On January 6, 2005, the Ontario Court of Appeal reversed a decision of the Superior Court of Justice and held that Crown claims for unremitted GST are entitled to super-priority in proceedings under the Companies’ Creditors Arrangement Act (the "CCAA"). The decision aligns Ontario case law with that of Alberta. In that province, the Court of Queen’s Bench has consistently held that the deemed trust imposed by the Excise Tax Act (the "ETA") in respect of collected and unremitted GST is effective in CCAA proceedings and that the deemed trust claim ranks in priority to the claims of secured creditors.
Re Ottawa Senators Hockey Club Corporation
Under subsection 222(1) of the ETA, every person who collects an amount on account of GST is deemed to hold the amount in trust for Her Majesty in right of Canada. Subsection 222(3) of the ETA provides that the deemed trust applies despite any other enactment of Canada, with the exception of the Bankruptcy and Insolvency Act (the "BIA"). There is no express exception for the CCAA and the battle in the lower courts of Alberta and Ontario has focused on the interpretation of this provision in relation to sections 18.3(1) and (2) of the CCAA which purport to defeat any statutory deemed trust, other than those described in a list of exceptions. Those exceptions do not include the ETA. The result is that two federal statutes are in conflict and each purports to trump the other.
In Re Ottawa Senators Hockey Club Corporation ("Ottawa Senators"), MacPherson J.A., writing for a unanimous court, agreed with the Alberta decisions in Re Solid Resources Ltd. and Re Gauntlet Energy Corporation. In those cases, the Court of Queen’s Bench held that the ETA provision, being the more recent, prevails over the CCAA section despite the fact that the CCAA is a specialized statute that deals specifically with the priority of claims in a restructuring. MacPherson J.A. held that it was not Parliament’s intention that the CCAA be treated as another exception to the ETA, particularly since the BIA and the CCAA are closely related federal statutes and the BIA is specifically excluded from the operation of the ETA’s deemed trust provision. The result is that subsection 222(3) of the ETA trumps subsection 18.3(1) of the CCAA and accordingly, an applicant’s GST obligations rank in priority to the claims of secured creditors.
The decision of the Court of Appeal is helpful to the extent that it establishes a uniform approach among provinces to the interpretation of federal statutes. However, the current drafting of those statutes is at odds with the general trend toward rationalization and harmonization of the CCAA and the BIA. There is no policy reason to treat GST obligations differently under the two statutes. The existing distinction may make GST a factor in the choice between the proposal process under the BIA and a restructuring under the CCAA. Where substantial GST obligations are outstanding, parties may choose to pursue a BIA proposal despite the potential benefits of increased flexibility under the CCAA. LoVecchio J. noted in Re Gauntlet Energy Corporation that this outcome "is particularly troubling given that an unsuccessful proposal under the BIA results in automatic bankruptcy whereas a defeated plan under the CCAA does not."
Given the Crown’s super-priority under the CCAA, there may be a greater tendency for secured lenders to take into account a borrower’s anticipated GST obligations when determining their borrowing base. From a potential borrower’s perspective, this may result in a marginal reduction in the supply, and increase in the cost, of secured credit. Unless Ottawa Senators is successfully appealed to the Supreme Court of Canada (the secured lenders have sixty days from the date of judgment in which to seek leave to appeal the decision), it will be up to Parliament to address these issues.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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