secured lenders may be more willing to both support a debtor's choice of the CCAA option and fund such a proceeding with debtor-in-possession financing. In some cases, lenders may now even prefer a liquidating CCAA to a receivership. In such cases, qualifying debtors will now have more access to, and benefit from, the most flexible and responsive restructuring regime. Century Services may also have a positive impact in a lender-borrower relationship even before restructuring or insolvency becomes an issue. Secured lenders often require reporting from borrowers on the status of payments of potential super-priority claims, and/or take reserves against any super-priority amounts owing or potentially owing when calculating the borrower's available credit. To the extent lenders feel more comfortable knowing they cannot be primed by CRA for GST/HST in CCAA proceedings, they may agree to relax such reporting and margining requirements, thus reducing reporting costs and increasing credit availability for their borrowers.


1 Century Services Inc. v. Canada, 2010 SCC 60 (S.C.C.); reversing Ted Leroy Trucking Ltd., Re (2009) 2009 BCCA 205 (B.C. C.A.); reversing Ted Leroy Trucking Ltd., Re 2008 BCSC 1805 (B.C. S.C. [In Chambers]) ("Century Services").

2 Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36.

3 Excise Tax Act, R.S.C. 1985, c. E-15.

4 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

5 The ETA Section 222 carve-out for bankruptcy (presently in Subsection 222(1.1)) has been in place in one form or another since the section was first added to the ETA in 1990. The Subsection 222(3) extension of the deemed trust to all debtor property was added in 2000. Given that bankruptcy is already carved-out in Subsection 222(1.1), the carve-out of the BIA as a whole in Subsection 222(3) only affects the operation of BIA priority provisions that are not bankruptcy-specific.

6 See Solid Resources Ltd., Re, (2003) 40 C.B.R. (4th) 219 (Alta. Q.B.) at paragraph 133.

7 Ottawa Senators Hockey Club Corp., Re, (2005) 6 C.B.R. (5th) 293, 73 O.R. (3d) 737 (Ont. C.A.); reversing Ottawa Senators Hockey Club Corp., Re (2003) 68 O.R. (3d) 603, 1 C.B.R. (5th) 295 (Ont. S.C.J.) ("Ottawa Senators"). 8 In her dissenting opinion, Justice Abella argued that, because CCAA Section 37 is essentially identical to old CCAA Section 18.3, it should not be considered a new enactment that would, by the doctrine of implied repeal, defeat the GST deemed trust of Section 222 of the ETA. She points to Section 44(f) of the federal Interpretation Act which states: . . (f) except to the extent that the provisions of the new enactment are not in substance the same as those of the former enactment, the new enactment shall not be held to operate as new law, but shall be construed and have effect as a consolidation and as declaratory of the law as contained in the former enactment;" (emphasis hers). The majority decision rejects this analysis by focusing, instead, on the 2005 CCAA amendments as a whole, which did include many substantive amendments.

9 See Bank of Nova Scotia v. Huronia Precision Plastics Inc., (2009) 50 C.B.R. (5th) 58 (Ont. S.C.J. (Commercial List)).

10 See Ivaco Inc., Re (2006) 25 C.B.R. (5th) 176, 83 O.R. (3d) 108, 275 D.L.R. (4th) 132, 26 B.L.R. (4th) 43 (Ont. C.A.); affirming Ivaco Inc., Re (2005) 12 C.B.R. (5th) 213 (Ont. S.C.J. [Commercial List]).

11 Under Subsections 50(12) or 50.4(11) of the BIA.

12 Under BIA Subsections 69(2) and 69.1(3), (5) and (6), these include: if the creditor was already enforcing before the proceedings commenced; if the creditor sent the required notice of enforcement and the notice period has expired or was waived before the proceedings commenced; if the proposal was not made to that secured creditor; and if the creditor is of a class of secured creditors that voted against the proposal.

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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