A recent decision of the Tax Court of Canada highlights the
benefits of a broadly drafted general security agreement (GSA) in
relation to a secured creditor's realization on a bankrupt
borrower's intangible assets in the form of GST input tax
In International Hi-Tech1, the Court fielded
two procedural motions in an ongoing dispute between the Minister
of National Revenue (MNR) and the parent corporation
(Garmenco)2 of a bankrupt borrower (Hi-Tech) over the
ITCs of Hi-Tech. Garmenco was a secured creditor of Hi-Tech, having
extended a $6 million loan to Hi-Tech secured by a GSA. During a
GST audit and subsequent reassessment, MNR alleged that Hi-Tech had
miscalculated its ITCs.3 Garmenco sought to assume
control over Hi-Tech's appeal of that reassessment in
accordance with the powers granted to it under the GSA. The MNR
attempted to block Garmenco's assumption of control of the
proceedings, arguing that only the trustee in bankruptcy of Hi-Tech
(Trustee) could take on this role. However, the Trustee had
accepted the validity of the GSA and released its interest in the
collateral charged by the GSA prior to Garmenco taking any
Justice Bocock undertook a detailed review of several standard
provisions of the GSA. He noted that the GSA created a security
interest in all accounts and all other present and future choses in
action of the debtor of every kind, as well as all writings, papers
and books of account, which the Court interpreted as including the
ITCs and all documents relating thereto. Other provisions of the
GSA established, in the Court's view, that (a) Garmenco was to
be seized of all present and future books and records including the
GST returns, (b) Garmenco had the power to direct payment of the
secured accounts to Garmenco upon default, and (c) Garmenco was
appointed as attorney to do all things necessary to exercise all
such incidental powers in the borrower's name.5 The
MNR had contended by a specific assignment to Garmenco of the chose
in action represented by the ITCs was required in order for
Garmenco to assume control of the proceedings. However, this
position was rejected by the Court.6
As Garmenco would be the party exclusively entitled to the
proceeds arising from any ITCs emanating from a successful appeal,
the Court concluded that the Rules7 gave the
Court the power to provide Garmenco with a procedural remedy to
realize upon its rights to the ITCs by permitting Garmenco to
assume the appeal of the MNR's reassessment. Thus Garmenco was
authorized to continue Hi-Tech's appeal before the Court in
order to have the appeal heard on its merits.8 In the
Court's view, Garmenco's status as a secured creditor
(rather than a general creditor or a creditor holding an alleged
unliquidated claim against the bankrupt's estate9)
was sufficient for it to be considered a "receiver" for
purposes of the Excise Tax Act10 and to become
the bankrupt's agent entitled to object to a GST reassessment
and maintain an appeal.11
Although it is a decision of the Tax Court of Canada,
International Hi-Tech's confirmation of the breadth of
a GSA may serve as a valuable tool in future disputes relating to
security interests granted under a GSA over intangible assets that
are not the subject of a specific assignment.
1 International Hi-Tech Industries Inc. v. R., 2014 TCC
198, 2014 CarswellNat 2309 [International
2 Hi-Tech had granted security to its parent and other
related companies. Only the parent is referenced in this case
comment for ease of reference.
3 International Hi-Tech, at para 2.
4 International Hi-Tech, at para 3 and 12. The
Court noted that by releasing its interest in the collateral
charged by the GSA, the Trustee no longer had an interest in the
chose in action represented by the ITCs.
5 International Hi-Tech, at para 16.
6 International Hi-Tech, at para 12.
7 Tax Court of Canada Rules (General Procedure),
8 International Hi-Tech, at paras 22 and
9 The Court acknowledged that if the entity seeking to
enforce the taxpayer's rights of appeal were a general creditor
of the estate, a bankrupt or an alleged indemnitee under some pari
passu or unliquidated claim, then no right to institute an appeal
would exist in the absence of the Trustee's consent or a court
10 Excise Tax Act, R.S.C. 1985, c.
11 International Hi-Tech, at paras 16, 17 and
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